26 August, 2016
A bidder seeking to acquire a UK listed company has given "post-offer undertakings" in relation to increasing the target's employee headcount and keeping the target's headquarters in the UK if its offer is successful.
A post-offer undertaking is a legally binding commitment and the UK Takeover Panel can take the bidder to court if it does not comply.
It is the first time a bidder has elected to give a post-offer undertaking under the regime, which was introduced into the UK City Code in January 2015.
As is the case in Australia, bidders for UK listed targets are required to make a statement in their offer document as to what their intentions are as regards the target employees. Following the takeover of Cadbury by Kraft in 2010, and the furore about promises made by the bidder which were then abandoned, the Panel amended the Code to say that bidders would be held to any statements of intention for 12 months following the offer period.
The possible offer for AstraZeneca by Pfizer in 2014 re-opened the debate on this aspect of the City Code, with discussion focusing in particular on what sanctions were available to the Panel if a party did not comply with any of its statements of intention.
Following a consultation process in the second half of 2014, the Panel amended the City Code so that parties to an offer could, when commenting on their plans following the offer, elect to make either a post-offer intention statement or a post-offer undertaking.
The regime for statements about plans following a takeover
The key features of the two forms of statement that a party to a takeover can make are as follows:
A post-offer intention statement – These are not legally binding but there will be consequences if they are breached. Any statement of intention in offer documentation must be both an accurate statement of the party's intentions at the time and made on reasonable grounds. This closely mirrors the position in Australia in respect of such statements. Whilst a post-offer intention statement will give rise to an expectation that the party will take that course of action in the 12 months from the end of the offer period, it will not be forced to do so. If the party decides not to follow the intended course of action in the 12 months following the end of the offer period, it must consult the Panel and an announcement will be required, except with the consent of the Panel. Failure to comply is not a breach of the City Code, but if the Panel concludes that the party did not meet either or both of the tests required for intention statements when it made the statement (i.e. if the statement was not accurate when it was made and/or was not made on reasonable grounds), the Panel’s usual sanctions will be available to it (for example, public or private criticism).
Post-offer undertakings – By way of contract, a post-offer undertaking, or POU, is a binding commitment. This clearly makes it much more onerous than a statement of intent, which is why bidders have, until now, steered clear of giving them. There is no obligation under the City Code to give a post-offer undertaking, but any party choosing to give one will be bound by it. This means that they will be required to comply with the terms of the undertaking for the period of time specified in the undertaking.
A party wishing to make a post-offer undertaking must:
- consult the Panel before making the undertaking;
- make it clear that it is a post-offer undertaking;
- specify the period for which the commitment is made; and
- state any qualifications or conditions.
Any qualifications or conditions to the post-offer undertaking must be specific and precise (much like conditions to a takeover offer) and the Panel will not permit general qualifications relating to a material adverse change, unspecified force majeure or directors’ fiduciary duties. Parties are, however, allowed to include a qualification or condition which provides that a post-offer undertaking will no longer apply where the Panel determines that the party is unable to comply with the post-offer undertaking as a result of an event beyond the party's control.
Post-offer undertakings are treated, and strictly enforced, by the Panel as binding commitments. In support of the Panel's enforcement powers, the party must:
- provide written reports to the Panel to confirm compliance with the undertaking; and
- if the Panel so requires, appoint an independent supervisor to monitor compliance.
Ultimately, the Panel is able to obtain an order from the Court to seek compliance with the commitment.
This regime applies to both takeover offers and schemes of arrangement.
The first post-offer undertaking given on a UK offer
On 18 July 2016, Softbank, a Japanese investor in the technology, internet and wireless sectors, announced a recommended cash offer for ARM Holdings, a UK-incorporated and listed semiconductor intellectual property supplier.
In the offer announcement, Softbank said that it would give post-offer undertakings to:
- at least double the employee headcount of ARM in the UK; and
- increase the employee headcount of ARM outside the UK.
by, and at the end of, five years after the effective date of the takeover.
The scheme explanatory statement contains these post-offer undertakings in full, as well as undertakings to keep ARM's headquarters in Cambridge for five years and to keep the relative proportion of technical employees to non-technical employees in line with historical trends in ARM.
Interesting points to note are:
- there are no qualifications or conditions to the undertakings;
- there is some detail on how the undertakings may be achieved;
- Softbank has agreed to procure that ARM also gives post-offer undertakings relating to the employee headcount and headquarters; and
- the accountancy firm, Grant Thornton, has been appointed as the independent supervisor and will monitor compliance with the undertakings.
Statements of intention
It is also worth noting that, as well as giving the usual statements of intention required by the City Code (for example in relation to safeguarding statutory employment rights and the redeployment of the target's fixed assets), Softbank also says that it intends to continue to operate the business of ARM’s existing global headquarters (including the majority of the leadership of ARM's product groups and its key corporate functions such as legal and human resources) in Cambridge for at least the next five years from the Effective Date. As discussed above, under the City Code a party is only expected to comply with a statement of intention for 12 months so it is unusual to see a bidder making a commitment in relation to a longer period. It is not, however, a post-offer undertaking and so the Panel will not compel the bidder to comply with it.
It is the first time a bidder under a takeover of scheme has elected to give a post-offer undertaking in the UK under the (relatively) new regime in the City Code. The political environment in the UK, with the scheme following shortly after the vote by the UK to leave the European Union and the appointment of Theresa May as prime minister, will have featured in the bidder's decision to give a post-offer undertaking and will, presumably, have played a role in the pressure on them to give binding commitments, rather than simply making statements of intent.
Theresa May personally spoke to the chief executive of Softbank and, once the scheme of arrangement was announced, welcomed the investment and commitment to doubling the number of jobs in the UK as a clear vote of confidence in Britain. This deal, the size of the investment and the commitment to invest heavily in the target post-deal were heralded as being evidence of Britain's continued attraction as a country for investment. The post-offer undertaking may also have helped secure the recommendation of the target board, as the commitments are specifically referred to in the paragraph on the board's recommendation.
It will be interesting to see if more parties are willing to give a post-offer undertaking in future, but their binding nature and the limitations on the qualifications and conditions that are permitted suggest that they will remain relatively rare.
It is also possible that, in Australia, we could, in an appropriate case (eg a potential takeover of a company in a particularly sensitive sector), see a bidder seek to give a post-offer undertaking that mimics the UK regime.
For further information, please contact:
Andrew Rich, Partner, Herbert Smith Freehills