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In January 2014, the Takeover Panel Executive (the “Executive”) published a practice statement (No. 27) clarifying the interpretation/application of Rule 21.2 of the Takeover Code in relation to irrevocable commitments and letters of intent given by offeree company shareholder directors.
The practice statement provides welcome clarification as to what undertakings are permissible in a shareholder director’s irrevocable commitment or letter of intent.
In many cases, an offeror may seek irrevocable commitments from certain shareholders, including shareholder directors, in order to increase the chance of a successful offer; such commitments are known as irrevocable commitments/undertakings.
In September 2011, following Kraft’s takeover of Cadbury, the Takeover Panel introduced a general prohibition, subject to certain exceptions, against “offer related arrangements” as part of a package of measures aimed at redressing the imbalance between target companies and bidders by reducing the tactical advantages bidders had over targets.
In November 2012 the Takeover Panel carried out a review of the 2011 Takeover Code amendments, which highlighted a number of examples where shareholder directors had entered into irrevocable undertakings which related to matters other than simply the acceptance of the relevant offer (or to vote in favour of a scheme), and therefore exceeded the exceptions set out in the Takeover Code.
The Executive stated that it would seek to take appropriate remedial action should breaches of Rule 21.2 continue.
The release of its January 2014 practice statement implies that the Executive has seen that such breaches have continued and it has sought to tackle this situation by providing clarification to offerors and offeree shareholder directors alike.
Rule 21.2(a) of the Takeover Code provides that, except with the Takeover Panel's consent, neither the offeree company nor any person ‘acting in concert’ with it may enter into any offer-related arrangement with the offeror or any person ‘acting in concert’ with the offeror during an offer period or when an offer is reasonably in contemplation.
For these purposes, the offeree company directors are presumed to be ‘acting in concert’ with the offeree company.
“Offer-related arrangements” are defined as any agreement, arrangement or commitment in connection with an offer and include any inducement fee arrangement or other arrangement having a similar or comparable financial or economic effect.
However, irrevocable commitments and letters of intent are expressly excluded from the definition of "offer-related arrangements" (Rule 21.2(b)(iv)).
The Executive has sought to confirm that, whilst in relation to his/her shares Rule 21.2(b)(iv) permits an offeree shareholder director to give irrevocable commitments or letters of intent to accept an offer or to vote in favour of a particular scheme (without breaching Rule 21.2), it does not permit such shareholder directors to enter into other kinds of “offer-related arrangement” with the offeror or persons ‘acting in concert’ with the offeror.
Therefore, the contents of an irrevocable commitment or letter of intent must not include any such “offer-related arrangements” howsoever worded.
As noted in its November 2012 review, the Executive has come across a number of examples where provisions have been included in irrevocable commitments which go beyond those permissible by Rule 21.2. It has therefore highlighted in its January 2014 practice statement a number of these prohibited commitments, namely:
The above list is not exhaustive and shareholder directors should query with their advisers any commitments they are asked to provide to offerors which extend beyond their decision as shareholders to accept an offer or to vote in favour of a scheme.
The Executive has further confirmed that the above commitments would still breach Rule 21.2 even if stated as being subject to the director's fiduciary or statutory duties.
The Executive has also taken this opportunity to clarify where additional commitments shall be permissible, these being limited to provisions aimed solely at giving effect to a commitment to accept the offer or to vote in favour of the scheme. Examples of such commitments provided by the Executive include:
The Takeover Panel statement is a welcome clarification of the interpretation and application of Rule 21.2, and should assist in reducing the number of breaches of that Rule in future public company M&A transactions.
However, if there is any doubt in relation to whether the contents of a proposed irrevocable commitment or letter of intent complies with Rule 21.2, then the Executive should be consulted at an early stage in the timetable.
For more information please contact Mark Howard on +44 (0)20 7203 8902 or at email@example.com