On 8 October 2015 the Code Committee of the Takeover Panel published Practice Statement No. 29 to give guidance on the Panel's interpretation and application of Rule 21.2 concerning any offer-related arrangements that may be entered into between a bidder and target.
Rule 21.2 restricts a bidder (or any person acting in concert with it) from entering into an offer-related arrangement with a target company (or any person acting in concert with it) either during an offer period or when an offer is reasonably in contemplation, save where the Panel gives its consent to the arrangement in question. An "offer–related arrangement" is defined as any agreement, arrangement or commitment in connection with an offer, including any inducement fee arrangement or other arrangement having a similar or comparable financial or economic effect. Certain specific arrangements are excluded from this general prohibition.
Rule 21.2 was introduced in its current form in September 2011, following concerns that the widespread use of offer-related arrangements in the context of takeovers was having a detrimental effect on the target company, by deterring competing bidders and thus reducing the scope for its shareholders to be able to consider and benefit from a competing offer. The new Practice Statement provides guidance on the following aspects:
Commitments to maintain confidentiality
Whilst it is acknowledged that Rule 21.2(b)(i) permits a target to enter into a confidentiality agreement with a bidder in order to maintain the confidentiality of information provided to a bidder in general, the Panel states that the terms of any such agreement must not restrict the board from making an announcement relating to the possible offer or publicly identifying the potential bidder.
Commitments to provide information or assistance for the purpose of obtaining any official authorisation or regulatory clearance
Rule 21.2(b)(iii) permits a target company to enter into a commitment with a bidder to provide information or assistance for the purposes of obtaining any "official authorisation or regulatory clearance". The Panel notes that this includes all authorisations and clearances required from any governmental and regulatory bodies upon which the offer is conditional. In addition, where the bidder requires shareholder approval, or if the offer is a securities exchange offer where the bidder is required to obtain regulatory approval in relation to a circular or prospectus or similar which it is required to publish, the Panel considers that the target company would be able to enter into a commitment to supply relevant information. However, the Panel does not consider that this extends to agreements, arrangements or commitments to assist with other matters (such as assistance with a bidder's application to a tax authority).
Directors' irrevocable commitments and letters of intent
Directors' irrevocable commitments and letters of intentare excluded from the general prohibition on offer-related arrangements under Rule 21.2(a), provided that they do not include certain further terms that would inhibit a competing offer from being made.
The new Practice Statement incorporates Practice Statement 27 (which has now been withdrawn) and amends the examples of prohibited terms to include any requirement:
- to notify the bidder if the director becomes aware of a possible competing offer or the terms of a possible competing offer;
- to provide information in relation to the target company for due diligence or other purposes (or to provide a warranty in respect of any such information); and
- to conduct the target company’s business in a particular manner prior to an offer becoming wholly unconditional.
Rule 21.2(b)(v) permits the parties to an offer to enter into an agreement, arrangement or commitment which imposes obligations only on a bidder or any person acting in concert with it, other than in the context of a reverse takeover.
The Panel notes a bidder may commit to pay a reverse break fee to the target company, other than in the context of a reverse takeover. It would be permissible for a bidder's obligation to pay a reverse break fee to be made conditional upon the target company having taken or not having taken certain action, provided that those conditions would not have the effect of deterring potential competing bidders or leading to a bidder making an offer on less favourable terms.
Bid conduct agreements
The Panel notes that the provisions of an agreement between a bidder and target relating to the conduct, implementation and/or terms of the offer (a bid conduct agreement) will be “offer-related arrangements” prohibited under Rule 21.2(a) unless they fall within a specified exclusion. The new Practice Statement gives some examples of the types of provision that will be regarded as being prohibited and which are not therefore permitted by any applicable exclusion. These include:
- a restriction on the payment of dividends by the target;
- an obligation relating to the conduct of the target company’s business prior to an offer becoming wholly unconditional (or a scheme becoming effective); and
- a warranty in relation to information which may have been provided by the target to the bidder.
The Panel notes that it is not its practice to review draft bid conduct agreements in advance of their execution in order to identify provisions which are prohibited by Rule 21.2. However, the Panel should be consulted at the earliest opportunity in all cases where there is any doubt as to whether a provision which is proposed to be included in a bid conduct agreement is in compliance with Rule 21.2.
The Panel states that it is best practice to include the following clause: “The parties agree that, if the Takeover Panel determines that any provision of this agreement that requires the offeree company to take or not to take action, whether as a direct obligation or as a condition to any other person’s obligation (however expressed), is not permitted by Rule 21.2 of the Takeover Code, that provision shall have no effect and shall be disregarded.”