Legal briefing | Corporate Advisory, Corporate and M&A | 01 Apr 2018

Forget about the price tag: what else must a bidder offer?

Overview

In two recent high-profile takeovers, bidders gave binding commitments as to the conduct of the target business post-completion, in order to protect broader stakeholder interests. This legal briefing considers the regulatory framework for these commitments, and highlights that a bidder needs to consider not only the price to offer shareholders, but also what protections it is extending to other stakeholders.

BACKGROUND

Until very recently, only Softbank, in connection with its recommended offer for ARM, had given binding "post-offer undertakings" in accordance with the new regime introduced into the Takeover Code in 2015. This might have been dismissed as a one-off, but two recent bids suggest that external pressures for the protection of stakeholders will continue to be a feature of high-profile bids.

Prior to its bid for GKN succeeding, and in response to a letter from the Department for Business, Energy and Industrial Strategy, Melrose gave a suite of commitments and undertakings in relation to the combined business's presence in the UK, employees, R&D and pensions.

In Comcast's announcement of a firm intention to make a bid for Sky this week, Comcast confirmed that it "voluntarily intends" to put in place a series of commitments that would guarantee the long-term future of Sky News and its ongoing editorial independence, as well as support the growth of Sky in the UK.

Although both bidders might have had confidence in their offer price being compelling, this isn't necessarily a guarantee of success. The Enterprise Act 2002 gives power to the Secretary of State to refer to the Competition and Markets Authority ("CMA") a takeover bid which gives rise to concerns over media plurality, national security or financial stability. In addition, the Secretary of State has indicated a wider concern that, where businesses the government considers to be important are involved, takeovers should not act against the interests of the UK economy, employees or the broader set of stakeholders. This is reflected in the recent consultations setting out the government's proposals to reform and strengthen the powers for scrutinising the national security implications of particular types of investments – please see our client note on this topic. In particular, on 15 March 2018, the government confirmed that it would be lowering the thresholds for changes 2 in control over enterprises in certain sectors relevant to national security. Longer-term reforms are still being considered.

Therefore, even though there is not strictly a "public interest" test in the UK, the government has an ability, and willingness, to intervene in certain takeovers. Several media outlets have also taken a "no holds barred" approach to their commentary on bids, particular those by overseas bidders, feeding negative public opinion.

WHO ARE STAKEHOLDERS?

"Stakeholder" is a loose term used to describe any person, group or organisation interested in a business. In its broadest sense, it includes the UK economy, as well as suppliers, customers, employees and pensioners.

WHAT IS A BIDDER REQUIRED TO DO TO ADDRESS STAKEHOLDER INTERESTS?

Under the Takeover Code, a bidder is required to state its intentions for the target business for the 12 months following completion, including the impact of its offer on employees, pension schemes and places of business. Following recent changes to the Code, these intentions are required to be disclosed at an early stage, namely at the time of the firm offer ("2.7") announcement, in order to give stakeholders (and the government) an opportunity to comment on these intentions.

These statements of intention are not binding, but must be an accurate statement of bidder's intentions at the time and made on reasonable grounds. The recent changes to the Code show an increased focus by the Takeover Panel on specificity in these statements, with further information required on a bidder's plans for R&D, or changes to the "balance and skills" of the target's workforce. Certainly, in circumstances where a bidder has quantified the synergies expected from the transaction, it is our experience that the Panel will expect any employee headcount reductions also to be quantified (on the basis that the bidder will know the information because at least some of the synergies will be derived from these reductions).

If, following its offer, the bidder does not take any of the actions it stated it intended to take, or takes a different course of action, it is required to make an announcement of this fact promptly. In addition, at the end of the 12-month period following its offer, the bidder will be required to make an announcement of its "compliance" with its intention statements.

WHAT ELSE COULD A BIDDER OFFER?

Like Softbank before them, both Melrose and Comcast offered more than statements of intention to protect stakeholder interests. Perhaps unsurprisingly, in putting together its suite of protections, Comcast has clearly had regard to the remedies offered by 21st Century Fox to the CMA in response to its provisional finding that Fox's takeover of Sky is not in the public interest due to media plurality concerns.

Post-offer undertakings

Under the Code and subject to consultation with the Panel, a bidder may choose to make a post-offer undertaking (a "POU"). There is a set of detailed rules which set out the content and other requirements for a POU, including that:

  • a time period for the POU be specified (normally no more than five years);
  • the POU be specific and precise;
  • the POU be readily understandable and capable of objective assessment (and not depend on the subjective judgement of the bidders' directors); and
  • any conditions or qualifications to the POU be prominently stated.

Following the offer, the Panel takes on the role of policing the POUs. It can (and typically will) require a bidder to appoint a supervisor to oversee the bidder's compliance with its POUs and progress reports must be 3 published every 12 months. If a bidder does not comply with its POUs, the Panel has the power to require enforcement, including through the courts if necessary. This being the case, POUs require extensive discussion with the Panel before they feel comfortable assuming this role.

Each of Softbank, Melrose and Comcast made POUs to maintain the target's headquarters in the UK, and to spend a certain amount on R&D/ news services (as applicable). Softbank also made POUs to increase ARM's total number of employees.

Other commitments

However, there are certain commitments which are not readily capable of meeting the requirements of the Code. In these circumstances, bidders can make (non-binding) statements of intention and/or, with the consent of the Panel, offer commitments to other parties. For example, Comcast proposes to give certain commitments to the independent directors of Sky News for a longer period than permitted for a POU under the Code. Melrose offered the government direct commitments as to R&D spend, and not disposing of certain parts of GKN's business, in addition to its POUs.

COMMENT

Whilst there will not be pressure on every transaction for a bidder to give POUs or other contractual commitments in relation to its conduct of the target business, we expect that every bid will be impacted by the increased focus from the Panel, the media and other interested parties on a bidder making meaningful and detailed statements of its intentions following the offer. This will be compounded by the announcements a bidder is now required to make if those intentions are not carried out following an offer. We therefore would encourage all bidders to start considering what it is able to offer to stakeholders at an early stage in considering an offer.

Amy Grammer has recently returned from a two year secondment as a case officer at the Panel. Travers Smith is advising Robey Warshaw as cash confirmation counsel to the Comcast offer for Sky.

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