Statements of intention by a bidder on a takeover offer: UK Takeover Panel update on its expectations

Earlier this month, the UK Takeover Panel published a new Panel Bulletin –  these are published from time to time to remind practitioners and market participants of the operation of specific provisions of the UK Takeover Code in the light of issues of which the regulator has become aware, with the aim of changing and improving market practice. This one is particularly interesting as it focuses on the difficult topic of a bidder's intentions for the target and its employees post-closing and what is, and is not, acceptable in the eyes of the UK regulator.

In brief

• It has been a requirement of the UK Takeover Code, since the controversial hostile takeover of Cadbury by Kraft in 2010, that a bidder must set out its intentions in relation to the target business, its employees and management post-closing of the transaction. This is intended to flush out public disclosure of the bidder's views on synergies and the impact of the bid on the workforce.
• The latest UK Panel Bulletin sets out the UK Panel's expectations in relation to these intention statements.
• Panel Bulletins are issued in the UK to remind people how the regulator expects specific provisions of the Takeover Code to operate, and indicate areas where it believes market participants have got things wrong. They are issued by the "Executive" – the day-to-day regulatory body, which is answerable to the UK Takeover Panel itself (which is an unincorporated association of individuals, representing shareholder associations and other bodies based in the UK).
• Bidders, and their advisers, should be careful when preparing their intention statements in light of this latest guidance as it is clearly an area of focus for the Panel.

Statements that a bidder is required to make on an offer

The UK Takeover Code requires a bidder to set out, as early as the first substantive announcement of the deal (the announcement of a firm intention to make an offer), its intentions as regards:

• the future business of the target, including R&D;
• target employees and management, including material changes in employment conditions or balance of skills and functions;
• its strategic plans for the target and likely repercussions on employment, places of business and HQ / HQ functions; and
• the target's pension scheme(s).

These intention statements are intended to allow shareholders to make a properly informed decision on the bid and assist the target board in giving its opinion on the offer, as required under both the UK Takeover Code and English company law, which requires directors to have regard to the interests of wider stakeholders beyond shareholders. The statements will also be of particular interest to the target's employee representatives and pensions trustees, who have the right to give public opinions on the transaction under the UK Takeover Code.

Standards required for statements of intentions

The UK Takeover Code sets out the standards of care that apply when a bidder makes these statements of intention.

Rule 19.6 of the Code provides that, where a party to an offer makes a statement about its future intentions, that statement must be:

• an accurate statement of that party's intention at the time that it is made; and
• made on reasonable grounds.

If the party changes its intentions in the 12 months following the bid, it must consult the UK Panel at the point it decides to do something different (i.e. ahead of when it actually takes that different course of action). It will then have to make an announcement to the market about that change.

Even if a party does not change its intentions, it must after 12 months (or any other period it specified in the intention statement) confirm to the UK Panel and announce to the market that it has complied with its intention statements.

When an offer document (or scheme booklet) is published, the UK Panel requires the bidder to send it a schedule of the intention statements contained in the document. It will then use that schedule to ensure that the party complies with the intention statements and monitor compliance against that schedule (e.g. reviewing press and media reports).

Background to the rules: Kraft/Cadbury

The background to Rule 19.6 is in the high-profile takeover of Cadbury by Kraft in 2009. Cadbury had announced (before the offer) that it would close a factory in the UK. In the course of its hostile bid for Cadbury, Kraft chose to make public statements that it would keep the factory open, and attracted some PR benefit in doing so. However a week after the offer closed, Kraft backtracked and said it would in fact have to close the factory in question, with the very public loss of many local jobs.

Kraft said that, following extensive talks with senior management at Cadbury, it reluctantly accepted that Cadbury's plans to close the facility were so advanced, and the investment required to reverse the closure programme would be so significant, that alternative plans would not be viable.

The UK Takeover Panel accepted that Kraft had held an honest and genuine belief that it could keep the facility open, but criticised Kraft for making the statement where it did not know the details of the phased closure and investment in the new facilities (Panel Statement 2010/14).

The UK Takeover Panel (as part of a larger overhaul of the UK Takeover Code prompted by this bid) subsequently clarified the rules around intention statements, and introduced an express requirement that such statements must, as well as being subjectively true, be objectively capable of being true.

Role of financial advisers

Responsibilities during the offer

The UK Panel expects parties' financial advisers to ensure that their clients comply with the UK Takeover Code:

" Financial advisers to whom the Code applies have a particular responsibility to comply with the Code and to ensure, so far as they are reasonably able, that their client and its directors are aware of their responsibilities under the Code and will comply with them and that the Panel is consulted whenever appropriate." (Para 3(f), Introduction to the Code)

It reiterates this in Note 1 on Rule 19.1 on the standards of care and accuracy required on an offer:

"The Panel regards financial advisers as being responsible to the Panel for guiding their clients … with regard to any information published during the course of an offer…"

It is clear that the UK Panel will look at the role of the financial adviser(s), as well as the party that made the statement, when examining whether the standards for intention statements have been met and may seek to hold them to account, where appropriate, given their responsibility for ensuring their client complies with the UK Takeover Code.

Post-offer compliance

Once the offer is completed, the onus is clearly on the bidder to ensure it follows its intention statements in the 12 months following the closing of the offer and complies with the rules on consultation with the UK Panel and confirmations around compliance with post-offer intention statements.

The UK Panel has said previously that it recognises difficulties faced by financial advisers who may no longer be mandated by the bidder at that point, and therefore cannot necessarily have ongoing responsibility in relation to compliance with the intention statement requirements.

However, if a party does change its intentions, the Panel will go back and look at the original intention statements and examine whether they complied with the standards set out in Rule 19.6 at that time they were made. A hindsight test is inevitable, in practice.

Examples of changes in intention statements

We have seen a number of statements around changes to parties' intentions, many of which were driven by a true change in circumstances after closing of the offer, and are therefore not problematic in the eyes of the UK Panel. These include:

• revisions stemming from worse than expected financial performance of the target post-acquisition (e.g. following the acquisition of Lombard Risk Management by Vermeg in 2018);
• changes driven by the Covid-19 pandemic, which saw many bidders changing their intentions and for example introducing headcount and salary reductions; and 
• changes as a result of a downturn in the specific target's market, for example following the Asterion offer for Aggregated Micro Power Holdings in 2020 and the Global Auto Holdings offer for Lookers in 2023.

Panel Bulletin 7

All said, a review of bidders' intention statements in the London market reveals some common disclosures including for example:

• " [Bidder] confirms that, following the acquisition becoming effective, the existing contractual and statutory employment rights, including pension rights, of all [target] management and employees will be fully safeguarded in accordance with applicable law."
• "Prior to the announcement of a firm intention to make an offer, consistent with market practice, [bidder] was granted access to [target's] senior management for the purposes of confirmatory due diligence. However, because of the constraints of a public offer process, [bidder] has not yet had access to sufficiently detailed information to formulate a detailed strategy for the business. Following completion of the acquisition, [bidder] intends to work with [target's] management team to formulate a detailed strategy."

It is these formulaic, commonplace disclosures that the UK Panel is looking to change in Panel Bulletin 7.

The UK Panel says that it expects a bidder will always have developed specific intentions for the target business, and they must be included in the announcement of an offer. In other words, in the eyes of the UK regulator a bidder will have a business plan, however undeveloped, and via this Bulletin it is seeking more disclosure of the bidder's intentions and details of that plan for the target business post-closing.

If, exceptionally, the bidder has no intention to make any changes in relation to those matters, it must make a statement to that effect (i.e. a negative statement confirming no intentions).

The UK Panel recognises that a bidder may wish to state that it will undertake a review of the target's business post-completion, but that statement will not, of itself, fulfill the UK Takeover Code requirements. As a minimum, a bidder should disclose what the review is likely to cover and what its expectations are in relation to it.

Interestingly, the UK Panel says that it will not accept the following statements or arguments:

• the bidder is not certain about expected synergies, and so has not formulated any intentions;
• whilst some head count reduction is envisaged, the bidder need not disclose the detail of that intention, or the bidder considers any headcount reduction will not be material and so not need not disclose any intention in relation to the continued employment of employees;
• the bidder's only intention for the 12 months after the offer has completed is to conduct a strategic review and will only formulate its intentions with regard to the target business after the review has concluded; or
• the bidder’s post-offer intention statements satisfy the relevant requirements of the UK Code because they are in a “standard form” or because they are similar to statements made by another bidder in relation to a different target.

Tips for parties and their financial advisers

Our tips for parties and advisers when preparing statements and standards to which they must be prepared include:

• identify the key intention statements;
• determine who is best placed to verify which statements, based on their background knowledge of the deal, the target and the bidder's business and their access to information;
• the financial adviser must be able to take a view on the most important statements rather than just relying on the bidder's views;
• review the synergies and any papers given to providers of equity or debt financing to ensure that there is nothing in there that contradicts or undermines the statements of intention;
• if the bidder does intend to conduct a review, as a minimum it will have to explain what that will cover and what it expects the outcome to be; and
• consider whether statements are not just correct on their face but also give a holistic picture of the bidder's intentions.

In the 12 months following the offer, parties must remember their ongoing obligations in relation to intention statements. Bidders should not assume that once the offer is closed, the Panel no longer has any interest in the matter.

Concluding thoughts

From a timing perspective, the last time the Panel reviewed the Code requirements around intention statements was in 2011, during the uptick in deals following the global financial crisis in 2007. They are now looking to correct market behaviour in this area again, as we see an uptick in deals following the normalisation of markets after the global Covid-19 pandemic.

From a policy perspective, we note that the UK Panel's practice is also evolving in an area which takes into account the broader stakeholder view of a transaction, beyond a narrow, capitalist focus on the premium that shareholders will receive. This evolution appears to HSF to be in keeping with the wider global shift to recognise such factors, often articulated as the growing importance of ESG.