Open for Business. Takeovers of UK companies and the involvement of the UK Government. Introduction. The UK takeover timetable and process.

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1 July 2014 Open for Business Takeovers of UK companies and the involvement of the UK Government The unsuccessful potential offer by Pfizer Inc for AstraZeneca Plc earlier this year has reignited the debate on the UK Government s role in the regulation of high profile takeovers and, particularly, whether or not there should be a wider UK public interest test reintroduced to the UK framework for takeovers. This month the UK Business Secretary, Vince Cable, has been reported to be considering introducing new legislation to enable the UK Government to intervene in the context of takeovers of critical infrastructure by overseas bidders. The debate has been prompted by concerns that an acquisition of AstraZeneca would impact on the UK s science base, notwithstanding Pfizer s open letter to the British Prime Minister setting out various commitments relating to the retention of a significant R&D innovation hub in the UK. Introduction Overseas bidders for UK companies are often surprised by parts of the UK takeover regime. Of particular note are the prescriptive UK takeover timetable and process and the rules requiring statements to be made on the rationale for the deal and the bidder s intentions regarding the target s workforce and places of business. Introduction... 1 The UK takeover timetable and process... 1 Disclosure of bidder s intentions... 2 Enforcement of statements made and the Pfizer commitments... 3 Involvement of the UK Government in UK takeovers... 4 Our view of the prevailing winds... 6 This note looks at some of the issues faced by overseas bidders in hostile UK takeovers and the role of the UK Government in such transactions. In particular, this note considers the need for overseas bidders who are thinking of making an offer for a UK champion to plan how they will address proactively any likely UK political concerns, regardless of whether any new legislation is introduced by the UK Government. The UK takeover timetable and process Following Kraft s successful hostile bid for Cadbury in 2010, the UK takeover regime was the subject of much debate amongst politicians and a wideranging review by the UK Takeover Panel. This resulted in a number of rule changes designed to help targets and to move away from a market practice that had become too bidder friendly. Open for Business Takeovers of UK companies and the involvement of the UK Government 1

2 Following the first announcement of a possible offer (whether voluntary or in response to a leak), a potential bidder is now subject to an automatic 28 day put up or shut up (PUSU) deadline. By the end of the deadline, the bidder has to make a firm offer or walk away for 6 months. Perceived wisdom is that this makes it harder for bidders to place targets under prolonged siege without having to commit themselves and there have been a number of high profile examples of bids failing because targets have refused to agree to extend PUSU deadlines. If a bidder is unable to make a firm offer before the PUSU deadline and the target board is unwilling to engage, a hostile bidder can still encourage target shareholders to pressurise its board to extend the PUSU deadline. This tactic can create an intense period of public debate as to the merits of a possible transaction during the four weeks following an announcement. At the same time, overseas bidders can find themselves under considerable pressure to address any concerns regarding their future intentions for the business (as described below). Disclosure of bidder s intentions In addition to the inevitable market and political interest in an overseas bidder s intentions, Rule 24.2 of the Takeover Code provides that in its offer document, a bidder must state its intentions with regard to the future business of the target and explain the long-term commercial justification for the offer. In addition, it must state: (i) its intentions with regard to the continued employment of the employees and management of the [target] and of its subsidiaries, including any material change in the conditions of employment; (ii) its strategic plans for the [target], and their likely repercussions on employment and the locations of the [target s] places of business;. Following the Kraft review, it is no longer acceptable for bidders to satisfy this requirement with a boilerplate statement promising to observe the employment rights of the target s employees. Instead, the Takeover Panel actively engages with bidders to discuss the proposed level of disclosure in the light of the amount of information the bidder has and the degree of planning it has undertaken with regard to future plans. Consequently, if a bidder has undertaken synergy work that has included preliminary assumptions regarding headcount reductions and/or potential sales or closures of parts of the target s business, it will be required to disclose these plans in its offer document, even if such plans are not finalised. Open for Business Takeovers of UK companies and the involvement of the UK Government 2

3 Conversely, where a bidder has no intention to make any changes with regard to the future business of the target, its employees or locations, a statement to that effect must be made. In addition, Note 3 on Rule 19.1 (which was amended following Kraft s offer for Cadbury) states: If a party to an offer makes a statement in any document, announcement or other information published in relation to an offer relating to any particular course of action it intends to take, or not take, after the end of the offer period, that party will be regarded as being committed to that course of action for a period of 12 months from the date on which the offer period ends, or such other period of time as is specified in the statement, unless there has been a material change of circumstances. Therefore a bidder will be bound to any statement that it makes regarding employees etc. for a period of 12 months (or such other period stated). Enforcement of statements made and the Pfizer commitments Pfizer s proposed commitments In the context of Pfizer s potential bid for AstraZeneca, Pfizer faced a number of accusations that any takeover would lead to cuts in research jobs and R&D investment in the UK. In order to address these concerns, Pfizer wrote an open letter to the British Prime Minister emphasising its five year commitment to retaining a significant R&D innovation hub in the UK. These public statements were the subject of much debate as to their enforceability and whether or not the caveat in the relevant rule of the Takeover Code unless there has been a material change of circumstances meant that the commitments had little real meaning (particularly in the case of generic five year commitments). This, in turn, provided a political challenge for the UK Government that wanted to be seen to have dealt with the concerns relating to continued employment and investment in the UK scientific community. Enforcement by the Takeover Panel or the UK courts The primary responsibility for enforcing the Takeover Code resides with the Takeover Panel. To the surprise of overseas bidders, the Takeover Panel does not fine bidders, targets or their advisers for breaches of the Takeover Code, instead encouraging an open dialogue with market participants (without the threat of financial sanctions undermining such dialogue) and relying on its power of censure (and other non-financial sanctions) to motivate market participants and, in particular, their advisers to ensure compliance with the Takeover Code and rulings of the Takeover Panel. Open for Business Takeovers of UK companies and the involvement of the UK Government 3

4 As Pfizer pointed out, the Takeover Code provides that the Takeover Panel may seek enforcement of its provisions through the UK courts. Therefore, the rules (and any bidder s statements) are technically legally enforceable. However, this analysis needs to be seen in the light of past and current practice. Although this power of enforcement was introduced as part of changes required to implement the European Takeovers Directive in 2006, to date the Takeover Panel has never needed to ask the UK courts to enforce the Takeover Code on its behalf. As noted above, since Kraft s bid for Cadbury, there has been an increased focus on future intention statements by bidders. The ability and desire of the Takeover Panel to use its traditional tools, or, conversely, to resort to the UK courts, to enforce these statements remains unclear. Other means of enforcement Faced with the peculiarities of the UK system outlined above, an overseas bidder wishing to address any concerns about the binding nature of its public statements could seek to supplement the terms of the Takeover Code by creating another mechanism to demonstrate the binding nature of such commitments. Although not seen before in the context of UK takeovers, it is possible to structure commitments so that they are legally enforceable without the need to rely on the Takeover Panel to enforce them. Such commitments would need to be framed carefully if they are to work. For example, it is possible for a bidder to commit to clear financial consequences if objective, measurable milestones are not met. This would require a willing independent third party to agree to assess whether the milestones are in fact met and to have the standing to enforce the commitment so that the corresponding financial consequences are secured. Any such commitment would need to be carefully structured, for both legal and tax purposes, to address various issues arising from the limitations on what a court will enforce against a volunteer and to avoid the complications in trust structures with as yet unidentified beneficiaries. However, if such a commitment were seen to be sufficiently robust, it ought to put an end to any doubts as to whether or not the bidder is actually bound to its public statements. Involvement of the UK Government in UK takeovers Kraft/Cadbury review Kraft s successful takeover of Cadbury provoked much debate in the UK as to whether it was too easy for overseas bidders to acquire UK targets. The resulting changes to the Takeover Code appeared to have addressed the need to give better protection to target boards whilst avoiding greater Open for Business Takeovers of UK companies and the involvement of the UK Government 4

5 intervention by the UK Government. Pfizer s hostile approach to AstraZeneca has re-opened that debate. The public interest test EU law enshrines the concept of free movement of capital between Member States. Any restrictions on the movement of capital between Member States or between Member States and non-member States must be proportionate and are only permitted on the basis of acceptable public interest considerations (which do not include protectionist aims). Therefore there is limited scope for Member States to introduce restrictions on cross-border takeovers (i.e. movements of capital). Although takeovers of most UK champions would probably fall under the merger control jurisdiction of the EU (rather than the UK s Competition and Markets Authority), in the UK, the Enterprise Act 2002 provides that the Competition and Markets Authority (CMA) is required to assess whether or not a takeover should be prohibited on the basis of whether it can be expected to lead to a substantial lessening of competition. The Act does not provide decision-making powers for ministers, save that, consistent with EU law, the Secretary of State can intervene if a takeover gives rise to public interest concerns in the context of (i) issues of national security; (ii) media quality; (iii) plurality and standards; and (iv) financial stability. Notwithstanding the likelihood of merger control jurisdiction being more likely to fall within the jurisdiction of the EU in most very large transactions, there has been (and continues to be) some debate about the merits of extending the UK public interest test to allow the UK Government to intervene in more situations (presumably even if the EU has merger control jurisdiction). Recent press reports referred to the need to be able to intervene in foreign takeovers of critical infrastructure, which tracks the language contained in The Committee on Foreign Investments in the United States (CFIUS) legislation. Any wider public interest test might alternatively re-create the test originally contained within the Fair Trading Act 1973 (notwithstanding that such test had long since been replaced by a competition test by the time the act was replaced by the Enterprise Act 2002). Comparison with the new French Alstom decree The French Government has traditionally been viewed as much more protectionist in its outlook than the UK Government, particularly in the context of transactions involving large French companies. However, until recently, the French Government s legal ability to intervene in foreign takeovers of French companies was limited to acquisitions in a limited number of sectors such as the defence or security sectors. In May of this year, in the context of the ongoing bid for the energy business of Alstom (the French train and turbine maker), the French Government expanded the list of sectors in which foreign investments require state approval to include Open for Business Takeovers of UK companies and the involvement of the UK Government 5

6 transport, energy, water, health and telecommunications companies. The move was reported as an expression of economic patriotism championed by the minister of industry, Arnaud Montebourg. The rule applies to all overseas bidders (including from the EU). Although these new rules were initially reported to be the subject of a review by the EU, they have already enabled the French Government to influence the outcome of the Alstom deal: as a condition to giving its approval, the French State has imposed changes on the structure of the transaction and has entered into an agreement to borrow 20% of the shares in Alstom from Bouygues (an existing large shareholder in Alstom) with a 20-month option to purchase them. It is expected to use this interest to maintain a seat at the table and ensure that the commitments taken by the purchaser as part of the transaction are complied with. Our view of the prevailing winds Following the Kay Review in 2012, the UK Government has stated that it will review the impact of foreign ownership of UK businesses with a report expected later this year. Contacts For further information please contact: Jeremy Parr Partner (+44) jeremy.parr@linklaters.com Nick Rumsby Partner (+44) nick.rumsby@linklaters.com Notwithstanding differing approaches within the EU and elsewhere, the UK Government has long held the belief that the UK economy is a significant beneficiary of foreign direct investment. This approach has been followed by successive governments on both sides of the political spectrum. The recent economic troubles of the UK (and its nascent recovery) appear only to have strengthened this belief. Despite the challenge faced by politicians in reconciling this approach with the demands of specific cases and their portrayal in the press, ultimately we believe that it is unlikely that the UK Government will seek to adopt a different approach in the near future. Overseas bidders considering high profile UK takeovers (hostile and recommended) will, nonetheless, continue to face challenges in dealing with politicians, the UK press and employee representatives. These challenges are likely to increase as the 2015 UK general election approaches and politicians seek to appeal to national and local constituents, particularly given the recent comments attributed to Vince Cable. Well-advised overseas bidders should, therefore, plan how best to be proactive in addressing any likely political concerns and avoid being seen as reactive or under-prepared. This may make a target recommendation even more desirable or may include ensuring that any commitments are seen as truly binding. One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com Open for Business Takeovers of UK companies and the involvement of the UK Government 6