Rule 21.2 of the City Code was introduced in 2011 and prohibits offer-related arrangements (such as break fees) between target companies and bidders. The rule incorporates certain exceptions such as irrevocable commitments and letter of intent with target shareholders to accept the offer or vote in favour of the scheme, which are permitted.
In its review of the Code changes in November 2012, the Code Committee stated that it would not allow parties to include provisions in irrevocable undertakings from shareholders who are also target directors such as non-solicitation of other bids or an agreement not to recommend any rival bids. Target directors are persons acting in concert with the target company and should not therefore enter into deal restrictions prohibited by Rule 21.2.
On 17 January 2014 the Panel issued Practice Statement 27, which confirms the Panel Executive’s view that rule 21.2(b)(iv) (the exception for irrevocable commitments and letters of intent) does not permit a target director to enter into restrictions such as agreements:
- not to solicit competing bids
- to recommend the offer
- to notify the bidder or rival bids
- to convene board meetings and/or vote in favour of board resolutions necessary to implement the offer
- to provide due diligence information to the target
- to assist the bidder in satisfying its offer conditions or preparing its offer document; or
- to conduct the target’s business in a particular way.
Including a carve-out for the target directors’ statutory or fiduciary duties will not cure such breaches of the Code. However, the Panel will permit provisions designed “solely” to give effect to commitments to accept the offer (or vote in favour of the scheme) such as an undertaking not to dispose of shares or withdraw an acceptance, warranties on title to the shares or undertakings to choose a particular form of offer consideration.
The key distinction is whether the undertakings are in the target director’s capacity as a shareholder (likely to be acceptable) or as a director (likely to be in breach).
The Practice Statement confirms that the Panel will not allow parties to circumvent the restrictions in rule 21.1 by extending directors’ irrevocable undertakings. In practice, the directors’ irrevocables should only include commitments which are also included in non-director irrevocables.