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06 February 2019
One of the highest profile public M&A transactions of 2018 was the competitive takeover battle between Comcast and Fox for control of Sky, against the backdrop of Disney's proposed merger with Fox. This article on the transaction looks at the post-offer commitments given by each of the bidders in connection with their competing offers.(1)
The current post-offer commitments regime – comprising the ability of a party to an offer to give legally binding post-offer undertakings (POUs) and imposing a stricter regime on statements of intent made by a party – was introduced in 2015 and reinforced in early 2018.
Fox agreed to a number of post-offer commitments relating to Sky News, with the objective of securing political and regulatory support for its takeover of Sky. When Comcast indicated its interest in acquiring Sky in early 2018, it sought on a voluntary basis to match Fox's commitments including, among other things, a guarantee of the continued operation and long-term funding of an editorially independent Sky News, with a view to ensuring its offer would be viewed as competitive.
Following the use of POUs by Softbank in securing the takeover of ARM and Melrose in its pursuit of GKN, the undertakings and statements of intention given by the parties relating to Sky further demonstrated a willingness on the part of bidders to harness the post-offer commitments tool in efforts to secure the success of an offer.
The Takeover Code provides a framework for the giving of post-offer commitments by parties to a takeover offer. The framework, which was refined in 2015 to provide clarity for shareholders and other stakeholders as to the status of statements made by parties to an offer relating to action they will, or will not, take following an offer, draws a clear distinction between POUs and 'post-offer statements of intention' (SOIs), to which separate rules apply.
What is a POU?
The POU regime facilitates the giving by a bidder or target of a legally binding commitment, enforceable by the Takeover Panel (who may apply to the court to seek enforcement), which must:
Further, the terms of a POU must prominently state any qualification or condition to which the undertaking is subject, which itself must be objective.
A party to an offer must comply with the terms of any POU for the period of time specified in the undertaking and must complete any course of action committed to by the date specified in the undertaking. Departure from the terms of a POU will be excused only if a qualification or condition set out in the undertaking applies and after having obtained the panel's consent to rely on it.
The code lays out a reporting regime designed to ensure compliance with POUs – parties will be required to report on compliance with a POU on a not less than annual basis in such form as the panel may require, and are likely to be required by the panel to appoint a supervisor to monitor compliance with the POU.
What is a post-offer SOI?
An SOI is also a statement made by a party to an offer relating to a particular course of action that the party intends to take, or not take, after the end of the offer period. Unlike a POU, an SOI is not legally binding, but nonetheless must be an accurate statement of the party's intention at the time it is made, and it must be made on reasonable grounds.
Further, if a party wishes to depart from an SOI during the 12-month period following an offer period, the party must consult the panel and must make an announcement describing the nature of, and reasons for, the departure from the SOI (unless the panel relieves the party of that obligation). Accordingly, while the SOI regime may not provide the same degree of regulatory rigour and oversight as the POU regime, a party should give an SOI only with due care and attention.
A party which has made an SOI will also be required to confirm to the panel whether it has complied with the SOI at the end of the 12 months following the offer period, and to publish that confirmation.
The code mandates that a bidder must give certain SOIs regarding the impact of an offer on the target's business, employees and pension schemes. In addition, a bidder may make elect to give certain other specific SOIs regarding the target's business going forward.
In addition to the takeover of Sky, POUs have been used on two other occasions since the introduction of the regime in 2015.
In 2016, Softbank became the first bidder to give POUs – giving pledges to maintain technology company ARM's global headquarters in Cambridge for five years and to double the number of ARM employees in the United Kingdom over that five-year period – in order to secure the support of the UK government for its proposed acquisition of ARM. Softbank also gave a POU to procure that ARM entered into equivalent POUs.
In 2018, Melrose used the tool in connection with its hostile offer for UK engineer GKN. Pre-empting the UK government's intervention in the offer – which had the attention of the business secretary for national security reasons, given GKN's involvement in programmes with the Ministry of Defence – Melrose offered a package of commitments and undertakings, including POUs, which guaranteed the merged business's presence in the United Kingdom and increased R&D for a five-year period. Melrose separately agreed to a set of undertakings with the UK government to safeguard GKN's defence business.
Both Fox and Comcast made certain post-offer commitments relating to Sky.
Fox, which made its Rule 2.7 firm offer announcement for Sky in December 2016, announced certain specific SOIs with regard to Sky, including to:
Subsequent to Fox's firm offer announcement, the secretary of state for digital, culture, media and sport determined that Fox's offer to take control of the remaining 61% of Sky was not in the public interest due to media plurality concerns – as a result, and following extensive engagement with the UK competition regulator, Fox proposed various remedies with respect to the continued operation of an independent Sky News – the secretary of state ultimately accepting that a divestiture of Sky News to a suitable third party was the most effective remedy.
Against this backdrop, Comcast also offered a package of post-offer commitments in respect of the Sky business. This included a suite of SOIs which were broadly analogous to the SOIs given by Fox. In addition, Comcast, which was not subject to a UK regulatory investigation in the same way Fox was, went further and offered a suite of legally binding POUs, which were replicated by Sky.
Under the POUs, Comcast and Sky committed for a five-year period to:
On the closing of the deal, Comcast and Sky executed a legally binding deed poll in favour of the Sky News editorial board which had the effect of extending the parties' commitment to maintaining an editorially independent and funded Sky News from five to 10 years.
Post-offer undertakings offer a versatile M&A tool to bidders in the face of potential political, regulatory or other stakeholder pressure. However, parties need to be aware of the strict requirements and limitations that apply to the giving of such statements.
Parties must consult with the panel in advance of making a POU and should factor the time and documentary requirements into the overall deal timetable – given the panel's role in policing a POU, extensive engagement with the panel is needed in order for the panel to evaluate and get comfortable with a particular POU. This includes:
Parties should also be aware of the limitations of the POU regime. For example, while the duration of POUs is not prescribed in the code, the panel will generally expect a party to seek to make a POU for a maximum period of five years. The panel may also decide not to permit the giving of a POU where it determines that the proposed commitment would more appropriately be given in a different form, such as by private contractual commitment or an undertaking to another regulator.
Financial advisers should also remain conscious of their responsibilities with respect to the code if their client proposes to give a POU, ensuring the client is fully aware of the code requirements associated with the POU regime at the time of giving the undertaking.
For further information on this topic please contact Will Pearce or Ben Stewart at Davis Polk & Wardwell London LLP by telephone (+44 20 7418 1300) or email (email@example.com or firstname.lastname@example.org). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
(1) This article is part of a series on the transaction. For the previous articles in the series, please see "Sky takeover – applying the chain principle" and "Sky takeover – regulating an auction process".
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