'Cold shouldering' Background Panel findings FCA statement Comment
On January 10 2017 the UK Takeover Panel published Panel Statement 2017/1, in which it declared the 'cold shouldering' of Bob Morton and John Garner to be a breach of Section 9(a) of the Introduction to the Takeover Code. The statement is helpful in understanding the panel's approach to 'cold shouldering', as the penalty has been imposed on only two previous occasions – in 1992 and 2010.
Section 11(b) of the Introduction to the Takeover Code states that if the panel finds a breach of the code, it may publish a panel statement indicating that the offender is unlikely to comply with the code. The consequence of such statement is that members of the UK Financial Conduct Authority (FCA) and certain professional bodies would not, in accordance with their respective rules, be able to act for such person in a transaction subject to the code (ie, that person would be 'cold shouldered'). This penalty is the most serious disciplinary power available to the panel.
On July 17 2013 Groundlinks Limited – a British Virgin Islands company owned by the trustee for one of Morton's family trusts – acquired shares in Hubco Investments plc, a company admitted to trading on PLUS. In February 2015 Morton became aware that this acquisition may have increased the holdings in Hubco of companies, owned either by trustees of his family trusts or by himself and his wife, to more than 30% of Hubco's issued share capital, thus potentially triggering an obligation to make a mandatory offer to other Hubco shareholders under Rule 9 of the Takeover Code. No such offer was made at the time.
The panel commenced its investigation into this alleged breach of Rule 9 in April 2015. During a call with the panel, Morton contended that Rule 9 had not been triggered as the Hubco shares were acquired by Groundlinks on trust for Garner at the time of the acquisition. As Garner was unable to afford the purchase of such shares at that time, Morton informed the panel that the purchase was funded against a promissory note from Garner to repay the consideration for such shares at a later time.
In May 2015 Garner confirmed this version of the events and informed the panel that the promissory note had been signed and dated at the time of the acquisition. He then provided the panel with a copy of the note dated July 17 2013. In August 2015 the panel discovered that this note was drafted in March 2015 by Morton's solicitor and that Garner had backdated the note to July 17 2013. This led to a number of factual retractions by both Morton and Garner on the signing and dating of the note, although they maintained that the relevant Hubco shares were acquired by Groundlinks for Garner as beneficiary.
Section 9(a) of the Introduction to the Takeover Code states that the panel expects parties to deal with it in an open and cooperative way. In dealing with the panel, parties must disclose all relevant information known to them, and correct or update that information if it changes. Specifically, they must take all reasonable care not to provide incorrect, incomplete or misleading information to the panel.
In Panel Statement 2017/1 the panel ruled that:
- the agreement alleged to have been entered into by Morton and Garner on the ownership of the relevant Hubco shares was a lie; and
- Morton and Garner had deliberately attempted to mislead the panel into believing that there was such an agreement through the production of the backdated promissory note.
Therefore, the panel decided that Morton and Garner were in breach of Section 9(a), as they had systematically provided the panel with information which they knew to be false, in order to deceive the panel into believing that there was no breach of Rule 9 of the Takeover Code. Considering the extent of this breach, the panel ruled that Morton and Garner are persons who are unlikely to comply with the code.
The panel ruled that Morton be cold shouldered for six years. It justified this timeframe on the basis that Morton's collaboration with Garner in providing the panel with a "dishonestly back-dated promissory note" which purported to acknowledge a transaction that he had invented constituted "particularly egregious misconduct". Further, Morton was a repeat offender; he had been disciplined by the panel on three previous occasions. In 2015 the panel publicly censured Morton for failing to make a Rule 9-mandatory offer in connection with the purchase of shares in Armour Group plc by his four sons in 2011.
Morton's counsel had argued that the penalty was too harsh as the case did not involve a breach of Rule 9. Morton (together with persons acting in concert with him) held more than 50% of the Hubco shares at the relevant time and, therefore, was not under an obligation to make a Rule 9 offer. In response, the panel noted that detriment to others is only one of many criteria which the panel may take into consideration when exercising its disciplinary powers. As it is vital to the efficacy of the UK takeover regime that persons act honestly and in good faith with the panel, the panel ruled that Morton should be cold shouldered as a deterrence to others.
Regarding Garner – who will be cold shouldered for two years – the panel noted that it had considered whether it could impose a different penalty. Garner's counsel had argued that his misconduct was out of character and his business career was at a relatively early stage. The panel concluded that it was unable to impose a different penalty, as Garner's role in misleading the panel was significant. Specifically, he had signed and dishonestly backdated the note for a fictitious debt.
After Panel Statement 2017/1 was published, the FCA issued a statement to remind all regulated firms that – in accordance with MAR 4.3 (Support of the Takeover Panel's Functions) of the FCA Handbook – they should not deal with Garner, Morton or their principals on any transactions applicable to the code. In addition, the FCA stated that it expects regulated firms to inform all their approved persons that they should not deal with these individuals on such transactions. The FCA added that a breach of MAR 4.3 may leave a firm and any individuals exposed to enforcement action by the FCA.
Panel Statement 2017/1 is a helpful reminder of the need for thorough and robust 'concert party' analysis in relation to the Takeover Code. If Morton had undertaken such analysis, he would not have needed to devise a fiction to avoid the application of Rule 9 of the code. The panel has stated on numerous occasions that parties should consult with the panel if in any doubt regarding application of the code.
The statement also provides a useful insight into the factors that the panel takes into account when determining whether it should cold shoulder an individual and the duration of such penalty. If the panel is unable to trust the information that an individual provides, Panel Statement 2017/1 indicates that the panel is likely to cold shoulder the individual. The panel considers compliance with Section 9(a) essential if it is to perform its statutory duty to enforce the code and regulate the conduct of takeovers.
Finally, backdating a document is regarded as deceitful behaviour, as such document represents itself as having been executed earlier than it was. This can constitute a criminal offence for the signatory under the Fraud Act 2006 and other criminal legislation.
For further information on this topic please contact Will Pearce or William Tong at Davis Polk & Wardwell LLP by telephone (+44 20 7418 1300) or email ([email protected] or [email protected]). The Davis Polk & Wardwell website can be accessed at www.davispolk.com.
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