IMPLEMENTATION AGREEMENTS – RULE 13
The Panel notes that it has become customary for offeror and offeree companies seeking to implement an offer regulated by the Irish Takeover Rules, whether by means of a bid or scheme of arrangement, to enter into an implementation agreement including various mutual undertakings, representations, warranties and indemnities and termination rights.
The Panel notes that it has also become customary, where an implementation agreement is in place, for the parties to include, as a condition to the offer, a condition that the implementation agreement not have been terminated, and remain in effect, in accordance with its terms. In certain cases, the offeror and the offeree have also included, as conditions to the offer, conditions that certain matters relating to compliance by the other party with specified terms of the implementation agreement have been satisfied (or have been waived by the party for whose benefit the condition is expressed).
The principal provision of the Irish Takeover Rules applicable to conditions is Rule 13.
Rule 13.1 provides that offer conditions must not normally include any condition the satisfaction of which depends solely on subjective judgments by the directors of the offeror or of the offeree (as the case may be) or is within their control.
Rule 13.3(a) provides that, except for specified regulatory conditions and the acceptance condition, an offeror shall not invoke any condition or pre-condition:
“….so as to cause the offer not to proceed, to lapse or to be withdrawn unless the circumstances that give rise to the right to invoke the condition or pre-condition are of material significance to the offeror in the context of the offer and the offeror has consulted the Panel and the Panel is satisfied that in the prevailing circumstances it would be reasonable for the offeror to do so”.
As explained in Consultation Paper 2 issued by the Panel in July 2011, Rule 13.3(a) establishes two tests that must be satisfied before an offeror can rely on a condition for its benefit.
The first and primary test is the test of “material significance”. An offeror would not be permitted to invoke a condition or pre-condition unless it would incur material adverse commercial consequences in the context of the offer if it were compelled by the Panel to continue with its offer. This test is not restricted to any particular type of condition or pre-conditions and will, for example, apply to any bespoke condition or pre-condition.
The second test is the “reasonableness” test. An offeror who has met the “material significance” test must also consult with the Panel and seek its confirmation that it is reasonable in the circumstances to invoke the condition or pre-condition. The Panel considers that, in most cases, the expectation would be that an offeror, acting in good faith, that has met the “material significance” test will also meet the “reasonableness” test.
Rule 13.3(d) establishes, similarly, “material significance” and “reasonableness” tests that must be satisfied before an offeree can invoke, or cause or permit the offeror to invoke, any condition to an offer.
Generally speaking, the Irish Takeover Rules do not prohibit or seek to inhibit parties to an offer agreeing contractual arrangements regulating the conduct of the offer where those arrangements are consistent with the requirements of the Irish Takeover Rules. The Panel’s practice has been, accordingly, to permit parties to an offer to enter into an implementation agreement including where, under its terms, the parties reserve the ability, in a wide range of circumstances, to terminate the implementation agreement.
The Panel considers that Rule 13.1 does not prohibit the inclusion of conditions to an offer that the implementation agreement not have been terminated, or that certain matters relating to compliance by the other party with specified terms of the implementation agreement have been satisfied, unless the satisfaction of any such condition depends solely on subjective judgments by the directors of the party for whose benefit the condition is expressed or is within the control of such party.
If it is a condition to an offer that the implementation agreement not have been terminated, the termination events prescribed by that implementation agreement (i.e., the circumstances specified in the agreement in which the agreement may be terminated by the parties) are, in effect, also conditions to the offer. Having regard to the desirability for clarity and consistency, and to ensure that there is a high degree of certainty, the Panel expects that such termination events would, in those circumstances, be expressly included as conditions to the offer and stated in terms compliant with Rule 13.1.
The Panel emphasises, however, that the invocation of a condition to an offer, including any such condition, is subject to the consent of the Panel and falls to be assessed against the “material significance” and “reasonableness” tests prescribed by Rule 13.3. The Panel views Rule 13.3 as a fundamental provision of the Irish Takeover Rules. The effect of Rule 13.3 is to overlay a materiality and reasonableness threshold on the ability of any party to invoke a condition to the offer regardless of the legal and contractual effect of the condition (and, in the case of a condition that an implementation agreement not have been terminated, regardless of the legal and contractual effect of the contractual provisions that may have been agreed by the parties in the implementation agreement).
The Panel considers that Rule 13.3 is understood to be the key protection against widely drafted conditions being invoked contrary to the reasonable expectations of the offeree shareholders, the market and all parties to an offer. It is important that the standard for the invocation of a condition causing an offer to lapse or be withdrawn should be predictable and readily understood.
The Panel notes that the fact that it allows or approves the entry into by parties to an offer of an implementation agreement shall not be taken into account in any determination of the Panel under Rule 13.3 as to whether, in the prevailing circumstances, it would be reasonable for a party to invoke a condition to the offer to lapse or withdraw the offer.
The Panel reminds offerors of their obligation under Rule 13.3(b) to use all reasonable efforts, following the announcement of a firm intention to make an offer, to ensure the satisfaction of every condition and pre-condition to which the offer or the making of the offer is subject. The Panel should be consulted in case of doubt.
14 February 2017