The offeror must disclose details of any agreement or arrangement, made or proposed, under which the target company or its related companies will give direct or indirect financial assistance in connection with the offer. (Clause 12 of Schedule 1)

In some instances where takeovers are virtually bound to succeed (e.g. a majority owner increasing its stake with prebid agreements in place) the response to this clause has been a vague statement about existing financing arrangements possibly being extended to cover the assets of the target company if the takeover succeeds. This does not comply with the requirement to disclose particulars of arrangements under which the target company will give financial assistance in connection with the offer. The Panel will insist on supplementary disclosure that identifies the parties with whom the financing arrangements have been made and the nature of those arrangements.

The Panel appreciates that the form of takeover documents is evolving as the market gains experience with the Code. The Panel executive is happy to discuss takeover disclosure issues with the legal advisers to offerors and target companies before documents are finalised. This advice is without prejudice to the Panel’s position if a document is later challenged, but many potential problems can be averted ahead of time by a call to the Panel executive.

Rule 46 of the Code requires a target company, on receipt of a takeover offer, to prepare a target company statement for distribution to its shareholders. That statement must be certified by two directors and two senior executives of the company in accordance with clause 26 of Schedule 2 of the Code.

The Panel considers that clause 26 certification is an important requirement of the Code. (See also Takeover documents must comply with the Code on page 1).

The Panel has recently declined several applications for exemption from the requirements of clause 26. This practice note aims to help market participants understand the Panel’s approach when considering requests for exemption from clause 26.

Clause 26 requires the chief executive officer, the chief financial officer, and two directors of the target company to certify that to the best of their knowledge and belief, after making proper enquiry, the information contained in or accompanying the target company statement is true and correct and not misleading, whether by omission of any information or otherwise, and includes all the information required to be disclosed by the target company under the Takeovers Code.

The intention of clause 26 is to ensure that the target company’s two most relevant senior executives share responsibility for the factual accuracy of the target company statement. The chief executive officer and chief financial officer must be involved in this process because of their detailed knowledge of the affairs of the company, knowledge which directors may not have. The senior executives are not required to make recommendations to accept or reject the offer; that is a matter for the independent directors of the target company. Nor are they required to certify opinions, such as those expressed in the independent adviser’s report which forms part of the target company statement (see clause 19). However, the certificate does extend to the contents of the independent adviser’s report, including its analysis.

Two representative examples of applications for exemption from clause 26 which the Panel has declined are discussed below.

One unsuccessful application was for an exemption in respect of the chief executive officer and the chief financial officer of a target company who also held the same positions with the offeror. The offeror had over 80% of shares in the target company when the takeover offer was made. The applicant submitted that it would be inappropriate, and contrary to usual practices of good corporate governance, for the senior executives to certify the target company statement. The Panel would not grant the exemption to the two senior executives because, as a consequence, no senior executive of the target company would be taking responsibility for the information contained in or accompanying the target company statement. The Panel invited the target company to provide specific reasons why one or other of the senior executives should be exempted. No specific reasons, other than a perceived conflict of interest, were given and the Panel therefore declined the application.

A second unsuccessful application sought a retrospective exemption for the chief financial officer not to have to sign the clause 26 certificate. The Panel was told that the chief financial officer was on secondment to the target company and was prevented by the terms of his engagement from making any public statement relating to the target company. It was proposed that the next most senior financial officer of the target company could certify instead. In response, the Panel said that the chief financial officer could not avoid the clause 26 requirement because the secondment contract was subject to the overriding effect of rule 5 of the Code (which prevents parties from contracting out of the Code).

In at least two other takeovers the target company has been managed by the offeror and employed no executive staff of its own. In both these cases senior executives of the offeror signed the target company statement in their capacity as persons fulfilling the roles of senior executives of the target company. Although they had conflicts of interest, these people were responsible for the executive functions of the target company, including briefing the independent adviser about the target company’s prospects, so it would not be appropriate to exempt them from the obligation to sign the certificate.