Bulletins | April 23, 2018

Melrose’s takeover of GKN provides another instance of post-offer undertakings

In one of the most dramatic corporate struggles of recent time, Melrose Industries Plc (Melrose) won a significant battle in its hostile £7.9 billion bid for GKN Plc (GKN) has 52% of shareholders voted in favour of the takeover by the US based turnaround specialist. The only legal challenge that stood in Melrose’s way was intervention by the UK government but the latest reports suggest that the takeover will be given the green light.

Post-Brexit uncertainty and Melrose’s business model of buying, improving and selling businesses within five years have raised concerns about the implications for Britain’s industrial strategy. GKN is a significant investor in, and supplier of, aerospace and automotive parts. Tom Williams, the chief operating officer of the commercial aircraft division of Airbus, GKN’s biggest customer, has questioned Melrose’s approach and, consequently, the benefit to UK aerospace industry; saying “the industry does not lend itself to shorter-term financial investment which naturally reduces R & D budgets and limits vital innovation.” This could have a material effect on jobs in the UK industrial sector and the UK’s ability to innovate in line with market demands.

GKN’s involvement in programs with the Ministry of Defence, such as supplying parts and technology to Britain’s armed forces, led to the possibility of government intervention. Britain’s business secretary, Greg Clark, has the power to intervene in mergers and takeovers in specific instances of public interest, such as national security, and can issue a public-interest intervention notice to refer the matter to the Competition and Markets Authority (CMA) for a preliminary assessment.

Melrose heeded this threat to their proposed takeover and attempted to pre-empted the guarantees the government may seek by obliging upon themselves legally binding post-offer undertakings over next five years:

  • to maintain the Melrose Group headquarters in the UK;
  • to maintain the listing of Melrose’s shares on the Official List maintained by the UKLA and admitted to trading on the London Stock Exchange’s main market for listed securities;
  • that the majority of Melrose’s directors will be resident in the UK; and
  • that research and development spend will be at least 2.2% of GKN’s aggregate sales.

However, while these post-offer undertakings may have warded off a CMA referral, it is anticipated that Mr. Clark and Gavin Williamson, the defence secretary, will still seek additional guarantees from Melrose to safeguard GKN’s defence work, particularly in respect of GKN’s aerospace technology.

Post-offer undertakings

The concept of “post-offer undertakings” was introduced into the UK Takeover Code (the Code) in January 2015 and was recently amended (see Changes to the Takeover Code in our Winter 2018 In Counsel). Prior to this, voluntary commitments (i.e. statements as to what action the bidder may or may not take) and statements of intention, were both effectively deemed to be binding commitments.

Since the introduction of the new rules in January 2015, there has been a distinction between “post-offer undertakings” and “post-offer statements of intent”, with only the former now being legally binding.

Post-offer undertakings and any accompanying qualifications or conditions must be specific and precise, readily understandable and capable of objective assessment and not dependent on subjective judgements of the relevant party or its directors.

The Takeover Panel (the Panel) is granted a number of powers under the Code to ensure compliance by a party of its post-offer undertakings. As part of those powers, the party must:

  • provide written reports to the Panel to confirm compliance with the undertaking; and
  • at the request of the Panel, appoint an independent supervisor to monitor compliance.

If a party fails to comply with its commitments, the Panel is able to obtain an order from the court to seek compliance. The Panel also has disciplinary powers which include:

  • issuing a statement of censure;
  • reporting the conduct to a regulatory authority or professional body in the UK or overseas. In the UK, the Financial Conduct Authority (FCA) could then investigate that company’s conduct to consider whether the behavior constitutes market abuse; or
  • publishing a statement indicating, in the Panel’s opinion, the company is not likely to comply with the Code, which in turn means that firms authorised by the FCA cannot act for the defaulting party in connection to a transaction to which the Code applies.

While the Code imposes no obligation to give post-offer undertakings, as in the case of Melrose, the political environment may leave a foreign bidder with few other options. The takeover by Melrose is seen by many as evidence of the increasing vulnerability of UK companies and industries in the transforming business and geopolitical landscape. Such is the mounting concern for assets and skills leaving Britain, the government is facing increasing pressure to exercise its limited powers when it comes to intervening in mergers and takeovers of UK companies.

For an analysis of pensions issues of the proposed takeover of GKN please see GKN and Melrose… the battle continues.