What are the latest hot topics in UK public M&A?
In this Talking Points video, our guest speaker Selina Sagayam, International Corporate Finance Partner at Gibson Dunn & Crutcher, discusses trends and hot topics with Kavita Bassan, part of the Lexis®PSL Corporate team.
The video focuses on:
- some of the trends examined in our recent Market Tracker public M&A trend report, ‘Tracking the market: Trends in UK public M&A for the first half of 2014‘, including:
- the domination of the UK public M&A market by foreign bidders, and
- the dampening of bid activity fuelled by US tax inversion strategies and other tax benefits such as the UK patent box scheme
- the repercussions of Pfizer’s hostile bid for the UK’s AstraZeneca, including:
- the proposals for the introduction of another public interest test
- whether or not hostile foreign bids require greater policing than other takeover bids, and
- the Takeover Panel’s proposals in relation to post-offer undertakings and post-offer statements of intention
In-Depth Summary of the topics covered in the video
To provide more details to the discussion in the video, we have also produced the following summary.
Domination of the UK public M&A market by foreign bidders
The video starts by looking at what has been driving foreign companies to seek to acquire UK listed companies in the last year. Foreign bidders have dominated the UK public M&A market due to various factors, including:
- the transparency of the UK’s financial services system
- the UK’s open economy
- the clarity and certainty of undertaking a takeover bid in the UK compared with other European countries, and
- the gradual recovery from the global financial crisis and US companies’ expanded cash reserves
Muting of US tax inversion strategies which have been fuelling UK bid activity
Tax inversions, where US corporations re-domicile their headquarters overseas for tax savings reasons, have been hitting the headlines with renewed vigour in the past year. In the video, we examine the backdrop to the recent surge in US tax inversion transactions, outlining the relevant US tax rules and the methods that US companies have used to try to make tax savings/benefit from tax breaks.
The US has one of the highest corporation tax rates in the world, and US corporations are taxed on their global revenues. Over the years, US corporations have made use of various tax loopholes to try and reduce the amount of tax they pay. While some loopholes have been closed off, US companies could still mitigate the impact of the US global tax rules by merging with a non-US corporation and redomiciling their headquarters overseas—provided US shareholders did not constitute more than (broadly) 80% of the enlarged shareholder group.
Recent bids such as Pfizer’s much publicised hostile bid for AstraZeneca earlier in 2014 prompted the US administration to look again at the use of tax inversion strategies and the video discusses the steps now being taken to combat them, including:
- the statements by the Obama administration on 24 July 2014 against US corporations’ use of tax inversions for tax savings reasons
- the US Treasury Department’s new rules, closing certain corporation tax loopholes, including tax inversion and ‘hopscotch’ loans (ie loans from non-US susidiaries to a US parent to reduce the amount of revenues that are subject to US tax), which apply to deals closing on or after 22 September 2014 (regardless of when announced) (see the Treasury’s press release: Fact Sheet: Treasury Actions to Rein in Corporate Tax Inversions), and
- the US Treasury Department’s proposals for the introduction of as yet unspecified additional rules in relation to asset stripping tax loopholes
The new rules severely curtail the benefits of the tax inversion loophole and therefore make it more difficult for US corporations to reduce the amount of tax they have to pay. Where tax reduction is the primary driving force for making a bid for an overseas company, bidders are likely to re-assess the merits of making such a bid. A likely consequence in the immediate future is that US corporations will make fewer bids for UK listed companies until there is greater certainty on the new rules and what the forthcoming additional rules will look like.
UK patent box schemes
In parallel with the changes to the US tax rules, developments in Europe (eg the EU’s scrutiny of what it regards as ‘potentially disguised state aids’) are also leading US corporations to tread more cautiously.
As a means to attract R&D to the UK, Chancellor George Osborne introduced competitive tax breaks for patents in the UK. Under the UK patent box scheme (which came into effect on 1 April 2013), companies that meet the relevant requirements pay a reduced corporation tax rate of 10% on income from UK or European patents held in the UK. The scheme has proved to be successful with the likes of GlaxoSmithKline investing millions in the UK as a result (see GSK announces £200 million investment in UK advanced manufacturing and science).
Since summer last year, Germany has publicly criticised and challenged the use of patent box tax incentives by the UK (and other EU Member States) as being (among other things) anti-competitive/constituting a harmful tax practice. Germany filed a complaint with the European Commission, which led to the scheme being discussed at last December’s ECOFIN meeting (see Press release of the 3281st Council meeting Economic and Financial Affairs on 10 December 2013, page 21).
The issue is also relevant for the OECD Forum on Harmful Tax Practices which has led work in relation to the OECD’s Base Erosion and Profit Shifting project, specifically Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance.
With this backdrop, the UK and German Governments recently released a joint announcement setting out their agreed proposals for new rules for preferential intellectual property regimes (ie, on restricting the availability of patent box tax breaks). The proposed reforms will mean that tax breaks for patents will only be granted if they are tied directly to research, development and innovation operations situated in the UK. See our news analysis piece on the proposals, Levelling the IP tax landscape, as well as Germany and UK agree patent box compromise, LNB News 11/11/2014 102 for further details.
Currently, patent box scheme rules effectively give companies a tax break of 10% of revenues derived from intellectual property. The proposed reforms will mean that tax breaks for patents will only be granted if they are tied directly to research, development and innovation operations situated in the UK.
In summary, the landscape has become difficult to predict leading to significant deal risk in the case of deals driven primarily by potential tax savings.
The proposals for the introduction of an additional public interest test
There has also been fallout this side of the Atlantic from Pfizer’s bid for AstraZeneca. In May 2014, Business Secretary Vince Cable suggested that another public interest test should be introduced, giving the UK Government the power to intervene in, and block, hostile bids which are against the national interest (see eg The Andrew Marr Show—transcript of interview with Vince Cable, 13 July 2014 pp 1–4). Shadow Business Secretary Chukka Umunna, in his open letter to Vince Cable on the public interest test in light of the proposed Pfizer takeover of AstraZeneca, suggests that the maintenance of strategic R&D and science (the so-called ‘science-based’ test) be added as an additional category to the public interest test already exists in English law pursuant to the Enterprise Act 2002 (EnA 2002).
- the evolution of the UK Government’s ability to intervene in foreign takeover bids, from the protectionist position under the Fair Trading Act 1973 to the more open, competition-based approach (ie whether a proposed merger would lead to a substantial lessening of competition) under EnA 2002
- the existing public interest test, which allows the Secretary of State to intervene in mergers where they give rise to certain specified public interest concerns (specifically, issues of national security, media quality, plurality & standards and financial stability)—see EnA 2002, ss 42, 58
- the barriers to introducing another public interest test, not least:
- the necessary involvement of the European Commission in assessing whether any new public interest test is compatible with the general principles of EU law, and
- economic considerations, including the fact that cross border takeovers benefit the UK economy(as highlighted by BIS in its Implementation of the Kay Review: Progress Report issued in October 2014—see paragraphs 2.98–2.113)
- whether an additional public interest test would be desirable and feasible, including transparency, predictability and scoping issues (eg what would the parameters of the suggested ‘science-based’ test, be and what about other sectors/industries?), and whether the introduction of another public interest test would re-politicise the M&A arena and could be a backward step
In short, the discussion concludes that there has been some backtracking on the need for an additional public interest test and the signs are pointing to it being unlikely that one will be introduced.
Policing foreign hostile bids
There has been much media debate about hostile bids by foreign bidders for UK listed companies. In this section of the video, Selina questions:
- the assumptions many people make about foreign bidders and domestic targets (given that, in reality, the national identity of a company is often based on its shareholder base, and the spread of shareholders in foreign bidders and UK targets is not always that dissimilar
- what exactly the national authorities and regulators are trying to police
- whether takeovers are a good thing in principle
One aspect of policing takeovers is the concept of requiring bidders to give positive assurances about certain matters and, if they do, how to enforce them.
Post-offer undertakings and post-offer statements of intention
During Pfizer’s possible offer for AstraZeneca, Pfizer stated publicly that (subject to a successful combination with AstraZeneca) it would make several binding commitments for a minimum of five years. Pfizer’s statements caused confusion in the market—there was uncertainty about their weight, impact and enforceablity in the event of non-compliance by Pfizer.
Although the Takeover Code requires bidders to make statements of intention in relation to certain issues (eg relocation of place of business, intentions regarding employees), it does not (and is unlikely in the future to) require bidders to provide purportedly binding undertakings. Where such statements of intention are made, however, the Panel will treat them as binding commitments for 12 months or such other period as is specified.
In direct response to Pfizer’s statements, the Takeover Panel issued on 15 September 2014 its Consultation on post-offer undertakings and intention statement in relation to proposed amendments to the Takeover Code to deal with post offer assurances (see also Panel plans new regulation of statements framework, LNB News 15/09/2014 126). The consultation closed on 24 October 2014 and the Panel’s response is still awaited.
In this section of the video, Selina outlines the Takeover Panel’s proposals, which distinguish between:
- post-offer undertakings/commitments—if a bidder goes beyond making a statement of intention and publicly gives a commitment or undertaking to do or not to do something (eg to retain R&D facilities in the UK) unconditionally, then such undertakings/commitments will be binding and a bidder may face severe consequences if it breaches them, and
- post-offer statements of intention—although bidders will need to undertake verification and diligence before making statements of intention, the Takeover Panel will not force a bidder to comply with them
The video also:
- highlights that post-offer undertakings/commitments cannot (without Takeover Panel consent) contain any carve outs, eg material adverse change, fiduciary out (eg compliance with directors’ duties) or force majeure event, and
- discusses enforcement by the Takeover Panel, including:
- self-reporting by the bidder on the state of the undertaking
- monitoring by independent experts appointed by the Takeover Panel, and
- the Takeover Panel’s statement that it will enforce the undertakings/commitments unless another public authority/regulator (eg the Competition and Markets Authority) takes enforcement action
In light of these proposed changes to the Takeover Code, practitioners are advising their bidder clients to tread extremely carefully and certainly not to make any voluntary commitments or undertakings.
Talking Points Series
This video was part of the Talking Points series. Find other Talking Points videos here.
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