Panel publicly criticises advisers for breaching the Takeover Code

Panel publicly criticises advisers for breaching the Takeover Code
The Takeover Panel has publicly criticised Credit Suisse, Freshfields and Holman Fenwick Willan for breaching important provisions of the Introduction to the Takeover Code. Kavita Bassan, solicitor in the Lexis®PSL Corporate team, discusses the details of the recent Panel Statement and what they mean for corporate lawyers.

Original news

Takeover Panel issues Panel Statement 2015/15 on Asia Resource Minerals plc (formerly Bumi plc), LNB News 05/11/2015 68
The Takeover Panel has publicly criticised Credit Suisse (Singapore) Limited and Credit Suisse Securities (Europe) Limited (Credit Suisse), Freshfields Bruckhaus Deringer LLP (Freshfields) and Holman Fenwick and Willan LLP (HFW) for their conduct as advisers in relation to the acquisition by Vallar plc of interests in two Indonesian coal mining companies. They, along with JP Morgan Limited (JP Morgan), were found to have committed serious breaches of sections of the introduction to the Takeover Code (the Code).

What was the Panel ruling?

Panel Statement 2015/15 (PS 2015/15) relates to the conduct of legal and financial advisers involved in certain transactions which resulted in a serious breach of Rule 9.1 of the Code (which was the subject of an earlier Panel Statement). The Panel has concluded that:

  • the conduct of the advisers in connection with those transactions gave rise to a number of separate breaches of important provisions of the Introduction to the Code (the Introduction)
  • the respective conduct of Credit Suisse, Freshfields and HFW was sufficiently serious to merit the issue by the Panel of a statement of public censure in accordance with Section 11(b) of the Introduction, and
  • the conduct of JP Morgan was disappointing but not sufficiently serious to merit public criticism

For comments on PS 2015/15 by Patrick Sarch, partner at Clifford Chance LLP, see section What lessons should corporate lawyers draw from the recent Panel Statement? What should they take away from PS 2015/15?, below.

What does this mean for the advisers involved?

This is the first time that the Panel has censured a law firm since its creation in 1968. Although the Panel did not publicly criticise financial adviser Lazard in Panel Statement 2010/14—in which it publicly criticised Kraft Foods Inc for failing to meet the requirements under Rule 19.1 in relation to statements made during the offer for Cadburys plc—it is thought to have privately censured Lazard for failing to fully discharge its responsibilities under Note 1 to Rule 19.1 in guiding Kraft in relation to information published during the offer.However, in PS 2015/15, the Panel:

  • has not publicly criticised any individual lawyer or financial adviser at the advisers, and
  • accepts that, although each of Credit Suisse, Freshfields and HFW failed to satisfy the requirements of Section 9(a) of the Introduction to the Code, there was no intention on the part of any of them to mislead the Panel

Public censure by the Panel is the highest level of censure in the Panel’s armoury, and it can have a significant impact on the reputation of those being censured. It is a powerful tool which is rarely used by the Panel, in particular in relation to advisers.

However, the Panel has not imposed any other penalties, such as financial compensation orders or ‘cold-shouldering’ penalties (the harshest penalty at the Panel’s disposal under which it can effectively bar persons from engaging in takeover-related activities for a specified period of time).

What is the background to PS 2015/15?

This Panel Statement builds on Panel Statement 2012/9 on Bumi Plc (PS 2012/9), issued by the Panel on 19 December 2012.PS 2012/9 related to the acquisition by listed shell company Vallar Plc (Vallar) of:

  • a 25% interest in PT Bumi Resources Tbk (the Bumi Resources transaction) from PT Bakrie & Brothers Tbk and Long Haul Holdings Limited (the Bakrie Group), in exchange for which the Bakrie Group were issued with shares in Vallar, a proportion of which were issued with suspended voting rights, so that Bakrie Group’s aggregate voting rights in Vallar did not exceed approximately 29.9% of the voting rights in Vallar (and accordingly would not give rise to any mandatory offer obligation pursuant to Rule 9 of the Code)
  • a 75% interest in PT Berau Coal Energy Tbk (the Berau transaction) from PT Bukit Mutiara (Bukit Mutiara), in exchange for which Bukit Mutiara was issued new shares in Vallar carrying approximately 20.4% of the voting rights in Vallar

Subsequently, Bumi Plc (Bumi) was established as the parent company of Vallar and listed on the premium listing segment of the Official List. Bumi changed its name to Asia Resource Minerals plc in 2013.

The Panel Executive (Executive) investigated whether the Bakrie Group and Bukit Mutiara (the Indonesian parties) acted in concert in relation to the Bumi Resources transaction and the Berau transactions (together, the transactions).

Under Rule 9.1 of the Code, if a person acquires, whether by a series of transactions over a period of time or not, an interest in shares which (when aggregated with shares in which persons acting in concert with him are interested) carry 30% or more of the voting rights of a company, that person must make an offer for all the remaining shares in the company, other than for those already owned by him or any concert parties. The Panel will normally waive the obligation to make such an offer that would otherwise arise from the issue of new securities as consideration for an acquisition or a cash subscription, if there is an independent vote at a shareholder meeting. To be effective, the resolution must be approved by a majority of independent shareholders of the offeree voting on a poll (a whitewash dispensation).

The Panel found that the completion of the transactions resulted in a serious breach of Rule 9.1 of the Code, concluding that the Indonesian parties should have been regarded as acting in concert, both at the time of the transactions and subsequently. The Executive ruled that:

  • the aggregate voting interests of the Indonesian parties and any persons acting in concert with them be reduced to less than 30% of the voting rights in Bumi Plc, and
  • pending disposal, the aggregate number of voting rights that may be exercised at any general meeting of Bumi by the Indonesian parties and any persons acting in concert with either of them, must not exceed 29.9% of all of the voting rights exercisable at any such meeting

Having noted that the transactions could have been the subject of a whitewash dispensation, but were not, the Executive stated that it was separately investigating why the existence of the concert party was not previously brought to its attention and why a Rule 9 waiver was not sought in relation to the transactions.

What were the key facts?

Who were the parties and their advisers?

The table below sets out the parties and their advisers:

[table id=4 /]

What were the key events?

The table below sets out a timeline of some of the key events and documents:
[table id=3 /]

Why did the Panel conclude the Indonesian parties were acting in concert?

It appears that the Panel considered the following connections between the Indonesian parties (which it had not been made aware of) to have been relevant in determining whether they were acting in concert:

  • the Indonesian parties were using the same advisers
  • the existing relationship between Bumi Resources (which, for the purposes of Indonesian takeover law, was considered to be controlled by the Bakrie Group), as lender, and Bukit Mutiara, as borrower, under the Berau acquisition loan, and
  • the break fee and escrow arrangements in place (which had been structured so as to enable Bukit Mutiara to pay down the Berau acquisition loan)

The Panel further noted that each of Credit Suisse, HFW and JP Morgan had pre-existing relationships with the Indonesian parties (eg, Credit Suisse and JP Morgan had acted on Berau’s 2010 IPO, Credit Suisse had partially financed Bukit Mutiara’s 2009 acquisition of Berau and HFW had advised Bukit Mutiara on this acquisition and had drafted the agreement documenting the Berau acquisition loan).

What was the extent of the advisers’ knowledge?

The Panel states that all of the advisers knew that the transactions would trigger a Rule 9.1 mandatory offer if the Panel regarded the Indonesian parties as acting in concert (for details, see PS 2015/15 at para 4.9).
It appears that at times the advisers assumed one of the other advisers had addressed the concert party risk, but did not verify such assumptions. At other times, the advisers deferred to the commercial judgment of the Indonesian parties that they were not acting in concert, and took comfort in warranties to that effect included in the SPAs.
For example, Credit Suisse’s external advisers raised concerns about possible concert party issues when reviewing the SPAs for the transactions. Credit Suisse London also raised flags about possible concert party issues. Credit Suisse went so far as to prepare a draft written submission (the submission) seeking confirmation from Panel that the Indonesian parties would not be regarded as acting in concert in which, in relation to the initial collateral structure for the jumbo loan, it:

  • explained that Bukit Mutiara would pledge in favour of Credit Suisse some of the new Vallar shares that it was to receive on completion of the Berau transaction
  • made it clear that this was being done so as to provide collateral for the jumbo loan, and
  • disclosed the fact that there had been prior business dealings between the Indonesian parties, including the Berau acquisition loan

However, following circulation of the draft submission to HFW, Freshfields, the Bakrie Group and Vallar, the Bakrie Group informed Credit Suisse that (following discussions with Vallar) the Panel should not be approached in relation to proposed share pledge. Instead, the structure of the collateral for the jumbo loan was changed to the forward-sales arrangements.

HFW and Freshfields consulted with the Panel in relation to whether the forward-sales arrangements would bring the Indonesian parties into concert. However, they incorrectly presented information, such as failing to specify that the main purpose was to provide collateral for the jumbo loan—instead the advisers wrongly gave the impression that the forward-sales arrangements were being undertaken at the instigation of Bukit Mutiara (which was not the case) as it was seeking to monetise its prospective interests in Vallar.

The Panel commented that none of the advisers:

  • consulted the Panel as to whether it might consider the Indonesian parties as acting in concert, or
  • made the Panel aware of the connections between the Indonesian parties known to the advisers, which the Panel considers to have been relevant to that question

What were the key Code provisions considered by the Panel?

The Panel discussed several sections of the Introduction, including:

  • Section 3(f)—Code responsibilities and obligations
  • Section 6(b)—Interpreting the Code—rulings of the Executive and the requirement for consultation
  • Section 9(a)—Dealings with and assisting the Panel
Section 3(f)—Code responsibilities and obligations

The Panel concluded that the financial advisers failed to discharge their particular responsibility to advise their clients in accordance with Section 3(f):

[table id=5 /]

Section 6(b)—Interpreting the Code—rulings of the Executive and the requirement for consultation

The Panel concluded that the advisers failed to consult the Panel in accordance with Section 6(b):

[table id=6 /]

Prior to the announcement, Freshfields could have done more regarding the concert party issue, but did not breach Section 6(b)

Section 9(a)—Dealings with and assisting the Panel
The Panel concluded that the advisers failed in their obligations under Section 9(a) to assist the Panel when presenting the forward-sales arrangements.The Panel stated that Credit Suisse, Freshfields and HFW:

  • were aware of the commercial background to the forward-sales arrangements and their purpose and failed to take reasonable care that such background and purpose was fairly presented to the Panel (failure to take all reasonable care not to provide the Panel with incorrect, incomplete or misleading information relating to the forward-sales arrangements and their purpose)
  • failed to properly explain to the Panel the direct and causative connection between the collateral requirements under the jumbo loan and the forward-sales arrangements, and
  • did not provide the Panel with all the facts regarding connections between the Indonesian parties (which would have been relevant to the possibility that the Indonesian parties would have been regarded by the Panel as acting in concert)

What lessons should corporate lawyers draw from the recent Panel Statement? What should they take away from PS 2015/15?

Advisers should consult the Panel if there is any doubt whatsoever (no matter how small) that there may be a concert party involved on a transaction they are involved in. As the Panel states, it is for the Panel to investigate and determine whether or not persons are acting in concert, not for the advisers on a transaction. Internal discussions within an organisation or group and discussions with other advisers are not sufficient to discharge advisers’ responsibilities under the Code.
Advisers should disclose fully and promptly all information which may help the Panel determine whether there are any concert party issues. Advisers should not withhold information, fail to disclose information, or present information in a manner which could be misleading or give a wrong or inaccurate impression. All previous and on-going dealings between parties and/or advisers should be disclosed fully.
Advisers should remain alive to the issue of concert parties both during and after a transaction. If an adviser suspects that there may be a concert party issue, it should make its own enquiries—if the result is that there is no longer any doubt whatsoever, it need not consult the Panel. If an adviser identifies a risk or a possible risk that parties may be regarded by the Panel as acting in concert, it should liaise with the Panel directly (and not assume that another adviser is addressing the issue with the Panel).
Warranties and/or representations set out in transactional documents that persons are not acting in concert are not a suitable alternative to consulting the Panel. An adviser should not rely on warranties provided by the parties as being conclusive evidence that they are not acting in concert—reliance on such warranties will not absolve an adviser of his responsibilities under the Code.
Lexis®PSL Corporate Practical Guidance point: Where necessary and depending on the complexity of a transaction, an adviser may want to consider preparing an easily digestible list of parties and advisers, a timeline of events and a summary of key documents/agreements to assist the Panel.

This very unusual Panel Statement throws the responsibilities and obligations of advisers under the Code into sharp focus and highlights that the Panel will not tolerate non-compliance.  It clearly demarcates the role of advisers in providing information to and consulting the Panel, and the role of the Panel in determining whether persons are acting in concert, and emphasises that if there is any doubt, no matter how negligible, advisers must consult the Panel and assist it in its investigations.  The Panel's statement should remind all advisers that they must ensure there is clarity as to who is dealing with each issue and that the information provided to the Panel is fairly and transparently presented." 

- Patrick Sarch, partner, Clifford Chance LLP

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About the author:
Jenisa is Head of Market Tracker, a transaction analysis product that sits within Lexis®PSL Corporate. She has over 13 years of legal publishing experience, with a focus on researching and reporting on trends and developments in the corporate and commercial legal market. Previous roles include content developer for Lexis®PSL, Legal Podcaster at Informa, and Research Editor at Practical Law Company where she specialised in reporting on cross-border corporate and commercial developments from the firm’s New York office.