Legal Business Blogs

Guest post: Pfizer’s placebo promises (why AstraZeneca may have been right to reject the ‘final’ takeover bid from Pfizer)

In front of the Commons Business committee last week, Ian Read, chairman and chief executive of Pfizer, made two points in relation to Pfizer’s commitments, assuming it were to succeed in acquiring the Anglo-Swedish drug manufacturer AstraZeneca.It’s pledged, you may remember, over a minimum period of five years, to:

  • complete the investment in major new Cambridge R&D centre planned by AstraZeneca;
  • keep 20% of its global R&D headcount in the UK;
  • base its scientific leadership in the UK;
  • locate its HQ in the UK, and
  • keep “substantial” manufacturing in Macclesfield.

First, he said, the question of whether any commitments were legally binding was really a side issue, since he intended to keep the commitments regardless; and second, his lawyers would anyway confirm that the commitments were legally binding.

From what he said, and essentially repeated to the Science and Technology Committee, Read’s argument seemed to be that Pfizer’s commitments are binding because of rules in the Takeover Code, and because of the enforcement powers of the Takeover Panel and of the courts in respect of breaches of the Code. Sarah Newton MP said she thought his answer ‘very reassuring’ – but she shouldn’t be reassured.

This is what he said to the science committee (in his answer at 9.49.18 am to Sarah Newton’s question about how the pledges can be enforced):

‘Our understanding is that having made these pledges, and submitted them as part of our offer – we’ll put them in our offer document, if we go forward with the purchase of AZ – it becomes legally binding under your Takeover Panel for the five year period; and if we were to not respect those promises, it will be the Takeover Panel who would say “You have not met your commitments”, and they would refer it the the High Court, and the High Court would have unlimited powers to readdress the situation …’

Pfizer must be relying on rule 19.1 of the Takeover Code, which is in section 1, dealing with ‘Conduct during the Offer’, and says


Each document or advertisement published, or statement made, during the course of an offer must be prepared with the highest standards of care and accuracy and the information given must be adequately and fairly presented. This applies whether it is published by the party directly or by an adviser on its behalf.

Note 3 to the rule says:

3. Statements of intention

If a party to an offer makes a statement in any document, announcement or other information published in relation to an offer relating to any particular course of action it intends to take, or not take, after the end of the offer period, that party will be regarded as being committed to that course of action for a period of 12 months from the date on which the offer period ends, or such other period of time as is specified in the statement, unless there has been a material change of circumstances.

You may have heard mention in the media of new and untested rules in the Code – it’s this ‘Note 3’ that was inserted into the tenth edition of the Code in 2011, and which is untested.

Pfizer’s argument, then, is that its promises are legally binding because to cut R&D at Cambridge or close the Macclesfield factory (for instance) within five years would breach Note 3, a breach which the High Court then has unlimited power to remedy.

I don’t buy it, I’m afraid. It’s a reasonably coherent argument that allows Pfizer to say its commitments are binding in an abstract, technical sense. It doesn’t mean they’re binding in the real-world sense of being enforceable. Here’s why not.

First, while it’s perfectly true that the Takeover Panel does indeed have the ability under section 955 of the Companies Act 2006 to refer a breach of the Code to the High Court, it has never done so before, and would require considerable courage to do so for the first time. Ian Read went far too far when he airily suggested last week that the Panel ‘would’ refer Pfizer to the High Court in the event of a breach.

Secondly, it’d be hard to satisfy the High Court that any breach had taken place given the hedged nature of Pfizer’s promises, and the fact the Note 3 itself would let Pfizer off the hook as long as there’s any material change of circumstances. The global business environment changes all the time; I wouldn’t fancy trying to persuade the High Court that nothing commercially material had changed between now and a proposed closure of Macclesfield in, say, three years. Production costs elsewhere could change significantly in that timescale.

Third, there might even be an argument that Note 3 does not have the effect that’s being suggested. The Note says Pfizer would be ‘regarded as being committed’ to its pledges, but the actual rule to which it’s attached, rule 19.1, is only about the accuracy of Pfizer’s statements at the time they’re made. There’s quite a bit of room for the merged firm’s lawyers to argue that a subsequent breach of the expectations expressed in Note 3 would not be a breach of the Code that the High Court could deal with. That point is indeed untested.

But most importantly of all, even if the Takeover Panel did bring a breach of promise to the High Court, and even if it could satisfy the High Court that the Code had been breached – what does anyone think the High Court would actually do about it?

What section 955 says is that if a company has breached a Code requirement the court may make any order it thinks fit to secure compliance with the requirement.

The emphasis is mine. The High Court would be able to grant a remedy for one purpose, and one purpose alone: to make Pfizer stick by its pledges.

It would have no power to punish Pfizer for going back on them, or to compensate anyone.

You might think it could conceivably fine Pfizer, if it thought a fine would make Pfizer reverse its decision. But how could a fine have that effect? If Pfizer, a company that even without AstraZeneca’s business clears over a billion pounds a year, decides for commercial reasons that it has to move R&D to the US or manufacturing to India, what scale of fine would be required to overcome its business logic? A breathtaking sum would be required, going into many millions – perhaps even billions.

It’s hard to imagine the High Court ordering that level of fine.

What’s more, under the Human Rights Act the High Court would need to respect Pfizer’s right to peacefully enjoy its possessions, which a court can only lawfully interfere with to the extent that it strikes a fair balance between the public and private interests involved. Yes, there’s a public interest in keeping production and research jobs in Britain. But to fine a single company a nine or ten figure sum would surely be excessive, even weighed against that public interest.

A fine, then, is hard to imagine being ordered. The smaller it was, the less likely it would be lawful under section 955; the bigger, the less likely it’d be lawful under the Human Rights Act.

So what about an injunction? The High Court could conceivably grant an order preventing the closure of Macclesfield or Cambridge, it might be argued by Pfizer. But even this possibility involves serious, and I think insurmountable, problems.

The High Court would certainly have power under section 37(1) of the Senior Courts Act 1981 to grant an injunction, and section 37(3) mentions an example of the sort of injunction that might be thought relevant here: an order restraining the merged company from removing from England, or otherwise dealing with, assets located here. That’d be similar to what lawyers used to call a Mareva injunction to “freeze” assets, now called a “freezing injunction” under rule 25.1(1)(f) of the Civil Procedure Rules.

But if the merged company did break its promises, would it necessarily do so by disposing of assets? Is it clear whether AstraZeneca actually owns land in Macclesfield, or that it owns its production machinery? Even if it does (and AstraZeneca’s evidence last week suggested it does actually own land at Cambridge), why should the merged company be barred from disposing of those assets? After all, it did not promise to maintain ownership of land in the UK, and neither selling any land it owns, nor giving up a lease of it, would breach the expectation in Note 3. I don’t think even selling (or terminating a leasing agreement on) manufacturing equipment would fall foul of Note 3: Pfizer has not made any pledge to use or maintain any particular type of plant. It’s not easy to think of an order relating to assets that could be an sensible remedy calculated to secure compliance with Pfizer’s pledges.

No. In their true essence, Pfizer’s key pledges are anti-redundancy pledges, and the only sensible way the High Court could secure compliance with them would be to restrain Pfizer from making redundancies in Macclesfield or Cambridge. The trouble with that is that the courts have traditionally set their face against such orders.

In 1975 in the Court of Appeal in Chappell v Times Newspapers (unfortunately not on BAILII) Lord Justice Geoffrey Lane (as he then was) said:

Very rarely indeed will a court enforce, either by specific performance or by injunction, a contract for services, either at the behest of the employers or of the employee.

That principle has a long pedigree, as explained in the 2012 Supreme Court judgment in Société Générale v Geys by Lord Wilson (paragraph 77) –

‘[T]he courts,’ said Sir George Jessel, Master of the Rolls, in Rigby v Connol (1880) … ‘have never dreamt of enforcing agreements strictly personal in their nature, whether they are agreements of hiring and service, being the common relation of master and servant, or …’

– and Lord Sumption (paragraph 118):

When it comes to enforcing an unwanted relationship of employer and employee, there are altogether more sensitive considerations involved than those governing most other more contractual bargains. As Fry LJ put it in De Francesco v Barnum (1890) … the courts are ‘very unwilling to extend decisions the effect of which is to compel persons who are not desirous of maintaining continuous personal relations with one another to continue those personal relations.’

A good example of the application of the principle is Alexander v Standard Telephones in the Chancery Division of the High Court in 1989, in which Mr Justice Aldous refused an injunction to prevent an employer from making redundancies. On page 304 at C, Aldous J explained:

as a matter of principle the courts have refused to grant injunctions to restrain a breach of contract for personal service which would compel an employer to provide work for an employee he does not wish to employ … This attitude is no doubt based on the fact that it is not practicable to make an employer and an employee work together in circumstances where one of the parties is not prepared to continue the relationship

If you need any further persuasion, looking at the question more broadly than simply redundancy, it’s clear from the unanimous judgment of House of Lords in Co-op Insurance v. Argyll Stores that the courts will very rarely order a company to continue doing business anywhere in particular.

The case involved a supermarket in Sheffield, and Lord Hoffmann (giving the lead judgment) quoted and ultimately approved what he said was the courts’ “settled practice”:

There is no dispute about the existence of the settled practice to which the judge referred. It sufficient for this purpose to refer to Braddon Towers Ltd. v. International Stores Ltd. [1987] … where Slade J. said:

‘Whether or not this may be properly described as a rule of law, I do not doubt that for many years practitioners have advised their clients that it is the settled and invariable practice of this court never to grant mandatory injunctions requiring persons to carry on business.’

His speech sets out the many good reasons that lie behind the courts’ practice, and is worth reading in full if you want to understand why this sort of order, which would require the High Court’s constant supervision, is unlikely to be granted. One of the most telling points Lord Hoffmann makes of relevance to the Pfizer case is that the court would have to enforce such an order by the ‘unsuitable instrument’ of punishment for contempt of court:

The heavy-handed nature of the enforcement mechanism is a consideration which may go to the exercise of the court’s discretion in other cases as well, but its use to compel the running of a business is perhaps the paradigm case of its disadvantages …

… the defendant, who ex hypothesi did not think that it was in his economic interest to run the business at all, now has to make decisions under a sword of Damocles which may descend if the way the business is run does not conform to the terms of the order. This is, as one might say, no way to run a business.

So: even if the Takeover Panel were brave enough to go to the High Court, and even if it could persuade the Court that reneging on Pfizer’s flexible pledges amounted to a breach of the Takeover Code – no material change having occurred in the meantime – there’s nothing the High Court could realistically do to secure compliance with the pledges. It could not properly impose a fine; and long-established principle and practice is against the grant of an injunction.

Pfizer’s claim that its pledges are legally binding may seem reassuring on the surface – but I’m afraid it’s only a sugar coating. Like a placebo, it may fool the patient into feeling better. But I doubt there’s any real effect.


Barrister and former government lawyer Carl Gardner blogs at Head of Legal.