UK: UK Takeovers: Public To Private Update

Last Updated: 9 March 2012
Article by Richard Butterwick and Robbie McLaren

In a relatively slow public M&A market immediately following the introduction of the major changes to the UK Takeover Code (the Code) in September 2011, the impact of the changes has been difficult to assess, but a number of recent deals have focused attention on certain of the Code's new provisions. This article considers the Code's requirements for a target company initiated Formal Sale Process and the new requirement for "flex" term disclosure.

The key changes to the Code, introduced in September 2011, were designed to reduce the ability of bidders to gain a perceived tactical advantage over a target's board by rebalancing the playing field in favor of a target's board, by:

  • Bidder identification (Rule 2.4(a)) — requiring all known potential bidders who have approached or continue to be in discussions with a target to be named by the target where a target announcement is made (whether voluntary or required by the Takeover Panel following a leak).
  • Extendable 28 day "Put-up or Shut-up" period (Rule 2.6(a)) —requiring, once publicly identified, potential bidders to announce either a firm intention to bid or no intention to do so within 28 days (a period extendable, with the consent of the Panel, at the target's request).
  • No inducement fees, break fees or other deal protections (Rule 21.2) — prohibiting, with the exception of a limited number of target commitments (including on confidentiality, regulatory clearances, employee incentives, and scheme timetabling) offer-related arrangements and agreements (including scheme implementation agreements).
  • Financing terms and fee disclosure — requiring offer documents to disclose greater information of matters, particularly on the financing of an offer, in order to provide shareholders and employees (and target boards, where the offer is hostile) with fuller details to evaluate the offer.

Formal Sale Process — A Cry for Help or a Helpful Structure?

Since the Code rule changes were introduced, several companies have announced a "Formal Sale Process." In many instances these companies have been in some financial distress (see, in particular, Blacks Leisure and Alexon), but in others (such as the process announced by Cove Energy plc) a private company type 'sell-side' process can effectively be started by the target's financial adviser using the public announcement to solicit interested parties (either for the company or certain of its assets). The parties can then work through bidding rounds after they have reviewed due diligence materials (which could include vendor due diligence materials relied upon by any successful bidder).

It should be noted that whether or not a target has entered into a Formal Sale Process is relatively binary. If the target's announcement does not specify that a "Formal Sales Process" is being instituted (and, additionally, provide details of how potential bidders may enter the process) it will not qualify as such. As a result, simply announcing the receipt of approaches from one or more named bidders and that target is entering into discussions with them and/or conducting a strategic review of the business does not, in the eyes of the Takeover Panel, qualify as a Formal Sale Process and therefore permit the bidder to benefit from the dispensations set out below.

In addition to potentially reduced diligence costs discussed above, the benefits for potential bidders of a Formal Sale Process also include dispensations from the Code (with the consent of the Takeover Panel) such that a bidder may (for so long as it participates in the Formal Sale Process):

  • Remain anonymous (Note 2 on Rule 2.6) — unless specifically identified in the press.
  • Dispense with the 28 day "Put-up or Shut-up" period (Note 2 on Rule 2.6).
  • Provide for an inducement fee (Note 2 on Rule 21.2) — of up to 1 percent of the successful participant's offer value.

However, if potential bidders choose not to participate in, or to leave, the process they will still be able to request the same information provided to other parties (under Rule 20.2 of the Code). On leaving the Formal Sale Process, a potential bidder which confirms that it is still actively considering making an offer for the target will be required to Put-up or Shut-up within 28 days. It is commercially unlikely a target will be willing to extend that deadline in such circumstances and the potential bidder would not be able to offer after the 28-day deadline unless an offer were put to the target's shareholders by another party; or where: (i) the target consented; (ii) the target issued a material number of new shares; or (iii) there was another material change in circumstances.

For targets, the risk that the process is ultimately unsuccessful will exist for those who choose to publicly put themselves up for sale using a Formal Sale Process either following a strategic review, an initial approach or otherwise. It could be said that the public announcement of one approach or more puts the target "in play" in any event, and so targets may consider the perceived benefits of running a Formal Sale Process outweigh the risk of a failed process, particularly where there is considered to be strong private equity interest in the target. In circumstances common to financial sponsor led public to private transactions (where certain management team members are not able to recommend the transaction to shareholders as a result of the share rollover or other incentive terms being offered to them in the proposed offer structure), the independent board members of the target may also consider a Formal Sale Process a possible mechanism for ensuring the best deal available for target shareholders is being obtained.

Given that the Code requires that the Takeover Panel should be consulted at the earliest opportunity when any of the dispensations in a Formal Sale Process may be sought, it will be particularly important for the target to inform the Takeover Panel after an approach in circumstances where the target wishes to subsequently announce a Formal Sale Process.

Disclosure of financing sources and terms

The new rules incorporated into the Code now require that all financing and refinancing documentation be put on display from the point a firm offer is announced. Prior to the new rules, the Code only required financing arrangements to be summarized in a more limited way and the financing documents only needed to be put on display in certain circumstances.

The offer document must now include a fuller description of how the offer is to be financed and the sources of finance. The new rules do not however require detailed descriptions of equity funding structures provided by funds of the sponsor to private equity bidding vehicles, but the equity allocation split between funds investing in the structure will require disclosure.

In giving its description of the financing (and any refinancing terms entered into during the offer period), the bidder will need to disclose potentially sensitive commercial terms:

  • The amount of each facility or instrument — however, "headroom" amounts available within a facility above the offer's value may be contained in a separate side letter or other collateral agreement to avoid disclosure identifying, to actual or potential counter bidders, a bidder's available resources
  • A summary of key covenants, security, repayment terms (including refinancing deadlines and requirements)
  • Details of the interest rates, including any "stepup" or other variation provided for (including disclosure of "flex" terms).

This last requirement to include details of the terms relating to the interest rate, including step-up arrangements, would appear to require disclosure of the right of the arrangers to "flex" the terms of a committed financing in a syndicated lending facility, including by an increase in facility pricing. Syndication during offer periods has become increasingly common in recent years as a result of the restricted credit markets. In the primary syndicated lending market, "flex" terms had not previously been disclosed to potential syndicates because of the potential distortion in pricing that could result (i.e. the syndication market migrates to the highest pricing point that the borrower is willing to pay).

Where UK public takeover deals require syndication through the takeover offer period, it may be that the new rules requiring flex disclosure result in changes to pricing and structuring. Since the rule changes were introduced, the Takeover Panel has in a number of offers applied the disclosure requirements pragmatically where banks have expressed concern about the sensitivity of flex terms, with the result that full disclosure of potential flex terms has not been required from the point of the Rule 2.7 announcement of a firm offer (as is required by Rule 26.1 of the Code), allowing syndication (and potential flexing of interest terms) to occur post-announcement (but pre-offer/scheme document publication).

While the market may continue to look to the Takeover Panel to provide dispensations to the disclosure requirements in appropriate cases, the new rules may also prompt more structural change in respect of flex terms. It is possible flex pricing could be removed and priced into the interest terms with a "claw-back" on the interest terms for sponsors where the syndication market triggers it. Another possibility is that the changes result in more offers being made on the basis of bridging or interim facility agreements, or even (where it is possible under a sponsor's fund arrangements) on an all-equity basis, with post offer re-financing. What is certain is that the full effect of the new rules on the financing by the primary syndicated lending market of UK public offers is still to be seen as the market reacts to, and evolves with, the Code's increased disclosure obligations and any dispensations that may be given in individual cases.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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