The Takeover Panel has published a new practice statement to provide guidance on its approach when a bidder is including an unlisted share alternative in a cash offer. An unlisted share alternative typically comprises securities in “Bidco" (i.e. bidder or a bidder group company) and provides target shareholders with the opportunity to remain indirectly invested in the target if the offer is successful. The number of offers including unlisted share alternatives has increased in recent years.
The guidance clarifies what is mainly existing practice, covering areas such as equivalent treatment for target shareholders, disclosure details, and restrictions on availability.
The areas covered include:
- Acceptance thresholds: a bidder may specify an aggregate maximum and minimum acceptance threshold for the unlisted share alternative.
- Equivalent treatment:
- Confirmation that making an unlisted share alternative only available to target shareholders with an individual minimum numerical threshold (e.g. 100 target shares) does not meet the Takeover Code's equivalent treatment requirement. However, including an individual minimum percentage threshold (e.g. a target shareholder can only elect for the alternative offer in respect of at least 50% of its target shares) does satisfy the requirement.
- The rights and restrictions relating to the unlisted shares (e.g. voting, governance, etc.) must mean that all target shareholders get equivalent treatment and that there are no special deals with favourable conditions for certain target shareholders.
- The Takeover Panel may permit certain governance rights being granted to a target shareholder who will have a specified percentage of Bidco shares (e.g. the right to appoint a director to the Bidco board). The Takeover Panel will have regard to the proposed percentage threshold rights to determine whether any proposed benefits or rights go beyond proportionate governance rights and breach the equivalent treatment requirement.
- Designation of a shareholder as a “shareholder representative" which has the ability to make decisions on behalf of minority shareholders in Bidco is unlikely to meet the equivalent treatment requirement.
- Nominee arrangements: it is sometimes proposed that “small" shareholders will hold their interests in Bidco via a nominee shareholder, for administrative ease. If a bidder wants to impose such a nominee arrangement, the Takeover Panel considers that this would not provide equivalent treatment unless (i) the nominee arrangement was imposed on all target shareholders electing for the alternative offer or (ii) was offered only as an option and not compulsory.
- Restrictions on availability:
- Consult the Takeover Panel before including any legal or regulatory restrictions on the availability of the unlisted share alternative. Restrictions which may be permitted by the Takeover Panel include if there is a significant risk of civil, regulatory, or criminal exposure for bidder or target when making the alternative offer available in a particular jurisdiction.
- If target shareholders are restricted from receiving the unlisted share alternative, the Takeover Panel expects them to receive the cash consideration (where permissible).
- Restrictions are limited to legal or regulatory constraints and should not extend to other issues such as exclusion of competitors or persons who may cause reputational harm to the bidder.
- If a bidder has certain compliance procedures (e.g. KYC) that a participating shareholder would need to satisfy prior to completion of the alternative offer and proposes to exclude a participating shareholder from the alternative offer on the basis of not satisfying such procedures, it should consult the Takeover Panel. The Takeover Panel will want to ensure that any proposed exclusion is due to an acceptable legal or regulatory restriction and not for other reasons.
- Exchange Ratio: the exchange ratio should not be structured to exclude target shareholders below an individual minimum numerical threshold.
- Fractional entitlements: a bidder may round down to the nearest whole number where the exchange ratio results in entitlement to fractions of shares.
- Estimated value of unlisted shares:
- The offer/scheme document must contain an estimate of the value of such securities by an appropriate adviser (normally the bidder's financial adviser). The financial adviser will typically explain the methodologies used to determine its estimate of value and set out the factors relevant for its valuation. The Takeover Panel will want to ensure that all relevant factors which have been taken into consideration are included and that the adviser explains its approach to valuation in respect of key factors (for example, any restrictions on liquidity of the unlisted shares).
- The Takeover Panel also expects the financial adviser to explain how the estimate of value per unlisted share relates to each target share (particularly if the exchange ratio of the alternative offer is not 1:1), and to set out both the estimated total enterprise value and, after adjusting for any acquisition debt and debt-like items, the implied total equity value of Bidco.
- The Takeover Panel considers that an adviser may express its estimate of value as a range, provided that the range is sufficiently narrow to result in meaningful disclosure to target shareholders. If Bidco is leveraged, and provided that the range for the estimated total enterprise value is sufficiently narrow, a wider range (in percentage terms) for the implied total equity value of Bidco may be appropriate.
- Disclosure:
- The firm offer announcement should contain detailed disclosure of the rights and restrictions relating to the unlisted shares being offered. This would typically include such matters as investment risk factors for the alternative offer, and details of the Bidco group. The Takeover Panel also expects such disclosure to include a summary of the relevant provisions of the articles of association of Bidco and any relevant shareholders' agreement and to explain to shareholders how such documents may be amended following completion of the offer.
- Whilst the offer/scheme document must explain the way in which the consideration under the unlisted share alternative is paid to target shareholders, the Takeover Panel states that it is beneficial for target shareholders for this to be disclosed earlier, in the firm offer announcement.
- Target board intentions: the Takeover Panel considers that the firm offer announcement should state whether the target directors intend to elect for the unlisted share alternative since this would help to provide target shareholders with sufficient time and information to enable them to make a properly informed decision on the alternative offer.
- Independent advice to target board: the target board must obtain competent independent advice as to whether the financial terms of the offer (including any alternative offer) are fair and reasonable and the substance of such advice must be made known to its shareholders. If the adviser is unable to advise the target board whether the financial terms of the alternative offer are, or are not, fair and reasonable, this must be made known to target shareholders and an explanation given in the target board circular. In such cases, the Takeover Panel should be consulted in advance about the explanation which is to be given.
- Discussion with target shareholders: the guidance provides a reminder of the disclosure and chaperoning requirements under the Takeover Code if a bidder wants to discuss an unlisted share alternative with one or more target shareholders.
- Consulting the Takeover Panel: there are many variables in the form and terms of an unlisted share alternative. Given this, the Takeover Panel expects bidders and their advisers to consult it early in respect of both the terms of any proposed alternative offer and the related disclosures. The Takeover Panel stresses that bidders and their advisers should not rely on disclosures made in relation to previous unlisted share alternative offers as a substitute for consulting the Takeover Panel.
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