For would-be Public-to-Private in the UK – Why and How

There have been several broad factors at play in driving the increase in number of PTP transactions:

• buyers, especially private equity funds, are sitting on record amounts of dry powder and access to cheap debt. The pressure to spend this productively together with fierce competition from other PE funds, is leading them into looking at listed companies that may be regarded as favourably priced, even when allowing for a significant (say, 30-50%) takeover premium to the current quoted price;
• public disclosure rules on The Main Market and AIM provide more transparency and enable buyers to more readily assess whether or not they believe that the quoted share price undervalues the target and its potential;
• shareholders of potential targets may well have become disillusioned with the recent share price performance and the prospects of regaining forward momentum. This might be due to a whole combination of factors such as: management’s repeated failure to hit forecasts; a sector being unloved by the markets; or the markets valuing short-term, tangible results over an unproven and risky long-term strategy. This, allied to a lack of liquidity, may convince larger shareholders to pressure management to sell; and
• management themselves may be frustrated: misunderstood by the markets; unable to raise equity finance without excessive dilution; beaten to the punch on acquisitions by more nimble and ready-funded private equity buyers; share options under water; and perhaps repeated public criticism from activist shareholders.

Some of the factors convincing the Board to sell will inevitably be the same as those driving the decision of the buyer to take private, particularly where the company’s current shareholder base will not support an expensive and/or risky long-term expansion strategy. Consider the attractions of: a  potentially significant reduction in annual compliance costs; the ability to travel a long and bumpy road without each bump being held up to scrutiny in the public arena; freeing up time for directors to focus on the business rather than endless roadshows and investor engagement; the ability to fund growth and acquisitions quickly and if needed, opportunistically with only one committed shareholder with access to ready funding; and a focus on the end result of the strategy several years hence rather than this year’s results and how the share price will react.

An increasing proportion of PTP transactions in recent years have involved companies traded on AIM rather than then London’s Main Market. That might be due in part to the growing size of larger AIM companies but perhaps also due to greater concentrations of large shareholdings, leading both to increased frustration over lack of liquidity but also a higher degree of deliverability and predictability for buyers.

Of course, to take private, one first has to buy public – in the UK, that means dealing with the wide scope and complexity of the  UK Takeover Code (“Code”), as rigorously applied by the Takeover Panel (“Panel”) and this in turn requires buyers, sellers and management alike to take more early stage and specialist advice in order to avoid some potentially nasty pitfalls, some of which are considered below:

The Approach and Exclusivity

Private acquisitions might proceed with just one agreed, preferred bidder or by an auction process but at some point, the bidder will demand and probably get a period of exclusivity during which it can carry out its due diligence investigations (or further DD if some was permitted prior to exclusivity). The bidder might well have negotiated a costs indemnity where the seller breaches that exclusivity. Contrast offers for public companies regulated by the Code where the bidder will have to rely on publicly disclosed information only prior to commencement of the offer period (when an announcement of an offer or an intention to make an offer is released). Thereafter, the target will open its books to the bidder but equality of information rules in the Code means that anything disclosed to the bidder must also be made available to any competing bidder.

Private buyers will negotiate the greatest warranty and indemnity protection possible, but this will not be available in a public offer. Private buyers can also protect against over-payment where, during the interim period between exchange and completion, the target business deteriorates and cash falls / debts increase. An offeror must take its chances once a firm intention to make an offer is announced.

In a private acquisition, exclusivity is granted by one or a few shareholders and has binding contractual force. An offeror will try to secure in advance the acceptance of key shareholders through irrevocable undertakings but there are impediments: shareholders will not wish to made insiders (and thereafter, unable to trade) too early; the Panel applies a “rule of six” meaning that it must be consulted and its approval sought  where the bidder / its advisors wish to approach more than six interested parties, including lenders and target shareholders; depending on how widely the shares are held, it may only be possible to obtain undertakings form a relatively small percentage of shareholders; institutional shareholders will invariably negotiate a get-out for higher, competing offers (typically, a margin of 5-10%). In other words, the bottom line is that at announcement stage, when the bidder and its intentions have been publicly identified, the bidder cannot guarantee that it won’t be bested by a competing offer.

Smoking out the Prey

Whilst delivering the deal and locking out competitors is less certain in the public arena, more strategies are available to a determined would-be bidder who has had the door slammed in its face by a sceptical or hostile target Board. There is of course the option to go hostile and go over the heads of the Board by appealing directly to target shareholders. Assuming however that this is not something the bidder wishes to do, it can still put significant pressure on the target Board to inform shareholders of its approach. Target Boards who have received an approach need to tread a fine line when balancing their obligations under the Code. On the one hand, the Code emphasises the need for absolute secrecy until an announcement is required. On the other hand, it requires the target Board to immediately announce on receiving a “firm intention” to make an offer “irrespective of the attitude of the board to the offer”. Of course, the offer has to be credible and from a credible person and this gives target Boards some room for manoeuvre. It is interesting however, that in recent weeks, the Panel has noted a number of incidences where companies “in play” have received credible approaches from would-be bidders and did not inform their shareholders (some of whom will have sold in ignorance at below the eventual bid price) and is now reviewing its guidance . The Board cannot keep its shareholders in the dark simply because it feels that the bid might be opportunistic (a common complaint in this time of Covid) or otherwise unwelcome. Changes in guidance may enable would-be bidders to “bounce” boards into revealing their approach to shareholders.

A bidder can also put a metaphorical foot in the target’s door by acquiring shares in the market. However, this engages provisions of the Code concerning public disclosure as well as, in certain circumstances, setting a floor for the price per share to be offered and determining whether the offer has to be in cash or have a full cash alternative. The provisions are extremely detailed and expert advice is essential before a bidder goes down this path.

Conditions and Termination Rights

Private buyers will be able to negotiate various conditions to completion which might include debt financing and material adverse change. Buyers in the UK would also routinely demand termination rights for material breach of seller warranties which are repeated during the interim period or for material breach of interim conduct obligations. None of these protections are available to offerors of public companies. Whilst in theory, the Code, allows offerors to impose conditions around the health of the target business, in practice, the Panel will only permit such conditions to be invoked in extreme circumstances. In the most recent example, in April 2020, the bidder of Moss Bros sought to invoke a condition to terminate its offer due to government ordered lockdowns in response to the growing Covid outbreak which shut Moss Bros’ entire physical retail operation. Cause enough to walk away you might think but the Panel rejected the bidder’s request, in that case arguing that at the time of its offer, Covid, whilst not as rampant as it subsequently became, was not entirely unknown and that the lockdown could therefore have been foreseen. In a previous ruling where a bidder also unsuccessfully applied to terminate an offer in the wake of 911, the Panel said that the change in circumstances needed to be “of very considerable significance striking at the heart and purpose of the transaction in question” and analogous to frustration of a legal contract.

The Code also places great weight on the responsibility of the offeror and its financial adviser to only announce an offer when source of funds is secured. Debt facilities must ensure that bar certain conditions relating to the offeror itself (its continued solvency, for example), lending facilities must be made available on a certain funds basis until the last date on which the offer can be consummated or is terminated – the bidder’s  financial adviser will require a certain funds letter from the lender(s) before it releases the announcement of a firm intention to make an offer. Inevitably, that raises funding costs and reduces the bidder’s freedom of manoeuvre.

 Role of the Target Board and Management Incentives

Whether it’s a good or a bad thing, Boards of private companies where the directors do not have a significant shareholding might have relatively little influence on negotiations between seller and buyer. That is not the case in public offers where the Code requires the Board (or an committee of independent directors) to receive advice from an independent competent adviser (the so called Rule 3 Adviser) as to whether the adviser considers the terms of the offer to be fair and reasonable and to summarise that advice in the Offer Document – clearly this gives the Board leverage in negotiations that it might not otherwise have.

Buyers should also bear in mind that where funding an MBO, their ability to sweeten the deal for key shareholders who are also directors or managers may be  constrained by the Code, which following the general principle that all target shareholders should be treated equally, requires the Rule 3 Adviser to publicly state that the terms of the management incentives package is fair and reasonable. If the adviser considers the proposed terms to be outside market norms then it will be compelled to consult with the Panel which in turn might insist that the adoption of such package is made conditional on a vote at a general meeting of target shareholders (excluding interested parties).

Put up or Shut up

In a private auction, a bidder which is being stretched outside of its comfort zone on price or which suspects that it has the edge over its competitors in other ways (perhaps because target management know that it’s a better strategic fit or because it can execute quickly without embarking on a risky and time-consuming fundraising process), can call the seller’s bluff and say “that’s it!”. In a public offer, the bidder has a fixed time limit from the date in which it is first identified (28 days but often extended by request with the consent of the Panel) to actually make the offer or announce that it has withdrawn. In the latter case, the bidder will then be locked out for a period of six months from making another offer (or even suggesting that it might do so) or from acquiring (more) shares in the target which would take it (and anyone acting in concert with it) up to the 30% mandatory bid threshold.

Buyer’s Longer-Term Intentions for Target

A key part of a bidder’s courtship of a target will be to emphasise the strategic fit or, in the case of PE / a financial buyer, its longer-term plans to maintain centres of production and/or preserve employment and/or invest in R&D etc. Reputational concerns aside and unless such intentions are given contractual force in the sale agreement, the bidder can renege on these promises after the acquisition. The position has been changing for some time in the public arena where, in addition to requiring the offeror to set out in detail in the Offer Document its intentions in certain key areas (Rule 2.7 ), the Panel will have to be consulted post-offer if the bidder wishes to depart from those statements. Any egregious abuse of these rules by an unreliable or cynical bidder might be expected to result in public censure and expulsion from the Gentlemen’s Club that is the City. 

Taking the Company Private

This is the easy bit! Having secured control of the target and with a special resolution of shareholders to authorise the re-registration and adopt new articles of association, the buyer can re-register it as a private company. The Companies Act 2006 relaxes a number of restrictions for private companies including: the ability to give financial assistance in relation to the acquisition of its shares (hence the 75% threshold required by lending banks); the ability to reduce its share capital without applying to the courts; the ability to pass written resolutions of shareholders; and no requirement to hold an AGM each year, to name just a few.

The issues discussed above and some further considerations on PTP transactions are set out in the table, accessible here.