AIM has offered growing companies all the benefits of trading in a supportive environment. However, as a result of a number of different factors, not least the current uncertainty in the financial markets, many of the companies listed on AIM may now feel undervalued and undercapitalised – this may make them consider alternatives, with one such option being to take the company private.
Structure and Financing
A public to private transaction involves a recommended takeover of a listed company, which is then de-listed and reregistered as a private company. Typically the takeover will be financed by a mixture of equity and debt. If the transaction involves the acquisition of shares of a UK resident public company, the provisions of the City Code on Takeovers and Mergers (‘Code’) will apply and govern the conduct of the takeover.
Issues to be considered
So what will be the key commercial and legal issues you should be aware of?
Conflict of interest:
There is a potential conflict of interest between the executive directors involved in the Management Buyout Team and the Company’s shareholders. The former will wish to minimise, and the latter will wish to maximise the price. Accordingly, the independent directors on the board of the Company take on an important role in advising shareholders in relation to any MBO proposal.
Competing offers and confidentiality:
Announcement of a MBO proposal may attract competing bids, which will drive up the price. Absolute secrecy is vital to ensure that an announcement is not required to be made before the MBO team has its own proposal and funding in place.
Break fee and exclusivity arrangements:
Rule 21.2 of the Code provides that break fees cannot exceed 1% of the offer value and that the target board and financial adviser must confirm in writing to the Panel that the break fee arrangements are in the best interest of the target shareholders.
Any bidder will need to bear in mind the existing holdings/other dealings of their concert parties to avoid inadvertently triggering additional disclosure obligations or additional obligations under the Code.
If the bidder’s stake in the Company comprises 30% or more of the voting rights in the Company, Rule 9 of the Code will require a mandatory offer with only a 50% acceptance condition and a full cash alternative.
Mininum offer price:
Under Rule 6 of the Code, except with the consent of the Panel, if the bidder or any person acting on concert with it have purchased shares in the Company (i) within the 3 month period prior to the commencement of the offer period, or (ii) during the period, if any, between the commencement of the offer period and an announcement made by the bidderin accordance with Rule 2.5, the offer to the shareholders of the same class should not be on less favourable terms. This means that the offer price must be at least equal to the purchase price paid for the target’s shares.
Under Rule 11 of the Code, a cash offer at the highest price paid for shares purchases is required if 10% or more of the target's shares are purchased for cash in the 12 months before the start of an offer period and during an offer period.
Martin Finnegan is a partner in Nabarro’s Corporate group. He specialises in corporate finance, with an emphasis on equity capital markets, particularly AIM, and mergers and acquisitions for both public and private companies. He is a member of the QCA’s Legal Committee.