A Practical Guide to Private Equity Transactions

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Other key issues relating to public takeovers

similar interests so far as the desirability of announcing the transaction is con-

cerned, this will not necessarily be the case. Bidco’s directors should be aware

that a decision by P2P Target on whether it should make an announcement will

be made by the independent directors, in conjunction with P2P Target’s advis-

ers. During the period before P2P Target has been approached, the responsi-

bility for making an announcement lies with the bidder. Once an approach has

been made, the primary responsibility for making an announcement will shift

to P2P Target.

It is not uncommon for a company to make a ‘holding announcement’. This

would state that it has received an approach from certain directors which may,

or may not, lead to an offer being made for P2P Target. Such announcements

are of important tactical signicance, alerting potential third party bidders to

P2P Target’s position, but facilitating the due diligence process by making the

existence of a possible offer public knowledge. It is quite common for compan-

ies to have prepared a draft holding announcement, so that it is ready for an

announcement to be made in an urgent situation.

To a far greater extent than in other management buyouts, in a public-

to-private transaction there is always the risk of a competing bid emerging

and the management bid failing. If a competing bid is made, P2P Target will

have to consider it, even if it has already recommended the management bid.

It is partly to avoid prompting competing bids that bidders try to delay any

announcement as long as possible; once a public company is known to be ‘in

play’, anything can happen.

3.5 Obtaining control

Under rule 10 of the Takeover Code, it must be a condition of the offer that the

offer will not have effect unless Bidco has acquired or agreed to acquire shares

carrying over 50 per cent of the voting rights in P2P Target. In practice, Bidco

will wish to obtain far more than a 50 per cent acceptance level; typically,

an offer will be conditional on either 75 per cent or 90 per cent acceptances

depending on how the deal is structured.

The ef fect which each of the dif ferent levels of acceptance will have on

Bidco’s ability to inuence and control P2P Target is as follows.

(a) 50 per cent shareholding

Once Bidco has over 50 per cent of the voting rights of P2P Target, it has the

power to dismiss the directors of P2P Target and gain effective control of the

P2P Target’s board. However, while a greater than 50 per cent shareholding

will enable Bidco to have effective control of the business of P2P Target, it will

not be able to make structural changes to P2P Target that need a higher thresh-

old of shareholder approval or require change to be made to the constitution.

In particular, it will not be able to procure that P2P Target grants security to

a bank which has funded the offer, because it will not be able to approve the

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necessary re-registration of the company from plc to private which requires

the approval of the holders of 75 per cent of votes cast.

(b) 75 per cent shareholding

Once Bidco has acquired 75 per cent of the voting rights of P2P Target, it has

the power to pass a special resolution. Certain fundamental matters, typically

relating to the underlying structure and constitution of a company, must be

determined by such a resolution. These include resolutions to:

re-register the company as a private company;•

commence a members’ voluntary liquidation;•

change the name of the company;•

change the articles of association of the company.•

The re-registration of Bidco as a private company will be necessary to enable

P2P Target to give security for the debt nance used in the transaction. Even

though Bidco will have the power to pass such resolutions with a 75 per cent

holding in P2P Target, it must take account of the following issues:

(a) In order to pass any resolution, Bidco will need to call meetings of P2P

Target, and the statutory notice periods and procedures for meetings will

apply.

(b) Section 994 of the Companies Act 2006 contains provisions for the protec-

tion of minority shareholders.

passed by a 75 per cent shareholder, the resolution is subject to a statutory

twenty-eight-day period for challenge by minority shareholders where it

has not been passed unanimously (see further section 4.2 below).

The desired level of acceptances will most usually be 90 per cent, since this

will trigger the compulsory acquisition procedures (also known as ‘squeeze

out’ rights) set out in sections 979–982 of the Companies Act 2006. These pro-

visions provide that, where an offer has been made to acquire all of the shares

of a particular class, if Bidco has acquired or unconditionally contracted to

acquire 90 per cent in value of the shares to which the takeover relates and

90 per cent of the voting rights carried by those shares, it may compulsorily

acquire the remaining shares. In this way, Bidco would be able to buy out any

6 Section 283 of the Companies Act 2006; on the bank funder’s requirements, see further sec-

tion 4.2 below.

7 Section 96 of the Companies Act 2006.

8 Section 84(1)(b) of the Insolvency Act 1986.

9 Section 78 of the Companies Act 2006; note that the articles of association of the company

may also now permit a change of name by other means.

10 Section 21 of the Companies Act 2006.

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minority shareholders who had not accepted the offer and thereby acquire all

of the shares in P2P Target.

If, during the course of the offer, Bidco acquires any shares in P2P Target

for more than the offer price, that higher price must also be paid to sharehold-

ers whose shares are compulsorily acquired. The procedure provides for a six-

week period for minority shareholders to make application to the court for an

order that Bidco is not entitled to acquire the shares or that the terms of the

acquisition should be different from those specied by Bidco.

The compulsory acquisition procedure under sections 979–982 of the

Companies Act 2006 applies only where an offer is made to acquire all of the

shares of the relevant class in P2P Target which are not already held by Bidco.

If the management buyout team owns shares in P2P Target and the offer is not

made to acquire their shares, Bidco would prima facie not be entitled to rely

on the compulsory acquisition procedure.

To avoid this problem, section 975 of the Companies Act 2006 provides

that the reference to shares held by Bidco includes shares which Bidco has

contracted to acquire. Accordingly, the offer is not made in respect of those

shares. Any of the management buyout team who holds shares in P2P Target

will instead contract to sell those shares to Bidco, usually in consideration for

the issue of shares in Bidco (or its ultimate parent company). Bidco will only

wish to purchase shares, and the management buyout team will only wish to

sell shares, if the offer is successful, and therefore the contract is likely to be

conditional on the offer being declared wholly unconditional. Changes intro-

duced by the Companies Act 2006 make clear that such a conditional contract

is sufcient to fall within the provisions of section 975.

By falling outside the offer, however, the management buyout team’s shares

will not be included for the purpose of ascertaining whether or not the 90 per

cent acceptance level has been achieved, triggering the compulsory acquisition

procedure. This may be signicant if the management buyout team has a sub-

stantial shareholding in P2P Target.

3.6 Irrevocable undertakings

Before making the offer, the management buyout team and Bidco’s funders

will want to obtain as much assurance as possible that the offer will be suc-

cessful. In order to get this comfort, Bidco will seek irrevocable undertakings

from P2P Target’s more signicant shareholders that they will accept the offer.

The shareholders giving these undertakings will then be bound to accept the

offer, and may appoint Bidco as their attorney to do so. Irrevocables are usually

obtained shortly before the offer is made, as they will create a disclosable inter-

est in P2P Target’s shares. In addition, pursuant to rule 8 of the Takeover Code,

any irrevocable commitment which is procured during an offer period (which

11 Section 986 of the Companies Act 2006.

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Public-to-private transactions

commences upon the announcement of any proposed or possible offer (with or

without terms)) must be announced on the day following that transaction.

Irrevocable undertakings may also be sought from the management team

and their family members. Where shares are held by trustees on behalf of fam-

ily trusts, care will need to be taken to conrm that the trustees have authority

to enter into an irrevocable undertaking to accept an offer.

An irrevocable undertaking may be either ‘hard’ (binding in all circum-

stances), ‘soft’ (ceases to be binding if a higher offer emerges) or ‘semi-hard’

(ceases to be binding if a higher offer emerges which exceeds the existing offer

by an agreed amount). Some shareholders that are unwilling to give an irrev-

ocable undertaking may be prepared to sign a letter of intent to accept the bid.

Although clearly of less value, letters of intent may still give the bidder some

comfort as to sentiment towards the offer.

3.7 The formal public documents

Under rule 19.2 of the Takeover Code, the offer document and any other

document issued in connection with the offer must contain a statement that

the directors of Bidco or the directors of P2P Target, as appropriate, accept

responsibility for the information contained in that document.

On a conventional offer, all P2P Target directors would assume responsi-

bility for any recommendation to shareholders to accept the offer and for all

information in the offer document relating to themselves and their families

or relating to P2P Target. In a public-to-private transaction, under note 3 to

rule 25.1 of the Takeover Code, the P2P Target directors who are involved in

the offer will have a conict of interest and accordingly will not be required

to accept responsibility for any recommendation to shareholders to accept

the offer. However, they will remain responsible (along with the independent

directors) for any information relating to P2P Target, even though the prime

responsibility for preparation of that information may have fallen on the inde-

pendent committee of the board of P2P Target. If they are also directors of

Bidco, the P2P Target directors who are involved in the offer will also be

required to give a statement accepting responsibility for the other parts of the

offer document, namely, those relating to themselves, Bidco and its nancing.

Note 5 to rule 19.2 of the Takeover Code extends responsibility for the

offer document to any company which has control of Bidco. In the case of a

public-to-private transaction, the Takeover Panel will require a responsibility

statement from the directors of the private equity provider, or alternatively

from the private equity investors’ credit committee which has approved the

offer. The exact application of this requirement to the private equity investors

will depend on the structure of the fund, and the nature of the fund’s internal

approval processes.

Under note 1 to rule 19.2 of the Takeover Code, where P2P Target’s

response to the proposed offer is delegated to an independent committee, each

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director of P2P Target (including those involved in that offer) must disclose to

the committee all relevant facts directly relating to himself, and other relevant

facts known to him or opinions held by him. For example, a director involved

in the proposed offer would need to disclose any negotiations he was having

with third parties concerning proposals for the continuing operations of the

company after the offer had completed.

3.8 Schemes of arrangement

In recent years many takeovers of public companies have been structured as

schemes of arrangement rather than as offers. A scheme of arrangement is

a court-approved process governed by Part 26 of the Companies Act 2006

and the Takeover Code (note in particular the contents of Appendix 7 to the

Takeover Code, which sets out some of the specic rules which apply to such

arrangements).

Bidco and its advisers will need to determine on the facts how best to

structure a proposed ‘take private’ transaction. If a scheme of arrangement is

preferred, this will only be possible with the co-operation of P2P Target. Such

arrangements are typically structured as a ‘cancellation scheme’ whereby P2P

Target cancels its shares and issues new shares to Bidco in return for Bidco’s

payment of the bid consideration to P2P Target shareholders.

Some of the more signic ant features of a scheme of arrangement include

the following matters.

(a) A scheme requires the approval of P2P Target shareholders representing a

majority in number, and not less than 75 per cent in value, of those voting

and present. Any shares held by the private equity investor, the manage-

ment team and Bidco will not form part of the class of shareholders for the

purposes of the vote approving the scheme.

(b) A scheme must be sanctioned by the court. Once sanctioned, a scheme is

binding on all P2P Target shareholders and therefore nothing further is

required compulsorily to acquire the shares of those who failed to vote or

voted against the scheme.

By contrast to an offer, P2P Target therefore has control of the transaction

process and key documentation relating to the transaction (i.e. a circular

to P2P Target shareholders describing the scheme and containing notices

convening the relevant shareholder meetings), albeit that the takeover will

be on a recommended basis and the parties will have set out the terms

of their co-operation in implementing the scheme in an implementation

agreement.

(d) Given the timescales of obtaining court sanction, a takeover offer may

establish majority control of P2P Target more quickly than a ‘take private’

by way of a scheme. However, the time period for achieving 100 per cent

control of P2P Target can be shorter via a scheme.

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Public-to-private transactions

(e) A scheme is less exible than an offer: the terms of a scheme cannot be

changed without the proposal of a new scheme. This may put Bidco at a

disadvantage if a competing bid materialises, although it is possible to

switch to an offer with the consent of the Takeover Panel.

(f) Stamp duty (at 0.5 per cent) is not payable by Bidco on a scheme. This can

be a material advantage over an offer in large transactions.

4 Funding issues on a public-to-private transaction

4.1 Equity funding: the investment documents

The investment documentation on a public-to-private transaction is very simi-

lar to the documents found on a private company buyout. The majority of the

provisions in the main investment documents will be unchanged, although

there are some key differences as highlighted below.

(a) Conditionality: cash conﬁrmation

The rst key difference is that the investment agreement will be signed imme-

diately before the announcement is made of a rm intention of Bidco to make

the offer, but completion will not take place until a few weeks later (as the rst

drawdown of monies from the investors will not be required straight away: see

further subsection (b) below). The issue therefore arises of the conditionality

which the investors may attach to such funding being advanced after signing.

Rule 24.7 of the Code requires that the nancial advisers to Bidco provide a

cash conrmation (in the offer document) conrming that Newco has the funds

available to nance the cash element of the bid. Such conrmation is required to

demonstrate that Bidco has taken all reasonable care to ensure that the nance

will be available. The nancial advisers need to be comfortable that, once the

investment agreement has been entered into, the investors’ monies will be avail-

able when the offer becomes or is declared unconditional in all respects. The

cash conrmation exercise usually involves the engagement of separate lawyers

to look specically at the conditions in the investment agreement and the bank-

ing documents to ensure that the cash conrmation can be given.

The investment agreement on a public-to-private transaction will there-

fore typically have only one condition: i.e. that of the offer becoming or being

declared unconditional in all respects. This can be contrasted with the situ-

ation found in most buyout investment agreements, where a raft of conditions is

included to serve as a checklist of the investors’ requirements before monies will

be advanced, even though, in practice, it is usual in that situation for the signing

of the agreement and the investment funding to take place simultaneously.

It is usual to see a provision in the investment agreement that the parties will

use their reasonable endeavours to seek to satisfy that condition. Sometimes, an

12 See further chapter 5, section 3.2.

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Funding issues on a public-to-private transaction

additional ‘get out’ clause is included, stating that the investors will not be under

an obligation to advance its monies if the bank funders withdraw their funding

commitment. In reviewing any conditionality wording, including ‘get out’ provi-

sions, it is essential to ensure that any conditions in the banking documents will

either be satised pre-exchange, or be within Bidco’s control/gift to satisfy once

the offer is declared unconditional. It is also important to review any other docu-

ments that are to be signed on or prior to exchange (for example, any agreement

under which the management team conditionally agrees to exchange their shares

in P2P Target for shares in Bidco or its ultimate parent company), to check that

the only condition that applies is that of the offer being declared unconditional.

(b) Timing of funding

Once the offer has become or been declared unconditional in all respects,

Bidco will be under an obligation to pay the following consideration for the

shares (in practice, these amounts are paid to receiving agents, who receive the

same on behalf of the relevant shareholders):

(a) for those P2P Target shareholders who have accepted the offer before it

becomes or is declared unconditional in all respects, the consideration

should be paid on the fourteenth day after the offer has become or been

declared unconditional in all respects;

(b) for those P2P Target shareholders who accept the offer subsequently but

before the nal closing date, they should be paid within fourteen days after

receipt of such acceptance.

The mechanics for payments on a public-to-private transaction are therefore

more complex than for a private company buyout. Care is needed from a prac-

tical perspective to ensure there is sufcient time to deal with shareholders

holding shares in dematerialised form under the CREST system. The invest-

ment agreement will typically state that, once the condition has been satised,

completion will take place at a time that Bidco, the investors and the managers

agree, but in any event no later than close of business on the thirteenth day

after satisfaction of the relevant condition, to ensure there is sufcient time for

such logistics to be handled.

Private equity investors may require drawdown notices to be served and

other internal processes to be completed before funds can be made available.

In the case of managed funds, notice periods of ten business days (or even

longer) may be required for the dr awdown of funds. Time periods should be

checked with care – it m ay even be necessary to serve drawdown notices before

the offer has become unconditional.

It is important from the investors’ point of view that it has appropriate con-

trols over Bidco’s conduct of the offer, given that the management team will

often be the owners and directors of Bidco during this period. As has been

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Public-to-private transactions

highlighted throughout this chapter, there are various obligations on Bidco

under the Takeover Code in particular, and the investors will wish to ensure

that all of such matters are controlled.

Therefore, in addition to the typical business conduct obligations that are

found in any investment agreement, it is usual to see a number of additional

obligations placed on Bidco that run from the date of exchange. Examples of

such obligations include:

(a) an obligation on Bidco to take all steps in connection with or relating to

the offer or the proposed acquisition of P2P Target as may be reasonably

required by the investors;

(b) an obligation on Bidco to comply with the relevant ‘squeeze out’ provi-

sions once acceptance in respect of 90 per cent of the shares to which the

offer relates has been attained;

the London Stock Exchange or on AIM, as the case may be;

(d) an obligation on Bidco to procure that P2P Target convenes a share-

holder meeting to pass a resolution to re-register P2P Target as a private

company.

There are also a number of further undertakings that investors will usually

seek from the management team that are specic to a public-to-private trans-

action, such as undertakings:

(a) to disclose to the investors, before the offer is declared unconditional, any-

thing of which they become aware that could or may be likely to affect the

conditions in the offer, or that could or may be likely to constitute a breach

of the warranties in the investment agreement (see further below);

(b) not to declare the offer unconditional as to acceptances, or fully uncondi-

tional, unless the Takeover Panel requires otherwise;

offer;

(d) not to agree or announce any extension of the offer, revise the terms or

conditions of the offer, increase the price offered, or propose any alterna-

tive consideration under the offer;

(e) not to exercise any of Bidco’s rights pursuant to the irrevocable undertak-

ings given by any of P2P Target’s shareholders;

(f) not to purchase any shares in P2P Target or otherwise deal in securities in

P2P Target (which obligation should also be given in respect of any rele-

vant persons who might be construed as acting in concert with Bidco, such

as close relatives and family trusts);

(g) to comply with the Takeover Code, and to procure that Bidco complies

with the Takeover Code and behaves in a manner consistent with the state-

ments of intention attributed to Bidco in the offer document.

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Funding issues on a public-to-private transaction

(d) Warranties

On a public-to-private transaction, it is not possible to obtain a full set of

acquisition-type warranties, as there is no sale and purchase agreement. As

we saw in chapter 5, the warranties that are given to the investors under the

investment agreement usually have as their main purpose the ushing out of

information, and so are often viewed more as an extension of the due diligence

process, rather than offering any meaningful economic redress if the warran-

ties prove to be false.

On a public-to-private transaction, the issue of warranties can become an

area of much debate. On the one hand, the absence of any acquisition warran-

ties from the sellers, and potentially more limited due diligence, may lead the

investors to insist that management give more extensive warranties concerning

P2P Target. On the other hand, concerns as to the economic worth of the man-

agers as warrantors, and the obvious difculties with being seen to take legal

action against members of a management team that the investors have backed,

remain equally valid on a public-to-private transaction.

Another related issue is the question of when any warranties are given.

As we have seen, where there is a delay between exchange and completion,

the warranties given by the relevant sellers are usually repeated at comple-

tion.

In a public-to-private transaction, however, it is more common that any

warranties to be given by the managers are given only when the investment

agreement is entered into, immediately before the offer is announced. As noted

above, an obligation is then imposed on the management team in the invest-

ment agreement to disclose to the investors full details of any material fact or

circumstance of which they become aware prior to the offer being declared

unconditional which is likely to be relevant to the conditions of the offer.

This is mainly a reection of the fact that the repetition of warranties before

completion is unlikely to offer any remedy to the investors in any event; the

degree of cash conrmation required means that it is extremely unlikely that

the investors will be able to back out of the deal should something signicant

occur between exchange and completion.

It is also prudent for investors to include some additional warranties from

management specic to the offer, for example:

(a) that the information in the offer document relating to Bidco and the man-

agement team, and so far as the managers are aware in relation to P2P

Target and its directors, is correct; and

(b) that the management team and Bidco have complied with the requirements

under the City Code.

13 See chapter 5, section 3.4.

14 See chapter 4, section 2.6(b).

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Public-to-private transactions

Warranties such as these will help to focus the minds of members of the man-

agement team on the content of the offer document, and their obligations under

the Takeover Code.

4.2 Bank funding

Debt providers must be prepared to commit to lend on the date Bidco announces

its offer, and full that obligation at a future date, even though there may be

an intervening breach by Bidco, Topco or any subsidiary of Topco (including

the members of the Target group upon acquisition) of the terms of the rele-

vant facility agreements (except for certain fundamental breaches discussed in

more detail below). This, of course, contrasts sharply with an acquisition of a

private company, where the debt providers will be entitled to withdraw their

nance if there are breaches of representations and warranties, or of the nan-

cial covenants or other events of default set out in the debt documentation.

The only events of default which may exempt the debt providers from their

obligation to lend in a public-to-private transaction (other than the relevant offer

not being declared unconditional in all respects) are typically restricted to:

(a) non-payment by Bidco of sums due under the debt documents;

(b) insolvency events in respect of Bidco, any Midco or Topco;

(d) breaches of covenants relating to the conduct of the offer;

(e) breaches by Bidco, any Midco or Topco of the restrictions in the debt

documents relating to mergers, acquisitions (other than the acquisition of

Target), granting of security (other than the security in favour of the debt

providers) and incurrence of nancial indebtedness (other than under the

debt documents);

(f) breaches by Bidco, any Midco or Topco of the representations as to their

legal status and existence, the legal and binding nature of the debt docu-

ments, their power and authority to enter into the debt arrangements and

the validity of the debt documents.

Given that Bidco, any Midco and Topco are new companies incorporated for

the purposes of making the offer, the only liabilities they will have incurred

and will anticipate incurring before an offer is declared unconditional will be in

connection with the offer and the funding of the offer. As a result, it is difcult

to envisage how any such breach may occur from a practical point of view.

Lending into default is one the idiosyncratic features of the debt funding of

public-to-private takeovers. It runs contrary to the normal principles of bank

lending, but the credit committees of lenders have become comfortable with

the concept. A more concerning feature of public-to-private takeovers for debt

providers is the inevitable delay there will be in obtaining security over the

assets of the P2P Target group, or, in the worst case scenario, the possibil-

ity that they may end up with no security at all. This delay arises because