Summary of UK Takeover Panel Practice Statement 36 (PS36): Unlisted share alternatives

PS36 provides guidance on how the Panel usually applies Takeover Code provisions relating to an unlisted share alternative to a cash offer (stub equity), emphasising that the Panel should be consulted at an early stage (including if “rollover shares” are later listed). This article sets out the key points from PS36.

1. Thresholds and restrictions: although minimum (without which the alternative offer won’t be made) and maximum (after which shareholders are scaled back pro rata) acceptance thresholds are permitted, as are exchange ratio thresholds, such limits should not be imposed in a way that might disadvantage minority shareholders. Should any legal or regulatory restrictions be proposed (e.g. not being offered in certain overseas jurisdictions; or a cap/bar on certain shareholders), the Panel should be consulted at an early stage.
2. Equality of treatment, and sufficient disclosure of information: it’s important to ensure target shareholders are (i) afforded equivalent treatment and that there are no special deals with favourable conditions which are not being extended to all shareholders (General Principle 1 and Rule 16.1); and (ii) given sufficient time and information to enable them to reach a properly informed decision (General Principle 2 and Rule 23.1).

   Guidance is set out as to the level of detailed disclosure required (broadly in line with market precedent to date) – including on the rights and restrictions relating to the unlisted shares, investment risk factors, and a summary of the relevant provisions of the underlying articles of association and any shareholders agreement (which should be published on a website). It may be possible to restrict certain governance rights only to certain shareholders holding a specified minimum percentage, however monetary benefits or preferential exit opportunities for particular shareholders are generally prohibited. The designation of a “shareholder representative” or similar, which has the ability to consent to certain actions on behalf of minority shareholders, is unlikely to be permitted.

3. Rule 24.11 valuation: guidance is provided (again broadly in line with market precedent to date, in terms of the range of relevant information to include, and methodologies) regarding the valuation from the bidder’s financial adviser on the unlisted share alternative, that must be included in the offer document. Although the estimate of value can be expressed as a range, it must be sufficiently narrow to result in meaningful disclosure.
4. Target board and Rule 3 adviser opinion: a target board must give its opinion on the alternative offer, together with a recommendation to shareholders. If this isn’t possible, this must be explained, and key arguments for and against the alternative offer given. The Rule 3 adviser must also provide advice as to whether the financial terms of the offer (including any alternative offer) are fair and reasonable – if it cannot do so, this must be made known and the Panel consulted.

HL opinion: Given that key target shareholders are increasingly becoming more active and demanding an option for ongoing participation on many bids, stub equity is often considered at an early stage in bid planning and can therefore be tailored to neutralise any pushback from the target company on the valuation of relevant deals. As evidenced by this Practice Statement, there is an increasing market acceptance of, and indeed enthusiasm for, stub equity – so, although there is a lot of work required upfront, it can be well worth the subsequent rewards for both target shareholders and the bidder.