PRINT THIS PAGE Taking care coming off the list
11/12/2002. Source:Taylor Wessing. Paul Burke
More and more public companies are choosing to go private as the general state of the stock markets continues to decline. Most transactions of this nature involve a management buy-out. Paul Burke of Taylor Wessing looks at how to ensure that the process goes to plan.
According to a survey by KPMG Corporate Finance, 29 public-to-private deals totalling £6.4bn were completed in 2001. Public-to-private transactions command a significant share of the private equity market, generating a third of the value of all deals completed last year. Although the number of these transactions fell towards the end of 2001, with only two transactions completed, they remain an established feature of the market.
The decision to take public companies private is typically made to address a low share price and reap the benefits of running a company free from concerns about short-term fluctuations in the share price.
Public-to-private transactions are more technically complex than most private equity investments. The commercial risk can be significantly greater, in particular because almost all of the transaction costs will be incurred prior to the announcement of the offer and before it is known whether or not the deal will succeed. Consequently, most public-to-private transactions have a number of common characteristics. They will often involve a management buy-out (MBO) and a recommended offer by the independent directors of the target company rather than a hostile bid.
MBOs can create the potential for significant rewards for both management and venture capitalists, while providing the selling shareholders with an attractive opportunity to realise value. However, the biggest task facing the management team of a public-to-private MBO is to manage the misguided perception of the selling shareholders and the independent directors that the purpose of the transaction is for the management team to make a financial killing at the expense of the selling shareholders. It is up to the management team to convince the shareholders that they represent the best opportunity to realise shareholder value in a company that may, for a number of reasons, have failed to realise this potential value.
In addition to the legal technicalities, the fact that in any MBO there are not just two sides involved, but usually four results in an interesting mix of conflicting interests and competing commercial objectives. The management team finds itself negotiating with its close colleagues all of whom are employed in various capacities by the target. For the management team, the deal can be particularly demanding because of their personal involvement and the fact that their financial security is at stake.
As the management team are likely to be spending a large amount of their time working on the transaction, they will need to obtain releases from their service contracts. However, directors of the target who are also directors of the bidder do not necessarily have to resign from the target's board provided all of the board are aware of their interest. They must, however, bear in mind their fiduciary duty to act in the best interests of the target company, their duty to disclose all relevant information and the fact that they will have to take responsibility for any circular or advertisement issued by the target and in particular the responsibility statement that is part and parcel of any document issued by the bidder on behalf of the management team.
An initial difficulty arises from the duty of confidentiality and insider dealing laws. The venture capitalist, whom the management team will need to line up before an offer is made, is going to need access to financial and other information that is available to the management, but not to the public. That information belongs to the company and cannot be made available to the financiers without the prior consent of the independent directors.
As a result of the directors of the bidding vehicle often remaining as directors of the target, the first step in any contemplated public-to-private MBO is for the target's board to constitute an independent committee to consider the proposals made by the bidder and to advise the target shareholders whether or not to accept the bidder's offer. The management team should declare their conflict and should not join in with the recommendation of the independent directors.
The takeover code requires certainty of funds to prevent bids being made without financial backing. In a private MBO the funding is signed up at the same time as all the other documents are signed, but the funding documents in an MBO of a public company will need to be signed up prior to the offer, but will not complete until the payment needs to be effected. Because the offer document needs to confirm that the bidder has the funds available to finance the transaction, the conditionality of the equity funders' and debt funders' commitment obligations needs to be scrutinised so that the management are not left with an unconditional bid and conditional financing.
After most public takeovers it is common for there to remain a small minority of shareholders who have not accepted the bid. Provided that there has been a takeover offer and acceptances were received in respect of no less than 90 per cent of the shares to which the offer relates, the bidder may utilise sections 428-430 of the Companies Act 1985 to compulsorily purchase the outstanding minority's shares in the target.
Notwithstanding the complexity and scope for difficulty, public-to-private MBOs have become an increasing part of the corporate landscape. They are attractive propositions in the right circumstances and, provided they are carefully planned, can generate significant benefits for all concerned. Although the number of public-to-private transactions has recently declined, there will undoubtedly be more public-to-private activity when the market picks up.
Copyright © 2002 Legal Week
This article first appeared in Legal Week, 18th April 2002
Paul Burke is a corporate partner with Taylor Wessing.
Legal Week is a news and information service for law firms. Its online titles include Legal Week, Legal Director and Legal Student. For more information please visit www.lwk.co.uk
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