Public to Private: Just another buy-out?
With the high levels of management buy-out activity over the last few years, many businessmen are now more familiar with the ins and outs of the management buy-out process (either from their involvement in the process as a seller or as part of a buy-out team) and the role of equity investors in relation to this type of deal than they have ever been.
The recent emergence of institutional buy-outs and the decision of many smaller listed companies to return to private status have altered the way in which people view their business options and the ways in which venture capital money can be utilised. Indeed, a return to private status has been the preferred route for more listed companies in the last two years than in the rest of the decade and many more companies are currently exploring the possibility. There are, however, complexities not present with a more mainstream equity investment deal.
A public company MBO will, for example, need to comply with the City Code on Takeovers and Mergers which introduces issues not ordinarily relevant to MBOs.
In addition to the Code requirements for independent financial advice and an independent committee of the target board to consider an MBO offer, an early consideration is that any information given to a bidder or potential bidder must, if requested, be given to any other bidder or potential bidder, regardless of whether the target board prefer the MBO team's bid. Careful control and monitoring of information flow is therefore extremely important.
As the MBO team will ordinarily have had much greater access to information about the target than other potential bidders, simply by virtue of their positions as directors or senior managers of the target, it raises the practical issue of exactly what information has to be provided to competing bidders.
The Code specifically addresses this, making it clear that it is only information generated by the target and which has been passed to the providers of external finance (whether equity or debt) to the MBO bidder that needs to be provided. It is a Code requirement that any member of the MBO team who is also a director of the target must co-operate with the independent committee in putting such information together, and also a requirement that the MBO bidder provides the target with all information that the MBO team has provided to its backers.
As with any MBO, the venture capital provider will usually want to incentivise the MBO team by having them take an equity stake in the buy-out vehicle, a wish usually shared by the MBO team. The Code, however, introduces a practical difficulty in that all shareholders of the same class in the target are required to be treated similarly by a bidder and also prohibits a bidder from making arrangements with shareholders if there are favourable conditions attached which are not available to all shareholders, unless the Panel on Takeovers and Mergers agrees differently. As the opportunity for the MBO team to take a stake in the buy-out vehicle will not be made available to all shareholders, there will be a breach of the Code if the MBO team members are also shareholders in the target unless the Panel consents to the arrangement. Consents can be obtained, but there are factors which need to be satisfied before the Panel will give them.
As the Code contains a number of provisions which relate to concert parties (including, importantly, the requirement that, unless the Panel agrees otherwise, any offer must be on no less favourable terms than those of any purchase of shares in the target by the concert party in the three months prior to the commencement of an offer period, and in certain other circumstances), it is clearly important to know who is part of a concert party in relation to the MBO bidder. Whilst it will include the MBO team and its venture capital backer, there is also a presumption that it includes other members of the backer's group unless the backer is only taking a minority stake in the MBO vehicle. It is crucial, therefore, to confirm with the Panel if and from when any other members of the venture capitalist's group are treated as being part of the concert party, as it may have a major impact on the way in which any offer can be structured.
An additional complexity relates to the timing of parties entering into the buy-out documentation. In a conventional MBO, the acquisition will complete at the same time as the main buy-out documentation is signed. In a public to private deal, the funding documents need to be entered into prior to the bidder announcing a firm intention to make an offer for the target, in view of the Code obligation on the financial advisor to the bidder to confirm in the offer document that the bidder has the funds available to finance the bid. This results in most of the bidder's professional costs for the project being incurred well in advance of knowing whether the bid will ultimately be successful, which is an additional commercial risk given the possibility of a competing bid or target shareholders simply not accepting the MBO team's offer. The timing issues and the public company status of the target also make the process of a lender taking security over the bidder and the proposed new group more complicated than in a conventional MBO.
Given the additional technical complexities, the fact that opportunities for due diligence may be more limited than usual, and the potential for commercial risks to be higher, then while a take private may be the right deal it would be wrong to view it as being just another MBO. It's far from that.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.