Corporate – Key considerations with regard to Public to Private and Reverse Takeovers

May 2009

Background

Since its launch 13 years ago, AIM has offered smaller growing companies many of the accepted benefits of being publicly quoted.  However, as a result of a number of different factors, including the global scarcity of available credit and the continuing uncertainty in the financial markets, many of the companies quoted on AIM are undervalued and undercapitalised.  In the current economic climate and with share prices falling, funding is increasingly difficult to come by.

Some AIM companies will consider raising funds via an investment from a strategic investor or consider the sale of some non-core assets. Others may become attractive targets for larger companies seeking to acquire a company with undervalued assets or smaller private companies seeking a listing on AIM (in a reverse takeover). Alternatively, some AIM companies will consider de-listing from AIM altogether or re-register as a private company and avoid being burdened by the regulatory and disclosures requirements associated with being a publicly quoted company.

We look briefly at two options that an AIM may consider, namely a public to private (“P2P”) transaction and a reverse takeover.

Public to Private

In simple terms, a public to private transaction involves a recommended takeover of a quoted company (“Target”) which is then de-listed and re-registered as a private company. Such takeovers are usually financed by a mixture of debt and equity.

A typical P2P involves the formation of a bid vehicle to make the offer.  An institutional investor may for instance subscribe for preferred ordinary shares and preference shares or loan stock in the bid vehicle and the cash received will be used to finance the bid.  Additional finance will often be funded by loans made to the bid vehicle by banks or other lenders.  The management team will usually receive ordinary shares in the bid vehicle, which will either be subscribed for in cash or issued in exchange for their shares in the Target.

If the transaction involves the acquisition of shares of a UK resident public company which is controlled and managed in the UK, the provisions of the City Code on Takeovers and Mergers ("Code") will apply and therefore govern the conduct of the takeover.

The more relevant provisions of the Code in the context of a P2P are as follows:

Rule 3.1 – Competent and independent advice for the target.
Rule 4.2 – No share sales during the offer period.
Rule 5 – Timing restrictions on purchase of further shares.
Rule 6 – Purchases of shares three months before the offer period.
Rule 9 – Mandatory offer if the 30% level is exceeded.
Rule 11 – Acquisition of 10% or more within 12 months prior.
Rule 14 – Comparable offer required for each class of share.
Rule 16 – No favourable conditions for MBO team.
Rule 19.2 – Responsibility statements required from various parties.
Rule 20.2 – Information given to competing offerors.
Rule 20.3 – Information given to independent directors.
Rule 24.7 – Confirmation that cash offered is available.

A takeover can be effected by way of an offer being made to shareholders, which they can choose to accept or reject, or by way of a scheme of arrangement which requires the approval of the Target’s shareholders at a meeting which is convened by the court, and the separate sanction of the court.

The key differences between an offer to shareholders and a scheme of arrangement are:

  • the offer process will be controlled by the bidder who will be required to issue an offer document whereas a scheme, being a statutory procedure, will require the Target to issue a scheme circular. Also, under a scheme, the timetable will be directed by the court and the implementation/process will be controlled by the Target. A shareholders meeting will need to be convened to approve the scheme.
  • A prospectus is not required for a scheme or cash only offer but will be required for offers which include shares as part of the consideration.
  • Under an offer in order to gain 100% ownership of the Target, the bidder must receive acceptances of not less than 90% of the shares and voting rights in the Target to which the offer relates.  Under a scheme approval must be by a majority in number (i.e. over 50%) of the shareholders represented at the shareholders' meeting, who together hold not less than 75% of all shares held by those shareholders.
  • No stamp duty is payable under a scheme although the procedural costs will often be higher.

Reverse Takeover

Under the AIM Rules, a reverse takeover usually refers to an acquisition (or series of related acquisitions) during a twelve month period where any of the class tests is 100% or more or which would result in a fundamental change in the business or a change in the board or voting control of the AIM purchasing company (the “Bidder”). In this type of acquisition, the class tests will determine that the Bidder (often an unlisted entity) is smaller in size than the target company (the AIM-listed entity).

The class tests (which are set out in Schedule 3 to the AIM Rules for Companies) will be used to compare the size of the Bidder with the proposed target company in terms of gross assets, profits, turnover, gross capital and a comparison of the consideration payable for the target company relative to the Bidder.

Any agreement which would effect the reverse takeover must be conditional on obtaining shareholder approval and be accompanied by an admission document in respect of the enlarged entity, describing the proposed acquisition and the convening of the general meeting of shareholders.  Where shareholder approval for the reverse takeover is obtained, the securities of the target company will be cancelled and the enlarged entity will need to apply (in the usual manner) for its securities to be admitted to trading on AIM for the first time.  Any company contemplating a reverse takeover should initiate discussions with a Nominated Advisor at an early stage. This will ensure that there are no breaches of the AIM Rules for Companies and enable the company concerned to discuss reverse takeover requirements with the AIM Team at the London Stock Exchange to determine whether there is any flexibility in applying the Rules to the transaction being contemplated.

Role of Lawyer

The role of the lawyer in these types of transactions is critical – not only advising on the vast array of complex legal agreements which are subject not only to the Companies Act, Listing Rules, but also the Takeover Code and related legislation but also in pro-actively managing the project to a successful conclusion.