Note 2 to Rule 2.6 of the UK Takeover Code

Background

In the context of reforms made to the Takeover Code (the Code) at the time, the formal sale process (the FSP) was introduced in September 2011 into the UK to facilitate sell-side processes. There is no definition of the FSP in the Code, but essentially it is a process by which a target company announces, prior to receiving an offer, that it is seeking one or more potential offerors by means of an FSP. It provides some flexibility to offeree boards in managing an offer process where they have decided the company should be sold.

Use of the FSP was initially associated with companies who found themselves in financial difficulties and had a real willingness to sell and, to a certain extent, this continues to be the case (as was evident in the announcements made by, amongst others, DiamondCorp plc on 18 October 2016¹ and Avanti Communications Group plc on 11 July 2016² , each of which stated that it was conducting a strategic review and considering its options, including potentially a sale, in order to address the company’s funding requirements with any sale to be carried out under the FSP).

Commentary

The Code requires that any announcement made by an offeree commencing an offer period must identify the potential offeror with which it is in talks, or from which an approach has been received. After the date of the announcement in which the offeror is first identified , a potential offeror is then subject to a 28 day “put up or shut up” deadline (Rule 2.4) by which it must either announce a firm intention to make an offer or announce it does not intend to make an offer.

Where the offeree has commenced the offer period with an announcement that it is to carry out the sale by way of an FSP, the Panel, who must be consulted in advance, will normally grant a dispensation from Rules 2.4 (a) and 2.6 (a) of the Code i.e. dispensation from (i) the requirement for potential offerors to be publicly identified at the beginning of an offer period; and (ii) the “put up or shut up” requirement as outlined above.

In recognising that there may be situations where the offeree launching the FSP is experiencing financial difficulties, the Code does allow the Panel to permit certain deal protection measures which are otherwise prohibited, subject always to prior consultation. For example, the prohibition on the “break” or “inducement” fees may be waived by the Panel in the context of an FSP initiated by the offeree prior to a firm offer announcement.

The offeree company may therefore agree a “break” or “inducement” fee with an offeror which had participated in the FSP at the date of the announcement of its firm offer, provided the fee does not exceed 1% of the transaction value and will only be payable if another offer becomes or is declared wholly unconditional. The Panel should be consulted at the earliest possible opportunity in all cases where such a dispensation is sought.

Main Features of the FSP

(each subject to prior dispensation from the panel)

  • No requirement to identify bidder at the outset
  • No “put up or shut up” requirement
  • Break fees and (certain) offer-related arrangements may be permitted

In the first half of 2016, there were no instances of the Panel granting a dispensation from the prohibition on “break” or “inducement” fees under Note 2 on Rule 21.2 as there were no firm offers announced following an FSP initiated by a target company³.

Advising the board of the offeree

Early consultation with Panel

An offeree board, considering launching an FSP, must consult with the Panel prior to making an announcement and, in any event, before one or more potential purchasers or offerors are sought (Rule 2.2 (f) (ii)).

Importance of confidentiality

Whilst an offeree may obtain dispensation from certain provisions of Rule 2, under the FSP, it should still seek to preserve the confidentiality of the sale process. Any prospective offeror should, for example, be required to sign up to a non-disclosure agreement. The requirements around announcement of a firm intention to make an offer remain the same.

Equality of Information (Rule 21.3)

An offeree board, considering launching an FSP, must consult with the Panel prior to making an announcement and, in any event, before one or more potential purchasers or offerors are sought (Rule 2.2 (f) (ii)).

Equality of Information (Rule 21.3)

As with any bid, the offeree must ensure that it manages the supply of informational to potential offerors in the FSP in a fair and consistent manner. Setting up a tightly controlled data room is advised to ensure equality of information among potential offerors.

Disclosure obligations (Rule 8) and generally keeping the market up to date

As announcing an FSP commences an offer period, the offeree must comply with the disclosure requirements set out in Rule 8 including an Opening Position Disclosure and ensure the market is kept informed of any developments concerning the FSP.

Advantages of a Formal Sale Process

Often companies launch an FSP as a means of generating interest in the sale of the company and to encourage competing bids. Another advantage of the FSP is the offeree’s ability to facilitate a due diligence exercise by potential suitors without having to publicly name them.

An FSP differs from a strategic review in that the announcement by an offeree that it is in an FSP is a clear expression that it is putting itself up for sale. In contrast, the announcement of a strategic review indicates the company is looking at a range of options. This could, but doesn’t necessarily have to, include an offer for the company. If an offer is mentioned in a strategic review announcement, as an option, an offer period under the Code will be started. However, a company having announced the possibility of a sale under a strategic review will not benefit from the dispensations from the Code unless it specifically announces that such sale will be arrived at by way of the FSP (see Main Features of the FSP).

On the one hand the FSP does not necessarily commit the offeree board to selling the company to a potential offeror, however prospective offerees should be mindful that it can prove a very open-ended process, as is evident from the on-going FSPs referenced below.

Trends in 2016

To date in 2016, nine companies have announced FSPs, and in each case the announcement was made in the wider context of a strategic review of the company's options.

  • Of these nine FSPs, four are on-going - Electronic Data Processing plc announced on 18 April 2016, Sutton Harbour Holdings plc announced on 21 April 2016, Avanti Communications Group plc announced on 11 July 2016 and St Peter Port Capital Limited announced on 3 October 2016.
  • Three of the nine FSPs have been withdrawn without an offer being made - (XL Media plc announced its FSP on 26 January 2016 and was withdrawn on 12 May 2016, Anglo African Agriculture plc announced its FSP on 29 July 2016 and it was withdrawn on 5 September 2016 and Diamond Corp plc announced its FSP on 18 October 2016 and it was withdrawn on 7 November 2016).
  • Two FSP's have resulted in a firm offer being made - (Cyprotex plc announced on 1 April 2016 and an offer was made by Evotec AG on 26 October 2016 and Pinewood Group announced on 10 February 2016 and an offer by Venus Grafton Sarl was announced on 26 July 2016).

Based solely on number of deals, compared to the same period in 2015, there would seem to be a downward trend in the use of FSPs as a mechanism for the possible sale of UK public companies. More likely, this simply reflects a broader slowdown in public M&A activity over the past year.

The FSP does have a helpful role in providing a more flexible structure to a potentially difficult sell-side process and it is clear from the number of sales effected this way since 2011, that the FSP is here to stay as a means of effecting an offeree-driven public company sale.