Whenever a UK company listed on the London Stock Exchange (Listed Company) is involved in an acquisition of a private company pre-emption rights will always need to be considered. We summarise some points to consider for you.
What are pre-emption rights?
Pre-emption rights are rights for existing shareholders to have a right of first refusal on the issue of shares in a company. Pre-emption rights are afforded to shareholders to protect shareholders against the dilution of their shareholdings. However, pre-emption rights can also apply to regulate the transfer of shares by giving rights of first refusal. The right can require a shareholder who proposes to transfer his shares to first offer his shares to some or all existing shareholders (depending upon how the right of first refusal has been drafted).
Pre-emption rights on the transfer of shares
Typically, when a private limited company is incorporated, it will be incorporated with model articles of association. Model articles of association do not contain restrictions on the transfer of shares but if a private limited company has been incorporated with bespoke articles of association and/or a shareholders’ agreement has been entered into, pre-emption rights may have been included and will need to be adhered to.
The risk is there may be one shareholder who wishes to exercise his right of pre-emption. This is often not be attractive for a UK company as it will likely want to purchase the entire issued share capital of the private limited company.
So, what should a Listed Company do to overcome the pre-emption rights issue?
How to overcome the pre-emption rights issue?
If a private limited company has pre-emption rights on the transfer of shares, a Listed Company could acquire shares if:
- each of the shareholders of the private limited company waives his or her rights of pre-emption; or
- assuming the right is not a reserved matter requiring more than 75% shareholder approval, dis-apply the rights of pre-emption by passing a special resolution.
But, what if the pre-emption rights still cause an issue?
Drag along right
The articles of association of the private limited company may provide some assistance here. Some private limited companies have a drag along right in the articles of association and/or shareholders’ agreement. This is a right for a majority of the shareholders to force a minority of the shareholders to sell their shares. If there is a drag along right, typically, that drag along right is not subject to the rights of pre-emption on the transfer of shares. Utilising a drag along right may give a Listed Company the opportunity to get the deal done, despite there being resistance from certain of the current shareholders. The catch is model articles of association do not come with a drag along right.
So, what if there is no drag along right available?
Some private limited companies may have a compulsory transfer mechanism within its articles of association and/or shareholders’ agreement. That is to say that shares held by a shareholder may be compulsorily transferred if the shareholder has, say, ceased to be employed and/or a director, suffered bankruptcy or materially breached one of the terms of a shareholders’ agreement. Depending upon the facts, invoking compulsory transfer can be a way forward. But, the catch again is model articles of association do not come with a compulsory transfer mechanism.
A Listed Company should also consider squeeze out rights set out in section 979 of the Companies Act 2006. The procedure provides that following a takeover offer for a UK company, a bidder (i.e the Listed Company) may acquire minority shareholdings on a compulsory basis if it has acquired or unconditionally contracted to acquire not less than 90% in value of the shares to which the takeover offer relates and not less than 90% of the voting rights carried by the shares to which the offer relates. As you would expect with the right to acquire on a compulsory basis there is a detailed procedure to follow.
Final considerations – does the Listed Company require shareholder approval from its shareholders?
In acquisitions by a Listed Company, the Listing Rules may require shareholder approval. By way of an example, a Listed Company with a premium listing in relation to equity shares (i.e. a Listed Company that is required to comply with those requirements in Listing Rule 6 and the other requirements in the Listing Rules that are expressed to apply to such securities with a premium listing) (Premium Listed Company) may be subject to Listing Rule 10 and the requirement for prior shareholder approval. If the proposed acquisition by a Premium Listed Company involves an acquisition of a private limited company and the assets of the private limited company when compared to the assets of a Premium Listed Company amount to at least 25% or more in value of the those assets of a Premium Listed Company, shareholder approval is required. In such a situation, in addition to the added time burden of arranging a shareholder meeting, a circular must be prepared, approved by the FCA and published.
A private limited company may also require approval from its shareholders too even though it may seem obvious that the shareholders approve the acquisition by virtue of them selling their shareholding. The answer for private company acquisitions depends upon what is set out in the articles of association and/or or shareholders’ agreement.