Summary

  • The formal sale process (FSP) was introduced to the UK Takeover Code (the Code) to facilitate sell-side processes in a UK public M&A context and to provide a limited exemption from the new tough ‘put up or shut up’ (PUSU) regime.
  • Potential target companies and practitioners have been wary of starting an FSP for fear that it might be regarded as a sign of surrender or failure by the existing management and most FSPs have been associated with financially distressed companies.
  • However, a couple of examples of successful FSPs suggest that the FSP, which more closely resembles a US-style sell-side auction of a public company distinct from the traditional means of executing bids in the UK, might have a found place in the UK market.

The FSP was introduced into the Code as a new concept in September 2011 to facilitate a sell-side process in a UK public M&A context and to provide a limited exemption from the new PUSU regime (see below).

Many companies and practitioners are wary of starting an FSP for fear that it might be regarded as a sign of surrender or failure by the existing management, and because FSPs are currently associated with financially distressed companies. Of the 24 FSPs announced to date, at least four have ended with the insolvency of the target company and only four  have resulted in a successful bid: Cove Energy, and Valiant Petroleum (see ‘Two successful bids’ below) as well as Atlantic Global and Datong where the bids valued the target companies at less than £10 million.

However, the successful FSPs raise the question of whether the FSP has arrived as a new sell-side process in UK public M&A and has found a place in the UK market. It is much closer to a US-style sell-side auction of a public company, and is quite distinct from the traditional means of executing bids in the UK.

Key features

An FSP is a process available to target companies, with the prior consent of the UK Takeover Panel (the Panel), permitting dispensations under the Code from:

  • the requirement to identify publicly, in the target company’s announcement commencing an offer period or any later announcement referring to the existence of a new potential bidder, all bidders that have approached the target company (Note 2 on Rule 2.6),
  • the requirement for all bidders to announce either a firm intention to make an offer, or a binding commitment not to make an offer, within 28 days of being publicly identified (the  PUSU deadline) (Note 2 on Rule 2.6), and
  • the prohibition on target companies agreeing to break fees and, in exceptional circumstances, other offer-related arrangements (Note 2 on Rule 21.2).

The Code distinguishes an FSP from the announcement of a strategic review. A strategic review announcement identifies several possible outcomes that the target company is pursuing, one of which may be an offer for the company. If an offer is specified, it starts an offer period, but does not give rise to any dispensations under the Code.1

The target company must publicly announce the start of the FSP in an announcement pre-approved by the Panel, being sure to label the process as such, to allow any would-be bidder to participate in that process.

The FSP concludes, if unsuccessful, on the target company announcing it has terminated the FSP or, if successful, on the announcement of a single recommended firm intention to make an offer. So, although an FSP might look and feel like a private sell-side process, it must be conducted as a public process in accordance with the Code and will not result in a legally-binding share purchase agreement.

As such, a competing bidder can always make a higher bid and the board of the target company can always withdraw its recommendation. Competing bidders or late entrants into the FSP can also take advantage of Rule 20.2 of the Code, enabling them the same due diligence information and access to management as other participants in the FSP.

Getting started

The FSP is a relatively new process and, undoubtedly, practice will continue to develop (see ‘The future’ below). However, it will normally be available where a target company unilaterally decides to start an FSP, or where it receives one or more private approaches and decides to start an FSP before any leak occurs or any announcement starting an offer period is required.

The Panel is unlikely to consent to a company starting an FSP following a leak or after a bidder has been subjected to a PUSU deadline. This is because the Panel will be keen to ensure that the FSP does not become open to abuse as a way around the PUSU regime. It is not possible to announce an FSP once a firm intention to make an offer has been announced.

A company that is open to either negotiating a private deal or a bid for the whole company may combine the processes by announcing the start of a strategic review to consider all available options, including an offer, and that discussions relating to an offer will take place within the context of an FSP (as was the case with Valiant Petroleum).

Key issues

Before starting an FSP, companies should consider the following key issues:

Approaching the Panel in good time to obtain its consent. While the Panel usually responds very promptly, companies are more likely to achieve a better outcome by allowing more time to explain matters to the Panel.

  • deciding whether to give any inducements to encourage would-be bidders to participate in the FSP, such as an inducement fee, commitments to co-operate to achieve regulatory clearances, or the prospect of a fast-as-possible scheme of arrangement,
  • considering what commitments the target company expects to receive from participants in the FSP. These might include standstills prohibiting/restricting: buying shares in the target company; announcing a bid or possible bid; or participating in a consortium without the target company’s recommendation or consent, and
  • considering whether any concurrent asset sale process will need to be stopped, or whether the target shareholders and/or would-be bidders would be likely to consent to the sale proceeding either as an alternative to an offer or together with the offer (for the purposes of Rule 21.1 of the Code).

Two successful examples

It is notable that the two most successful FSPs by reference to offer price were both in the oil and gas sector.

Rationale

Oil and gas companies with non-producing, exploration assets might find the prospect of raising equity or debt finance challenging in the current markets.

Such companies may seek to raise money for the next phase of their development by inviting new partners to "farm-in" (in other words, to fund the next phase of, or perform relevant work obligations for, the key development asset in exchange for a participating interest in the underlying licence/contract) or by selling non-core assets, often by means of a private sell-side auction. However, for companies with a small number of valuable assets, a would-be farm-in partner or asset purchaser might instead consider buying the whole company, meaning that the transaction then becomes a public M&A process subject to the Code. If several would-be bidders for the company emerge, an FSP may be the most desirable means to pursue that process.

Break fee

As is permitted under an FSP, both Cove Energy and Valiant Petroleum agreed to pay break fees to the “winner” of the FSP. As the board of Cove Energy subsequently switched its recommendation from Shell to PTTEP, Cove Energy was required to pay Shell a break fee; this was the first instance of a break fee being paid since the September 2011 changes to the Code were introduced and one of only two to date.

The future

In the Panel’s anniversary review in November 2012 of the changes to the Code introduced in September 2011, it noted that the number of FSPs that had been announced at that time indicated that, in the view of the Panel, the FSP represents a valuable addition to the options available to target companies. The Panel considered it too early to fully assess the FSP, but suggested that it would continue to review it, and that additional provisions may be introduced in the future.

Whatever one thinks about the attractions or otherwise of the FSP, it does represent a new process that can be used to maximise value for the target company's shareholders in certain circumstances, and which companies and practitioners should not too easily dismiss.

This article first appeared in the June 2013 issue of PLC Magazine.