In its latest edition of List! (number 25, July 2010), the UK Listing Authority ("UKLA") has clarified its approach on a number of matters relating to M&A transactions. In this article, we consider the main points raised.
Reverse takeovers - disclosure of information
If the operation of the market is, or may be, temporarily jeopardised or if it is otherwise necessary to protect investors, the FSA may suspend the listing of securities under Listing Rule ("LR") 5.1.1.R (1). LR 10.6.3G further provides that a suspension of an issuer's shares will be appropriate upon an announcement or leak of a reverse takeover as there will be insufficient information in the market about the proposed transaction.
In the case of a reverse takeover, as the target business will form the majority of the enlarged group, the UKLA has provided that it will not suspend the listed securities if it is satisfied that sufficient information on the target business is disclosed to the market.
Where the target business is not subject to a public disclosure regime, the UKLA has allowed issuers to publish fully audited financial information on the target business together with a confirmation that the issuer will continue to keep the market informed of any developments concerning the target business. Market feedback, however, has suggested that this approach is too onerous and may distract or even discourage issuers from executing significant transactions as they would otherwise become subject to long periods of suspension while they organise the audit of the relevant information.
Following this feedback, the UKLA has set out its current view on the minimum level of information to be disclosed to avoid a listing suspension for reverse takeovers, which includes:
- unaudited financial information on the whole target business for a three year period including profit and loss information, balance sheet information and the relevant cash flow information
- key differences between the current accounting policies of the issuer and those used to present the financial information on the target business. The announcement can state that the financial information may change when presented in the issuer's accounting policies
- if relevant to the business, non-financial operating or performance measures and a full commentary on current trading since the most recent financial information
- a statement that "the Directors of the issuer consider that the announcement contains sufficient information about the business to be acquired to provide a properly informed basis for assessing its financial position", which must also be confirmed by its sponsor in a private comfort letter to the UKLA
- a public commitment by the issuer to keep the market informed, without delay, of any developments concerning the target business that would be required to be released were the enlarged group listed, and a private comfort letter from its sponsor confirming to the UKLA that the issuer can keep this commitment.
While the UKLA no longer requires the disclosure of audited financial information on the target business, both the issuer and the sponsor will need to undertake significant work in collating and verifying the information so that they can provide their respective confirmations to the public and the UKLA on the sufficiency of the disclosed information. Moreover, the UKLA retains the right to override the issuer's and sponsor's view if appropriate and can suspend securities if it thinks that the market could not continue trading on a properly informed basis. Taking this into account, the net effect of the UKLA's "relaxation" of its approach to disclosure may not be as significant for issuers as hoped.
Reverse takeovers - TopCo structures
The UKLA had previously allowed issuers to avoid suspension where a new TopCo is used to effect a reverse takeover. The rationale behind this approach was that as the TopCo would make an offer for both the existing listed issuer and the unlisted target business, this would not constitute a reverse takeover undertaken by the listed issuer.
The UKLA has decided to change this approach as it believes that this structure is, in substance, a reverse takeover. The UKLA wishes to prevent TopCo structures being used as an avoidance mechanism to circumvent the disclosure regime for reverse takeovers. Going forward, the presumption will be that where such structures are used, the issuer's shares will be suspended until the earlier of the publication of a new applicant prospectus or the publication of the information described above.
Under LR 10.2.7 R, break fees are to be treated as class 1 transactions requiring shareholder approval if their total value exceeds specified thresholds. The UKLA considers that a break fee is "an obligation of an issuer for payment of a sum to the counterparty to a proposed transaction which will be triggered by the occurrence of certain specified events which have the effect of materially impeding a transaction". The crucial element in this test is that the issuer must be obliged to make a payment to the other party to the failed transaction. As a result, if an arrangement has been structured to replicate a break fee's effect or serve the same purpose as a break fee, it will be caught by LR 10.2.7 R and may be treated as a class 1 transaction. For example, an issuer's obligation to pay the other party's costs for a failed transaction would be classified as a break fee.
As LR 10.7.2 R could capture numerous arrangements, issuers and their advisers should consider each arrangement on a case-by-case basis at the start of a transaction and consider whether any additional matters will need to be put to shareholders for approval.
Classifying joint venture arrangements
The UKLA has confirmed that when a listed issuer with a premium listing enters into a joint venture, it is a significant transaction which must be classified using the class tests under LR 10. The listed issuer must classify both sides to the transaction, that is, both the disposal into the joint venture and the acquisition of an interest in the joint venture. The UKLA does, however, recognise that there is only one transaction and while the two class tests will not be aggregated, the highest result from both tests will determine the classification of the overall transaction.
As joint venture arrangements can be particularly complex, issuers and their advisers are encouraged to contact the UKLA helpdesk to discuss the correct application of the class tests to their specific transaction.