New Practice Statement 36

Earlier today, the UK Takeover Panel published a new Practice Statement 36 (Unlisted share alternatives) (PS36) which sets out guidance on how the Panel Executive normally interprets and applies the relevant provisions of the UK Takeover Code in respect of an unlisted share alternative to a cash offer ("stub equity"). 

So what do you need to know?

Set out below are the key takeaways from the new PS36.

1. Panel consultation -The Executive expects to be consulted where unlisted share alternatives are being offered. This includes "rollover shares" which are subsequently listed. The focus will be on fairness and disclosure.

2. Equivalent treatment - Minimum thresholds setting a minimum without which the alternative offer would not be made and maximum thresholds setting a maximum after which shareholders would be scaled back on a pro rata basis are permitted. However, bidders should not seek to specify individual limits on shareholders which might be to the detriment of minority shareholders. Similarly, the Panel would not permit an offer to be structured such that the exchange ratio excludes shareholders below a minimum threshold. Any legal or regulatory restrictions which may result in exclusion would need to be discussed with the Panel. All of this is in accordance with General Principle 1 and Rule 16.1.

3. Disclosure and rights - PS36 sets out further guidance on disclosure obligations in relation to the unlisted shares. Whilst equivalent treatment is required, governance rights linked to a specified percentage holding in shares are permitted and shareholders with such a shareholding may be permitted board appointment, consent and information rights which are not being extended to all shareholders. Monetary benefits or preferential exit opportunities would be in breach of Rule 16.1.

4. Valuation - Bidders must include a valuation of the unlisted securities in the offer documentation and PS36 provides guidance on approach and methodology. Ranges are permitted provided that the range is sufficiently narrow to result in meaningful disclosure.

5. Target board and Rule 3 opinion - Target boards are required to set out their opinion on alternative offers and provide a recommendation to shareholders. Where this is not possible, this must be explained and key arguments for and against the alternative offer should be given. Similarly, Rule 3 advisers are required to provide advice to the target board as to whether the financial terms of the offer (including any alternative offer) are fair and reasonable. Where the Rule 3 adviser is unable to advise the target board, this must be made known and the Panel must be consulted.

Alternative consideration is being used increasingly to secure shareholder support where there is a valuation gap or where parties wish to remain invested in the target or sector. We expect this will continue and so the additional guidance is welcome.