Guidance Note about the Role of Independent Advisers
for the purposes of the Takeovers Code
Third Edition
August 2007
Partial offers
39.
With a partial bid the bidder must stipulate the percentage of the securities that it does not hold for which it is bidding. This is the "specified percentage". Other than under the procedure described in the following paragraph, partial offers must have a minimum acceptance level of more than 50% of the voting rights in the target company and must obtain at least that percentage in order for the offer to be able to be successful. If acceptances fall short of the minimum acceptance percentage the offer will fail. If acceptances exceed the specified percentage they will be scaled back. In some cases shareholders may be successful in selling all their holdings into a partial offer but a more realistic assumption may be that current shareholders will be left with some shares in the target company.
40.
If the offeror is seeking to acquire shares in the target company that would increase its control percentage to between 20% and 50% of the total voting rights, the offer must be approved by a majority of the shareholders of the target company not associated with the offeror that vote on the proposal
7. This voting process takes place during the offer period.
Accepting or rejecting the offer
41.
In advising offerees as to the merits of accepting or rejecting the offer again the adviser could be undertaking a valuation exercise of the target company and, in the case of a scrip bid, of the offeror. The adviser may need to make a decision about how to value a partial interest in the target company. This in turn may depend on whether the bidder is seeking more than 50% of the voting securities or somewhere in the 20 - 50% range with shareholder approval.
42.
Some of the same considerations may apply as in a full offer, but there are likely to be additional complexities with a partial offer. Comments could cover matters, among others, such as:
(a)
The reasons for a partial bid as opposed to a full bid;
(b)
Having regard to the percentage of voting rights that the bidder is seeking to control, the benefits that may accrue to the company and the shareholders who retain their shares if the specified level of control is achieved by the bidder;
(c)
The prospects of a shareholder being able to sell all or most of his or her shares into the offer, having regard to the scaling rules of the Code and the likelihood of success of the offer. This discussion may have added significance if there are competing partial bids, with competing bidders starting from different voting control positions.
43.
In commenting on the merits of a partial offer advisers may usefully reflect on whether control considerations outweigh pricing issues as far as the impact on target company shareholders is concerned.
44.
The adviser could discuss the consequences for a shareholder if it were to choose to accept, or not to accept, the offer. The consequences of not accepting the offer might include:
(a)
If sufficient shareholders respond in the same way, the offer failing, or the bidder increasing its offer price or making a (later) full offer for all the equity securities in the company;
(b)
Any premium for control that is being paid by the offeror being paid to only the accepting shareholders;
(c)
In the event that the partial bid succeeds, the accepting and non-accepting shareholders being left as minority shareholders in a company controlled by a single shareholder, where those who have not accepted the offer would be left with a greater level of shareholding interest than those who had accepted the offer.
45.
The adviser may need to comment on any plans the bidder may have for the target company. These intentions should be disclosed in the offer document, at least insofar as the bidder proposes to make any material changes in respect of the business activities of the target company (clause 14, Schedule 1, of the Code). The adviser may comment on whether it considers the bidder will add value to the company over time. It may also be relevant to comment on how the bidder intends to deal with any conflicts of interest if it is already a competitor of the target company. If the bidder will not provide the adviser with any information on these questions the adviser may wish to comment accordingly.
46.
Having regard to the Code, the adviser could also comment on future prospects for the remaining shareholders after a successful partial offer. These comments could cover matters, among others, such as:
(a)
The controlling shareholder's "creep" rights under rule 7(e) of the Code (if it has control of over 50% of voting rights) (see above);
(b)
The likelihood of future takeover offers under the Code from the controlling shareholder, or from other bidders;
(c)
The likelihood of enhancement to the value of target company shares for the minority shareholders as a result of increased financial or managerial support for the company from the new majority shareholder, or of detriment to the value of those shares in the event of diminished liquidity and a reduced possibility of future takeover activity following a successful takeover.
The right to vote for or against a partial offer
47.
If the bidder is seeking to acquire a voting percentage between 20 and 50% of the target company it can only do so with the approval of a majority of the shareholders of the target company not associated with the offeror, who vote on the proposal. This is a special right given to shareholders under the Code, and the Panel believes it is important that shareholders are well advised of the merits of voting for or against a particular partial offer made in that range.
48.
The adviser may need to comment on the reasons why a shareholder should be allowed to increase its control percentage in the 20 - 50% of control range without having to make an offer for more than 50% of the voting rights in the target company.
49.
In addition, as with any offer, the offeree shareholder also has to decide whether or not to accept the offer. In making this decision a shareholder has to take into account that, regardless of his or her own voting position, the bidder could well get approval to make a bid in the 20 - 50% range. This is a complex situation, and one that we encourage advisers to explain well to target company shareholders.
50.
The intended control outcome in the target company may be an important consideration in discussing the merits of the shareholders' choice whether to vote in favour of or against a partial offer that is seeking 50% or less control. Comments in the adviser's report could cover various matters, among others, such as:
(a)
The effect of the offeror obtaining the sought after percentage, say, 35% of the voting rights, in the target. Does this holding give the bidder effective control of the company taking into account other shareholding blocks?
(b)
The benefits that the bidder may bring to the company from an increased control percentage to justify the remaining non-associated shareholders voting to approve the percentage sought.
(c)
The reasons why a shareholder might vote to approve the offeror obtaining a controlling stake without having to make an offer for all, or at least the majority, of the target company's voting shares.
(d)
Whether there is a premium included in the price being offered by the bidder and, if so, what is that premium?
(e)
The likely effects of the offer, if accepted, on the shareholder's own shareholding, given the Code's scaling rules?
Footnotes:
The shareholders who are not eligible to vote are the offeror and its associates. If another shareholder is also making a takeover offer for the target at the same time it would be eligible to vote on the competing offer.
