Public harmony

New laws stemming from the EU Takeover Directive will impact private equity firms undertaking public-to-privates. By Andy Thomson.

As national protectionism threatens to take root in the European M&A arena, at least one important new piece of legislation seeks to counter this trend. The EU Takeover Directive aims to harmonise company takeover laws across the EU, creating one set of rules to be applied throughout the region.

On May 20 2006, certain changes arising from the Directive were brought into force in the UK. Some key measure affect private equity houses seeking to acquire public companies, as follows:

Hamilton: building large stakes pre-offer may become more common

-Previously, target company shareholders were required to pass a resolution giving approval for a bid if the management, together with the bid vehicle, held over five percent of the target’s equity at the time of the offer. The five percent threshold has now been removed, meaning in all cases where management roll over shares into equity in the bidder, the terms must be signed off as fair and reasonable by the target’s financial advisor and approved by a shareholder EGM. In such cases, the bid timetable will be lengthened (though it should be noted that this does not apply to schemes of arrangement).

-SARs (rules governing the timing and disclosure of stake-building in public companies) have been abolished, meaning significant stakes can be built up quicker without the previously required ‘cooling off time’ that enabled targets to put bid defense tactics in place. “Typically, private equity houses haven’t wanted to build large stakes pre-offer,” says Ian Hamilton, a partner at law firm Weil Gotshal & Manges in London. “But there are always exceptions, as the recent acquisition of shares in AB Ports by a private equity consortium shows, and these may become more commonplace in the future.”

-Dealings in derivatives and options relating to a target’s shares during an offer period must now be disclosed, ensuring greater transparency for bidders to see who owns underlying shares when assessing whether a bid is likely to be accepted. This effectively gives hedge funds less power to wield influence behind the scenes.

-Within the offer document, bidders must make clear its plans for employees of the company and offer workforce bodies the chance to include a statement expressing views no the proposed takeover. “This reflects a growing trend from Europe to place awareness of the wider stakeholder impact at the heart of company law,” says Hamilton. “It means industrial relations is now higher up on the list of things to think about pre-offer.”

This feature first appeared in the July issue of Private Equity Manager.