By Kathleen Wang
What is public M&A?
Public M&A refers to mergers and acquisitions involving publicly listed companies, or companies that trade on a stock exchange. Companies may seek to merge with or acquire another business to grow its business or add a new line of business to its existing activities.
Notable feature of public M&A transactions
A notable distinction between public and private M&A transactions is the degree of regulatory supervision. Because public companies are listed on a regulated stock exchange, any transactions are subject to extensive rules and procedures by the relevant authorities.
In the UK, the City Code on Takeover and Mergers regulate takeovers and mergers for UK registered companies and companies listed on the London Stock Exchange (LSE). Companies seeking a merger are also subject to the Companies Act 2006.
Additionally, companies may be subject to the dual supervision of the Takeover Code and other relevant overseas regulation authority depending on where the companies’ offices are registered and where its shares are traded.
Parties involved in an M&A transaction
There are four actors involved in an M&A transaction:
The ‘buyer’ – this is the acquiring company who will make an offer, pay the purchase price, and after closing, control the target company.
The ‘seller’ – this is the target company being acquired. For a public company, this includes the company’s management and Board of Directors who will liaise with the buyer, as well as the public shareholders who may approve the transaction.
Investment banks – investment banks may advise both buyer and seller on the financial aspects of the transaction, such as the initial decisions of entering into a transaction, to setting the offer value.
Law firms – law firms for both the buyer and seller will work to draft all necessary documents, monitor the transaction, and obtain relevant regulatory filings and competition approval.
Deal structure of a public M&A transaction
There are two principal mechanisms to effect a merger or takeover in the UK:
Contractual offer – a contractual offer to all of a target company's shareholders to acquire their shares. The required threshold for a takeover by contractual offer is a simple majority of the voting rights of the target company; however, some buyers might adopt a 90% threshold, which would give them a legal right to order a compulsory buy-out of the remaining 10% voting rights, thereby gaining full control.
Scheme of arrangement – this is a statutory mechanism involving a shareholder vote (requiring a 75% approval) and court approval, under which 100% of the target company's share capital is acquired by the buyer.
Schemes of arrangements are becoming increasingly popular for M&A transactions; in 2019, 47 out of 66 transactions on the LSE were by way of a scheme of arrangement.
Timeline of a public M&A transaction
There are multiple stages to a typical M&A transaction, throughout which relevant Code regulations apply.
Timeline of a contractual offer transaction:
Pre-offer due diligence – the buyer or any company interested in a merger will conduct due diligence prior to making a bid. This includes a review of both publicly available information and any non-public information the target company is willing to disclose.
Making an offer – the buyer may then approach the target company’s Board of Directors with an offer. Per Code regulations, at this stage the buyer must produce the Confirmation Letter if the offer contains a cash element, as well as documents outlining how the offer is to be financed.
Making the offer public – once the buyer has notified the target board of its offer, the Code imposes a strict deadline of 28 days within which the buyer must either announce this offer publicly or announce that it no longer intends to make an offer. This is to protect the target company from any detriments arising from an unnecessarily prolonged transaction process.
A formal announcement of offer must include the terms of the offer, the identity of the buyer, all conditions of the offer, and the long-term commercial justifications for the offer, including the buyer’s plans regarding managing the business and employees of the target company.
The substantive offer process – from this point, the Code imposes a strict timetable which the companies involved must adhere to. This stage includes obtaining shareholder approval and employee consultations, satisfying any offer pre-conditions and conditions, closing the offer, and paying the consideration of the offer.
Competition clearance – public M&A transactions may be subject to anti-competition checks.
If a transaction has an EU dimension and reaches a certain EU-wide turnover threshold (EUR250 million), there is a mandatory notification and competition clearance requirement by the European Commission.
By contrast, notification to the Competition and Markets Authority (the UK competition commission) is not mandatory; however, parties who choose not to notify and obtain clearance run the risk of being called in for review by the CMA, which could delay the transaction process.
It should be noted that the current competition and merger control regime may be subject to change after Brexit’s Transition Period, ending in December 2020.
Timeline of a scheme of arrangement transaction:
Drafting the Scheme agreement – the participating companies will conduct due diligence checks and prepare the draft terms of the Scheme of Arrangement.
Application to court – the proposed Scheme of Arrangement must then be submitted to court for a court order to convene shareholder meetings. At this point, the Scheme must also be published publicly.
Shareholder approval – prior to convening the shareholder approval meeting, the target company must publish a share circular to shareholders outlining the terms of the agreement and an expected timetable which the companies must follow. For the transaction to continue, the target company’s shareholder approval must reach 75%.
Court Sanction – following shareholder approval, the Court will conduct a hearing to sanction the Scheme.
Competition Clearance and regulatory approval – Scheme of Arrangement transactions are subject to the same merger control mechanisms as transactions by way of contractual offers, as well as any regulatory filings in the relevant jurisdictions.
Effective Date – The court sanction will then be delivered to the Registrar of Companies, at which time the Scheme takes effect, pending regulatory approvals. Following this period, any consideration under the Scheme must be paid within an agreed-upon deadline.
Mitigating risks in public M&A transactions
A company seeking a takeover or merger run the risk of their offer failing, either because of a higher competitor bid or failure to reach the shareholder approval threshold. A failed offer has significant consequences for the potential buyer/bidding company, as the Takeover Code prevents the bidder from making another offer for 12 months, which could affect the value of the takeover/merger or even the possibility of the transaction happening.
Therefore, the buyer will usually insert a number of deal protection mechanisms throughout the transaction, regulated by the Takeover Code:
Break fees – the parties may arrange for the target company to pay a break fee of up to 1% of the total transaction value if it withdraws from the offer. However, per the Takeover Code, break fees can only be implemented after the offer has become unconditional and only after the formal announcement of offer stage of the transaction.
Irrevocable undertakings to accept – the buyer often may seek irrevocable undertakings from significant shareholders of the target company to approve the offer.
Stakebuilding – the buyer may increase the likelihood of the success of its offer by acquiring shares in the target company, which also counts towards reaching the shareholder approval threshold.
However, the Takeover Code prevents the acquisition of more than 30% of the target company’s share capital. Further, where the buyer has participated in stakebuilding within a specified time period of announcement of offer, the terms of the offer must not be on less favorable terms than the terms of the stakebuilding share acquisitions.
Just Eat Takeaway’s acquisition of Grubhub – (June 2020) The European food delivery service Just Eat has agreed to acquire competing delivery service Grubhub, a company listed on the New York Stock Exchange, for $7.3bn in an all-share transaction. This transaction comes after Uber’s negotiations to acquire Grubhub stalled over US anti-competition concerns.
Freshwater Group’s offer for Daejan Holdings – (May 2020) Freshwater Group has acquired subsidiary Daejan Holdings in a public-to-private transaction. Freshwater was already the majority shareholder for Daejan, and made an all-cash £1.31bn offer in March to acquire the rest of the shares, through a Scheme of Arrangement. Daejan Holdings had, prior to the transaction closings in May, traded on the LSE.
Brigadier Acquisition Company acquires Moss Bros – (June 2020) LSE-listed men’s formalwear company Moss Bros has been acquired by Brigadier, which owns several similar clothing companies, in a £22.6 million all-cash transaction. Previously, Brigadier had sought to cancel the transaction, citing ‘material adverse changes’, following Moss Bros’ closure of all its stores during the pandemic; this submission was subsequently rejected by the UK Takeover Panel.