UK M&A market sees increase in formal sale processes

The Takeover Code (the Code) does not formally define an FSP, which was introduced as a new concept in 2011. In short, the process enables a target company to announce, before it receives an offer, that it is actively seeking one or more potential bidders by means of an FSP.

It will not surprise market observers that there has been an increase in the number of FSP announcements in the first half of 2020 given the difficulties experienced by listed companies during the Covid-19 pandemic. Increased pressure from a cash flow perspective as a consequence of the challenging economic circumstances in the UK may mean that more companies seek to find a strategic merger partner through the auspices of an FSP in the coming months.

The public nature of an FSP means that a company is seen as being 'in play'. This may mean that in the coming months opportunistic bidders will seek to take advantage of the commencement of an FSP to launch an offer which the target company may consider to undervalue it. We have also seen companies using an FSP to create competitive tension, particularly where they have received a large degree of interest from prospective bidders, illustrating the potential benefits that a well-run and successfully co-ordinated FSP can provide.

What does a formal sale process involve?

The announcement that a company is conducting an FSP triggers the commencement of an 'offer period' under the Code. One of the fundamental principles of the Code is that any announcement made by a target company which starts an offer period must publicly identify the potential bidder with which it is engaged in discussions, or from whom they have received an approach.

Linked to this concept, the potential bidder is subject to a 28 day 'put up or shut up' (PUSU) deadline, which means that it has 28 days to announce a firm intention to make a bid for the target company or walk away. This also removes the possibility of 'virtual' bids, which can take up a large degree of management resource and leave a target company feeling under siege.

Helpfully, the changes introduced to the Code in 2011 mean that the Panel on Takeovers and Mergers (the Panel) can grant dispensations to a target company allowing it to conduct an FSP without being required to identify a potential bidder publicly. A potential bidder participating in the FSP will also not be subject to a PUSU deadline. This enables a potential bidder to take the appropriate time to formulate its strategic plans for the company, and to undertake the necessary financial and operational due diligence.

Early consultation with the Panel Executive is strongly advised before attempting to take advantage of these dispensations. The Panel Executive will consider granting the relevant dispensations in the context of an FSP where a sale of the company is genuinely being considered by the target company's board of directors.

A core feature of an FSP which is beneficial to a target company is that the Panel will normally also grant a dispensation from the Code's rules relating to inducement or 'break' fees. A target company will be permitted to enter into an inducement fee arrangement with a single bidder who is participating in the FSP, and that agreement in respect of the inducement fee can only be entered into at the time of the bidder's announcement to make an offer for the company. Importantly, the Code stipulates that the value of the inducement fee must be 'de minimis', and the inducement fee must be capable of becoming payable only if an offer becomes or is declared wholly unconditional.

Interestingly, the Code provides target companies with the latitude to impose certain conditions on a potential bidder as a condition to that potential bidder's participation in the FSP. For example, the target's board could seek an undertaking from a potential bidder to enter into a 'standstill' agreement, under which the potential bidder would agree not to acquire any shares in the target company without the express consent of the target's board. The target company also has the ability to enter into different arrangements with different potential bidders that are participating in the FSP, meaning it can retain a degree of flexibility around the overall management of the process.

The target company is not, however, permitted to require a potential bidder to agree to waive the provisions of the Code more generally as a condition to it participating in the FSP. That said, the target company may require the potential bidder to undertake not to request any information under Rule 21.3 of the Code – the rule regarding equality of information to competing bidders – provided that the undertaking applies only until the earlier of the announcement by a third party of a firm intention to make an offer or the conclusion of the offer period.

Using a formal sale process

A number of companies have elected to undertake an FSP since the introduction of the changes to the Code rules. In some of those cases, the announcement was made in the context of a wider strategic review of that company's options. In a number of instances, the companies that have elected to proceed down the FSP route were in significant financial distress – for example, The Co-operative Bank Plc and Blacks Leisure.

Other companies have elected to use an FSP to start a 'sell-side' process to solicit interested parties. An example is the FSP commenced by Jimmy Choo in April 2017. Jimmy Choo was ultimately acquired by Michael Kors in November 2017 for approximately £900 million, with Michael Kors offering a 36.5% premium to the prevailing share price at the time of the offer.

Despite notable exceptions such as the Jimmy Choo acquisition, we have historically not seen an FSP being a particularly popular means of facilitating the sell-side process in the context of Code-governed transactions. There may be a number of different reasons for this lack of enthusiasm, but there is a perception in the market among some practitioners that electing to proceed down the FSP route signifies a failure to execute the company's chosen strategy successfully or that it has experienced prolonged financial difficulty. In these unprecedented times, however, we expect a continued increase in companies pursuing FSPs during the remainder of 2020.