UK: Responding to an approach: Some key considerations for potential target companies

Introduction

While there is little doubt that the immediate impact of the COVID-19 pandemic has suppressed public M&A activity over the last few months, opportunities for investment in listed assets and the potential benefits of corporate consolidation and/or bolt on M&A arising from the uncertainty are likely to drive takeover activity in the second half of the year. As a result, companies should be mindful that they may find themselves on the receiving end of an unsolicited approach.

This briefing sets out a number of steps that, regardless of their likely sentiment about a potential offer, boards should consider to ensure they are well-positioned to respond effectively in the immediate aftermath of an approach.

Be alert to potential warning signs

Companies should ensure that they minimise the risk of being caught unaware by being vigilant about potential warning signs of an impending approach. Practical steps to take in this context include active monitoring of the share register and of any rumour or speculation in the market.

Active monitoring of the register will not only identify new holders that could be building up stakes as a precursor to a possible bid, but will also flag any significant shareholders that are selling down (which could both facilitate stakebuilding by a potential bidder and indicate that the relevant shareholder would be receptive to an offer if made).

Although significant changes in holdings typically have to be notified under DTR5¹, this will not happen on an immediate basis – additional information and market intelligence from the company’s broker (in particular any indications there are significant buyers or sellers in the market) will be critical in filling this gap. Depending on the circumstances of the company in question, and how vulnerable the directors believe it is to an unsolicited approach, it may potentially be appropriate to request updates of this nature on a weekly or bi-weekly basis.

The registrars should also be instructed to provide immediate updates in relation to any significant or unexpected changes in the register. Where positions are unclear, UK incorporated companies should also remember that they have powers under the Companies Act to require information about underlying controllers of registered holdings and, depending on the circumstances, it may be appropriate for the registrars to be instructed to regularly serve formal notices requiring such information.²

Active monitoring also has the potential benefit of identifying any activist shareholders appearing on the register. Although activist investors have generally been quiet during the height of the pandemic, this is unlikely to continue indefinitely – and dealing with shareholder activism, particularly at the more aggressive end of the spectrum, can raise a number of issues that are similar to those discussed in this briefing in relation to preparing for an unwelcome approach from a potentially hostile bidder.

Ensure effective lines of communication with major shareholders

In current market conditions, having a strong relationship and effective lines of communication with major shareholders is more critical than ever.

In the context of defending an unwelcome approach (or responding to any activist campaign), building shareholder support will be much less of an uphill struggle where time has already been spent ensuring the company’s strategy for riding out the COVID-19 crisis has been clearly articulated and communicated to the market.

When engaging with their shareholders, companies should be mindful of the restrictions under the Market Abuse Regulation (MAR) on selective disclosure of inside information prior to its announcement to the market. More generally, boards should also ensure they are complying with the general obligation to disclose inside information to the market as soon as possible (including in light of the fact that that COVID-19 and public policy responses to it may alter the nature of information that is potentially material to investors). For further discussion of disclosure considerations, including the ability to delay disclosure, see our separate briefing COVID-19: Disclosure issues for UK listed companies under MAR.

Ready the defence manual

Clearly responding to the COVID-19 pandemic has created significant demands on the time of directors and other members of executive management. Notwithstanding this, companies would be well advised to review, with input from their lawyers and financial advisers, their internal defence procedures (including any defence manual) to ensure these are up-to-date.

Having an effective defence manual is key to managing the internal response to an approach in an efficient and orderly manner, minimising the risk of mistakes and ensuring that appropriate steps (such as alerting relevant individuals internally and at advisers, convening board or committee meetings, putting in place a communication plan, preparing draft leak announcements, etc.) are taken without delay.

Where the company believes it is particularly vulnerable to a bid, pre-emptive refresher training for directors on key Takeover Code requirements³ and practical dos and don’ts can also be helpful to ensure that the board is up-to-speed on the basics, enabling any post-approach discussions to focus on the specifics of the proposals that have been made and the detail of defence strategies.

Consider potential defence strategies

Regardless of the board’s receptiveness to the idea of a bid in principle, it is good practice to formulate a response strategy. This will typically involve identifying likely potential bidders and possible lines of attack as well as preparing key defensive messages. Having this information and supporting data to hand will be relevant in defending a truly hostile bid, but will also provide leverage around price negotiations in a scenario where a recommendation is potentially on the table.

The appropriate defence strategy will depend on the circumstances of the company in question, but one consideration that may be particularly pertinent against a backdrop of volatile markets is whether (even in circumstances where it is at a premium to current market price) a proposed offer undervalues the target business.

In this context, preparing (or having to hand) an up-to-date valuation of key assets, a “sum of the parts” valuation or updated profit projections can be a core element of a well-prepared defence strategy. This has, however, become increasingly difficult in a post-COVID world as the potential impact on the wider market and its appetite for assets, as well the potential performance of most businesses going forward, is inherently uncertain. Modelling potential scenarios will obviously be beneficial, but that has to be weighed up against the inevitable impact on management time when there are likely to be many other matters that may well need prioritising. Identifying the art of the possible, and striking an appropriate balance in terms of the work undertaken, is therefore important – but, at the very least, the detail of the steps that the company has taken to mitigate the impact of COVID-19 on the business and management’s views on its prospects going forward should be readily to hand.

Putting up the “for sale” sign?

In some cases, a company may take the view that it is appropriate to actively solicit potential bidders in light of its financial situation. Where this is the case, consideration needs to be given to how any process will be structured – will this be run privately or will the company announce a formal sales process (i.e. publicly put itself up for sale) or a strategic review (which may include a bid as one of many options)?

As a practical matter, companies may prefer to conduct the initial stages of soliciting potential bidders in private, to determine whether there is sufficient interest to justify launching a public process. Where this is proposed, the Takeover Panel must be consulted before more than one potential purchaser is approached (the so-called “rule of one”) and careful consideration needs to be given to the implications of a leak, as flipping from a private process to a formal sales process is not straightforward (in particular, the relaxations to the naming and bid deadline rules that would normally apply in a formal sales process may not be available).⁴

Conclusion

While we have not seen a significant volume of public M&A in the UK markets since the start of the pandemic, the current environment creates potential for opportunistic M&A activity and, given the fast-moving nature of public M&A transactions, companies would therefore be well advised to work with their lawyers and financial advisers to ensure they are in a strong position to respond to, and if necessary defend against, any unsolicited approach.

How can we help?

• Extensive experience of advising companies on public M&A transactions – since 2015 we have advised on over 50 takeover offers worth over £40 billion in aggregate.
• Our public M&A team includes ex-secondees from the Takeover Panel, and so is fully up-to-date with its regulatory outlook and best practice.
• Regularly provide training (including refresher training) on this topic to directors and other members of senior management.