5 things you need to know about … shadow bids in UK takeovers

1. What is a "shadow bid"?

This is a term, coined by the press, to describe an approach to a public company by a potential bidder which has not been announced to the market.  The subject has been the source of much recent debate following a number of high profile possible offers being announced where the first announcement also disclosed that the target had received multiple approaches over the prior weeks or months.

2. Criticisms of the current regime

Critics argue that the process for alerting shareholders of an approach is "opaque" and that investors who sell their shares, ignorant of an approach, are being disadvantaged.  The argument continues that the Takeover Code’s commitment to "fair treatment for all shareholders" should encompass selling shareholders where an approach has been made but not announced.  The only way for such shareholders to be treated fairly is for all "credible" approaches to be disclosed to the market immediately.

3. Current regulation

Public company disclosure obligations following an approach are primarily covered by the Takeover Code.  Once an approach has been made to a public company (a very low threshold), the target must take certain steps to ensure no "false market" exists.  This includes monitoring press commentary and share price movements.  Where there is evidence of a leak or a suspicious share price movement, an announcement obligation will arise.  Prior to an approach being made, this obligation sits with the potential bidder.  Following an approach (which is not unequivocally rejected), the obligation passes to the target.  Without a leak or suspicious share price movement, disclosure of an approach is only required when a bidder notifies a target of a "firm" (binding) intention to make an offer, although a target is always permitted to voluntarily. announce an approach.

4. Private auctions

The regime allows negotiations to proceed privately to create the best opportunity to reach a recommendable offer but not if there is a real risk that trading is happening on inside information.  An alternative option available under the Takeover Code is for public companies to run controlled auctions using a "Formal Sale Process".  Under the banner of an FSP, the public company announces to the market up front that it is running an auction (so shareholders are aware), and is then able to negotiate with multiple parties in private, benefiting from a number of dispensations under the Takeover Code, such as no requirement to name bidders.  This tends not to be used for bilateral discussions but it is available to companies which want to explore a sales process more fully and cures some of the criticisms raised.

5. Thoughts

It is difficult to envisage an alternative to the current regulation which would provide greater certainty for shareholders.  Early announcement of an approach is likely to be detrimental to shareholders for a number of reasons:

i. It may dissuade bidders from approaching targets.  By their nature, public companies are "for sale" and will often receive multiple approaches, many of which will be speculative.  If bidders face exposure at the preliminary stages, it is likely that some of these approaches will fall away, which will inevitably lead to fewer offers being made for public companies.

ii. It will lead to increased market volatility.  Announcing early stage approaches will leave the market trading on guesswork about an important matter, which will not be capable of being cured by disclosure because the uncertainty is real. In practice very few approaches translate into actionable offers for a company, no matter how credible the potential bidder may be.

iii. It is likely to undermine the target board’s negotiating position.  Once publicly announced, the board is no longer able to focus solely on the long term interests of the company and its shareholders and may well face pressure from certain other interested groups which could weaken the target board’s position unnecessarily.

iv.  It could lead to confusion in the market.  Early announcement would be inconsistent with the UK Market Abuse Regulation, which permits boards to negotiate significant M&A, amongst other things, behind closed doors.  Taking a different approach for takeovers is likely to lead to confusion in the market.

For these reasons, and others, we hope that the existing approach is not over-hauled.

With close to 600 M&A lawyers around the world, White & Case is an M&A powerhouse and one of the most active M&A practices among global law firms – ranked among the top 3 firms for global M&A by deal value for 2016-2020.  We are equally adept at advising on big ticket, complex M&A deals as well as on mid-sized and smaller deals for strategic clients in EMEA and the rest of the world.  Led by M&A heavy hitters, with a deep bench of public M&A and PE specialists with an established record advising targets and bidders on takeover offers and schemes.  We also have extensive experience advising on strategic acquisitions of significant minority stakes and hostile takeovers, and market-leading debt and equity capital markets capabilities.  We provide expert advice to help navigate complex situations, offering innovative financing solutions for both bidders and targets (including advice on PIPEs, high yield and structured finance).

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