Although cash remained the preferred form of consideration, 2024 saw a higher proportion of bidders offering securities. Such uplift was in part due to an increase in strategic bidders offering listed securities, but also due to an increase in alternative offers involving unlisted securities. In a year when the perception that UK public companies remain undervalued has continued, securities alternatives have been a useful tool to bridge valuation expectations and satisfy the needs of larger shareholders wishing to retain ongoing exposure, including where joint offeror status is not available. Although the debt market has continued to stabilise, high financing costs compared to recent years has also resulted in bidders turning to securities as a means of reducing their funding requirement.
We expect the increased use of unlisted securities alternatives to continue into 2025, particularly whilst UK capital market activity remains low. The expected changes to the UK prospectus regime, increasing the threshold for a prospectus for a follow-on issue of equity from 20% of the issuer’s existing share capital to 75%, may also result in more UK listed bidders offering their shares as all of part of the consideration.
The key rules on unlisted securities offers
Under the Takeover Code, a bidder is prohibited from entering into any favourable arrangements or “special deals” which are only available to certain target shareholders. As a result, an alternative offer of securities (whether listed or unlisted) must be offered on equal terms to all target shareholders.
It is common to structure the bid as a scheme of arrangement, as the prevailing legal view is that a scheme of arrangement does not involve an offer to the public, and so a prospectus is not required in respect of the issue of unlisted securities to target shareholders as consideration for the bid. That said, if the bid is to be structured as a contractual offer, or there is a chance that the bidder may need to switch from a scheme of arrangement to a contractual offer, thought should be given as to whether the unlisted securities can be structured in such a way as to still avoid the need for a prospectus.
It is important to be aware of any legal restrictions that may apply to offering securities to target shareholders overseas, particularly if the alternative offer is expected to be accepted by shareholders in those jurisdictions.
Under the Takeover Code, the offer/scheme document must include an estimate of the value of any unlisted securities, which is typically given by the bidder’s financial adviser.
The shareholders’ agreement and any constitutional documents relating to the securities will need to be made publicly available on the bidder’s and the target’s website during the offer period.
Under the Takeover Code, there are certain circumstances in which a securities offer is required, for example, where a bidder has acquired 10% or more of any class of shares in exchange for securities in the offer period or the three months prior.
If any rights or terms applying to the securities apply, or are capable of applying, differently in the hands of different shareholders, advice should be taken as to whether a separate share class exists for the purpose of the target shareholders’ vote on the scheme of arrangement.
Summary of the terms of unlisted share alternatives offered in 2024
As can be seen from the summary below, the terms of the unlisted securities offered vary considerably. An unlisted securities alternative is typically structured with the shareholder register in mind, and as such it is common to see minimum acceptance thresholds and rights such as board appointment and information rights set at levels which have the identity of anticipated rolling shareholders in mind.
