UK Public M&A – When Is a “Final Offer” Not Final?

November 9, 2016

The battle to take control of SVG Capital was a good example of how the UK’s Takeover Panel operates on a pragmatic "principles" basis rather than on a strict rules basis.  And it confirmed the importance, and benefits, of participants in UK public takeover transactions discussing their tactics with the Panel prior to announcing any proposals. 

Introduction

• Public company takeovers in the UK are regulated by the Takeover Panel.  Whilst the Takeover Code contains a set of rules the Panel has always been clear that it operates on a "principles" basis and not a "strict rules" basis.  The Code is not interpreted on a strict black letter basis and the Panel often refers to the "spirit" behind various rules of the Code.  Many of the rules are based and have been developed on market practice over time. 

• One of the most important principles is that participants in public offers will be bound by their public statements.  And one of the most important examples of this is when a bidder expresses its offer for a target as being "Final".  In these circumstances, the Panel will not allow a bidder subsequently to increase its offer or make a new offer for six months.  It is for this reason that it is rare for any offer, and in particular an opening offer, to be expressed as "Final".  The recent example of the bid by HarbourVest for SVG has illustrated that in some circumstances "Final" may not actually mean that.

What Happened?

• HarbourVest announced an unsolicited offer for SVG, a UK investment trust, on 12 September 2016.  The offer was expressed to be "Final" at 650p per share meaning that, in accordance with the Code, it was not allowed to increase that offer even if there was a competing bid.

  HarbourVest already held 8.5% of the SVG shares and pursuant to undertakings given to it prior to making its offer quickly received acceptances for a further 26.6% (although technically 6.6% could have been withdrawn).

• On 3 October 2016 SVG agreed in principle to sell a proportion of its assets to Pomona Capital and Pantheon Ventures which would have enabled SVG to make a tender offer to its shareholders for more than the 650p per share offered by HarbourVest. 

• It was necessary for the Pomona/Pantheon proposal to be approved by an ordinary resolution of SVG shareholders – i.e. a simple majority of shareholders who vote (not 50% of all shareholders) – an easier threshold to achieve than for a share offer particularly given the level of acceptances that HarbourVest had received. 
• The Pomona/Pantheon proposal was announced before any legally binding contract had been signed save that, unusually, SVG did agree to pay a break fee if the proposal did not proceed through no fault of Pomona/Pantheon.  Target companies are generally prohibited under the Code from agreeing to pay break fees.  One exception to this rule is that a target may agree to pay a break fee to a white knight offeror.  What was interesting in this situation was that the Panel exercised jurisdiction over the amount of the break fee notwithstanding the proposal was for assets and not shares.
• On 6 October 2016 SVG announced that it had agreed in principle to sell 100% of its assets to Goldman Sachs which would have enabled it to return 680p per share to shareholders.  This deal was also announced before any binding contract was signed and also included a break fee which was capped under the Panel’s rules notwithstanding it was an asset deal.

• On 18 October 2016, SVG announced that it had signed a legally binding agreement to sell all of its assets to HarbourVest at a "see through" value of 715p per share – significantly higher than its original share offer of 650p and superior to both the Pomona/Pantheon and Goldman deals.

• Throughout this process all the participants discussed and agreed their plans with the Panel prior to their proposals being announced.

Take Aways

• This deal is a good example of how the Takeover Panel in the UK works in practice-interpreting its rules on a "principles basis" and pragmatically.

• It also reinforces the importance, benefits and effectiveness of bidders and targets consulting the Panel and involving it on tactical planning prior to any announcements being made.
• In particular, and although counter intuitive, the Panel allowed HarbourVest to submit a higher offer for 100% of the assets despite the fact it would not have been allowed to increase its offer for SVG.  The rationale for this was that the second proposal was for assets and not shares – despite the fact that the outcome for shareholders was similar.

• The Code does not apply to the purchase of assets, but on this transaction the Panel insisted on applying the Code rules in relation to break fees payable to Pomona/Pantheon and Goldman.

• Although the Panel is clear that it is not bound by precedent this deal provides some useful experience that may be valuable in future transactions.

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