Speechly Bircham has recently acted as the legal adviser to both the management and the independent board on the take-private of Coolabi plc (Coolabi), a leading children’s and family entertainment producer and rights management company. The deal was announced by North Promotions plc (North), a company funded by Edge Performance VCT plc on 1 December 2011. This was one of the first private equity backed take-privates since the changes to the Code. The two Speechlys teams acted with a Chinese wall in place and so gained first hand experience of the new regime from both sides of the transaction.
The Panel on Takeovers and Mergers – securing an extension
The major impact for a PE bidder of the recent changes to the Code is timing. The 28 day period to make an announcement of a firm intention to make an offer under new rule 2.6(a) was insufficient time for the boards of Coolabi and North to agree a structure for the transaction, put acquisition finance in place and agree terms with the management. As the parties are prohibited from agreeing between themselves their own extension, Coolabi had to approach the Panel for an extension. As we expect will become practice, the Panel gave its decision to grant a two week extension to the board of Coolabi shortly before the deadline was due to expire. This will have a greater impact on hostile bidders who are reliant on the target board to approach the Panel.
No inducement/break fees
Under the new rules bidders have lost the protection of inducement and break fee arrangements. North was thus prevented from entering into an exclusivity agreement with the managers of Coolabi. Going forward bidders will therefore need to balance this risk against the good practice of instructing advisers early in the process and undertaking as much of the due diligence and negotiation of financing arrangements as possible before triggering the first announcement by the target.
North therefore placed increased importance on collecting irrevocable undertakings from the target’s shareholders, including management and independent directors, in order to obtain deal certainty.
Increased disclosure and transparency
Under Rule 2.12, Coolabi was required to send a letter to its employees on the announcement of a firm intention to make an offer. For targets with a large number of staff and overseas-based employees this is an administrative burden. Further, the employees have a right under Rule 25.9 to require that a separate opinion from the employee representatives is appended to the target circular (or if such opinion is not received in time, it must be published on the target’s website and announced via an RNS). The employees did not exercise this right on the Coolabi take-private.
Conclusion
The above requirements relating to timescale, increased costs associated with a failed bid, additional disclosure requirements in relation to the financing arrangements and the intentions for the target and its employees (coupled with the pressure of being bound by these for two years) make what is already a challenging process for PE bidders in the UK even more so. However, it was possible in respect of the Coolabi transaction with a sensible approach and the full cooperation of the target board to take steps to minimise the impact of the changes and reach a successful conclusion.
Malcolm MacDougall