Communicating with shareholders in M&A
October 2015 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
The received wisdom is that M&A situations and takeovers are decided by directors and their coterie of lawyers and advisers in lengthy boardroom discussions. After negotiations, terms are agreed and contracts are signed, and the deal is considered done. However, this behind the scenes drama represents only the start of the process. In the case of offers for publically listed companies, there remains the need to secure the approval of what can arguably be called the ultimate owners of the target company – the shareholders. As this constituency can run the gamut from savvy fund managers at major financial institutions and hedge funds to cautious and conservative retail shareholders, communications with shareholders has to be measured and cognisant of their differing roles, responsibilities and sophistication to secure the necessary approval for the deal.
While an offer may have its genesis in the boardroom, publically listed companies will, in the end, have to procure shareholder approval. For example, in the UK, recommended offers are commonly executed under a ‘scheme of arrangement’ under the 2006 Companies Act, requiring a majority shareholder vote in favour at a general meeting, as well as approval from a separate court meeting, with stringent voting and ‘fair representation’ requirements (75 percent of shares being voted in favour from a majority of the voting shareholders)’. This has become a popular takeover mechanism in the UK, with a high rate of success (according to ISS data, only one UK scheme of arrangement was defeated by the shareholder vote in 2013-15). Analogous arrangements in North American markets also tend to secure near universal level of shareholder acceptance, with only five votes failing in the US and Canada during 2013-15. In the more classical public takeover offer situation, the offeror goes out to shareholders of the target company to secure sufficient acceptances to first declare the offer unconditional, and then to go on to be able to compulsory purchase the remaining shares. The ease with which bidders could acquire UK targets was eroded by reforms to the Takeover Code in the wake of the contentious takeover of Cadburys by Kraft. No longer could offerors make bids anonymously, and declarations of intentions were mandatory, as well as there being the imposition of a 28-day ‘put-up or shut-up’ deadline.
Don’t just present the deal, outline its mechanism and timeline
They key to communicating effectively with shareholders in either situation is to present a strong narrative to the target company’s shareholders, and show that the offer price is fair and final. But as well as extolling the merits of the offer, it is also vital to outline consequences of non-acceptance (the possible lack of a going concern basis or the lack of marketability should the shares be delisted, for example). Certain developments (such as an offer being declared unconditional) are likely to act as a trigger to shareholders, both retail and institutional, to act on the offer if they are made aware of the development and the implications of dissenting. On a more prosaic and practical level, the mechanism and timeline of acceptance must be clearly laid out.
Communicating with each different group of shareholders presents their own challenges and obstacles. Institutions may wait until the last minute to accept the offer, mindful of the possibilities of share price changes or any increase in the offer, or any potential rival bids. Custodians and Private Client Brokers (PCBs) who manage shares on behalf of individual shareholders are often reliant on the shareholder instructing them. The logistic hassle of pushing the instruction through the custodial chain may result in expected acceptances materialising later than expected or even past the deadline. The offeror’s agents can push this process along and iron out any hold-ups. The indifference and occasional hostility of long-serving individual shareholders to an offer also has to be countered. Effective shareholder communications targeted to the demands and prerogatives of these various shareholder groups helps to smooth out the process of securing the necessary shareholder support on time and on the terms of the deal.
Beyond the more highfalutin financial analysis and calculations of portfolio managers and market analysts, completion is also dependent on making sure that shareholders return the correct paperwork with the required documentation. These simple administrative matters can also go awry at the back offices and corporate action departments of financial institutions and custodians, as well as with inexperienced retail shareholders. Proxy solicitation agents can communicate and resolve these issues among institutions and small retail shareholders alike. The more complicated and unclear the process is, the less likely timely approval can be secured. Given the proclivity of institutions and custodians to sit on acceptance instructions at the last minute, an unexpected hitch or extra hoop to jump through can result in a late or invalid acceptance. On the recent offer by Emirates National Oil Company for Dragon Oil, many major custodians had submitted incomplete paperwork, rendering that 13 percent of the acceptances for the offer were not valid as the initial closing date.
‘Unsophisticated’ investors: handle with care
The target company’s share register may comprise thousands of small individual retail holders who may hold their shares through PCBs. Depending on the size of their presence on the share register, it is often essential to identify these shareholders, and then to contact them so that the necessary acceptance thresholds may be reached. The companies involved in the offer are likely to lack an in-house capacity to identify and contact this core bloc of shareholders. External proxy solicitation teams can then step in to uncover these previously hidden shareholders, harness their support and get over the line.
Particular care must be taken with calling and mailing individual retail shareholders. As they are deemed to be ‘unsophisticated’ investors, the UK Takeover Panel deems them to be vulnerable to pressure from companies and their communication agents. Discussions with them are limited to relaying publically available information only, and any perceived rendering of anything which could be construed as financial advice can result in the Panel ordering the cessation of communication with these shareholders. It is therefore important to tailor public disclosures and announcements to the market with this is mind to be able to most effectively answer the most commonly anticipated questions on the basis of publically available information. Once the communications materials have been agreed among the various parties, the Panel can review the documents and will typically approve them within 24 to 48 hours. Any subsequent revisions to the materials to take note of subsequent developments (such as a revision of terms) will, however, require fresh approval from the Panel. While the communications are heavily regulated, contacting shareholders is still undeniably useful and often pivotal in securing acceptance within a desired timeframe. As your average individual retail shareholder is not likely to be refreshing their regulatory announcements when they get up every morning, communication with them can bring developments to their attention, secure their acceptance, and ensure its timely delivery.
Rebutting the nay-sayers
M&A situations brings out the shareholder activists and the more vocal financial analysts; what once seems like a smoothly preceding offer schedule can then become fraught, with a resulting loss of confidence among the market and shareholders. Hedge funds may not be afraid to stick their head above the parapet and express dissatisfaction on terms seemingly acceptable to the remaining shareholder base. Building bridges with the prime brokers can limit this, or at least result in them feeling less need to express their reservations so publically. Also, while companies may consider M&A to be out of the typical corporate governance-focused remit of proxy advisers such as ISS, it is not unknown for them to opine on M&A transactions, according to their own methodology, and sometimes in the face of the company’s valuations and that of independent financial advisers. Those attempting to secure shareholder favour must communicate with their shareholders effectively in order to calm their jitters and secure the necessary acceptance.
Offer situations represent the most critical decisions not just for companies, but their shareholders. Shareholders want adequate information, to be kept abreast of developments, and to be sure of correct procedures for taking action. While only a small group of people may have been involved in setting out the terms of the deal, its completion is often dependant not just on fund managers and hedge fund arbitrageurs, but also upon potentially thousands of small retail shareholders. Failure to communicate effectively with all levels of shareholders can cast into doubt any deal which had previously seemed watertight when hammered out behind closed doors.
Sheryl Cuisia is the managing director and Alex Caldwell is the senior corporate governance consultant at Boudicca Proxy Ltd. Ms Cuisia can be contacted on +44 (0)207 183 5138 or by email: firstname.lastname@example.org. Mr Caldwell can be contacted +44 (0) 207 183 0131 or by email: email@example.com.
© Financier Worldwide
Sheryl Cuisia and Alex Caldwell
Boudicca Proxy Ltd.