1) Contracts for difference allow private equity funds to gain exposure to and influence over a target company without directly holding shares, by entering into contracts tied to the share price. 2) Forming a consortium with other parties to jointly bid for a target company allows each member to pool resources to make an attractive offer and gain control over the target. 3) Proper due diligence is essential before making any takeover offer to understand any issues with the target company and avoid being able to later withdraw the offer or invoke conditions that were previously known.

1. UK TAKEOVERS
Risky business target. Pooling together the resources of each
of the consortium members will enable an
attractive package to be offered to the
target’s owners. This is crucial if the
situation is competitive.
How to mitigate risk when taking companies private The members of the consortium are
likely to enter into a cooperation
P
ublic to private transactions are contract expires in accordance with its terms agreement, which sets out each of their
now commonly seen in (closes), the CFD holder receives, or has to respective rights and obligations in relation
management buyouts by private make, a payment depending on the price at to the bid process, and going forward once
equity firms. Due to the diverse the time of close. A counterparty would the acquisition has taken place. Care must
investor base and regulatory requirements usually hedge its exposure by acquiring the be taken if the members of the consortium
that public companies are subject to, these underlying shares in relation to a long CFD. have been stake building in relation to the
transactions are usually carried out through a Because the CFD is essentially a contract, it target.
takeover offer. can incorporate a number of terms, such as The Code might deem the members of
When a bidder sets its sights on a public allowing the shares to be transferred to the the consortium to be acting in concert, as it
target and would like to take it private fund in settlement of the contract. Other defines such persons to be “persons who
through a takeover offer, the biggest risk terms can include the entitlement to pursuant to an agreement or understanding
(presuming that it is a good idea in the first exercise, or control, any right conferred by (whether formal or informal), cooperate to
place) is that this goal is not achieved due holding the shares. For example, the obtain or consolidate control... of a
to a failing in the deal structure or a counterparty might agree with the fund to company”. A consortium’s cooperation
successful competitive bid. exercise share votes at the direction of the agreement should make clear that the
A bidder can use a number of CFD holder. consortium’s total holdings of capital in the
mechanisms to reduce uncertainty in These voting rights give the fund a target must not exceed 29.9%. If this
relation to the acceptance of its offer, for degree of control over the underlying assets threshold were breached, the consortium
example, building a stake in the target by of the CFD. This control offers a number would be required to make a mandatory
acquiring shares, imposing break fees and a of advantages to the CFD holder, including bid for the target, meaning the consortium
period of exclusivity, seeking a gaining backdoor due diligence of the would lose flexibility and would be bound
recommendation from the target’s board or target through access to documents and to make its offer on certain terms, such as
offering incentives to the management circulars that would normally be reserved having to make a cash offer at no less than
team. More topical mechanisms the bidder for shareholders, contributing to the highest price paid for shares in the
can bear in mind to increase the chance of acceptances by the CFD holder directing target in the preceding 12 months.
a takeover’s success include contracts for the counterparty to accept any offer made
difference and consortium bids, along with to the target shareholders or enter into Due diligence
the most important element in any irrevocable undertakings in relation to the Due diligence is paramount before making
transaction – due diligence. offer, and participation in an offer without an offer, not least to flush out issues upon
parting with cash (although financing which the offer might be made conditional.
Contracts for difference would need to be in place when the offer is However, it could be difficult for the offerer
In response to the rapid development of made). In this way, the CFD holder could to invoke a condition for a matter that it was
derivative securities, private equity funds are have the benefits of holding the shares aware of before making the offer. The UK
increasingly acquiring contracts for without holding the shares. The downside Takeover Panel would be unlikely to allow
difference in preparation for making a is obviously any potential losses that the an offerer to withdraw an offer or even
takeover bid. A contract for difference CFD holder might experience due to the invoke a condition if the offerer purported
(CFD) is a contract referable to an adverse movement of the price of the to do so on the basis of something it knew or
underlying asset, for example, shares in a underlying shares. The UK Takeover Code ought to have known about as a result of due
company, which is taken out (opened) at a now requires the disclosure of relevant diligence it did or could have done before
specific price on a certain day. When the securities, which would catch contracts for making the offer.
differences. So it would be difficult to use The Panel’s reasoning for this is “to
this mechanism in a stake-building reduce to a minimum the number of offers
exercise. Also, apart from the obvious which are withdrawn by placing upon
“The contract-for- impact of the state of the debt market and
the increasing cost of financing
potential offerers and their advisers an
obligation to exercise due care before
difference holder acquisitions, CFDs also often have an
element of borrowing tied into them, as the
making an offer,” to protect the
shareholders of the target. For example, if it
could have the CFD holder is usually required to put turns out after making an offer that the
down 10% of the value (with the target has large debts, the offerer would
benefits of holding counterparty financing 90%), with the have to be able to satisfy those debts if they
outstanding amount being settled on were or ought to have been apparent from
the shares without closing the contract. its due diligence exercise.
holding the shares ” Consortium
A number of parties may come together to
By counsel David McLeod Smith and associate
Manmohan Singh Panesar at Squire Sanders
form a consortium that will make a bid for a & Dempsey
2 IFLR/September 2007 www.iflr.com