Private equity buyers may be required to disclose more information about their debt financing under the new UK takeover rules, including potentially commercially sensitive information about market flex terms. These requirements were mandated by the changes implemented by the UK Panel on Takeovers and Mergers (the “Panel”) to its regulations in the City Code on Takeovers and Mergers (the “Code”) on September 19, 2011.
In the past, there were only limited disclosure requirements in the UK applicable to financing matters, which included an obligation to summarize the financing arrangements in the offer document, and the Code did not require full disclosure of all financing documents. For example, customary financing terms documenting the ability of the underwriter to “flex” the pricing and/or other financing terms to facilitate syndication could be kept confidential. However, the Panel has now beefed up the disclosure requirements to include not only a description of how the offer is to be financed and current debt is to be refinanced and the source(s) of the finance, but also details of the new debt facilities, in particular with respect to “(1) the amount of each facility or instrument; (2) the repayment terms; (3) interest rates, including any “step up” or other variation provided for; (4) any security provided; (5) a summary of the key covenants; (6) the names of the Principal financing banks; and (7) if applicable, details of the time by which the offeror will be required to refinance the acquisition facilities and of the consequences of its not doing so by that time” (Rule 24.3(f)). In addition, “any documents relating to the financing of the offer” (Rule 26.1(b)) must be published on a website, unless the Panel agrees otherwise.
These changes potentially impact the commercial arrangements between offerors and lenders by requiring the disclosure of ancillary financing documents, including details of financing fees and market flex provisions. Banks have customarily required commercially sensitive information, particularly market flex provisions, to be kept confidential, and keeping this information confidential is also in an offeror’s interests. Disclosure of market flex provisions in particular would reveal to the market that the offeror is required in certain circumstances to accept different financing terms, including potentially paying additional fees and higher interest rates. The enhanced bargaining position of prospective lenders may lead to flex terms being invoked, and ultimately could lead to flex provisions being replaced by higher pricing from the outset.
The Panel has, given the particular commercial sensitivity, accepted that details of financing headroom that could be used to increase the offer price need not be disclosed, but has shown little indication that it will allow concessions under the Code to keep market flex terms confidential. The Panel was recently asked to provide guidance in relation to Colfax Corporation’s offer for Charter International plc, which serves as a useful case study. In that situation, the Panel allowed the Colfax lenders’ market flex rights to be kept confidential, but only based upon the transitional arrangements for implementation of the changes to the Code, and the parties to the Colfax transaction agreed that if the credit agreement were to be amended as a result of the exercise of flex rights, the amended financing terms would be made public. As these concessions were only made under the transitional arrangements, it is not clear whether such concessions to the Code’s disclosure rules will be available going forward.
Ultimately, the enhanced disclosure requirements may make it harder for private equity buyers to raise debt financing on desirable terms, which may put them at a disadvantage to strategic buyers not relying on financing or whose financing is not subject to market flex provisions. The challenge will be to find a satisfactory approach to pricing and structuring that minimizes the commercial impact of the new disclosure requirements.