UK may increase takeover costs

Deals in which special incentives are offered to management shareholders must be approved by the Takeover Panel, which will only give its consent if the financial adviser to the target company publicly states that any proposed arrangement with management shareholders is “fair and reasonable”.

Such incentivisation arrangements for management are a key element for private equity-backed acquisitions, said Simon Walker, chief executive officer for the British Venture Capital Association (BVCA). 

“In many cases it will be essential for the private equity firm to ensure that key personnel are retained following the acquisition and that they are appropriately rewarded for delivering value to the new owners of the business,” Walker wrote in a response to the proposed changes. “These arrangements may involve the issue of equity in the new holding company, the grant of options and new salary, bonus, pension and other arrangements.”

However, under the revised rules the Panel would have veto power over all incentive arrangements proposed for management, not just those that are applied to any members of the management team who are also shareholders. 

“It means that any transaction now may be at the mercy of an approval process, which people don’t think the rules were designed to catch,” Holder said. “Wherever management is going to be incentivised then the approval process is going to kick in.”

The Panel has said the change is necessary because any arrangements with management may affect the willingness of a target director to use his influence to support the offer, and that any value given to management will diminish the value available to shareholders. However, the BVCA and other groups have said adequate protections for shareholders are already in place.

For instance, any incentive arrangements will be well known to shareholders already, because they must be publicly disclosed. Managers must also obtain independent financial advice before recommending an offer to shareholders. And shareholders are free to reject an offer even if it is recommended by the board of directors. 

“I think the argument is that those barriers to bad deals are already in place, and to put an extra barrier in place doesn't really make any sense,” Holder said. “More importantly, it may put some bids off. There is a lot of upfront cost in this to actually get the decision to how much you make the offer for and what you do with management, and if you feel that there is an increased risk that this is going to be voted down then it may make people less likely to make these offers.”

The Panel is still receiving feedback from firms and lobbying groups. Holder says that the Panel will seriously consider the industry’s concerns in making a decision.