• Abstract and Figures
• Public Full-text

FOCUS PRIVATE EQUITY August 2008 TAKE-PRIVATES INVOLVING ‘STUB EQUITY’ A signifi cant recent development for ‘take-private’ offers in Australia is the inclusion of an unlisted scrip offer to shareholders (ie ‘stub equity’1), as an alternative to cash, to facilitate continued investment in the underlying business. Partner Tom Story and Senior Associate Julian Donnan report on the use of ‘stub equity’ in take-private transactions and provide an overview of the key legal issues. ‘Stub equity’ is a HOW DOES THIS BACKGROUND new development in AFFECT YOU? Acquisitions of publicly listed entities by private equity consortiums in Australia have generally ‘take-private’ offers • Bidders wishing to offer stub equity to been implemented through the offer of cash investors as part of a take-private acquisition consideration rather than scrip. The acquisition may: do so either through a scheme by Macquarie Advanced Investments Group or takeover bid; make the stub equity (MAIG) of Macquarie Capital Alliance Group offer subject to minimum and maximum (MCAG) includes the fi rst ‘stub equity’ offer as thresholds; and provide for shareholder rights part of an Australian take-private transaction. consistent with a privatised entity. The recently announced proposal by TPG Capital • From an investor perspective, the offer of and Global Infrastructure Partners to acquire all scrip, as an alternative to cash, may present the securities in Asciano Group also includes a welcome opportunity to participate in a scrip alternative of unlisted securities in a the future performance of the privatised bidding company. entity. This may need to be weighed against reduced liquidity and a position as a minority shareholder with limited rights and regulatory protections. • The target board and independent expert may need to separately consider and assess the 1. So named for its connotation with a ticket stub after value of the scrip alternative, as compared the original ticket is clipped (presumably on the basis to the cash alternative, including the risks that the stub represents the right to participate in the inherent in a stub equity offer such as venture after access has been granted or, in this case, reduced liquidity. after the acquisition has been approved). For a range of reasons, including enhanced WHY PROVIDE certainty of outcome, we consider it more likely that bidders who make offers of stub equity STUB EQUITY? will adopt the scheme route for the acquisition, rather than making a takeover bid. One of the key commercial drivers for bidders in providing stub equity is to improve the attractiveness of a proposal to target boards and CONDITIONS TO investors through the opportunity for investors to participate in the future performance of the THE OFFER OF privatised entity. By providing stub equity, the bidder may also reduce the amount of cash STUB EQUITY required for the acquisition. An offer of stub equity can be made conditional Shareholders who consider that the bidder and upon a certain minimum percentage of target its management team can create greater value shareholders electing to receive scrip under the in a privatised structure may elect to receive scheme. It is also possible for an offer of stub stub equity. Alternatively, shareholders may equity to be subject to a cap. To the extent that prefer to take the cash alternative at a premium scrip elections cannot be satisfi ed in full, the to the pre-bid trading price. entitlements of shareholders must be scaled back on a pro rata basis. For example, in the In determining whether stub equity will be MCAG transaction, MAIG’s offer was subject to offered, bidders should have regard to the a 5 per cent minimum acceptance of the stub existing shareholder base and who they equity, with a pro-rata scaleback if demand may target as shareholders in the privatised exceeds 20 per cent. structure. For example, hedge funds may be more willing to invest in stub equity than some Features such as a minimum acceptance institutional fund managers with investment threshold make commercial sense, as a small mandates that restrict investment in unlisted number of stub equity holders may increase securities. Similarly, founding shareholders who overall costs for the unlisted entity. However, may have held interests before the initial listing imposing minimum and maximum thresholds of the target may also be willing to take an does mean that there is some uncertainty as to interest in an unlisted vehicle. the eventual outcome, including whether the scrip alternative will, in fact, be available. The stub equity offer included as part of Apollo Management’s bid for UK real estate business Countrywide plc in 2007 was structured to DISCLOSURE AND appeal to hedge fund shareholders in the target. In that transaction, the proportion of equity RISKS in the bid vehicle available to Countrywide shareholders was ultimately increased to 55 An offer of stub equity will require disclosure per cent, a much higher proportion than would in the scheme booklet or bidder’s statement normally be the case under a stub equity offer. of a standard that is equivalent to that of a prospectus. Disclosures of relevance to a stub SCHEMES AND equity offer will include: • the terms of issue of the stub equity TAKEOVERS securities; • the management and ownership structure of Take-privates involving stub equity may be the bidder; implemented by way of a members’ scheme • any new management or fee arrangements; of arrangement under section 411 of the • intentions of the bidder regarding future Corporations Act 2001 (Cth) or a takeover bid management of the business; under Chapter 6. In some instances, such • pro forma fi nancial information about the as the MCAG acquisition, the target entity bidder; may comprise a stapled company and trust. • the bidder’s debt and equity funding Therefore, in addition to the company scheme, arrangements; and a ‘trust scheme’ may also be required to acquire • risks applicable to the stub equity securities, the units issued by the target entity’s trust. such as the absence of liquidity (assuming no listing is sought) and details of any loss of existing regulatory protections. CAPITAL GAINS CONTINUING TAX ROLLOVER DISCLOSURE RELIEF REQUIREMENTS The taxation consequences of the stub equity Assuming that no listing is sought for the offer for securityholders will depend on a range stub equity, the bidder would not be required of matters, including the structure of the offer to comply with the continuous disclosure and each securityholder’s position. For many obligations under the ASX Listing Rules Australian resident securityholders, it is likely following the acquisition. However, if the bidder that, on the disposal of their target securities, is an Australian entity with more than 100 they will realise a taxable capital gain. To the members as a consequence of the issue of stub extent that the consideration is in the form of equity, it will be characterised as a ‘disclosing cash, there will not be any relief from such entity’ under the Corporations Act. gain being taxable. However, where a scrip alternative is offered, certain securityholders That means that if the entity becomes aware of may be eligible to claim scrip-for-scrip capital information that is not generally available in the gains tax (CGT) rollover relief to defer a capital market and which would have a material effect gain derived on disposal if certain conditions on the value of its securities, it would need to are met: lodge a document containing the information with the Australian Securities and Investments The bidder must end up with at least 80 per Commission unless an exception exists. cent of the shares in the target entity. This is not Disclosing entities are also subject to a number an issue under a scheme of arrangement which, of periodic fi nancial reporting requirements if approved, will result in the bidder acquiring under the Corporations Act, including the 100 per cent of the target’s equity. requirement to prepare half-year and annual fi nancial reports and directors’ reports. Where there is a pro-rata scaleback on the scrip- for-scrip arrangement, such that the proceeds If the stub equity vehicle is an unlisted consist of both cash consideration and stub Australian public company, it should also equity, the target entity’s securityholders may be noted that the vehicle will be subject to be able to rollover the capital gain only to the the takeovers provisions in Chapter 6 of the extent of the stub equity. CGT rollover, however, Corporations Act if there are more than 50 would not be available to the extent that capital members holding shares. gains are attributable to the cash consideration received from the bidder. INDEPENDENT Rollover relief only applies on a share-for-share or unit-for-unit basis (and not a share-for-unit EXPERT’S REPORT or unit-for-share). Therefore, where the target comprises ‘stapled’ entities, the acquirer may Where an acquisition involves the issue of also need to comprise of ‘stapled’ entities. stub equity, the independent expert may need to provide a separate valuation of the scrip Proposed amendments may restrict the ability offer and the cash offer. That valuation may of the acquiring entity to achieve full cost need to apply any discount that is attributable ‘push down’ to the target’s assets under the tax to the absence of liquidity in the market for consolidation rules to the extent that the target’s the bidder’s securities as an unlisted entity shareholders can claim a scrip-for-scrip rollover. (assuming that the stub equity is not, in fact, listed and no alternative liquidity mechanisms A class ruling may be sought from the Australian have been incorporated in the structure). Taxation Offi ce to confi rm the availability of the scrip-for-scrip rollover for eligible shareholders in the target.

Load more

  4

Copy Link