Spring 2022 End-Semester Exam on Acquisition of Public Companies- Finance, Georgetown University
The below exam addresses questions tested on the topic of acquisition of public companies at Georgetown university. The finance exam was done in Spring 2022 and the well-answered questions we have included can help you prepare and pass your test. Our service also offer finance exam help to all university students. You can contact us at any time and our experts will take your test on acquisition of public companies.
In the case of acquisition of public companies using the full bid method, there may be uncertainties that arise. What is the legal procedure or scheme or arrangement that can be used to remove these uncertainties?
A full bid is an easier process for shareholders to understand than a partial offer and still leaves them with the option of assenting to only a proportion of their holdings. The price of giving shareholders this choice may be uncertain for the offeror about the final level of shareholding he will achieve. This uncertainty can be removed in some jurisdictions by the use of a legal procedure called a scheme of arrangement which, however, is inflexible in other ways.
- Need for recommendation in case of the scheme
- Acceptance level required
- Time needed to obtain majority control
- Time needed to obtain 100%, control
- Degree of certainty
A scheme of arrangement is entered into between the company and its shareholders. The offeror' may have little or no involvement beyond providing the cash or other consideration called for under the scheme. Because of this, it is very difficult to employ a scheme of arrangement without the active cooperation of the board of directors of the target company It may perhaps be argued that directors ought in any case to put advantageous proposals to shareholders for their decision As a practical matter, it can be assumed that the option of using the scheme of arrangement is only available in a recommended offer.
Under the terms of a scheme of the arrangement, existing shares of the company are canceled and new shares issued. A cancellation and reissue of shares are not technically speaking the same as a transfer of existing shares No payment of transfer duty, therefore, arises under a scheme, which can provide a significant cost saving No capital duty is incurred when the new shares are issued under the terms of the scheme, so there is no offsetting cost in this regard.
As a scheme is a fairly complex legal procedure that includes court hearings, legal costs are higher than for a straightforward offer. These additional expenses should be outweighed by the saving in transfer duty. A scheme is particularly useful where a new top holding company is being created to merge two existing groups beneath it. If the groups involved are sizeable, the savings in transfer duty may be very substantial. However, capital duty will be payable on the entire share capital of the new holding company.
There are important differences in the level of acceptance required. An offer I usually conditional on at least 50% of the total shares in the issue being assented to it and must reach the high level of 90% acceptance before the remaining shares which have not been assented to the offer can be acquired compulsorily. A scheme, on the other hand, has an apparently higher percentage level of acceptance required (normally 75%), but this percentage relates to those present or represented at the meeting to consider the scheme, who may be quite a small number, and not to the total shareholding body. Consequently, it is possible for a scheme to be approved with a far lower total of votes than an offer.
On the other hand, it is also possible for a 25% minority to block a scheme completely A minority of this size could not be certain of preventing a public offer succeeding at least to the level where voting and management control of the company passed to the offeror.
A public offer will be open initially for a minimum period of, say, three weeks. after which it may be closed provided it has become unconditional. Voting control of the company can be immediately exercised if sufficient acceptances have been received. It takes appreciably longer to reach this stage under a scheme. The scheme proposals must be approved by meetings of shareholders. the notice period which is approximately the same as the minimum period a public offer must remain open for acceptance However, the need to comply with court requirements imposes delays both before and after the posting of the documents to shareholders, totaling about one additional month Consequently, if taking control as quickly as possible is the main objective, a scheme will not be appropriate. Such instances are most likely to be unrecommended offers where owing to the need for cooperation from the target company's board, a scheme is not a practical alternative in the first place.
If it is critical not simply to obtain majority control of the target but to acquire the entire issued share capital, a scheme is a quicker and more reliable route. A scheme is an 'all or nothing procedure. If a scheme is approved at the meetings called to consider it, the scheme becomes binding on all shareholders, whether they attended or were represented at the meeting or not If it is rejected, no shares are acquired at all. If a public offer is made, it is extremely unlikely that all shareholders will accept it in the first instance and there is no immediate way to compel them to do so..
Because of the legal nature of the scheme and its use in agreed situations, from the first public announcement of the proposals, they are assumed to be virtually certain of success. The announcement of an offer does not carry a similar degree of certainty.
If a scheme is used, the offeror knows from the outset that he will acquire 100% of the company or none at all. No possibility exists for the level of acceptance to settle in a 'no-man's land', over 50% but short of 90%. This no man's land is the most difficult outcome for an acquirer to finance. The amount to be paid out is considerably greater than the minimum required to obtain control, yet as minorities are still outstanding, no direct access to that company's assets is possible. This may not be a comfortable situation for the acquirer or his bankers.
During acquisitions of companies, there are some shareholders who may not accept the offer made. Explain how the company can deal with such shareholders.
Special procedures exist for acquiring small minorities who may not accept the offer. It is unlikely that all shareholders will accept even an attractive and recommended offer as a percentage will be uncontactable or unable to give good title, for example, where probate has not yet been granted.
If a sufficient level of acceptance of a public offer is received (under British law 90% of the shares for which the offer is made are held by at least 75% in number of the shareholders), the offeror may, in due course, acquire the balance of the shares compulsorily through legal procedures. However, this is a lengthy process that takes up to six months to complete from the date the offer was originally made. It is open to shareholders who wish to do so to raise objections before the court. During this period, there will be minority shareholders outstanding in the offeree company, some of whom may be actively opposed to the full absorption of their company into the new group. Revisions of the group structure and redeployment of group assets may not be possible until the minorities have been acquired.
Under a scheme, control of 100% of the shares of a company is obtained as completion of the required procedures. No question of outstanding minorities can arise. This is likely to be some four months after the inception of the scheme However, this is some two months before the compulsory acquisition of outstanding minorities would be completed if a public offer had been employed.
What are the main contents of takeover documents that are circulated to shareholders on behalf of the acquirer of the company?
Contents of takeover documents
Whether a partial offer, a full offer, or a scheme of arrangement is employed, a document will be required to be circulated to shareholders on behalf of the acquirer. In most jurisdictions, the person sending out such a document is required to be licensed as a dealer or securities adviser in order to assist the authorities in controlling the contents of the offer documentation. The contents of such a document are determined by law, stock exchange rules, and other regulations including those contained in a takeover code if one applies in a particular market. The main components of this type of document are as follows:
- Chairman's letter
- Offer letter
- Financial information
- Legal requirements
- Notice of meetings
This letter sets out the broad principles and terms of the acquisition and explains why it is being put forward and what benefits are expected from it. The tone of the letter will vary greatly depending on whether the proposals are agreed upon or not, or whether it is hoped that they will be agreed upon in due course.
If the offer is agreed upon from the outset, the letter is more effective coming from the chairman of the target company. His views about the attractions of the offer may be felt by the shareholders of that company to be more relevant than those of the party making the offer.
The offer letter will be written by the acquirer's financial advisers who make the offer on behalf of the acquirer. The letter will state the terms of the offer and describe its different elements in it. It will include the terms and conditions attached to the offer and explain the timing for acceptances and the level of acceptance required. The financial effects of acceptance will be spelled out with examples of the effect on capital value, income, and possibly attributable assets and earnings More technical matters relating to the validity of acceptances, how to tender share certificates, and when the consideration will be received will also be explained
Financial information about the offeree company will be set out. The information given will normally be a summary of the past five years' results together with the latest audited balance sheets If a forecast of results is being made, details of the basis and main assumptions will be supplied. Any material changes since the date of the audited figures will also be given, particularly an updated statement of the indebtedness and commitments of the group. If the offer is in cash, little financial information about the offeror needs to be shown. A confirmation will be given by a financial institution that the maximum amount of cash required under the terms of the offer will in fact be available to the offeror
Where the acquiring company offers its own shares or other securities in exchange for those of the target company, the offer document also serves as a prospectus. Financial information about the offeror similar to that required for a listing must be given, including a working capital statement and if possible a profit and dividend forecast for the current financial year.
Where a profit forecast is made by either the offeror or offeree it must be verified and reported on by the auditors and the financial advisors of the company making the forecast
Differing levels of disclosures are required by the stock exchange and other official bodies in various markets. The disclosures emphasize dealings in shares, areas relating to any conflicts of interest which might arise, and significant contractual arrangements which have been entered into.
A scheme requires at least two meetings of shareholders. Other offer arrangements may require meetings to approve certain steps being taken, for example, to issue substantial numbers of new shares or dispose of major assets. The notices convening the meetings will be attached to the offer document. The information included in the offer document forms the basis for shareholders' decisions on how to vote at the meetings.