The recent offer for AIM-listed Smart Metering Systems plc (SMS) by funds advised by Kohlberg, Kravis, Roberts & Co. L.P. (KKR) has highlighted the importance for bidders of retaining the flexibility to switch deal structure and the tactical advantage of implementing a public takeover by way of general offer, rather than scheme of arrangement, where there is shareholder opposition to the transaction and the bidder is prepared to acquire less than 100% control of the target company and has committed financing available to it on that basis.
As is the case in Ireland, in the UK (where SMS is incorporated) there are two principal ways of conducting the takeover of a listed public company, namely, by scheme of arrangement and general offer. A scheme of arrangement requires approval of at least 75% in value of target shareholders voting at a shareholder meeting to consider the scheme. In a scheme, shareholder apathy usually favours the bidder as the 75% threshold is calculated by reference to the number of shares voted, rather than the total issued share capital of the target company. However, where there is shareholder apathy, shareholders holding as little as 15% of the target company’s shares can defeat a scheme.
Similar to the UK Takeover Code, under the Irish Takeover Rules, a general offer must include an acceptance condition which is, unlike a scheme, calculated by reference to the total issued share capital of the target company. Typically, the bidder will set its acceptance condition at the level which will allow it to compulsorily acquire the shares of any dissenting shareholders under the applicable statutory squeeze-out mechanism (usually 90%, although can be 80% for certain Irish listed companies). However, a bidder is free to set the acceptance condition at as low as 50% of the target company’s issued shares plus one share.
KKR’s Offer for SMS
On 7 December 2023, KKR and SMS announced that they had reached agreement on the terms of a recommended all-cash acquisition of SMS by funds advised by KKR to be implemented by scheme of arrangement. Under the terms of the transaction, SMS shareholders would receive 955 pence per share. This represented a circa 50% premium to SMS’s three-month volume weighted average price.
The necessary SMS shareholder meeting to consider the scheme was convened for 9 January 2024. However, on 21 December 2023, the founder of SMS and a former chief executive of the company announced that they had joined with long-term shareholder PrimeStone Capital to oppose the takeover, which they described as “disappointing”, and that they intended to vote against the scheme. Between them, the three shareholders were interested in or able to control approximately 17.8% of SMS’s issued share capital. Therefore, depending on turn-out at the shareholder meeting, these shareholders could have had sufficient votes to defeat the scheme.
On 5 January 2024, SMS announced that it had decided to adjourn the shareholder meeting to 22 January 2024 to “provide SMS shareholders with further time to consider the scheme”. At this point, a bidder’s options would typically include seeking to win the dissenting shareholders’ support by increasing its offer price or alternatively continuing with the scheme on its originally announced terms in the belief that either the dissenting shareholders would ultimately relent rather than seek to vote down the transaction entirely.
However, on 18 January 2024, KKR instead chose to switch implementation of the transaction from a scheme of arrangement to a general offer. As part of the announcement of the switch, KKR confirmed that the acceptance condition would be set at 50% of SMS’s issued share capital plus one share. With control of only 17.8% of SMS’s issued share capital, the three dissenting shareholders would therefore not be able to block the offer. KKR also confirmed that the offer (still at 955 pence per share) was final.
The message to the market was clear: KKR was prepared to close the transaction with acceptances at any level above 50%.
On 24 January 2024, the offer document and related acceptance form were sent to SMS shareholders. On 22 March 2024, KKR announced that it had received acceptances in respect of circa 62% of SMS’s issued shares. Consequently, in spite of the dissenting shareholders’ opposition to the transaction, KKR’s offer had become unconditional in all respects and would close in respect of those shares. On 25 March 2024, KKR announced that it had received further acceptances which were sufficient not only to enable it to de-list SMS from AIM (75% threshold) but also to compulsorily acquire remaining shares not tendered into the offer (90% threshold).
The transaction highlights that while implementation by scheme of arrangement remains the structure of choice in a recommended transaction, retaining the right to switch structure can be crucial and, whether as a result of a switch or not, a general offer can be used to out-flank shareholder opposition where the bidder is prepared to acquire (initially, at least) less than 100% and has financing available to it on that basis.