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Corporate Finance: Non-executive directors take buy-out strain.

Primary responsibility is central to the role of non-executive directors in a management buy-out of a publicly quoted company - a public to private takeover.

They are responsible to a large degree in shaping the future direction of the company and ensuring the smooth progression of the P to P in compliance with the City Code on Takeovers and Mergers, the rule book which governs all takeovers of the publicly quoted UK companies.

The directors of any company which is the target for a takeover offer will have these responsibilities.

What makes public to private takeovers different is that this responsibility weighs most heavily on the non-executive members of the board rather than the board as a whole.

The MBO team on a public to private takeover will almost certainly include some or all of the executive main board directors of the target company.

Their position is one of inherent conflict, being at the same time interested in the target company and the prospective bidder.

This conflict is resolved by the non-executive directors (being independent of the P to P) forming a committee of the main board and having sole responsibility to assess the P to P offer and to control the process from the company's point of view.

A central tenet of the City Code is that shareholders must be given sufficient information and advice to reach an informed decision on any takeover offer for their company.

It will falls to the non-executive directors to ensure this happens.

To discharge this duty the non-executive directors must consider some fundamental issues.

Is a takeover in the interest of the company and its shareholders at all?

If so, are the terms of the P to P offer fair and reasonable in the circumstances?

Should alternative offers be solicited?

Are the terms on which the MBO team are investing in the offeror fair and reasonable?

These may be difficult questions to answer. They will certainly require a detailed review of financial and market data and forecasts, an assessment of the future strategies open to the company, an analysis of the pros and cons of bringing the company into play early by inviting competing takeover offers and an investigation of the offeror's funding documents.

If the non-executive directors decide not to advise shareholders to accept, the P to P is unlikely to proceed.

Where the non-executive directors and their advisers are unable to confirm that the MBO team's investment is fair and reasonable, the Takeover Panel would not in all likelihood provide the consent required where an MBO team (being shareholders in the company) are being treated differently from other shareholders because of their interest in the offeror.

In the absence of such consent the process would stall.

This is a key phase in the whole public to private takeover process.

The non-executive directors will have appointed financial advisers from the outset to assist them with these considerations and the offer process generally.

It is a stipulation of the City Code that such an adviser is appointed and that the adviser's independence is beyond question.

The adviser will usually be the existing financial adviser of the company.

However, such is the emphasis on independence that the non-executive directors must consider alternative appointees if they believe that the existing financial adviser has a particularly close relationship with the MBO team which would impact on its independence.

Another important aspect of the public to private process for non-executive directors is the control and supply of confidential information.

Any potential competing offeror is entitled to receive, on request, copies of all information generated by the company or the MBO team in their capacity as directors of the company which is passed to the financial backers or potential financial backers of the offeror vehicle.

The non-executive directors must have a system in place to cope with any such requests from potential competing offerors quickly and efficiently.

This will usually involve the executive directors providing the non-executive directors with all information which is passed to their financial backers.

The right to receive all such information is enshrined within the City Code and is not limited by the capacity in which the MBO team generates the information.
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Author:Curtis, GRAHAM MIDDLEMISS Corporate Partner Pinsent
Publication:The Birmingham Post (England)
Date:Sep 21, 1999
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