Take Private Insights: Targeted Stub Equity
Key Takeaway
Private equity bidders typically consider providing key target personnel the opportunity to roll by offering stub equity (unlisted scrip in the bidder or a holding vehicle) as an alternative to cash consideration. Two approaches bidders commonly take to this are to either offer stub equity to only targeted shareholders, or to offer it to all shareholders. These two approaches give rise to their own deal execution issues, being sterilising a large number of votes and an undesirable number of shareholders rolling (detailed further below).
Another approach was adopted in a recent deal (Softbank Robotics' take private of ASX-listed Millennium Services by way of scheme of arrangement), where scrip was offered in a manner that effectively excluded retail shareholders from participating in that scrip alternative. This is a novel approach to managing the above deal risks, but which should be considered with caution and will not generally be permitted other than in very specific circumstances.
Key Execution Issues
The usual approaches to offering stub equity give rise to the following two deal execution issues:
| Offering scrip to only targeted shareholders enables minority shareholders to veto the deal | Offering scrip to all shareholders risks large number of non-targeted shareholders rolling |
| The usual Australian take-private structure is a scheme of arrangement (as it delivers certainty), which requires the approval of each 'class' of target shareholders. Differential consideration typically puts shareholders into a different class. To avoid this and associated deal risk by giving smaller shareholders more influence over the approval of the deal, stub equity offers are generally made to all target shareholders (excepting foreign and small shareholders). | Shareholders other than those specifically targeted may elect the scrip alternative, which may complicate the post-take private governance arrangements. However, this risk can be managed by giving the bidder a contractual right to compulsorily acquire small parcels after closing. In any event, given stub equity is usually targeted at key personnel, and the fact that unlisted scrip is typically unattractive to investors, the take up of stub equity is often low. |
The Novel Approach
In the Millennium scheme, Softbank Robotics offered three alternatives in scheme consideration comprising (1) cash; (2) unlisted scrip in a Singaporean holding vehicle; and (3) a combination of cash and scrip.
Interestingly, in addition to shareholders outside Australia and New Zealand, the scrip options were not available to ‘small shareholders’, being shareholders who held: (a) < 300,000 target shares (a parcel of ≤ AUD345,000); or (b) > 300,000 target shares, but as a result of the scheme consideration election would receive < 300,000 shares in the Singaporean holding vehicle. The effect of this was that only a very small portion of the target's shareholders were eligible to participate in a scrip alternative. Only four shareholders (all members of management) took up a scrip option.
All shareholders were permitted to vote together on the scheme in a single class. As such, the bidder effectively offered stub equity almost exclusively to the targeted key personnel without the risk of having small shareholders in its holding vehicle. However, private equity bidders considering a similar structure should be aware that the Millennium decision did not explore the issue of class creation in detail. As such, this should not be taken as precedent that a targeted offer of stub equity to key personnel as consideration in a take private will not give rise to the usual deal execution issues flagged above.
