Monday, July 16, 2007

PIPEs in Europe

Private Placements in Public Equities (PIPEs) have represented $26bn worth of placements in the US so far this year but this method of transaction is relatively rare in European markets although the popularity is gaining.

PIPE transactions first gained favour in the 1990's among sophisticated investors in the US. In a PIPE transaction the company will sell newly issued securities to a small group of investors including hedge funds and institutional investors, and in some cases a small amount of accredited investors. The benefits to companies of the transaction are that compared to traditional offerings the PIPE provides a quicker raise for the company and an easier exit for investors than other private equity transactions. With the discounts available this method of investing can be lucrative for investors. So why are there not more of this type of financing in Europe?

The main reason for this is the perceived complicated structures of the various different State regulations throughout Europe and the potential pitfalls of takeover law and disclosures.

The main obstacles are:

1. Legal issue regarding shareholder approval of the issue of new shares and the board of directors authorisation to issue such shares.

Standard Memorandum and Articles of Association in England carry pre-emption rights for shareholders. Meaning that any newly issued shares in a secondary offering must be offerred to the existing shareholders first. Obviously such pre-emption would make the structuring, speed and confidentiality of a PIPE impossible to structure in a timely manner.

Given as a major barrier to structuring a PIPE, this situation in our experience, is generally overcome as most companies have some sort of 'dis-application entitlement' agreed at each AGM. This usually also takes into account the authorisation of the Board of Directors to issue a certain amount of shares.

The notification usually goes something like this:

"By ordinary resolution passed at an AGM of the Company held on XX XX XXXX:

(i) the Directors are generally and unconditionally authorised in accordance with Section 80 of the Act to exercise all the powers of the Company to allot relevant securities (within the meaning of Section 80(2) of the Act) up to the amount of the authorised but unissued share capital at the date of the resolution;

(ii) the Directors are authorised for a period of five years from the date of the resolution, pursuant to Section 95 of the Act to allot equity securities for cash pursuant to the authority referred to in sub-paragraph (i) above as if Section 89(1) of the Act (which confers on shareholders rights of pre-emption in respect of the allotment of equity securities which are, or are to be, paid up in cash other than by way of allotment to employees under an employees’ share scheme as defined in section 743 of the Act) did not apply to such allotment."

Most companies would have a limit as to the percentage of the company they could issue as new securities and most would carry a resolution that required it to be renewed each year. But if this is in affect (which in our experience it generally is) then this solves one problem in the structuring of a PIPE. It is also interesting to note that if a transaction is started while the provisions are in place, then that transaction will still be valid when the authority has lapsed as if it still existed.

The above, however, should be considered alongside the guidelines of the IPC (Investors Protection Committee) which is a trade body of Insurance companies and Pension funds. Although their guidelines are not law, as significant investors in larger companies they can carry lots of power to scupper unsuitable deals.

2. Take Over provisions

The takeover guidelines in the UK are to be considered when structuring a deal. An investor does not want to get into a position where a mandatory bid is required when the threshold for ownership is met. Basically if an investor achieves ownership of over 29.9% the rules trigger the mandatory bid situation, where a bid for the remaining shares in the company must be made.

Such rules have a number of benefits for companies and shareholders however they also protect the company from itself. In the 1990's the term 'Toxic PIPE' became the mantra of opponents of structured PIPEs. These structures were such that they had a 'reset' clause where if a share price declined to below the convertible written into the structure then the conversion price reset to a predetermined discount off the market price. As with many dot com businesses in the US, whose prices collapsed, suddenly the PIPE transactions were resetting and resetting until the company was, for all intents and purposes, owned by the PIPE investors.

Such a structure in the UK would trigger the provisions and cause the PIPE investor to have to make a mandatory bid. In affect, PIPE structures in a UK company would have a floor for the share price allowing conversion to only 29.9% of the company, avoiding such rules. Many have commented that this could be avoided by a syndicate of investors in the PIPE, however, this would be a 'concert party' which is essentially a group of connected investors working together, which for the rules counts as one.


The 'whitewash' provisions of the takeover guidelines allow for the shareholders to 'dis-apply' the takeover rules. generally this is done where the company is in trouble and requires financing to continue in business. If passed by the shareholders then the mandatory bid rule does not apply. However, should the investors wish to acquire further shares after the initial whitewash, another whitewash will need to be applied for and the investors concerned will not be allowed to exercises their vote in that whitewash.

If the issues above can be taken care of then structuring a PIPE transaction in the UK should be no more difficult than in the US. Although we are not experts on the US rules regarding restricted shares, it seems to us that the restricted shares rules are cumbersome and complicated for investors in the US, whereas there is no such rules on the AIM market.

Of course, there are restrictions but they are generally agreed between the company and the Nominated Advisor (NOMAD) under 'orderly market' situations. This is where an investor would agree to work with the NOMAD in order to sell shares obtained from the investment, the terms of which would be set out in a 'lock up' agreement.

There are many issues to consider when looking to structure a PIPE in the European markets and as a director of a listed company you should discuss the matter with your NOMAD and your legal team, however, we are confident that PIPEs will be more prevalent in the UK markets than they have been.

Our PIPE accounts are designed for sophisticated investors to enter this market and benefit from, what we see as, a win / win situation for companies and investors.

No comments: