The UK Takeover Panel’s Guidance on “Stub Equity” In Take-Private Transactions
On 3 July 2025, the UK Takeover Panel (Panel) published a new Practice Statement 36 (PS 36), which provides formal guidance on how the Panel will interpret and apply the Takeover Code to an “unlisted share alternative” (known as stub equity) in the context of a take-private transaction of a UK public company.
Stub equity is an offer of unlisted securities in the bidder (or another company in the bidder’s group). It allows existing shareholders of a target company to roll over a portion (or all) of their investment into the relevant bidder vehicle, enabling them to participate in the future upside of the business and thereby incentivising acceptance of the offer. Stub equity provides an alternative to cash for unlisted bidders, chiefly private equity bidders and other financial sponsors.
The terms of stub-equity are flexible, transaction specific and need to be carefully calibrated to the investor base of the target company to ensure potential take-up. A shareholders’ agreement is generally entered into between the bidder (or bidding consortium), which typically retains control, and the rolling shareholders to govern the rights and obligations of the shareholders in the bidder vehicle going forward.
While not all investors can hold unlisted securities, stub equity provides a viable and useful alternative for investors who do not necessarily want to exit, or fully exit, their investment. Further, it reduces the cash funding required for the acquisition of the target company and can incentivise existing shareholders that the bidder wishes to remain in the target company (e.g. management or founder shareholders).
The use of stub equity is on the rise. In 2024, a higher proportion of bidders offered shares as consideration compared to 2023. For example, in 2024, 38% of firm offers (21 bids) included listed or unlisted securities as consideration, a rise from 21% in 2023. These 2024 offers varied: eight were all-share offers, one bidder offered cash and shares and a share alternative, another offered cash and a share alternative, five offers combined cash and shares and six involved cash with an unlisted securities alternative. The remaining 35 bids in 2024 were cash-only.1
PS 36 is welcome guidance on generally established Panel practice. It sets out considerations for bidders when considering a stub equity offer and will be of particular interest to private capital bidders, as well as existing and future investors in UK public companies. The key principles in respect of PS 36 are summarised below.
General Principles
Equal Treatment of Shareholders
The principle of “equal treatment of shareholders” is a cornerstone of the UK Takeover Code, and PS 36 reinforces how this principle applies to stub equity offers. PS 36 clarifies that all holders of the target company’s shares of the same class must be afforded equivalent treatment when an unlisted share alternative (stub equity) is offered (General Principle 1 and Rule 16.1). This means that the stub equity option must be available to all shareholders, subject to very limited exceptions such as significant legal or regulatory restrictions in certain jurisdictions (see below).
Informed Decision Making
The principle of “informed decision making” in PS 36 means that target company shareholders must be provided with all the necessary information, in a clear and timely manner, to fully understand and evaluate the stub equity being offered (General Principle 2 and Rule 23.1).
Terms of the Unlisted Share Alternative
Minimum and Maximum Acceptance Thresholds for the Unlisted Share Alternative
Minimum Thresholds: A bidder may set a minimum overall percentage of the target company’s shares that must be elected for stub equity for the alternative to be issued. If this minimum is not met, all shareholders would typically receive cash instead. However, individual minimum numerical thresholds (e.g. requiring a shareholder to elect for at least 100 shares or shares worth a minimum amount) are not permitted, on the basis these could disadvantage smaller shareholders.
Maximum Thresholds: A bidder can also specify a maximum number or percentage of shares that may be elected for stub equity. If the elections exceed this cap, the elections would be scaled back pro rata across all shareholders who chose the stub equity, meaning they would receive a proportional amount of cash for the excess.
Exchange Ratios
The exchange ratio is the precise rate at which existing target company shares are swapped for unlisted securities in the acquisition vehicle. PS 36 mandates that the exchange ratio must be clearly stated and applied uniformly to all shareholders electing for stub equity, ensuring equal treatment and transparency.
Legal and Regulatory Restrictions
PS 36 provides limited circumstances where restrictions on the ability of shareholders to elect for the stub equity are permitted. These circumstances are where (i) overseas laws or regulations result in a significant risk of civil, regulatory or criminal exposure if the offer is made to shareholders in a particular jurisdiction, (ii) if a person is sanctioned or (iii) if laws or regulations restrict a person from holding more than a certain amount of the acquisition vehicle’s share capital without regulatory approval.
Unlisted Shares - Rights and Restrictions
The rights and restrictions relating to the unlisted shares will typically include provisions in relation to matters such as economic rights, information rights, voting and control as well as transfers and exit, among other provisions. These matters are generally for the offeror to determine but the Takeover Panel will be concerned to ensure that the offeror complies with the two general principles of equal treatment and informed decision making.
PS 36 permits proportionate governance rights for shareholders who hold a specified percentage of shares in the new private company. These can include board appointment, consent and information rights. However, crucially, these “percentage threshold rights” must not confer any monetary benefits or preferential exit opportunities not available to all other shareholders, upholding the general principle of equivalent treatment.
Disclosures
The Takeover Panel expects detailed disclosure to be made in the firm offer announcement of the rights and restrictions relating to the unlisted shares being offered. This should include the rights and restrictions of the unlisted shares, investment risk factors and details of the bidder group. A summary of the articles of association of the acquisition vehicle that the target shareholders would be rolling into should also be provided, as well as any shareholders’ agreement. The articles of association and the form of any relevant shareholders’ agreement must be published on a website from the time the offer document is published.
When an offeror considers discussing an unlisted share alternative with shareholders of an offeree company, the offeror should be mindful of Rules 20.1 and 20.2. This means that any new material information or significant opinions shared with a shareholder must be publicly announced. Furthermore, any presentations or documents used in such discussions must be published on a website promptly. Finally, all meetings between the offeror and shareholders, whether during or before the offer period (if related to the offer), must include an appropriate financial adviser or corporate broker for the offeror, who is also responsible for providing specific confirmations to the Panel.
Nominee Arrangements
PS 36 clarifies that where an offeror proposes a nominee arrangement in respect of shareholders holding less than a certain percentage of shares in Bidco, whereby a nominee would legally own the shares that are beneficially held by those shareholders, the Panel views this as a breach of General Principle 1 (equivalent treatment) unless (i) it is applied to all offeree company shareholders choosing to take stub equity or (ii) if it is presented as an optional choice rather than a mandatory imposition.
Valuation of Unlisted Shares
If an offer includes unlisted securities, the offer document must provide an estimated value for these securities. This valuation is typically prepared by the offeror’s financial adviser or another suitable expert.
When estimating the value of unlisted shares, certain key factors must be considered. These include, among other things:
- Financial and other information about the target company, whether publicly available or privately obtained, including its net debt and share capital.
- The offeror’s financial projections for the target business post-acquisition and commercial assessments from the offeror’s personnel.
- The terms of the acquisition and of its financing (especially any debt incurred by the offeror).
- The rights and restrictions of the unlisted shares.
Furthermore, when an adviser provides an estimated value for unlisted shares, the adviser must explain how the estimate per unlisted share relates to each share in the offeree company, especially if the exchange ratio is not 1:1. The advisor should present both the estimated total enterprise value and, after accounting for acquisition debt, the implied total equity value of Bidco. The Panel Executive allows for the estimate to be a range, as long as it is narrow enough to be meaningful for shareholders. If Bidco is leveraged, a wider percentage range for the implied total equity value might be acceptable, provided the enterprise value range is sufficiently narrow.
Rule 3 Adviser
The target company’s board must obtain competent independent advice on whether the financial terms of any offer, including an unlisted share alternative, are fair and reasonable. The substance of this advice must be disclosed to shareholders.
If the independent adviser cannot determine the alternative offer to be fair and reasonable, shareholders must be explicitly informed of this, along with an explanation, within the circular. The Panel Executive must be consulted in advance about such an explanation.
Views of the Target Company’s Board
The target company’s board must publish its opinion and recommendation on the offer, including any unlisted share alternative, detailing its advantages and disadvantages. If unable to recommend, it must explain why. Additionally, the directors must disclose their own intentions regarding their shareholdings and whether they will elect for the share alternative, providing reasons if required by the Panel.
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