Devil’s in the detail

One of 2005’s biggest and most controversial deals was the Glazers’ takeover of Man Utd, which involved a legal battle to rival any of the team’s on-the-field exploits.

Manchester United, the most successful English football club of the past decade and one of the world’s best-known sporting brands, was finally taken over by US tycoon Malcolm Glazer and his sons in a deal worth nearly 800m in May 2005. This put an end to a lengthy saga which began in March 2003 when Glazer first bought shares in Man Utd. The Premiership club had already been the subject of a takeover bid from BSkyB in 1998, but objections from the Competition Commission meant that the proposed acquisition fell through.

It is not hard to understand why the Glazers wanted to buy Man Utd. It was one of the few debt-free and consistently profitable football clubs in Europe. With a strong brand image and potential for marketing growth, especially in Asia, it represented not just a football club, but also a global sports franchise.

What is a takeover?
In the UK, the term ‘takeover’ is used to describe a transaction whereby a bidder seeks to obtain 100 per cent control of a company whose shares are held by the public (the target). The other way to attain 100 per cent control is through a scheme of arrangement under Section 425 of the Companies Act 1985 (CA85).

Takeovers in the UK are governed by the City Code on Takeovers and Mergers (the Code), which is issued by the Takeover Panel. The Code aims to provide an orderly structure and timetable for UK takeovers. Its most fundamental objective is to ensure equality of treatment between shareholders of the target. Although the Code does not have the force of law, and the Takeover Panel is not a statutory body, the sanctions available to the panel to enforce compliance with the Code ensure that it is, in practice, mandatory.

There are several reasons why takeovers take place. The target may simply be very reasonably priced and the bidder may decide that it will end up making money by purchasing the target. Other takeovers are strategic. A bidder may decide to purchase a company that has good distribution capabilities in new areas, or which allows the bidder to enter a new market without having to take on the risk of starting a new division. A bidder could also decide to take over a rival to eliminate competition in its field (although the competition authorities might have something to say in such circumstances).

An important factor in a takeover is whether the bid is recommended or hostile. A hostile takeover occurs where the target’s board opposes the bidder’s offer. A recommended bid, where the board is prepared to recommend the offer to the target’s shareholders, is more likely to succeed and usually means that the bidder will be allowed to carry out more extensive due diligence on the target.

Man utd’s takeover

Speculation surrounding the interest of the Glazers in Man Utd had persisted for some time. The acquisition of control of the club on 12 May 2005 was preceded by a number of proposals, which were considered by the Man Utd board in October 2004, in February 2005 and again in April 2005.

The February 2005 proposal was pitched at 300p per share. The board concluded that, while the price was fair, the proposal was unlikely to be in the best interests of Man Utd. The board, however, allowed limited due diligence because of the price of the offer, which was likely to be attractive to the majority of the shareholders.(The Glazers needed ‘due diligence’ – in short, a legal/financial health check over the company – so that their financiers were willing to provide the acquisition moneys.) On 8 April 2005, a revised proposal was made. Again, the board did not support the proposal because of the aggressive nature of the business plan.

By the end of April, the Man Utd board felt that there had been too much uncertainty surrounding the future of the club. It decided to invoke Rule 2.4(b) of the Code (the ‘put up or shut up’ rule), which allows the target to request the Takeover Panel to impose a time limit for the potential bidder to clarify its intentions. On 28 April, the panel set a deadline of 17 May 2005 for the Glazers to either announce a firm intention to make an offer for Man Utd under Rule 2.5 of the Code, or to announce that they did not intend to make an offer.

Prior to 12 May 2005, the Glazers held 28.1 per cent of the shares in Man Utd. On that day, Red Football Limited (RFL), the Glazers’ bid vehicle, acquired 28.7 per cent of the shares in Man Utd from Cubic Expression, the investment company owned by two Irish racehorse owners, John Magnier and JP McManus. The support of the two Irishmen was key to the Glazer offer and once the Cubic-owned shares were acquired, the Glazers gained control of Man Utd. Under Rule 9 of the Code, once a bidder acquires 30 per cent or more of the voting rights in a target, that bidder must make a mandatory offer in cash at no less than the highest price paid for a share by the bidder over the previous 12 months. A mandatory offer is different from a voluntary offer, where the bidder is not under any obligation to make an offer and can impose conditions other than the acquisition of control of more than 50 per cent of the total voting share capital (this is the only condition that can be imposed by the bidder in a Rule 9 offer). The offer document (by which the bidder makes the formal legal offer to the target’s shareholders) was posted on 23 May 2005, with the offer being made on the basis of 300p for each Man Utd share. By that time, RFL owned 76.2 per cent of Man Utd, meaning the offer was unconditional.

The Board’s role

The Man Utd board had until then been opposed to the Glazer bid. This was due largely to the way the bid was being financed. The Glazers were to provide 272m in equity contributions; Red Joint Venture, RFL’s parent company, was to provide 275m through the issue to investors of non-cash pay preference shares, which would have no recourse to Man Utd’s assets; and certain lenders were to provide 265m of loan facilities, due to be repaid within 10 years, and which would have security over Man Utd’s assets.

The board felt that too much debt was being incurred. It thought that there was a strong link between playing performance and financial performance and argued that high leverage could lead to a downward spiral in a period of underperformance.

For many months, the board took a lead in making sure this issue was discussed properly by shareholders and the media. Unusually, it took the pre-emptive step of declaring (even before an offer was actually made) that it would have difficulty in recommending an offer that was too highly leveraged (was financed through too much debt) as being in the company’s best interests. The board knew that once the Glazers had purchased the Cubic stake, the game was effectively over.

The legal justification for the board’s position was that, although it would be under a Code obligation to advise its shareholders on any offer, this did not necessarily mean that it had to recommend it. The directors owed duties to the company as a commercial entity and not to current shareholders specifically. There was no duty to recommend and failing to recommend would not be an improper use of the board’s powers, as long as the directors were acting in the best interests of the company and without regard to their personal interests.

The board’s reluctance to recommend meant that Cubic had to take the decision as to whether or not to deliver Man Utd to the Glazers, which ultimately it was prepared to do.

With control having passed to the Glazers, the board advised the remaining Man Utd shareholders to accept the Glazers’ offer, based on the risks of remaining as a minority shareholder in what was to eventually become a private company with a high degree of leverage. The views of the board were in essence that, unless there were non-financial reasons to remain as a Man Utd shareholder, the best course of action was to exit the company.

The lawyers’ role

Freshfields Bruckhaus Deringer advised Man Utd on the takeover. The magic circle firm offered guidance to the directors on their duties during a takeover. Meanwhile, Allen & Overy provided legal advice to the Glazers.

In such a high-profile bid, every action was subject to intense media scrutiny. One of the general principles of the Code is that directors of the target must do nothing to frustrate a bid or an imminent bid without shareholder approval. Since the directors were opposed to the bid, they had to be very careful not to do anything that would frustrate the Glazers’ offer. So, for instance, they permitted the Glazers to do their due diligence once it was clear that a majority of their shareholders (in percentage terms) wanted to see an offer on the table.

Freshfields also liaised with the Takeover Panel and drafted the Rule 2.4(b) submission, which was made in April. It also helped draft the letter of advice from the directors to the shareholders once the offer document was posted. The views of the board are required by Rule 25.1 of the Code and have to be accompanied by financial advice given to it by the independent adviser appointed, as required by Rule 3.1 of the Code. The independent adviser was Tricorn Partners.

The takeover complete

By 28 June 2005, RFL owned 98 per cent of the shares in Man Utd. This meant it could now invoke sections 428-430F of CA85 compulsorily to acquire the remaining Man Utd shares. A week earlier, the shares had been delisted from the London Stock Exchange. At some point, Man Utd will be reregistered as a private company, which would allow RFL to use Man Utd’s assets to secure some of the debts incurred for the purpose of the acquisition.

Mark Rawlinson, who advised Man Utd on its takeover by Malcolm Glazer, is a corporate partner at Freshfields Bruckhaus Deringer; Adil Mohamedbhai is a trainee solicitor at the firm


MARCH 2004

The Glazers announce that they have no current intention to make an offer


Man Utd’s board rejects the Glazers’ proposals


The Glazers retaliate by ousting three directors from Man Utd’s board


New proposals from the Glazers are not thought to be in the best interests of Man Utd, but the board allows the Glazers to carry out due diligence

APRIL 2005

Further proposals from the Glazers; the Takeover Panel sets a deadline of 17 May, by which time the Glazers must make up their minds

12 MAY 2005

The Glazers acquire control by buying the Cubic Expression-owned shares

23 MAY 2005

Offer document posted, by which time the Glazers already own 76.2 per cent

26 MAY 2005

Board advises remaining shareholders to accept offer

28 JUNE 2005

Red Football Limited announces that it owns 98 per cent of Man Utd