On 3 July 2025, the UK’s Takeover Panel (the Panel) published Practice Statement 36 (PS36) on unlisted share alternatives (also referred to as stub equity or partial share alternatives). PS36 provides important guidance to market participants and advisers on a key tool used by bidders in UK public takeovers.

The use of unlisted share alternatives, which typically involve the issue of shares or other securities in a corporate “Bidco” owned by the bidder, has been a common feature of UK public takeovers. They allow bidders to bridge valuation gaps and enable shareholders to retain on-going exposure to the target company. Importantly, they also afford bidders flexibility where other structures are not possible due to Takeover Code (the Code) restrictions on special arrangements and deals, or the non-availability of “joint offeror” status.

Key principles

PS36 provides guidance on how to structure and disclose unlisted share alternatives so as to ensure compliance with the Code. As with any offer, a bidder offering an unlisted share alternative must adhere to the following provisions of the Code.

• Equivalent treatment: All target company shareholders must be treated equally, with no special deals or favourable conditions afforded to select shareholders (General Principle 1 and Rule 16.1). Importantly, this means that an unlisted share alternative has to be open to all target company shareholders, subject to limited restrictions discussed below.
• Informed decision-making: Target company shareholders must be provided with sufficient time and information to allow them to make a properly informed decision as to the merits of an offer (General Principle 2 and Rule 23.1). 

Bidders and their advisers should consult the Panel early on both the terms and the proposed disclosure of any unlisted share alternative that they are planning to offer. This must be factored into the offer timetable from the outset. 

Terms of the unlisted share alternatives

Minimum and maximum acceptance thresholds

Bidders are allowed to set aggregate maximum and minimum acceptance thresholds for an unlisted share alternative. For example, bidders can specify that elections of an unlisted share alternative:

• may be made by shareholders holding no more than, say, 50% of the target company’s share capital (with any excess elections being “scaled back” and electing shareholders instead receiving cash); or 
• must be made by shareholders holding at least, say, 40% of the target company’s share capital (and, if that is not the case, all shareholders instead receive cash).

Individual minimum numerical thresholds are not allowed, as they would breach the requirement for equivalent treatment under the Code. An example might be where target company shareholders can elect for an unlisted share alternative only if they each hold at least 100 shares, or £1,000 worth of shares.

However, minimum percentage thresholds per shareholder (for example, requiring elections for at least 50% of a target company shareholder’s holding) are acceptable, as is any condition that the share alternative can be accepted only for all (but not part) of a target company shareholder’s holding. 

Exchange ratios

The terms of the unlisted share alternative must state the share exchange ratio on “per target share” basis (for example, two unlisted Bidco shares for each target company share held). Bidders must take care not to artificially manipulate the exchange ratio to effectively exclude target company shareholders with small holdings. If the exchange ratio results in target company shareholders holding fractions of a Bidco share, PS36 clarifies that those fractional entitlements can be rounded down, with target company shareholders instead receiving a proportional amount in cash for those fractional entitlements. 

In some cases, target company shareholders who elect for an unlisted share alternative may suffer dilution, such as where additional cash is injected by the bidder into Bidco to pay for fees and expenses of the offer. In that case, there must be appropriate disclosure of any such proposed dilution in the offer documentation, including an estimate of the additional subscription and resulting dilution, so that target company shareholders are aware of it when they evaluate the exchange ratio and terms of the unlisted share alternative.

Restrictions on availability

Although the basic position is that an unlisted share alternative must be made available to all target company shareholders, bidders often want to restrict the ability of some shareholders to elect for the unlisted alternative. PS36 makes it clear that restrictions of this kind are permitted only following prior consultation with the Panel and only in limited circumstances. These include, for example:

• where overseas securities laws would result in a significant risk of civil, regulatory or criminal exposure for the bidder or the target company if the unlisted share alternative is made available to target company shareholders in a particular jurisdiction;
• if there is a restriction on a person holding more than a certain percentage of Bidco’s share capital without regulatory approval (for example, under the UK’s regime for financial controllers and authorised firms); or
• to comply with sanctions legislation. 

Compliance with “know your customer” (KYC) requirements may also be a valid reason for excluding target company shareholders, but only if those requirements result from acceptable legal or regulatory restrictions. Bidders cannot exclude target company shareholders simply because they are competitors or because they might cause the bidder reputational harm. 

Rights and restrictions of unlisted shares

Whilst the rights and restrictions attaching to the unlisted shares (including economic rights, voting, governance, future share issues and transferability) are generally for the bidder to determine, the Panel will be concerned to ensure that they comply with the rules regarding equivalent treatment referred to above. 

The Panel may permit certain governance rights to be given only to target company shareholders who hold at least a specified percentage of the shares in Bidco, such as the right to appoint a director or board observer, consent rights in relation to certain reserved matters or information rights. However, preferential exit rights or monetary benefits for one or more specific shareholders are not generally allowed, even if they are tied to a minimum shareholding threshold. 

There may also be issues where a specific shareholder alone (whether on a named basis or by virtue of percentage threshold rights) is granted the ability to make decisions on behalf of minority shareholders in Bidco. For example, designating a “shareholder representative” with power to consent to certain actions or waive certain rights on behalf of minority Bidco shareholders is unlikely to be regarded as acceptable by the Panel.

It is often the case that an unlisted share alternative is structured with one or more specific target company shareholders in mind. But bidders must be careful not to sail too close to the wind, as the Panel will pay close attention to any proposed percentage threshold rights to determine whether they really do comply with the Code. Also, given the requirement to extend an unlisted share alternative to all target company shareholders, bidders need to accept there is a risk that shareholders for whom the unlisted share alternative was never intended, or who would hold only a very small number of shares in Bidco based on the exchange ratio, will take up that alternative, which may pose an administrative nuisance. (The Panel has confirmed in PS36 that nominee arrangements, under which a nominee holds legal title to the Bidco shares on behalf of target company shareholders whose Bidco shareholdings fall below a certain threshold, are not permitted.) 

Disclosure requirements

The offer documentation must include detailed information on the rights and restrictions of the unlisted shares, risk factors, and the Bidco group. The Panel expects this to include a summary of Bidco’s constitutional documents and any relevant shareholders’ agreement (which must also be made publicly available), and an explanation of how those documents can be amended following completion of the offer.

The target company board must publish its opinion and recommendation regarding the offer, including any unlisted share alternative, or explain why it is unable to make a recommendation. This will usually include a detailed list of advantages and disadvantages relating to the unlisted share alternative. The target company directors must also state whether they intend, in respect of their own shareholdings, to accept the offer and to elect for the share alternative (and, if required by the Panel, the reasons for such elections).

A target company must appoint a “Rule 3 adviser” to advise on the fairness and reasonableness of the offer terms. This includes the unlisted share alternative.

Valuation of unlisted shares

The offer document must include an estimate of the value of the unlisted shares from an appropriate adviser engaged by the bidder (usually the bidder’s financial adviser), with a clear explanation of the methodologies and factors considered.

It must also disclose the relationship between the estimated value per unlisted share and each target company share (particularly if the exchange ratio is not 1:1), including both the estimated total enterprise value and implied total equity value of Bidco (after adjusting for any acquisition debt and debt-like items). Value ranges may permissible, but only in certain circumstances and only if sufficiently narrow to be meaningful. 

Our view 

PS36 is a welcome reminder of how to structure unlisted share alternatives to meet Code requirements. We expect that bidders, including private equity bidders, will continue to offer unlisted share alternatives where there is a need to bridge valuation expectations or a desire to offer target company shareholders the opportunity to share in the long-term upside in the combined group.