DUAL-TRACK TRANSACTIONS

MAXIMISING THE OPTIONS

Claire Coppel, Harsha Kumar, James Roe, Hannah Valintine and Elizabeth Wall
of Allen & Overy LLP explain the advantages of, and issues involved in, dual-track
transactions, where preparations for an initial public offering and a private M&A
sale take place concurrently.

Traditionally, a dual-track transaction buoyant at a time when debt is expensive, This article looks at the legal and practical
means a process in which the owners and corporate and private equity buyers may not efficiencies and challenges that are inherent in
management of a business run in parallel be offering ambitious valuations in an auction running a private sale and an IPO in tandem.
both an initial public offering (IPO) and a process. Dual-track transactions also exist in In-depth knowledge of these opportunities
private merger and acquisition (M&A) sale other areas (see box “Twin-track restructuring and challenges is crucial to a good outcome;
process, usually by way of auction. The main process”). in particular, being able to anticipate how
driver for running the two exit strategies in to optimise the timetable and processes to
parallel is to achieve the best outcome, most At the time of writing, the market is achieve efficiencies will promote a successful
commonly to maximise the value of the exit challenging both for private M&A, due exit. It is worth a seller understanding the
or fundraising, as the IPO can represent to the cost of debt, and for IPOs, as the dynamics and what may be coming down
an additional bidder in an auction sale, geopolitical and macroeconomic uncertainty the track, or tracks, before embarking on
generating additional competition for the is undermining market confidence despite the such a process.
asset. FTSE 100 having recovered to pre-COVID-19
pandemic capitalisation levels. As new sale WHO CONTROLS THE EXIT
A dual-track transaction is also a hedge in the processes begin, driven by the maturity of
sense that there may be appetite for private closed-end funds or the demand for returns by One of the first issues to consider when
M&A at a time when the equity markets are public company shareholders, it will therefore structuring a dual-track transaction and
not conducive to an attractive valuation, be interesting to see whether sellers find the designing the project management around
or there is simply too much volatility in the hedge of a dual-track process appealing, it is who controls the exit. For a business
markets to allow confidence in the deal and whether they become prevalent as the that is wholly owned, this is straightforward.
execution. Conversely, if equity markets are markets pick up. But for a company with several institutional

© 2022 Thomson Reuters (Professional) UK Limited. This article first appeared in the August 2022 issue of PLC Magazine. 1
 tight, either for regulatory reasons, whether
Twin-track restructuring process associated with market abuse regulations or
in order to avoid conditioning the market in the
Dual-tracking is relevant not only to exit strategies but also to distressed scenarios, US, or so that the maximum amount of work
where companies and shareholders conduct negotiations both with potential new can be carried out without the risk of a leak and
investors on the one hand, and formal restructuring processes on the other. ensuing public scrutiny that may undermine
sale tactics. On the other hand, it can be
These processes are designed to establish a formal restructuring, including both desirable to disseminate information more
consensual and non-consensual arrangements, as a fall-back or plan B in the event widely both for market-testing purposes and
either that a solvent exit cannot be delivered or new money, whether debt or equity, in order to reach the most appropriate people
cannot be raised in sufficient time before the directors conclude that they need to across a business so that the information-
proceed with a formal restructuring transaction in order to maximise the likelihood gathering process for a data room is as efficient
of the business surviving. as possible.

There are interesting parallels between the co-ordination of an initial public offering On a dual-track transaction this tension is
and M&A dual-track transaction and a restructuring and sale or new money dual-track heightened. In terms of controlling information,
transaction, both relating to process issues around confidentiality and leveraging the audience for marketing purposes is
efficiencies, in particular for the preparation of marketing materials, and also in respect amplified: private auction participants and
of tactics around using key milestones to maximise value. equity analysts and investors on an IPO
represent different communities, and private
Key points of difference relate, in a technical sense, to the analysis of directors’ M&A and IPOs require certain different advisory
duties, as well as, from a practical perspective, to the timing pressure in a distressed skills from the investment bank, and the legal,
environment (see feature article “Directors’ duties on insolvency: navigating the twilight financial, tax and consulting advisers.
zone”, www.practicallaw.com/w-013-6147). What is more, in a restructuring context, the
breadth of stakeholders involved, from syndicated debt providers to trade creditors, Further, a leak may be perceived to have a
can result in increased project management challenges. dramatic impact on deliverability: while dual-
track transactions can be run in full view with
the IPO lingering as a threat to a bidder or
shareholders and potentially management • Whether they hold shares. bidders on the private sale track, sometimes it
shareholders, the shareholders’ agreement may be the case that knowledge of the other
(SHA) and the articles of association will need • How they are currently incentivised. track could be a distraction and lead to a lack
to be reviewed to determine which person or of engagement. The authors once advised on a
persons can initiate and ultimately conclude • How critical they are or are likely to be dual-track transaction where the advisers on the
an M&A sale or an IPO. perceived to be in relation to business IPO were not informed that there was a parallel
performance after the exit. M&A process ongoing so as to minimise the risk
Where there are multiple shareholders, of a leak and to ensure that all parties on the
particularly where there has been new • How likely they are to be part of the IPO track were focused on delivery.
investment or share sales over the life of management team and how they will be
the SHA, the exit mechanics in the SHA may incentivised following the exit. On an IPO, there is also the need to avoid
need to be updated in order to implement certain information flows that would affect
appropriate governance of the sale or IPO. • Whether the institutional sellers are the ability to market the offering into a
If the share register is fragmented, it may able to access key information on the particular jurisdiction and the risk that a leak
be unwieldy for numerous shareholders to business without their involvement. of certain types of information, such as a profit
have rights of consent across all decisions forecast, may require greater disclosure in the
on areas from administrative issues, Other early-stage considerations include how offering document.
such as the appointment of advisers and to incentivise relevant executives and other
cost-sharing, and process issues relating members of management in order to ensure, PR advisers are often brought in early in the
to timetable and launching marketing at a practical level, that they co-operate fully process on dual-track transactions in order
initiatives, through to the most material in the process with a view to promoting the to help manage and respond to a leak. It is
and substantive issues around valuation best exit outcome possible, as well as how important not only to cater for different leak
and allocation of proceeds. It is common wide the so-called “confidentiality net” for scenarios in the communications plan but
therefore to draft side letters or exit conduct the transaction is cast. also to think ahead to the direction in which
agreements to supplement the SHA and a process may need to pivot in the event of a
clarify these areas. CONFIDENTIALITY leak, depending on how critical confidentiality
is deemed to be to either side of the track.
With regard to individual members of an In corporate finance transactions, there is often
executive or management team, the extent to a tension in relation to information flows. On the From a logistical perspective, areas that
which they participate in the various decisions one hand, there is merit in keeping the group require careful project management by
will depend on the preferred exit route as well of people who have access to the confidential the seller’s teams in order to maintain the
as on factors such as: information relating to a transaction very desired level of confidentiality are file access,

2 © 2022 Thomson Reuters (Professional) UK Limited. This article first appeared in the August 2022 issue of PLC Magazine.
 Example high-level timetable

The table below sets out an example high-level timetable. There are a number of variables and so the approach to timetable can
change, but the example gives an idea of a dual-track plan.

Phase IPO track M&A track

1 Structuring and preparation of marketing materials. Structuring and preparation of marketing materials.

Pre-marketing:
• Launch of teaser, high-level marketing materials.
1.5 • Expressions of interest submitted by bidders.

Early-look presentations and feedback. Auction round 1:

• Launch of confidential information memorandum and
2 Production of prospectus commences. management meetings.
• Non-binding offers submitted by bidders.

Analyst presentations and analyst preparation of Auction round 2:

research. • Launch of virtual data room and any sell-side due
diligence reports (for example, financial, commercial,
3 Investor deep dives. tax or legal) and transaction documents review and
negotiation.
• Binding offers submitted by bidders.

Pilot fishing. Auction round 3: final negotiation(s).

4
(In the UK) Pre-intention to float (ITF) Signing of sale and purchase agreement.
announcement and publication of registration
5 – Proceeding
statement (Financial Conduct Authority-approved
with chosen track
document).

Steps to proceed with initial public offering (IPO): Satisfaction of conditions precedent, such as competition,
• ITF & research publication. foreign direct investment, regulatory and any commercial
• Pre-deal investor education. or financing-related conditions.
6
• Pricing and publication of prospectus.
• Roadshow.
• Bookbuilding.
• Pricing.

Steps to complete IPO: Closing.

• Admission.
7 • Conditional trading.
• Settlement.

data room access and email and calendar is sought from the business only once. From dictate a higher materiality threshold in
invite distribution lists. Implementing good a practical perspective, this means planning IPOs.
organisation from the outset is fundamental the contents of the data room and agreeing
to success. how those contents will be displayed in the • The disclosure on an IPO is more
data room as part of the overall project plan standardised because the organisations
THE DATA ROOM at the beginning of the process. conducting the due diligence are
primarily:
The virtual data room for a private M&A There are several reasons why the data rooms
transaction can look very different to the one for private sales and IPOs look different: - the underwriters;
for an IPO. However, in order to maximise
efficiency on a dual-track transaction, both • Private M&A due diligence is, subject to - for a London Stock Exchange Main
for time and cost purposes and to minimise the nature of the asset, the bidders and Market IPO, the sponsor or, for an AIM
disruption to management, the optimal the point below on financial information, float, the nominated adviser (nomad);
approach is to ensure that there is as much typically much wider in scope than IPO
overlap as possible in the data sets that are due diligence because both the market - lawyers; and
prepared for the two tracks and that the and also securities laws and regulations
information required in a particular category relevant to capital markets transactions - reporting accountants.

© 2022 Thomson Reuters (Professional) UK Limited. This article first appeared in the August 2022 issue of PLC Magazine. 3
 In contrast to financial sponsors and to be three years too, although that does not With the target timetable on a traditional
trade buyers on a private deal, those typically carry across to the look-back periods dual-track, there is a significant amount
underwriters, sponsors and nomads for representations and warranties, which can of work that must be done in parallel on
have defined legal and regulatory be significantly shorter, except for tax and both sides of the track before deciding
obligations as well as defined internal certain other compliance areas. which route to pursue (see box “Example
policies. In addition, a large part of the high-level timetable”). On the IPO track,
underwriter’s due diligence on an IPO is The dual-track transaction tactics will all of the marketing materials, including
conducted through management Q&A inform the most appropriate logistics for the prospectus, have to be ready or
sessions and the drafting of marketing the data room. How to structure the data substantively final at the point of a pre-
materials. room, including whether there should be two ITF announcement, and on the M&A track,
different data rooms or one data room with the terms and conditions of the sale have
• Prospectuses contain customary different security access settings, will depend to be fully settled. Of course, this has a
historical financial information on who from the seller’s side, advisory teams cost implication should one side fail,
disclosure, management commentary and investor community needs access (for which has to be balanced with the timing
on historical trading, trends and capital the purpose of both uploading and reviewing and tactical implications of running the
structure (the operating and financial information) and what information is intended processes sequentially or with one running
review), confirmation of sufficiency to be released to whom and at what point. in advance of the other.
of working capital, financial (and,
increasingly, non-financial) guidance TIMETABLE IPO READINESS
and, occasionally, profit forecasts. There
are detailed rules, conventions and Ideally, the two sides of the dual-track In the UK at least, it has always been the
practices that support the production transaction will be choreographed so that case that there is enhanced scrutiny of a
of this information and the checking of equivalent decisions are scheduled to company’s systems and controls, focused on
its reliability. That comfort includes the coincide. The timetable does, of course, have financial information and financial reporting,
process that supports the preparation to be tailored on a case-by-case basis and in the process of an IPO. This is primarily
of the company’s business plan and the financial advisers may recommend that because of how a listed company will need
model, accounting comfort letters one process runs ahead of the other in order to operate and its obligations as a listed
and assurance, chief financial officer’s to capitalise on a particular window in the company. This focus is then reinforced by
certificates and, where appropriate, the markets or because a bidder is positioned the sponsor and nomad obligations. These
verification process undertaken by the to pre-empt the private auction. However, obligations tend to drive the nature of the
lawyers, which essentially serves as a the goal on a dual-track process is usually process and the comfort delivered, such as
depositary of the evidence supporting to maintain momentum behind both sides of commentary reports and comfort letters.
the relevant financial information. the track with a view to synchronising the key
milestones so that the green light to proceed Additional preparatory work is required on
• Because the parties conducting due with either a sale or an IPO is as informed an IPO, not only to allow the company to
diligence are bankers and other advisers, as possible. comply with the Listing Rules and Disclosure
the competition law concerns around Guidance and Transparency Rules once it is
disclosing information to trade buyers In practice, this typically means targeting the listed, but also to enable the company to
and certain financial sponsors are not hard launch of an IPO (in the UK, this is the comply with governance and sustainability
typically relevant and confidentiality pre-intention to float (ITF) announcement codes, investor expectations, and enhanced
is not generally as sensitive. Although and publication of the registration statement) company law financial and non-financial
it is worth noting that, when selling and the signing of the sale and purchase reporting that applies to companies that
to financial sponsors, the commercial agreement (or other private investment or are traded.
sensitivity of sharing information may joint venture agreement) on the same date.
be diminished depending on the other However, increased regulation relating to
investments that those firms hold. Aside from designing the timetable to financial crime means that there is likely to
However, data protection advice should leverage efficiency and negotiating power be more focus on the M&A track as part of
still be sought. across both tracks, the company’s financial due diligence than in the past.
calendar is an important factor. Depending
In terms of look-back periods, the approach on where the IPO is going to be marketed, Trends around investor demand, as well as
taken across the two tracks is not materially there will be dates on which quarterly, half- heightened legal and regulatory disclosure
different. The general look-back period for year and year-end financial information and other compliance requirements, have
data room disclosure on an IPO is typically required for the prospectus or other offering meant that sustainability or environmental,
extended to the three most recent completed document will go stale. Other timetable social and governance (ESG) matters have
financial years, including a bring-down period factors, in addition to those mentioned above, become part of an IPO process. This adds
up to the date of the offering document. will include prevailing financial performance, another workstream to the project plan for
This can be shortened for certain types of track record of management, the extent to IPO readiness.
information and extended for others; for which there is seasonal influence in the
example, it may be five years for compliance company’s business or the sector more That is not to say that sustainability due
matters. On a private sale, the look-back tends widely, and any impending regulatory reform. diligence is not relevant as part of an M&A

4 © 2022 Thomson Reuters (Professional) UK Limited. This article first appeared in the August 2022 issue of PLC Magazine.
process or that investors in the M&A sphere
do not have sustainability criteria. However, Limits on liability in underwriting agreements
ESG credentials will be at the fore as part of
marketing an IPO and to the extent that the In underwriting agreements, liability for the various parties giving representations
company needs to improve its performance and warranties is typically limited as follows:
on sustainability, there will need to be a
plan to achieve the desired profile before • For directors, the comfort is typically limited by reference to their knowledge,
IPO marketing commences. There is more having made certain enquiries, and the financial limit on liability will be set by
flexibility on an M&A sale for a buyer to reference to remuneration.
drive improved sustainability after the
acquisition. • For selling shareholders, liability is capped at a percentage of their net sell-down
proceeds.
ESG consultants have therefore risen in
prominence on IPOs and will review the • There is usually only one overall cap on a director or selling shareholder’s liability.
company’s purpose, culture, operations, There will not usually be a de minimis, threshold or basket limitation, unlike in a
reporting lines, policies and procedures in sale and purchase agreement.
order to determine its environmental and
social impact, as well as compliance with • The company’s liability will not be capped. In fact, the company will provide the
relevant governance standards (see feature underwriters and sponsor with wide indemnification protection relating to the
article “Sustainability in supply chains: marketing process and any loss that the banks might suffer in connection with it.
due diligence in focus”, www.practicallaw.
com/w-035-5415). • The time limits on liability for representations, warranties and indemnities given
by selling shareholders and directors relating to the business, the marketing
On the topic of governance, one specific materials and the shares being sold will often be similar to the time limits on
workstream relevant to an IPO as opposed to liability for business warranties in a private sale because the focus is on issues
a private sale is bringing in new independent being flushed out through the next audit cycle. Although certain warranty and
non-executive directors (INEDs). The scope indenmity policies will provide synthetic protection by extending time limits in
of that exercise will be determined by the certain areas.
extent to which the company intends to be
compliant with market practice or specific
governance standards, such as the UK DEAL DELIVERABILITY • Foreign direct investment regulators,
Corporate Governance Code. An interesting such as the Committee on Foreign
dynamic here is the point at which the Valuation and market conditions will Investment into the US.
company chooses to bring in proposed new always be central to the success of either
INEDs and the level of transparency given track; however, the increasing regulatory Certain governance rights for minority
to the relevant individuals in relation to the intervention at a global level, in particular investors that are agreed as part of the sale
M&A track and the related costs. in the merger control and foreign ownership process may also trigger approvals, even if
spheres, is not only a factor that will inform the voting rights that are acquired do not
For completeness, the other important the likely gap between signing and closing cross the relevant thresholds.
code that is relevant on an IPO in the UK but should also inform the marketing strategy
market, but is not usually applicable to on both sides of the track (see feature article On the IPO track, these approval thresholds
the M&A track, is the Takeover Code (the “National Security and Investment Act 2021: may also be relevant in respect of cornerstone
Code). Relevant parts of the Code on an IPO taming the M&A dragon”, www.practicallaw. investors that are acquiring shares or in
typically include: com/w-032-2847). Identifying the target respect of existing owners of the business
investors on the IPO track and the target selling down. For example, on an IPO
• The mandatory bid regime; for example, bidders on the M&A track will help to refine of an airline company, it is necessary to
in respect of over-allotment and share the overall exit strategy. observe nationality requirements in certain
lending for the purpose of stabilisation. jurisdictions in order to preserve landing
On the M&A track, direct and indirect share and operating rights. In that sector, this
• The provisions on acting in concert. If ownership thresholds may trigger approvals is a key factor that will inform the global
there are multiple shareholders in a from: co-ordinators’ or bookrunners’ approach to
private company before the IPO, they marketing as well as the exit parameters for
will usually ask the Takeover Panel to • Sector regulators (notably financial existing shareholders.
confirm that they will not be deemed to services and aviation).
be acting in concert following the IPO. Certain ownership thresholds may require
• Competition regulators, such as the only notification, rather than approval, but
It will also be important to brief the relevant Federal Trade Commission in respect of the investment banks will often want to
directors in advance of the impact of the Code Hart-Scott-Rodino filings in the US or outline the regulatory regime in the early
following IPO, so that they are not caught the Competition and Markets Authority stage marketing materials on both sides of
off-guard by a bid approach. in the UK. the track. The banks on the IPO track will

© 2022 Thomson Reuters (Professional) UK Limited. This article first appeared in the August 2022 issue of PLC Magazine. 5
 subject to a £1 liability cap and provided solely
Related information to enable the buyer to take out warranty and
indemnity (W&I) insurance to provide recourse
This article is at practicallaw.com/w-036-3033
in respect of those warranties (though W&I
insurance may not be an appropriate solution
Other links from uk.practicallaw.com/
in all circumstances).
Topics
Acquisitions: auctions topic/3-103-1080 On an IPO, the company and the executive
Equity capital markets topic/8-103-1351 directors are all usually required to provide
Main market IPOs and listings topic/3-103-1377 representations and warranties to the
Preparing a company for IPO topic/w-013-6277 underwriters and the sponsor or nomad in
Prospectuses: ECM topic/7-103-1380 the underwriting agreement, as well as to
Share acquisitions: private topic/1-103-1081 the banks and the company (respectively)
Sponsors, nomads and other parties topic/w-013-6279 in representation letters. These cover both
Underwriting and bookbuilding topic/7-103-1375 the target business and the adequacy and
accuracy of disclosure in the marketing
Practice notes materials, with the comfort being repeated
A toolkit for asset acquisitions 0-519-3748 at various milestones, including at pricing,
Disclosure: acquisitions 5-107-4667 until completion of the IPO process.
Due diligence and post-completion integration for acquisitions
in the UK (England and Wales) 6-107-3752 The scope of representations, warranties
Initial public offerings (IPOs): overview 4-107-3989 and indemnities for selling shareholders,
Listing in the UK: options for overseas companies 0-422-5109 depending on the level of their involvement in
Listing requirements and the prospectus 4-107-3994 the business, is often limited to title, capacity,
Preparing a company for an initial public offering (IPO) 7-107-3997 solvency and information relating to them
Preparing for a share sale w-015-1865 in the marketing materials, with the liability
Selling a company or business by auction 6-107-3766 of non-executive directors (NEDs) limited
Warranties and indemnities: acquisitions 2-107-3754 to the marketing materials, including the
forward-looking and belief statements set out
Previous articles in those materials (see box “Limits on liability
Preparing a business for sale: fail to prepare, prepare to fail (2022) w-034-6473 in underwriting agreements”).
Direct listings: something new or variations on a theme? (2021) w-029-0492
National Security and Investment Act 2021: On an M&A process, it is rare to provide
taming the M&A dragon (2021) w-032-2847 protection in relation to the marketing
Distressed M&A: challenges and opportunities (2020) w-028-3519 materials. But on a dual-track process, there
Intra-group reorganisations: is often a debate as to whether protection
directors’ duties in times of stress (2020) w-028-3705 should be offered in relation to advanced
The new Prospectus Regulation: regime changes (2019) w-020-4530 drafts of marketing materials where those
Directors’ duties on insolvency: navigating the twilight zone (2018) w-013-6147 have undergone verification on the IPO track.
Initial public offerings: changes coming down the track (2018) w-013-0099
Preparing for a Main Market IPO: great expectations (2013) 7-531-6878 ROLE OF THE BOARD

For subscription enquiries to Practical Law web materials please call +44 0345 600 9355 On a private M&A sale, the centre of
gravity for decision-making sits with the
shareholders. Any NEDs are likely to be
also want to agree a plan on investor “know of who provides the comfort, to whom, the nominated by the shareholders and so, on a
your client” (KYC) anti-money laundering scope of the comfort and the limitations change of ownership, the NEDs will almost
requirements at an early stage and, in the on liability. certainly resign with effect from completion.
current geopolitical environment with a As described above, unless the directors hold
complex sanctions matrix, KYC is increasingly On the M&A track, the starting point is that shares or are acquiring shares as members
involved (see News brief “Russian sanctions: the selling shareholders or the shareholders of management in the business in the future,
responding to a complex situation”, www. rolling into a new structure (whether they are unlikely to be offering protection
practicallaw.com/w-035-3181). institutional or management), or both, will through representations, warranties or
provide contractual protection regarding the indemnities.
CONTRACTUAL COMFORT target business to the buyer or new investors.
However, it is standard for private equity The board, as a unit, is therefore a less
Representations, warranties and indemnities sellers, and increasingly common for corporate important stakeholder, other than in matters
will be provided by the owners in relation to and individual sellers, to look to minimise their relating to pre-sale restructurings or other
the business on both tracks but there are key liability on exit by offering title and capacity pre-completion corporate actions. In this
differences in the liability regime in terms warranties only with all other warranties regard, the board needs to be cognisant of

6 © 2022 Thomson Reuters (Professional) UK Limited. This article first appeared in the August 2022 issue of PLC Magazine.
director duties (see feature article “Intra-group and indemnities outlined above. It to the timing of director appointments and
reorganisations: directors’ duties in times of will be important as part of the board resignations. Any directors intending to resign
stress”, www.practicallaw.com/w-028-3705). education process for the company at the time of the IPO are unlikely to want
and advisers to spend time with the to take responsibility and liability for the
On an IPO, however, the directors are key directors focusing on forward-looking registration document or prospectus. For
stakeholders for two reasons: statements that are proposed to be appointments, the UK regime requires that
included in the marketing materials, prospective directors take responsibility for
• Having an appropriate board in place whether on the industry or specific to the certain marketing documents, and so the
in terms of balance and expertise is key company’s prospects, and to ensure that early education of those directors is key.
from an investor perspective so investors the directors are comfortable that there
will look to them as guardians of the is a reasonable basis on which those Claire Coppel, James Roe and Hannah
business in the future. statements are being made. Valintine are Partners, Harsha Kumar is
Counsel and Elizabeth Wall is PSL Counsel,
• The directors need to stand behind the Given the responsibility regime for marketing at Allen & Overy LLP.
package of representations, warranties materials on an IPO, thought must be given

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