For U.S. public companies, private investment in public equity (PIPE) transactions have become a well-accepted alternative to raising capital in the public markets. In a typical PIPE, a public company sells securities in a private placement to institutional investors and agrees to register the securities for resale by the investors in the public markets. This allows the company to raise capital without the delays and costs associated with a public offering, while also providing investors with a ready means to exit their investment. Investors in PIPEs by U.S. public companies include hedge funds, institutional investors and, especially in recent years, private equity and venture capital funds that find PIPE transactions an attractive means of investing in growing companies with established revenue histories. U.S. PIPE transactions through July 2004 totalled $9.3 billion, on pace to eclipse the $12.7 billion raised in 2003, according to Placement Tracker.

PIPE transactions are also popular with public companies in some countries other than the United States, such as Israel. European public companies, however, have generally not embraced PIPE transactions for two major reasons. First, PIPE transactions by U.S. public companies have had a mixed record of success, highlighted recently in the high-profile court case involving private equity firm Forstmann Little & Co.’s ill-fated PIPE investments in telecommunications companies XO Communications and McLeodUSA. Second, European laws and regulations can make PIPE transactions significantly harder to implement. However, with the uncertainty of public market conditions, and the increased scrutiny of public filings by securities regulators, it may be time for European public companies to take a second look at the viability of PIPE transactions.

General Terms of PIPE Transactions

Public companies often turn to PIPE transactions when they need to raise capital quickly, either to finance their ordinary operations or an extraordinary event (such as an acquisition), or when the public markets are otherwise not a viable alternative. Broadly, PIPEs can be traditional, involving the issuance of common shares or convertible securities where the price of the common shares issued or issuable under the convertible securities is set at the time of issuance (often at a discount of 5 to 15 percent off the market price), or structured, typically involving the issuance of convertible securities where the price of the common shares issuable under the convertible securities is also protected from future market downturns. Often, investors of receive equity "kickers" in the form of warrants to acquire additional shares, with an exercise price above the current market price.

Structured PIPEs were common in the 1990s, but have generally fallen out of favor. This is primarily because they have the potential to cause a "death spiral" of the issuer’s stock due to the price protection provisions that require the company to issue more shares to the investors as the market price of the stock drops.

In any PIPE transaction, the issuer must consider not only the laws and regulations of the jurisdiction in which it is organized, but also the rules of the markets on which its shares are traded. Most non-U.S. public companies have their shares listed on a local market and may also list their shares on other markets, such as a U.S. market. Stock market rules can require, among other things, the approval of the company’s shareholders for certain issuances depending on the size of the offering and the nature of the purchasers. Even where shareholder approval is required, however, many companies have engaged in PIPE transactions where other alternatives were either less attractive or unavailable.

The following are brief overviews of PIPE transactions in selected non-U.S. jurisdictions.

PIPEs by United Kingdom Public Companies

There have been relatively few PIPE transactions by UK public companies, largely as a consequence of significant UK legal and regulatory impediments. These include the requirement for shareholder approval for any issuance of new shares and the disapplication of statutory pre-emption rights, the effect of Rule 9 of the City Code on Takeovers and Mergers (which requires an investor which gains more than 29.9 percent of the voting rights of a company to make an offer for the remaining shares in the company) and various provisions of the UK Listing Authority rules regulating the lowest price at which new shares may be issued.

PIPEs by German and Italian Public Companies

There also have been few PIPE transactions by German or Italian public companies. The principal legal and regulatory impediments include the requirement for shareholder approval for any issuance of new shares (which, in Germany, must be given at a shareholders’ meeting by a 75 percent majority), requirements for the exclusion of statutory pre-emption rights, dissenting shareholder rights and potential personal liability of the members of the company’s supervisory and management boards.

PIPES by Israeli Public Companies

Israeli companies have been relatively active PIPE issuers. Israeli law considerations include shareholder approval requirements, prospectus delivery requirements, Tel Aviv Stock Exchange requirements (if applicable) and laws restricting the oppression of minority shareholders.

A PIPE transaction can potentially be a viable means for U.S. and non-U.S. public companies to raise capital, depending on the jurisdiction of the issuing company and the terms of the issuance. However, companies must carefully consider the legal and regulatory issues before proceeding. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.