Barbarians at the gate: responding to unsolicited indicative takeover offers
May 2015 | SPECIAL REPORT: OPERATING AN EFFECTIVE BOARD
Financier Worldwide Magazine
Reaffirming that unsolicited takeover approaches are an integral part of the Australian M&A landscape, a recent report has identified that around half of the transactions valued over A$1bn in the first six months of 2014 were announced without approval from the target.
In a volatile market where potential bidders are always open to pursuing ‘opportunistic’ acquisitions, it is critical that listed companies are well prepared to respond to any takeover approach in a swift, decisive and coordinated way, not just in order to ensure that the target complies with its continuous disclosure obligations, but also to arm the target board with every tool to obtain the best possible result for its shareholders.
Takeover proposals excite the equities market, even if they are contingent and leave room for a reduction in bid price. Once a proposal is rumoured or announced, the target’s share price is bound to rise rapidly. For target directors, responding to these dynamics can be challenging.
An unsolicited takeover offer takes place where a buyer approaches the target without invitation and indicates an intention to discuss a possible ‘merger’ or ‘recommended offer’. This initial approach will generally involve the issue of a formalised letter or indicative proposal, as well as a request to conduct due diligence on the target’s non-public information, on an ‘exclusive’ basis.
Unsolicited approaches are more often ‘friendly’ than ‘hostile’ in the sense that the prospective acquirer will usually seek to agree the price, terms and other conditions of a takeover proposal with the board of the target in order ensure that the target board recommends the offer to its shareholders and does not actively seek competing proposals. Conversely, hostile offers are made directly, and publicly, to the target’s shareholders and intentionally bypass the target’s board.
This article touches upon some of the key considerations when responding to a ‘friendly’ takeover approach, including how target boards should prepare for, and respond to, friendly approaches.
A target’s directors may become aware that the target is the subject of a proposed ‘friendly’ takeover by way of a written letter from the prospective acquirer setting out the terms of a preliminary non-binding, indicative proposal to acquire the target. The proposal would typically specify an indicative price, usually at a premium to the recent volume weighted trading price of the target’s shares on the stock exchange.
Under the Listing Rules of the Australian Securities Exchange and Australia’s continuous disclosure rules, ‘market sensitive’ information must be disclosed to the market immediately. Receipt of an indicative offer may not require disclosure where an exception to continuous disclosure rules applies, in relation to a confidential, incomplete proposal, for example. Even where an exception is applicable, the target board will need to consider whether it should voluntarily make an initial announcement regarding its receipt of the proposal.
In deciding whether to immediately announce the receipt of an indicative non-binding takeover proposal to the market, one consideration for the target board is whether it intends to engage further with the prospective acquirer (based in no small part on whether it considers the offer to be priced at a reasonable level). An announcement at this time is generally in the form of a ‘placeholder’ announcement, noting the receipt of an indicative offer and urging target shareholders to refrain from acting until their board and its advisers have had the opportunity to consider the proposal further.
Public announcement of a proposal is likely to have a material (and often very significant) effect on the target’s share price. Following public announcement, successful execution from a target board’s perspective will largely depend on whether the proposal is favourably received by the target’s shareholders. As such, the board will want to contact key shareholders to gauge their attitude and identify their interest in the proposal. This can only occur if shareholders are aware of the existence of the proposal, meaning that early announcement of a target’s receipt of an indicative proposal may also have a strategic benefit in this sense.
Directors of Australian companies, as a part of their directors’ duties, are required to make a careful and informed assessment of whether a proposal is in the best interests of the target’s shareholders, and (where applicable) whether a sufficient basis exists for concluding that the proposal is capable of being negotiated and developed to the point that it becomes a proposal that is in the best interests of shareholders.
One threshold issue for the target board to consider is whether the proposed consideration set out in the indicative offer fully reflects the inherent value of the target company and incorporates a sufficient premium to the target’s shareholders for delivering full ownership and control of the target to the prospective acquirer.
Assuming that the directors believe that the offer price appropriately reflects the value of the company, a further issue to address is the level of certainty behind the acquirer’s proposal. This involves a consideration of the timeframe involved in completing the proposal and the level of execution risk (for example, assessing the conditionality of the offer and the bidder’s access to funds). This is critical for a target board because any proposal from a prospective acquirer is likely to require the target board to agree to engage exclusively with that acquirer, including agreeing to ‘no shop’ and ‘no talk’ restrictions with third parties, the effect of which is to restrict the ability of the target board to extract a higher offer from a rival bidder (which may otherwise spark a ‘bidding war’).
Based on a consideration of these issues, the target board may decide to accept or reject the proposal, or the board may seek to enter into more extensive negotiations regarding the key terms of the proposal. A target board may head down this path if it considers the offer price to be broadly acceptable – this allows the board an opportunity to obtain a positive result for its shareholders by entering into negotiations to increase the offer price or generally improve other key offer conditions. In reality, few if any indicative proposals are immediately acceptable on their initial terms and it will be prudent for the target board, with the assistance of its advisers, to seek to negotiate some of the key offer terms, including timing and restrictions, even if the headline price is broadly acceptable.
While unsolicited takeover proposals which are communicated to the market or the target’s board can be challenging for a target director to effectively address, there should be no excuse for a target board, with the help of its advisers, to not be able to deal promptly with such a proposal, which is now a legitimate feature of an efficient market for control. Companies and boards should seek to take a proactive approach by establishing takeover response procedures, with the help of their advisers, well in advance of any approach that may eventuate.
Unsolicited proposals to make a takeover offer are likely to remain one of the key testing grounds in public M&A of duties to shareholders, regulatory restrictions and tactics. A listed company board that receives an unsolicited proposal needs to respond in a considered, yet very prompt, manner, mindful of the value and tactical implications of the proposal and the target’s response. Needless to say, careful analysis and good advice can help ensure that the response is beneficial to shareholders and avoids the target board potentially having to deal with the ‘fall out’ from a perception that it has ‘dropped the ball’ on a matter of such vital importance to its shareholders.
David Schiavello is a senior associate at Minter Ellison. Mr Schiavello can be contacted on +61 3 8608 2814 or by email: firstname.lastname@example.org.
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