Joining forces – issues in consortium bids for listed targets
June 2019 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2019 Issue
Acquiring a listed entity is often a complex undertaking. There are added layers of legal, commercial and strategic issues where the objective is for a group of otherwise unaffiliated parties to join together as a consortium to make the bid. Some recent consortium bids and regulatory responses have highlighted these complexities. This article examines the issues associated with major shareholder involvement in consortium bids, as well as other bid structure and consortium formation questions.
Involving a major shareholder of the target in the consortium
It can be of significant strategic value for the consortium to have the support or involvement of a major shareholder of the listed target. BGH Capital made headlines in 2018 by securing the participation of AustralianSuper, a large superannuation fund, in separate consortium bids for Navitas and Healthscope. In each of these deals, AustralianSuper held a stake in the target of between 5 to 15 percent. Superannuation funds (being Australian pension style funds) holding sizeable minority stakes in Australian listed entities have become part of the landscape, but they have generally been considered passive investors.
Introducing a new member to a consortium involves disclosure of confidential information – that is, the fact of the proposed bid – that is likely to be price sensitive. If the new member is a target shareholder, receipt of such information will mean it is restricted from dealing in target securities. This means that as a preliminary step, a target shareholder needs to be asked whether it wishes to be put in that position, or given a path to the information being cleansed.
The size of the major shareholder’s holding will also affect the consortium’s approach. If the major shareholder has voting power of between 5 and 20 percent, any association (in the sense of a concert relationship or an agreement arrangement or understanding in relation to controlling or influencing the affairs of the target) between the major shareholder and the consortium, and the documents forming the basis of it, will need to be publicly disclosed to the Australian Securities Exchange within two business days after the formation of the association or, if earlier, by 9.30am on the next trading day after a takeover bid is made.
For example, when the approach by the BGH consortium was announced by Navitas, the BGH consortium members lodged a substantial holder notice showing all of the consortium members’ relevant interests in Navitas and attached their cooperation and process agreement. The exclusivity arrangements contained in that agreement did not permit AustralianSuper to accept or vote in favour of a higher offer. The Navitas target board later, as part of negotiations, required an amendment to the agreement permitting AustralianSuper to accept or vote in favour of a higher offer if the BGH consortium failed to match a binding superior proposal.
If the major shareholder has a relevant interest in more than 20 percent of the securities in the target and the other consortium members acquire a relevant interest in its shares, those other consortium members will be in breach of the takeovers laws unless ‘joint bid relief’ (or similar relief) is obtained from the Australian Securities and Investments Commission (ASIC). In this context a relevant interest could be obtained by the other consortium members if the major shareholder gives commitments regarding its target shares, such as through a standstill provision that involves a restriction on the disposal of its target shares.
There are also alternatives to having a major shareholder join the consortium, such as purchasing its stake, acquiring a call option over its stake or it making a public statement of voting intention in the context of a scheme of arrangement. ASIC has recently flagged it will closely scrutinise voting intention statements to ascertain whether there is an association with the consortium.
Choosing the optimal bid structure
The optimal outcome for a consortium is to acquire 100 percent of the target and to govern matters post-completion pursuant to a shareholders’ agreement. To avoid the complications with a less than 100 percent acquisition outcome, the preferred structure for a consortium bid is often the ‘all or nothing’ outcome available by way of a scheme of arrangement.
If a major shareholder is part of the consortium, or will receive a ‘net benefit’ (which involves a collateral benefit not available to the other target shareholders), the scheme will most likely be required to be approved by the requisite majorities of shareholders excluding the major shareholder (being 75 percent of votes cast and a majority by number of shareholders voting in person or by proxy).
Sometimes the consortium will offer equity in the bid vehicle to shareholders of the target who wish to retain an economic exposure to the target post-transaction. This is colloquially referred to as ‘stub equity’. In general, while offering greater optionality to target shareholders, small target shareholders often do not find stub equity attractive when compared to cash consideration because a privately held unlisted investment is far more illiquid and key rights in relation to control and exit are generally reserved for consortium members.
That said, the take-up rate of stub equity by small shareholders in such deals does demonstrate that there are some target shareholders who are attracted to the stub equity. Tax issues also need to be considered in relation to stub equity deals, including whether scrip for scrip rollover relief will be available and if there will be an ability to achieve full cost ‘push down’ to the target’s assets under tax consolidation rules.
Post-implementation governance arrangements for consortiums that have offered stub equity to all target shareholders are complicated. This is even more so the case since ASIC’s criticism in 2018 of the consortium bid for Capilano Honey that included stub equity in its scheme consideration options. ASIC’s key concern was that the stub equity issued by a proprietary company was to be held by a nominee – thereby in ASIC’s view deliberately reducing the number of investors in the bid vehicle – enabling it to remain a proprietary company that has fewer protections under the Corporations Act than there are for Australian (unlisted) public companies. Despite ASIC’s concerns the court approved the Capilano scheme, including the stub equity structure. ASIC has proposed to issue a consultation paper and legislative instruments to cure what it sees as conduct in contravention of public policy for this kind of structure.
Staged approach to consortium formation
A consortium to take over a listed target is generally formed in three stages: starting with confidential preliminary discussions, moving to agreement to submit a non-binding indicative offer (NBIO) to the target and conduct basic due diligence and, finally, a binding commitment to fund and implement the acquisition. If consortium members are foreign they may also need to seek and obtain (and ensure the binding agreements to acquire the target’s securities are conditional on) foreign investment approval.
At the first stage, the proposed consortium members may sign a non-disclosure agreement with each other. If one or both parties have approached the target before they agreed to form a consortium, they will need to check the terms of their confidentiality agreement with the target before they start discussions with one another. This is because targets will sometimes wish to include a term in their confidentiality agreements with potential bidders that the target’s consent is required for a potential bidder to form or join a consortium to make a bid.
The second stage is to submit an NBIO to the target and request access to non-public information.
Prior to submitting the NBIO, the parties may execute a short agreement often called a ‘cooperation agreement’. The cooperation agreement will outline the parties’ agreement to work together to investigate, negotiate and implement the transaction, the details of the proposed transaction and the process aspects of how the parties will work together. As mentioned above, if the consortium members have in aggregate a relevant interest or voting power in 5 percent or more of the target securities, the cooperation agreement will need to be filed with the ASX.
If the outcome of negotiations and due diligence investigations are satisfactory, the consortium will move to the third stage and sign an implementation agreement with the target. Before this point, the consortium will usually hope to have maintained the confidentiality of their approach and only to make the approach public on signing of a binding implementation agreement with the target. However, the target may also elect to disclose the consortium’s approach as early as the time it receives an NBIO in order to start a competitive auction for the target. That said, as indicated above, the proposed consortium bid may need to be publicly disclosed by the consortium members once a cooperation agreement is signed.
Once the implementation agreement is signed, the consortium is bound to fund and implement the acquisition, subject to the terms of the implementation agreement with the target. A detailed definitive agreement is typically entered into at this point between consortium members that sets out how the parties will fund the bid, implement the transaction and govern the consortium post-implementation if the bid is successful.
Consortium bids for listed targets are a complex, multi-stage process that require considered and sometimes creative pre-planning and management. However, consortium bids can allow prospective bidders to do deals that they could not otherwise do by themselves, and allow target shareholders to be presented with options for realising value that they may not otherwise have been given.
Tony Damian is a partner and Nicole Pedler is a senior associate at Herbert Smith Freehills. Mr Damian can be contacted on +61 2 9225 5784 or by email: firstname.lastname@example.org. Ms Pedler can be contacted on +61 2 9225 5694 or by email: email@example.com.
© Financier Worldwide
Tony Damian and Nicole Pedler
Herbert Smith Freehills