Recent developments in Australia’s ‘truth in takeovers’ policy
June 2018 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2018 Issue
Under Australia’s ‘truth in takeovers’ policy, both the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel will expect bidders, targets and shareholders to adhere to public statements that they will do, or not do, certain things with respect to a takeover bid or scheme of arrangement. The policy has been endorsed by the Panel as “a fundamental tenet of the takeovers regime”.
The regime is underpinned by the principle of an efficient, competitive and informed market, and is aimed at promoting confidence in public statements made by market participants.
2018 has seen a renewed sense of focus from both ASIC and the Panel on the truth in takeovers policy, both in terms of proposed new guidance from the Panel on the timeframe for the ongoing effect of best and final statements made by a bidder, and ASIC’s increased focus on compliance, with respect to shareholder intention statements.
These recent developments and their likely impacts are outlined below.
‘No increase statements’ – new proposed Panel guidance
Australia’s current truth in takeovers policy prevents bidders from departing from public statements that they will not improve the consideration offered under a bid (known as a ‘no increase statement’). The policy around holding bidders to such statements is that shareholders will trade in reliance on such a statement. If a shareholder sells on market, but a bidder increases its offer, despite a best and final offer, the selling shareholder who relied on the best and final statement will miss out at an increased consideration.
While the rationale is clear, an issue arises if a takeover bid fails when there has been a best and final statement. Can the bidder come back shortly after the initial bid and launch a new and improved bid? Although it is generally assumed there is a period when the bidder cannot return with a new offer, there had been no formal guidance on the existence or duration of such a period to date.
In response to this uncertainty, on 14 March 2018, the Takeovers Panel released a consultation paper seeking public comment in relation to proposed revisions to its guidance on unacceptable circumstances arising from last and final statements. Specifically, the Panel proposes revising ‘Guidance Note 1 – Unacceptable Circumstances’ by providing that an example of when unacceptable circumstances is likely to arise is, when, after making a ‘no increase statement’, the bidder (or an associate) makes another bid (or proposes a scheme) within four months after the bid closes and offers increased consideration (unless that is contemplated by a clear qualification to the no increase statement).
Comments on the proposed amendments were due by 20 April 2018, including whether there should be any amendments. Other issues requested to be addressed by the Panel included: (i) whether the restriction should apply if there is some sort of material change or exceptional circumstance during the relevant four month period; and (ii) whether the policy should also apply to a prospective bidder in connection with a preliminary approach for the purpose of an agreed control transaction, and if so, when the wait period would commence.
The proposed amendments to the Panel’s guidance are aimed at providing market participants with more certainty by establishing a time frame before which departure from a no increase statement may give rise to unacceptable circumstances.
If adopted, the changes would have the desired effect. There is an open issue in the consultation paper around whether the four month time frame should be a reference to the announcement of a bid, rather than the making of a bid (the making of a bid and whether it is generally accepted to refer to the act of serving a bidder’s statement on the target). This is because, under the Corporations Act, a bidder’s statement can be served up to two months after the announcement of a takeover bid where the target consents, the result being that, in certain cases, the current drafting could allow a fresh bid to be announced two months after the first bid closes.
Shareholder acceptance statements – EFDL’s bid for Finders Resources
In addition to holding bidders to last and final statements, the Australian truth in takeovers policy requires shareholders to stand by intention statements in relation to whether or not they intend to accept into a bid or vote in favour of or against a scheme.
The issue recently arose in the context of shareholder acceptance statements relating to Eastern Field Developments Limited’s (EFDL’s) bid for Finders Resources Limited at $0.23 per share.
In summary, Finders had stated publicly that two of its directors, independent to EFDL, and Taurus Funds Management Pty Ltd which managed approximately 11.31 percent of Finders shares, did not intend to accept the $0.23 per share EFDL offer. Finders also made subsequent announcements which included the holdings of the two directors and the shares managed by Taurus in aggregate figures of shares, in relation to which it said it had been notified were not intended to be accepted into the EFDL offer.
Despite these statements, Taurus later accepted the offer for all the Finders shares it managed and Finders subsequently disclosed, by way of a supplementary target’s statement, that the independent directors intended to accept the offer (which they subsequently did on 20 and 28 March 2018).
After ascertaining that Taurus had accepted the offer, EFDL raised concerns with ASIC, which applied to the Takeovers Panel on 29 March 2018. In its application, ASIC sought orders that the acceptances of Taurus and the two independent directors be cancelled and that withdrawal rights be offered to Finders shareholders in respect of whom an acceptance was received by EFDL on or after 20 March 2018. In addition, ASIC sought orders that EFDL not take into account voting power in shares that are the subject of the acceptances cancelled or withdrawn for the purpose of the creep provisions in the Corporations Act (meaning EFDL would not be able to rely on the higher base voting power from the relevant acceptances when calculating any creep amount over the following six months).
The Panel announced on 26 April 2018 that it had granted the orders sought by ASIC (other than in respect of the two independent directors) and made a declaration of unacceptable circumstances. The Panel’s orders involve cancelling Taurus’ acceptance of the bid, providing withdrawal rights for Finders shareholders who accepted the bid on or after 20 March 2018 and prohibiting EFDL from relying on Taurus’ acceptances and any acceptances that are subsequently withdrawn, for the purposes of the Corporations Act creep exception. Additionally, the Panel found that while Taurus had initially signed a letter regarding its intention statement which also provided that “Taurus confirms that it will notify Finders as soon as reasonably practicable if Taurus’ intentions with respect to accepting the Offer change”, Taurus did not require this qualification to be contained in the ASX announcement containing the intention statement.
The Panel announced on 30 April 2018 that it had received an application from Taurus seeking a review of the Panel's initial decision and orders, and that the Panel had made interim orders staying the orders relating to the cancellation of acceptances and the withdrawal process pending the outcome of the review application. At the time of writing it had not been confirmed by the Panel whether review proceedings would be conducted.
However, if the Panel’s original orders are upheld, given the size of Taurus’ stake, EFDL’s ultimate voting power will be below the thresholds required for EFDL to compulsory acquire or compulsorily extend buyout offers to remaining shareholders, regardless of the outcome of the withdrawal process (given EFDL has declared its offer price final). Minority shareholders who are ineligible for the offer (including Taurus) may be forced to remain shareholders in a company where EFDL could hold voting power in excess of 82 percent.
OZ Minerals’ clarifications regarding BlackRock’s intention statements in the Avanco bid
The issue of shareholder intention statements was also raised in the context of OZ Minerals’ off-market takeover offer for Avanco Resources Limited, announced to ASX on 27 March 2018.
In its announcement of the bid, OZ Minerals stated that BlackRock, which managed funds and accounts owning 11.6 percent of Avanco shares, had stated its current intention to accept the offer with respect to all of the relevant Avanco shares, subject to the bid conditions being satisfied and in the absence of a superior proposal.
In a release to ASX on 6 April 2018, OZ Minerals disclosed that ASIC had requested the company to clarify that BlackRock’s statement of intention actually contained a number of additional qualifications, including that BlackRock reserves and retains the right to deal with the Avanco shares on behalf of its clients in its absolute discretion or on the instructions of its clients or otherwise and that the statement of intention was not and was not intended to be legally binding. From a practical perspective, this again demonstrates ASIC’s renewed focus on the issue.
The market is seeing increased attention from ASIC and the Takeovers Panel in relation to truth in takeovers. While the Panel is helpfully taking measures to increase certainty, market participants should be aware that ASIC is taking a keen interest in intention statements, particularly where these are made by shareholders, and will not hesitate to take action where it has concerns that an intention statement is at risk of being undermined or that the full content of an intention statement (including qualifications) has not been fully disclosed.
Tony Damian is a partner and Amelia Morgan is a solicitor at Herbert Smith Freehills. Mr Damian can be contacted on +61 2 9225 5784 or by email: firstname.lastname@example.org. Ms Morgan can be contacted on +61 2 9225 5711 or by email: email@example.com.
© Financier Worldwide
Tony Damian and Amelia Morgan
Herbert Smith Freehills