The recent public tussle between the board of Spotless and Spotless’ suitors at Pacific Equity Partners led to a number of market participants and commentators to call for Australia to strengthen targets’ arms by introducing a form of the UK’s “put up or shut up” rule.
What is the put up or shut up rule?
Under the UK’s City Code on Takeovers and Mergers (City Code), once a possible offer has been made public, the potential offeror has 28 days to “put up” (announce a firm intention to make a fully financed offer, which in turn kicks off the City Code’s formal offer timetable) or “shut up” (state that no offer will be made, and stay off the park for 6 months, subject to limited exceptions). The process basically works like this:
Click here to view diagram.
When first formalised in the City Code in 2004, the put up or shut up rule could be invoked against a named possible bidder, at the UK Takeover Panel’s discretion, on application by a target. Following the public outcry over the manner in which the Kraft-Cadbury takeover played out in 2009-2010, the mandatory form of the rule was introduced. That is, save for a limited set of circumstances, a 28 day limit is now automatically imposed following a possible offer announcement, although it can be extended with the UK Takeover Panel’s agreement on request by the target.
Interestingly, in 2004, as part of the process of formalising the put or shut up rule, the UK Takeover Panel stated that it would not be in target shareholders’ interests to require a potential offeror to “put up or shut up” other than on the request of the target company. The rationale for this being that to impose a deadline for a potential offeror to clarify its intentions where this has not been requested by the target might deprive target shareholders of the opportunity to receive and consider an offer.1 The recent introduction of the mandatory form of the rule therefore represents a clear change of thinking on the part of the UK Takeover Panel.
What is the rationale behind the UK position?
The UK Takeover Code has always sought to prevent targets from being subject to unduly long periods of “siege” by establishing a fairly rigid bid timetable once an offer is announced. From the UK Takeover Panel’s perspective, possible offers that are made public can disturb and disrupt the ordinary course of a company’s business, distracting management (while they deal with the bidders and, potentially, shareholders who support them, as well as press and market speculation) and creating uncertainty for shareholders, customers and suppliers. Possible bids can be tactically leaked to put pressure on target boards to engage.
The bidder can use this period (known as a “virtual bid period”) to apply pressure to the board and rally shareholder support, while itself incurring minimal costs.
In this context, the “put up or shut up rule” fixes a limit, from the outset, on the period of time for which this ‘virtual bid period’ can continue. Moreover, the mandatory form of the rule may be expected to encourage potential offerors to keep confidential the existence and details of a proposed offer and to conduct discussions with the target on a confidential basis, in each case in order to ensure that the 28 day clock does not start ticking at a time when the offeror is not willing or able to go firm with its offer.
Should bidders in Australia have to put up or shut up?
Australia does have a form of the put up or shut up rule: a person who proposes to make a takeover bid must follow through with a takeover offer on substantially the same terms within 2 months of the proposal.
The difference is that the Australian rule does not apply to announcements or leaks of merely possible takeover offers, and it does not apply to proposals to effect a takeover by scheme of arrangement.
Do boards really need it in their defence arsenal?
One question to ask is whether target boards in Australia are at a disadvantage given the absence of a put-up or shut-up rule? There is no doubt that the UK position strengthens the hand of a target board in certain circumstances. The rule, in effect, nullifies any advantage accruing to a bidder if an incomplete acquisition proposal has been leaked, because the target knows from the outset how long the situation will last and when the bidder will be forced to play its final hand.
However, target boards in Australia have a range of other tactical opportunities available to them. Targets in Australia are freer to take actions to frustrate possible bids than their British brethren. Both countries restrict the actions a target board can take to frustrate an unwelcome offer. Frustrating actions include significant issuing of shares, declaring unusually generous dividends, acquiring substantial assets or incurring significant new liabilities.
In the UK, once a target “has reason to believe that a bona fide offer might be imminent”, the board is prohibited from taking action which may result in the offer or possible offer being frustrated without shareholder approval. In Australia, first, the restrictions only kick in once a genuine potential bid is communicated to the board of a target – it is not a question of target directors having to make an assessment of whether an offer “might” be imminent; the bidder must have come to the target with a proper proposal.
Secondly, only one of the frustrating action restrictions in Australia applies automatically once the target receives notice of a takeover proposal. ASX Listing Rule 7.9 prohibits a target who has received such an offer from issuing shares for 3 months after the proposal is received (subject to certain exceptions). The other restrictions on frustrating actions appear in Takeovers Panel policy, and, as such, require a bidder to take the target to the Panel and convince the Panel not only that the target is frustrating its proposed bid, but that those actions constitute unacceptable circumstances.
Thirdly, one of the factors that the Panel will take into account in deciding whether unacceptable circumstances exist is whether, before undertaking the action, the target notified the potential bidder that it intends to take the action if the potential bidder does not make its bid or formally announce its proposed bid within a reasonable time (e.g. a fortnight). That is, a target can effectively impose its own “soft” put up or shut up deadline on a bidder, putting the risk back on the bidder that the Panel may permit what would otherwise constitute frustrating action because the bidder was given a chance to stop the target frustrating its proposal, and it did not take it.
Finally, and particularly relevant in the context of the popularity of the scheme of arrangement in change of control transactions, a bidder proposing a takeover by way of scheme in Australia cannot complain that it is being “frustrated” by the target. Our Takeovers Panel has made it very clear that a proposed scheme cannot be frustrated if the target board does not support it. If a bidder wants to be able to complain about frustrating action, it needs to be willing to take its scheme proposal across into a hostile takeover offer.
Does it make the market more efficient and competitive?
Another question to ask is whether a put up or shut up rule would make the market for corporate control more informed, efficient and competitive– the first purpose of our takeover laws.
One aspect of the recent increase in institutional shareholder activism in Australia is the role shareholders have played in encouraging potential bids to be put to shareholders. Acquisitions of MYOB, Energy Developments and, potentially, Spotless Group are examples. A feature of each of those transactions was that the buyer was a private equity fund that needed to conduct due diligence in order to make a firm offer. How would a put-up or shut-up rule have applied in those circumstances? In a different regulatory environment, might a less facilitative board have disclosed the bidder’s proposal in purported compliance with continuous disclosure obligations to start a 28 day put up or shut-up clock ticking - thereby effectively excluding the bidder from conducting due diligence and bidding?
Assuming the board was properly advised, the answer is no. In the face of a valuable, fully funded proposal supported by a large proportion of shareholders, it would be very difficult for a board to justify peremptorily invoking a put-up or shut-up rule in order to avoid the due diligence process necessary to remove conditionality from such a proposal. Apart from the legal analysis, the risk of being blamed for a Perpetual or Billabong style aftermath seems too real. Poorly advised, however, there is a risk that boards could thwart proposals being made to their shareholders on the grounds that the adverse effect of a virtual bid on the company outweighs the benefits of potential liquidity for shareholders.
In our experience, that is not a development which sophisticated shareholders capable of making their own investment decisions would naturally embrace. It also makes the public-to-private process even more complicated and uncertain. Given the important role private equity funds play in maintaining liquidity and efficiency in our public equity markets, that would seem to be an outcome better avoided.
Are there other relevant distinctions between the UK and Australian approach to possible bids?
- Australian boards can unequally share information among bidders
Under the City Code, where a target is dealing with more than one potential bidder, it is under an obligation to provide each bidder with the same information it has provided to any other bidder. By contrast, in Australia, a target can provide access to information preferentially, and is free to treat bidders unequally as part of its negotiating strategy. A target board has much greater freedom in Australia to leverage its control over access to management and non-public company information.
- In Australia, Bidders have less control through their pre-bid arrangements
Another important distinction between the Australian and UK takeovers regime is that bidders in Britain have a greater capacity to build up a stake in the target – whether through direct control or control over takeover acceptances – than a bidder in the Australian market.
First, in Australia the takeovers prohibitions apply once a potential bidder has attained a 20% stake in the company, whereas in Britain the relevant stake is 30%.
Secondly, the City Code has an established policy of permitting “irrevocables” over and above the 30% ceiling where the target board approves (or where a single irrevocable breaches the 30% threshold). This permits potential bidders to collect irrevocable commitments to support a takeover bid, allowing bidders to build up a large arsenal of committed supporters. In Australia, such commitments would in all likelihood give rise to a “relevant interest” in the target, and thus would be subject to the 20% ceiling.
So is more regulation required?
In short, as Takeovers Panel president Kathleen O’Farrell noted on her appointment in 2010 (citing the put up or shut up rule as an example), there is a danger in “cherry-picking” reforms from foreign jurisdictions without considering how they would work within the broader Australian regime. Targets in Australia have a number of distinct tactical options available to them in executing their defensive strategy. Moreover, the focus in Australian takeovers law has always been on efficient, competitive and informed markets, not on trying to regulate for perfect equality between would-be bidders and targets. Experience shows that target boards in Australia are robust enough to withstand and fend off potential bidders, where targets deem that is in the best interests of shareholders. (Consider the decisive rebuff recently delivered to suitors by Pacific Brands.) Another layer of regulation in the form of a UK-style put up or shut up rule would add to the complexity of Australia’s takeovers system and restrict the flexibility of both bidders and targets. Until there is an evidence-based argument that target boards need more assistance from the Panel or the regulators, it would be unwise to interfere with that flexibility.