The Takeovers Panel (Panel) declared unacceptable circumstances in the recent matter of Ludowici Limited1 on the basis that FLSmidth & Co. A/S (FLS), a company proposing to acquire Ludowici Limited (Ludowici), failed to promptly correct a news article that stated its offer price of A$7.20 per share was final and would not be increased.
The Panel ordered that FLS compensate those Ludowici shareholders who could establish, to the satisfaction of an arbitrator, that they sold their shares in reliance of the news article in the period between its publication and subsequent correction.
Implications for bidders of Australian listed companies
A bidder seeking to acquire an Australian listed company, whether via a takeover bid or scheme of arrangement, must ensure that:
- statements of a "last and final" nature are appropriately qualified if the bidder intends to reserve its rights to depart from such statements;
- public statements made about the transaction, including through both international and domestic news outlets, are vigilantly and
- pro-actively scrutinised;
- public statements about the transaction that are inaccurate or misleading, whether made by the bidder or third parties, are promptly corrected; and
- spokespersons of the bidder, whether commentating from within Australia or from foreign jurisdictions, are properly scripted and briefed on the implications of making "last and final" statements in the context of the Australian takeovers regime.
The decision in Ludowici Limited indicates that a bidder may risk regulatory action, and face significant financial consequences, if it fails to implement measures that adequately address the above matters.
Details of the case
On 23 January 2012, Ludowici and FLS announced that they had entered into an agreement (Process Agreement) in relation to an indicative, non-binding proposal by FLS to acquire, by way of a scheme of arrangement, all the shares in Ludowici at A$7.20 per share.
On the same day, an article in an international news service was published declaring that FLS's offer price of A$7.20 per share in Ludowici was final. During the Panel proceedings, it emerged that the statements in this news article had misquoted the chief executive of FLS who had, in fact, responded in the negative to a journalist who had queried him on whether he thought it would be necessary for FLS to increase its bid. The chief executive of FLS had, at no point, declared that the offer price of A$7.20 per share in Ludowici was final.
On 23 January 2012, FLS became aware of the news article. On 24 January 2012, FLS sought and received legal advice on the implications of "last and final" statements in the context of schemes of arrangement.
On 31 January 2012, FLS issued a corrective press statement indicating that, although it did not currently intend to increase its offer price of A$7.20 per share, it reserved the right to do so. This corrective press statement was released on ASX by Ludowici on 3 February 2012.
On 10 February 2012, Ludowici announced a competing non-binding indicative proposal by The Weir Group PLC (Weir) (which ultimately resulted in a binding competing proposal on 23 February 2012).
On 13 February 2012, Weir sought a declaration of unacceptable circumstances from the Panel on the basis that:
- FLS had made a "last and final" statement to which it should be held under ASIC's "truth in takeovers" policy;
- FLS had attempted to resile from its "last and final" statement; and
- given the above, the acquisition of control of Ludowici shares was not taking place in an efficient, competitive and informed market.
ASIC's "truth in takeovers" policy
ASIC's "truth in takeovers" policy is set out in ASIC Regulatory Guide 25 - Takeovers: False and misleading statements (RG 25). The Panel has endorsed this policy as a "fundamental tenet" of Australia's takeover regime2. Relevantly, RG 25 provides that:
- market participants that make a "last and final" statement should be held to it3;
- holders of securities in the target are entitled to expect that market participants will act consistently with their "last and final" statement4; and
- if a statement made to the media by a market participant is misreported, the market participant must immediately clarify it in a supplementary statement5.
The Panel's decision
The Panel declared unacceptable circumstances on the basis that:
- the news article created uncertainty in the market for Ludowici shares and had the potential to mislead or confuse investors;
- FLS failed to correct the news article in a timely manner; and
- FLS's failure had adversely affected an efficient, competitive and informed market for the acquisition of control over Ludowici shares.
The Panel considered that the appropriate way to protect the interests of those persons who were adversely affected by the unacceptable circumstances was by an order of compensation. Under this order, FLS was directed to compensate those Ludowici shareholders who could establish, to the satisfaction of an arbitrator, that they sold their shares in reliance of the news article in the period between its publication and subsequent correction.
Upon application by the parties for a review of the Panel's decision, the review Panel affirmed the initial Panel's findings6.
The making of a "last and final" statement by a bidder, in the context of a takeover, is a strategic device that has the potential to significantly influence the course of the takeover. Market participants act in reliance of these statements and, accordingly, are potentially exposed to loss if a bidder subsequently recants or acts contrary to such statements.
For this reason, and as a matter of upholding market integrity, the "truth in takeovers" policy provides that a bidder that declares its offer price under a takeover to be final, must not depart from this statement unless it has clearly and expressly qualified the statement. Foreign jurisdictions have similarly recognised the importance maintaining market confidence in information disseminated in the course of a takeover, with Hong Kong, Singapore and the United Kingdom imposing comparable obligations within their respective takeover regimes.
The Panel's decision in Ludowici Limited has generated considerable debate over whether the Panel's approach was inconsistent with a strict application of the "truth in takeovers" policy. On the one hand, some commentators consider that the Panel's decision undermines a fundamental tenet of the Australian takeovers regime because, while the Panel declared unacceptable circumstances and ordered FLS to pay compensation to qualifying Ludowici shareholders, the Panel did not prohibit FLS from increasing its offer price of A$7.20 per share in Ludowici. RG 25 also states that "a bidder cannot depart from a no increase statement, even if it compensates those who have sold on-market, or accepted into a market bid or competing bid"7 because "compensation does not adequately address regulatory concerns..."8.
In contrast, other commentators regard the perceived departure from the "truth in takeovers" policy as a practical and commercial outcome that both benefits target shareholders and redresses any financial disadvantage incurred by market participants who may have suffered loss in reliance on an inaccurate "last and final" statement. Under this view, if a bidder is prevented from departing from its "last and final" statement to increase its offer price in response to a counter-bidder, target shareholders would be deprived of a contested auction for their shares and, ultimately, the price they will receive for their shares would be diminished.
In our view, the Panel's decision in Ludowici Limited is consistent with the "truth in takeovers" policy. Significantly, the Panel found that the relevant news article did not contain any statement by the chief executive of FLS that could reasonably be construed as a "last and final" statement. This was because:
- the news article misquoted the chief executive of FLS and there was general confusion as to what was intended to be said;
- the news article was published on the day the Process Agreement was entered into which contained a provision contemplating FLS's ability to increase its offer price in response to a competing proposal; and
- the purported "no increase" statement was corrected prior to Weir's competing proposal emerging.
Effectively, the Panel distinguished the relevant statements in the news article from statements of a "last and final" nature which would attract a strict application of the "truth in takeovers" policy. Rather than finding that FLS had made a "last and final" statement, the Panel found fault with FLS's delay in correcting misleading statements in the market.