Under current takeover policy, a 'truth in takeovers' statement can commit a target shareholder to accept a takeover bid, even when the shareholder is prohibited by law from giving a contractual commitment to accept. That is an anomaly in takeover regulation.
Explaining to an offshore bidder that a pre-bid stake can be committed to a bid by a public statement though the operation of the regulator's policy, but not by a contractual agreement or an understanding with the bidder, is always a curious exercise.
But 'truth in takeovers' acceptance statements regularly facilitate takeover activity in Australia. This activity is generally good for investment and economic development. So, rather than restrict the use of these statements, what can we do to address this anomaly? And can our takeover law and policy provide room for a 'change of heart' decision?
A 'truth in takeovers' statement by a target shareholder is typically in language such as: 'Shareholder, a holder of 25% of the shares in Target, intends to accept the offer by Bidder in the absence of a superior proposal.'
The core takeover prohibition has the effect that a bidder can only acquire shares, or be promised shares, above the 20% threshold through a regulated transaction structure; such as a takeover bid or a scheme of arrangement. A promise to accept a bid would contravene the core prohibition if its effect would be to take the bidder through the 20% threshold.
'Truth in takeovers' statements depend on a policy of the Australian Securities & Investments Commission (ASIC), endorsed by the Takeovers Panel. Unlike the core prohibition, ASIC's policy does not regulate acquisitions - it seeks to make sure that statements made by players in a takeover bid do not mislead target shareholders or the market generally.
Quite reasonably from that perspective, the policy says that if a substantial shareholder in the target publicly states that it will accept a takeover bid, the shareholder will be held to that statement.
So the anomaly arises. A substantial shareholder in the target cannot promise to the bidder that it will accept the bid. But if the shareholder states publicly that it will accept, ASIC will hold it to that statement.
There are several ways in which the anomaly could be resolved.
The core prohibition could be modified. This could be done by raising the 20% threshold from which the core prohibition applies, or by allowing an exception to the prohibition for pre-bid commitments to accept a bid.
Alternatively, the 'truth in takeovers' policy could be relaxed, so that a substantial shareholder could depart from a public statement that it intends to accept the bid, presumably after the shareholder had publicly disclosed the change in its intention.
There has not been much political enthusiasm in Australia for raising the 20% threshold. Some similar jurisdictions apply a 30% threshold.
A proposal for an exception to the prohibition for pre-bid commitments gained some momentum a number of years ago, but failed to win support in Parliament. The Corporate Law Economic Reform Program Bill 1998 included provisions which would have enable a 'mandatory bid rule' - the 'mandatory' bid being a bid that had to follow an acquisition which breached the 20% threshold. Under that proposal, a pre-bid acquisition could breach the 20% threshold as long as it was followed by a bid on the same terms as the pre-bid acquisition.
ASIC is not likely to support a relaxation of its 'truth in takeovers' policy. ASIC would likely say that if a substantial shareholder wants to reserve the right to change its mind, it should do so when it makes its initial public statement. In my view, the policy is too restrictive, and does not adequately allow for the changes of heart and position which can occur during a commercial contest for control of a company.
Frankly, the current anomalous position that a 'truth in takeovers' statement can commit a target shareholder to accept a takeover bid, even when the shareholder would be prohibited from making that commitment directly to the bidder, is not bad for bidders. 'Truth in takeovers' statements can currently be used, with care, to facilitate bids.
But it is odd that we have this anomaly on an important issue for takeover bids.
The Takeovers Panel has recently released a new guidance note (Guidance Note 23 - Shareholder intention statement), working within the current policy regime.
In its submission to the Panel, ASIC argued that the Panel should discourage the making of such statements, in particular because of the risk that poor practices in seeking acceptance statements could lead to contraventions of the law, including the core prohibition (by amounting to agreements to accept a bid which breached the core prohibition).
The Panel declined to include any discouragement of truth in takeovers acceptance statement in the final version of its guidance note. It did include (at paragraph 4) a cautionary note that such a statement '…can give rise to concerns, depending on how it has been obtained and how it is used, particularly where the interests the subject of the statement, when aggregated with the bidder’s interest, exceed 20%.'
Absent any enthusiasm for fixing the anomaly, it looks as though bidders that carefully work within the core prohibition can have the benefit of 'truth in takeovers' acceptance statements to obtain significant assurance that the shares of major shareholders will be accepted into a takeover offer.
This is a satisfactory state of affairs, because it helps to give bidders the confidence to bid. Not all anomalies are harmful.
Any attempt to address this anomaly should not thwart the market for control by supressing the use of such statements. It would be better for the market for control to raise the core prohibition threshold, revive the once-proposed mandatory bid rule, or liberalise the 'truth in takeover' policy.