Background

South Africa’s Woolworths must have breathed a sigh of relief when its $2.2 billion acquisition of David Jones (DJs) by way of a scheme of arrangement completed and its acquisition of the minorities in Country Road succeeded. Neither success was certain after entities controlled by Mr Solomon Lew acquired a substantial shareholding in DJs ahead of the DJs shareholder meeting to approve the scheme.

The transaction has highlighted a number of items for bidders to consider in proceeding with any control transaction. We consider two in this alert.

Firstly, how could a bidder, in Woolworths’ position achieve legal certainty that any of the DJs scheme or the Country Road bid could succeed without an agreement, arrangement or understanding with Mr Lew? More specifically, how could this certainty be achieved in a takeovers regime which restricts bidders from entering into pre-bid arrangements which gives them a relevant interest in more than 20% of the target’s shares?

Secondly, given that the courts acknowledge that shareholders in a scheme may be offered differential consideration or collateral benefits, is there any further guidance on how bidders should navigate collateral benefits?

In summary the events have been as follows:

  • January 1998 - Woolworths acquires approximately 88% of Country Road’s ordinary shares for $2.00 cash per share by takeover bid. Solomon Lew’s entities do not accept into the bid and remain an approximate 11% shareholder of Country Road.
  • 9 April 2014 – DJs announces that it has entered into a scheme implementation deed with Woolworths under which Woolworths proposes to acquire all shares in DJs for $4.00 per share.
  • 18 June 2014 – Mr Lew acquires a relevant interest in 9.89% of the shares in DJs. DJs postpones the DJs shareholder meeting to approve the DJs scheme.
  • 25 June 2014 – Woolworths announces an off-market takeover bid for all of the remaining shares in Country Road conditional on shareholders in DJs approving the DJs scheme.
  • 30 June 2014 – Woolworths says its offer prices for DJs and Country Road are “best and final”.
  • 14 July 2014 – DJs shareholders approve the scheme.
  • 17 July 2014 – The Federal Court approves the DJs scheme.
  • 25 July 2014 – Mr Lew accepts into the Country Road bid and the bid goes unconditional.

Issue 1: achieving more certainty

The general takeover’s restriction as it applies to the Country Road bid

The Corporations Act 2001 (Cth) (the “Act”) restricts a person from acquiring a relevant interest in voting shares in a listed company if, following that transaction, the voting power of that person increases from 20% or below to more than 20%. The only exception to this restriction is where the bidder can pass through one of the permitted so called “takeover gates”.

Woolworths was therefore, at all times, restricted from entering into an agreement, arrangement or understanding with the Lew entities to gain control over their shares in Country Road. This is because Woolworths already had a relevant interest in more than 20% of the shares in Country Road. The Act only permits Woolworths to acquire a further interest in Country Road through the takeover gates. The most common gates are: a scheme or a takeover bid; a 3% creep in a six month period; or where the acquisition is approved by shareholders. In the end, Woolworths made a takeover bid for Country Road.

What’s interesting about this is Woolworths did so without any certainty that Lew would accept into that bid. According to evidence submitted to the Court for the DJs scheme, all Woolworths knew was that Lew wanted $19 per Country Road share. To reiterate, Woolworths was prevented from entering into an agreement, arrangement or understanding regarding the circumstances in which Lew would accept into the Country Road bid.

Permitted discussions

It is acceptable for bidders, in preparing for a takeover bid, to discuss with substantial shareholders what their attitude might be (without a commitment) should the bidder lodge a takeover bid in relation to those shares. The only condition on these discussions is that no agreement, arrangement or understanding is reached if it gives the bidder control over more than 20%.

The Federal Court judgment in relation to the DJs scheme has provided some insights into how the pre-bid discussions between Woolworths, DJs and the Lew entities were carried out. At the request of ASIC, DJs provided the Court with affidavits from representatives of DJs, Woolworths and Mr Lew. This exposed the Country Road bid discussions to scrutiny. These affidavits have revealed that there was no arrangement in relation to Lew’s holding in Country Road. Lew indicated he would accept into the Country Road bid at $19 per share but this was not binding on him.

Public announcement from the Lew Entities

A way to achieve certainty, where an agreement is not legally possible under the takeovers restriction, is for bidders to take advantage of the “truth in takeovers” policy. This policy applies equally to bidders and substantial shareholders. Under the policy ASIC will hold bidders and substantial shareholders to their public statements.

To illustrate this, if a bidder’s board is looking for a pre-bid commitment from a substantial shareholder, where the takeovers restriction prevents it from entering into an agreement with that shareholder, the bidder could seek a public statement from that substantial shareholder before launching the bid along the lines of “unless there is a superior offer from someone else, we will accept a takeover bid at $X per share”. In that situation, ASIC would ensure the substantial shareholder complied with its public statement. In the DJs scheme, Woolworths could have linked this to a public statement of Lew’s intentions for the DJs scheme, namely that he also would not vote at the scheme meeting.

We assume that Woolworths could not obtain a public statement from Lew that he would, in the absence of a superior proposal accept $17 per Country Road share and not vote at the DJs scheme meeting. So it took a chance and launched the takeover anyway, entering into a public negotiation with Lew. However, if a bidder in Woolworths’ position wanted certainty, it could have insisted on the public statement before launching the Country Road takeover.  If it had done that, there is nothing in the Court decision on the DJs scheme to suggest that this statement would have prevented the Court from approving the scheme. Although the Court did not need to consider this, we think that as long as the disinterested DJs shareholders who voted at the scheme meeting remained adequately informed, neither public statement by Lew would have been class creating. A public statement by Lew would have been disclosed to shareholders and satisfied the requirement that the disinterested shareholders remained adequately informed.

Issue 2: managing benefits in the scheme process

The general takeover restrictions did not apply to Lew’s holding in DJs. This is because Woolworths did not yet have a relevant interest in 20% or more of the DJs shares (nor would it if it obtained a relevant interest in all of Lew’s shares in DJs because Lew only held 9.89% in DJs).

Even where the takeover restrictions do not apply, bidders entering into pre-scheme agreements with substantial shareholders must still be careful to ensure their actions are not “class creating” or that processes are put in place to allow the remaining shareholders who will not share in the benefit to approve the transaction.

In DJs, the Court has provided further guidance on how bidders can ensure they achieve these two goals where there is a net benefit to some (but not all) target shareholders in the scheme.

One of the issues in the final court hearing was whether the Court should adjourn the final court hearing to approve the DJs scheme until the independent expert report on Country Road was available. This was on the basis that the independent expert report on Country Road would have been the best information available to DJs shareholders about the nature and extent of any possible collateral benefit to Lew. As Farrell J held, what “weighed in favour of making the orders to approve the [DJs] Scheme without adjournment” was that:

  1. the target shareholder (the Lew entities) receiving the benefit did not vote on the resolution to approve the scheme;
  2. although an independent expert’s report is the best way to communicate to shareholders the nature and extent of a possible collateral benefit, supplementary disclosures were sufficient in overcoming this by communicating the net benefit to remaining shareholders;
  3. the Scheme was passed by the remaining shareholders by a substantial majority;
  4. ASIC did not oppose the Scheme;
  5. no DJs shareholder appeared at the final hearing to oppose the Court making orders to approve the Scheme; and
  6. the directors of DJs did not change their recommendation; and
  7. the independent expert maintained its conclusion on DJs that the $4 per share scheme consideration was fair and reasonable.

This is consistent with what we would expect. It does not change our analysis on the public statement being a viable option to ensure bid certainty. Namely, where there is a net benefit to a target shareholder, bidders need to ensure that the fairness issue is adequately dealt with so there are not differences which are “class creating”. Also processes must be established by the scheme company to “tag” votes of interested shareholders or for interested shareholders to abstain from voting. This can be achieved by:

  1. taking every step (whether by an independent expert report or in the supplementary disclosure materials) to fully and frankly disclose the net benefit to the disinterested shareholders; and
  2. ensuring the shareholder receiving the benefit does not vote at the scheme meeting.

Provided these precautions are followed the courts should take a commercial approach to collateral benefits in schemes of arrangement. In DJs, each of the DJs independent expert, the board of directors of DJs and almost all of the shareholders maintained that this was a good deal for DJs shareholders. The Court did not stand in the way of these facts.