Treasury has identified five areas it is considering as possible areas requiring reform.
On 5 October 2012, Treasury released an initial scoping paper in respect of potential reforms to Australia's takeover laws. Back in July, ASIC Chairman Greg Medcraft conducted a widespread media campaign expressing ASIC's views on the failings of the takeover laws to deal appropriately with a number of trends which had developed in recent times in Australia's M&A market. ASIC then made private submissions to Treasury regarding the areas where it considered that the takeover laws needed modernising. The release of this paper by Treasury is the first the market has officially seen of the ASIC concerns.
Having now considered ASIC's submissions, Treasury has identified five areas it is considering as possible areas requiring reform:
1. Creeping acquisitions
The creep exception to the 20% takeover threshold allows a shareholder to increase its shareholding above the 20% threshold by 3% every six months. ASIC believes this exception is contrary to the spirit of the takeover laws because it allows a shareholder to acquire a controlling stake without making a formal takeover bid, avoiding having to pay a full control premium, without all shareholders having an equal opportunity to participate in the transaction and without the target having the opportunity to respond.
There is no real evidence that this exception has in the past been used to allow surreptitious acquisition of control in circumstances where the market remains in the dark as to the ability of the shareholder to creep. Acquiring control using the creep exception is a very slow process – it takes over five years to move from 20% to 50% relying only on the creep exception. And each 1% acquired by the shareholder needs to be disclosed to the market. If the exception is being used in this way, it will be very clear to the market what is happening, meaning the target can advise its shareholders as it considers appropriate, and the market can factor this into account in pricing the shares available for sale.
In the absence of compelling evidence that the creep exception is being used to avoid the general intent of the takeover laws, it is our view that it is a useful and important exception to the 20% threshold which supports efficient capital markets and promotes greater liquidity for companies that have major shareholders.
2. Equity derivatives
Consideration is being given to whether equity derivatives, which don't otherwise give rise to a relevant interest (for example, because they are compulsorily cash settled), should be disclosed under the substantial holding provisions of the Corporations Act.
Equity derivatives can be used by a bidder to build up an economic prebid stake in the target so as to reduce the overall premium it would be required to pay or to create a blocking stake through the hedging activities by the writer of the derivative. The Takeovers Panel guidance requires disclosure of such equity derivatives where they are entered into by a person who has a control purpose. The real issue for consideration therefore is whether this guidance needs to be taken further and made part of the law. If it is made part of the law, it may be that the control purpose qualification to the Panel's guidance will be foregone, on the basis that it is too vague and uncertain a concept to have in what is otherwise a black letter law disclosure obligation.
3. Clarity of takeovers proposals
While the press reported that the Chairman of ASIC was pushing for the introduction of a "put up or shut up" rule as applies in the UK, the issues identified by Treasury fall somewhat short of suggesting that such a rule might be desirable. Instead, Treasury is focusing on the issues caused by the current market practice of bidders delivering indicative, non-binding and highly conditional takeover proposals to targets, forcing their public disclosure and thereby engaging the target in a bear hug.
The concerns here are based on the effect of these proposals on market integrity and focus on two issues:
- first, the vague, highly conditional and non-binding nature of such proposals, with the bidder having no obligation or timeframe within which to proceed with an offer; and
- second, the disclosure of these proposals which may apply inappropriate pressure to the parties in dealing with and responding to the proposal and fuels speculative trading in the target's shares.
The revised guidance on continuous disclosure that was issued by ASX on 17 October 2012 will go some way to alleviating the second issue, although its ability to do so will be dependent on the desire of both bidder and target to keep the proposal confidential. ASX has expressly stated that confidential takeover proposals do not need to be announced to the market until the parties are committed to proceed with the transaction. This position is, however, dependent on the proposal remaining confidential.
In any event, we suggest that it is shareholder activism, particularly where driven by the short-term performance benchmarks many fund managers are trying to meet in a flat or declining market, which is the most significant factor causing the prevalence of bear hug proposals1 and the siege on targets which results from them. In the current market environment, investors are looking for short term returns, which puts pressure on target boardsfaced witha proposal that offersthose returns but fails tomatch the board's view on fundamental value. While this debate may result in some in the market advocating the need for a put up or shut up rule, the current disconnect between investors' and target board's views on value won't be fixed by requiringproposed bids to bemore certainor imposing a put up or shut up rule.
Treasury has put on the table an issue which the Takeovers Panel has been wrestling with for some time now, being the difficulty in proving whether an association exists where the evidence of such association is merely circumstantial.
If the association rules cannot be effectively enforced (and the Takeovers Panel has particular difficulty in this regard given the nature of its proceedings and its general reluctance to compel the giving of evidence), the concern is that shareholders who individually hold less than 20% of a company will be able to improperly act together to exert control over the company in breach of the takeover laws.
There is no suggestion that the current laws which define when an association exists are inadequate. That being so, any fix identified is likely to centre around how you prove the existence of an association and will perhaps see the proposal of a rebuttable presumption or some other reversal of the onus of proof if circumstantial evidence points to the existence of an association.
5. Impact of new media
ASIC and ASX are concerned about the ability of listed companies to properly manage their continuous disclosure obligations given the increasing number of channels through which rumours can now circulate with the proliferation of social media. It is not clear whether any law reform proposals will be necessary to address this concern, and it is certainly not clear whether any law reform is even capable of doing so. With ASX about to release a new guidance note on continuous disclosure, which ASIC has had significant input to, it may be that this issue will be dealt with by further guidance dealing with these issues.
The Treasury scoping paper will form the basis of a series of targeted roundtables which Treasury will convene with key business, legal and markets stakeholders to discuss ASIC's concerns. The outcome of the roundtable series will then inform a more comprehensive discussion paper on ASIC's recommendations and potential policy responses, as part of an extensive engagement process with the business community, legal experts and other interested parties.
Treasury has positioned this scoping paper as identifying concerns which have arisen due to changes in market dynamics over time and in respect of which the old world takeover laws may no longer be capable of appropriately regulating. We see it slightly differently – when looking at the current regime of the takeover laws, Takeovers Panel guidance and ASX guidance, it appears that we already have an adequate regime and structure within which to address these issues. Having said that, changes in market dynamics may have exacerbated some of these issues and, in particular, made it difficult to effectively enforce the current regime in all circumstances.
In the current environment with M&A activity at an all time low, we question whether it is the right time to be changing the rules, particularly where a number of the changes being considered are likely to increase the hurdles for bidders and may therefore further stifle activity.