This article explains how a market bid (also known as an on-market bid) can be used to acquire control of a listed Australian company.
What is a market bid?
Takeover bids are the most common way in which control of Australian listed companies and managed investment schemes is acquired.
There are two types of takeover bids: off-market and market bids (also known as on-market bids). Market bids are far less common than off-market bids, with only 16 market bids announced between January 2015 and December 2017.
A market bid is a procedure under Chapter 6 of the Corporations Act under which a bidder appoints a stockbroker to stand in the market on ASX and purchase target securities on behalf of the bidder.
A market bid can therefore not be used in respect of a unlisted target company or unlisted managed investment scheme.
Under a market bid, the stockbroker will place a 'buy-order' on the ASX trading platform at a price equal to the bidder's offer price. As a market bid must be an offer to buy all of the securities in the bid class, the buy-order will typically be for all of the quoted securities in target.
Although it is common to describe 'acceptances' of a market bid, target securityholders do not accept the bidder's offer as such, rather they simply sell their securities on ASX to the bidder at the offer price. Settlement takes place on a T+2 basis in accordance with the ASX's rules on settlement.
Because a market bid is conducted through the ASX's trading platform, the offer price must consist of cash consideration only and the offer cannot be subject to any conditions. These limitations are seen as the key disadvantages of a market bid compared to an off-market bid and help explain why market bids are far less common than off-market bids.
Whilst the bidder cannot include conditions in a market bid, the bidder may withdraw its bid if certain specified events, known as 'prescribed occurrences', occur before the bidder's voting power in target exceeds 50%. The prescribed occurrences most notably include an issue of shares or convertible securities by target or a subsidiary, a capital reduction or buy-back by target or a subsidiary, a conversion of target shares into a larger or smaller number, or target or subsidiary becoming insolvent.
The key advantage offered by a market bid is speed – once the market bid is announced to ASX, the bidder's stockbroker can commence buying target securities within an hour. In comparison, under an off-market bid, the bidder's offer cannot open for acceptance until 14 days after its bidder's statement is given to target (unless the target agrees to shorten that time period). Occasionally, off-market bidders who are prepared to make unconditional offers or offers subject only to a no 'prescribed occurrences' condition, will utilise their ability to stand in the market and make on-market purchases at the bid price once the bid period is open. The recent UGL takeover successfully implemented this strategy.
Given the potential speed of a market bid and their unconditional nature, a market bid can be an effective strategy if a bidder's ultimate objective is to not necessarily acquire control of the target – i.e. if bidder regards ‘success’ as something less than even a 50% shareholding in target.
As a market bid is driven by the bidder and does not require target consent or co-operation, it can also be used for a 'hostile' acquisition of a target. If the target board recommends that target securityholders accept the bidder's offer from the outset, the market bid is considered 'friendly'.
In fact, it is far more common for a market takeover bid to be hostile than friendly: all 16 of the market bids announced between January 2015 and December 2017 were hostile, that is, not being recommended by target on first announcement of the bid.
Further, it is far more common for a market takeover bid to be made for a smaller-cap target company. Of the 16 market bids announced between January 2015 and December 2017, only five had a deal value of over A$50 million based on the bidder's offer price.
Offer process for a market bid
Before a market bid is launched, the bidder will need to appoint an ASX 'Market Participant' (i.e. a stockbroker) to act on its behalf in relation to the market bid. This is typically achieved by the bidder and a stockbroker entering into a written agreement.
The stockbroker acting for the bidder is required to announce the market bid to ASX. That announcement must state key information about the market bid, including the cash offer price, the date of open and close of the bidder's offer period, and the bidder's existing relevant interest in target securities.
The bidder is also required to announce the market bid to ASX – this is usually achieved by the stockbroker and bidder releasing a joint announcement.
On the same day that the announcement is made, the bidder must give a copy of its bidder's statement to the target, release it electronically to ASX and lodge a copy with ASIC.
Usually, the bidder's statement is attached to the announcement of the market bid made by the stockbroker and the bidder, but it is open for the bidder to delay the release of its bidder's statement until later in the day (to avoid the target seeking to restrain on-market purchases under the market bid on the basis of defective disclosure in the bidder's statement).
The bidder's statement generally contains all information known to the bidder that is material to a target securityholder's decision whether to accept the offer, as well as specified information including:
- information about the bidder;
- how the bidder will fund any cash consideration;
- details of the bidder's intentions regarding the target's business, assets and employees; and
- details of any acquisitions of target securities by the bidder or its associates in the previous four months.
The bidder must then mail the bidder's statement to target securityholders within 14 days after the announcement of the market bid is first made. The offer period commences once the bidder's statement is mailed to target securityholders. However, during that period of up to 14 days before offer period commences, the bidder is free to acquire target securities on-market at the offer price.
The target must respond to the bidder's statement in a document that is mailed to target securityholders called a 'target's statement'. The target's statement must be sent to target securityholders within 14 days after the announcement of the market bid is first made. The target's statement must also be sent to ASX, the Bidder and lodged with ASIC. The target's statement contains the target directors' recommendation on whether to accept the offer, and usually an independent expert report valuing the target securities.
The bidder's ability to acquire target securities on-market from announcement of its market bid is a key strategic advantage for the bidder – in one recent market bid, control of the target passed to bidder within a week of announcement, which is well before the 14 day deadline for the target's statement to be sent. As such, it is common for the target Board to immediately respond to the market bid in a short-form announcement advising target securityholders what they should do in response to the market bid in advance of the target's statement being sent.
The bidder will typically set an offer period of one month, but is it common for several extensions to the offer period to be made by the bidder during the course of the market bid to allow target securityholders more time to accept. The maximum offer period, including extensions, is 12 months.
The bidder may increase its offer price at any time before the last five trading days of the offer period. If the bidder does so, unlike for an off-market bid, the bidder does not need to pay the increased consideration to target securityholders who accepted the market bid before the price increase. That can make an on-market bid cheaper for the bidder than an off-market bid.
Once the bidder reaches ownership of 90% of all target securities, the bidder may commence the process of compulsory acquisition of all remaining target securities not held by the bidder in return for payment of consideration equal to the offer price. The compulsory acquisition process involves the bidder sending notices to all remaining target securityholders and a period of time during which any remaining target securityholders may object to the Court.
Delisting of target from ASX will usually take place soon after completion of compulsory acquisition.
Indicative timetable for a market bid
The timetable for a market bid is largely prescribed by law, as described above. But the timing is uncertain as the offer period is typically initially set at one month, but is often extended a number of times, and can be followed by four to six weeks of compulsory acquisition.
As a result, a market takeover bid followed by compulsory acquisition usually takes about three months to complete, but there is potential for a market bid to be much faster. In one recent market bid, the bidder secured control of target within a week of launch and reached the 90% compulsory acquisition threshold in 3 weeks.
Because a market bid cannot include conditions, if the bidder requires regulatory approvals such as FIRB or ACCC approval, these will need to be obtained before the market bid is first announced.