There has recently been an increased focus by regulators and market participants on the adequacy of Australia’s takeover laws regime following some high profile corporate manoeuvres including Gina Rinehart increased shareholding in Fairfax Media and James Packer’s move up the share register of Echo Entertainment as well as the widespread use of bear hugs in unsolicited takeover approaches.
In July 2012, the ASIC chairman surprised the market by publicly raising various issues and concerns with aspects of our takeover laws. In response, the Department of the Treasury recently issued a ‘Scoping Paper’ as the first step in a consultation process on possible changes to some key parts of Australia’s takeovers regime in the Corporations Act. The Scoping Paper acknowledges that the current framework has been “largely successful” in giving effect to the ‘Eggleston Principles’ which form the basis of the takeovers provisions. However, the purpose of the consultation process is to ensure that the law continues to operate effectively in response to market developments. Treasury, with the assistance of ASIC and the Takeovers Panel, has now invited practitioners to roundtable discussions in Sydney, Melbourne, Perth and Brisbane to be held in the next 2-3 weeks.
One thing strikes us upfront - it is a curious time to be raising concerns and instigating discussion on our takeover laws.
M&A activity is clearly down. The world, including Australia, continues to face challenging financial and economic times. In this context, one may suggest that any discussion of takeover law reform needs to have a key focus on efficiency of markets and stimulating activity, not on making it harder to get deals done. We are not suggesting that the proposed reforms are intended to make it harder, just that any discussion of reforms needs to be undertaken with the bigger picture in mind.
The key question, of course, is: is takeover law reform actually needed?
Even if it is, given the delicate balance of our current Parliament, an election year next year, the lack of votes in takeover law reform and the recent history of proposed takeover and scheme reforms not proceeding, will law reform happen any time soon?
In this context, it is interesting to see the issues raised in the Scoping Paper namely:
This concerns possible reform to the 3% ‘creep’ exception. On reaching the takeover threshold of 19%, this exception allows a shareholder to acquire a further 3% every 6 months without having to make a takeover bid. The ASIC chairman raised concerns with this exception as it can allow takeovers by stealth and without a control premium being paid. The call for change here seemed to follow Ms Rinehart’s acquisition of a substantial shareholding in Fairfax Media and James Packer’s increased shareholding in Echo Entertainment. It is important to note that both Ms Rinehart and Mr Packer’s shareholdings are currently well below 20%. Indeed, acquiring control of a company in reliance on a 3% acquisition every 6 months requires some patience.
In this respect, is there really any need for change here? Maybe not but our 3% creep rule is somewhat out of step with other jurisdictions (such as the UK).
There is also potentially some inconsistency between the exception and the underlying principles of our takeover provisions which require that all shareholders have the opportunity to participate equally in the benefits of any change of control proposal. It may be that there is a case to change the 3% every 6 months to say 1% every year.
The use and disclosure of equity derivatives
The current substantial holding provisions do not extend to certain derivative arrangements like cash settled equity swaps. The use of swaps is becoming an increasingly common way of acquiring a pre-bid stake eg Archer Daniels Midland used swaps in acquiring a pre-bid stake/exposure in Graincorp prior to its recent takeover approach.
While the current law doesn’t extend to certain derivatives, the Takeovers Panel guidance note on the matter does require disclosure in the context of takeovers, failing which unacceptable circumstances exist.
The Takeover Panel guidance note seems to be working well. Nevertheless it would be preferable to see the disclosure requirements in the law rather than in a guidance note.
Clarity of takeover proposals
The requirement in section 631 of the Corporations Act to make a takeover offer within 2 months of the announcement of a takeover proposal does not apply to scheme of arrangement proposals or to appropriately crafted conditional and incomplete takeover proposals. The question then is should section 631 be extended to such proposals and/or should Australia adopt a UK style ‘put up or shut up’ (PUSU) rule (see our previous article ‘Putting your money where your mouth is: is there a case for a “put up or shut up rule” in Australia?’) which would require a potential bidder to confirm within 28 days of the announcement of a potential bid either that it will “put up” (ie proceed to make a bid) or “shut up” (ie not bid and be prevented from bidding for 6 months)?
Some of the calls for such changes come from perceived concerns about the increased use of bear hugs and the belief that protracted takeover discussions or speculation can have a distracting and debilitating effect on targets, for example, as some say occurred in the PEP/Spotless takeover and more recently the Billabong situation. In our view, these effects are often overstated.
The writers’ view is that any move to extend section 631 or adopt a PUSU rule would be to unnecessarily make it harder to get value enhancing takeover bids up. It would shift the balance unfairly in favour of targets. Target companies, like Spotless, would then be able to just say “No” to attractive takeover proposals (which may require due diligence) and allow the clock to run down to the time when the bidder would just have to walk away, potentially destroying shareholder value.
Should we really be making it harder for bids to get up at a time when we need more activity and stimulus?
Under the current provisions in the Corporations Act (and as has been acknowledged by the Takeovers Panel), associations are “notoriously difficult” to prove and to enforce.
In 2011, a large amount of the Panel’s time was occupied by association cases, with 10 out of its 16 decisions concerning this subject matter. These matters necessarily involve volumes of evidence and other materials which need to be processed and considered by the Panel (see our previous article ‘Suspicious conduct: associations or just mere coincidences in Viento, Brockman and CMI?’). It is therefore no surprise that Treasury has highlighted this as an area for potential reform. We agree. Based on recent experiences we definitely see this as an area where reform is needed to avoid shareholders individually holding less than 20% acting together to exert control over a company without launching a takeover bid.
In contrast to Australia, the UK Takeover Code has a more prescriptive approach and contains a number of rebuttable presumptions about when parties will be assumed to be associates. For example, a company will be assumed to be acting in concert with any of its directors (together with their close relatives and related trusts) unless the contrary is established. The UK Takeover Code also presumes family members to be acting in concert unless the contrary is demonstrated.
Other parts of our Corporations Act already recognise an alignment of interests between family members. For example, the director remuneration provisions prevent family members and other ‘closely related parties’ of key management from voting on a company’s remuneration report. Similarly, the related party provisions in Chapter 2E also deem family members to be related parties of directors and prevents them from casting votes on related party transaction resolutions. In this respect, there seems some inconsistency between such deeming provisions and the approach to associations in relation to Chapter 6. Adopting rebuttable presumptions of associations could be one direction to take. It would ease the evidentiary burden on parties alleging association. It would also provide market participants without sinister motives with a much clearer position on how to structure their affairs.
Impact of new media
The Treasury also seeks views on the use of social and other new media and the dissemination of potentially price sensitive information through an increasing number of channels – some of which are notoriously less reliable. How listed companies respond to rumours outside conventional news channels is of general interest. The curious case of the EB private equity bid for David Jones (see our previous article: ‘Takeover approaches: To disclose or not to disclose’) and the recent revised guidance from the ASX on continuous disclosure (which was very welcome) concern these matters. Some further guidance from ASIC on its approach to infringement notices for breach of continuous disclosure obligations would also be welcome.
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The Treasury Scoping Paper is an initial indication of where the consultation process will focus and does not itself seek to provide guidance about what changes may be proposed.
Treasury has said it will undertake a thorough and methodical analysis of the issues raised in the Scoping Paper, based on extended consultation with industry, before it provides its advice to the Government on potential reforms.
No doubt it is a good thing to assess the adequacy of our takeover laws from time to time.
However, while change may be in the wind and in newspaper headlines, given the inevitable variety of industry views, the delicate balance of power in our Paliament and its effect on the legislative process and the lack of votes in takeover reform as an election year approaches, it is likely to be some time before any substantive changes to the takeovers laws comes to fruition.
Whatever the case, one thing is very clear to us in these uncertain financial and economic times. That is, we should stay well clear of any reforms which make it harder for bidders to get bids up (as the recent UK takeover law reforms seem to have done) and/or which deter activity.