Nearly 2 years of record-breaking public M&A activity in Australia has put pressure on Boards to respond to changing tactics from increasingly aggressive bidders. There are some new lessons for Boards while other long-held truisms have been reinforced.
Boards of bidders should also be across how the target Boards are reacting (or can be expected to react) when they authorise a proposal to be delivered.
You’re never too big for someone to take a punt
Most Boards have now accepted the reality that, with some exceptions, almost no Australian listed company is too big to be taken over. In recent times, there has been no shortage of cash or scrip for hungry bidders to throw around, no matter the size.
Last year alone in Australia, public M&A records were smashed when Afterpay was acquired by our firm’s client Block (formerly Square) under a scrip deal worth approximately A$39 billion. A consortium of super funds and infrastructure investors also acquired Sydney Airport for almost A$25 billion in cash.
The pace of public M&A has slowed in Australia in recent months but at the same time, there’s little evidence of a corresponding significant reduction in the availability of large pools of capital. Recent activity – including the unsolicited approaches for Tyro Payments and Nitro Software - illustrates that private capital firms and funds are still willing to move where they see opportunities.
In this environment, ASX-listed company Boards should not be complacent in thinking that no bidder (or consortium of bidders) will ever come knocking. The lesson is simple - be prepared for a whole-of-company proposal.
Plan efficiently and keep your planning up to date
Belts and braces takeover response plans used to run for pages and pages. They canvassed various potential control-transaction scenarios and the range of response actions in considerable detail.
It’s time to revisit that approach and start again. Takeover preparedness should focus on a succinct and clear set of actions and principally address surprise offers.
Response plans should be short and focus on key issues. Things to think about include:
maintaining an up-to-date valuation so that you can quickly assess the financial merits of a surprise offer
monitoring potential vulnerabilities, competitor dynamics and the regulatory landscape so you can identify and respond to red flags
deciding which executives should be in the tent if an offer comes in
preparing leak response and communications protocols
identifying and, if appropriate, locking in advisers – you want the best teams in your corner.
ASX-listed company Boards don’t need to know the detail of a response plan, but (particularly if red flags start to appear) they should understand the state of the company’s defence preparedness and how it’s tested and kept up to date.
Don't assume confidential approaches will stay confidential
The standard playbook for ‘friendly’ bids involves a Friday night call to the Chair and/or CEO with a confidential non-binding indicative whole-of-company offer. Long weekends are popular.
While the black-letter law view may be that the receipt of such a proposal is not disclosable, our surveying of recent public M&A data shows that confidential approaches often get “outed” before a deal is done. ASIC has previously formed the view that Australia is a ‘leaky market’.
This dynamic was particularly the case for larger listed companies in the recent M&A frenzy. Of 12 successfully announced significant ‘Aussie’ public M&A deals in the last 2 years, 8 were publicly “outed” before a definitive, legally binding transaction document was signed. There are a number of reasons for disclosure which include leaks, as well as an interim announcement of access to due diligence, the granting of exclusivity or a process deed.
The bottom line for target company Boards (and also bidder Boards) is that you may not always control the disclosure decision of a potential deal.
What you say matters as much as what you do
There’s a lot of law and lore relating to directors’ duties and responsibilities in response to a whole-of-company proposal. It’s clear from both Australian case law and Takeovers Panel decisions that there’s no hard rule that an ASX-listed company Board must engage with a potential acquirer. Whether or not to engage, and when and how to engage, are questions that need careful assessment in all the circumstances.
However, the rules of engagement are only one half of the story. The other half is disclosure, and in our view that’s where a significant legal risk exists. Australia has one of the strictest regimes for disclosure-based liability. What Boards say on ASX (and elsewhere) in relation to an acquisition proposal – whether recommending, rejecting or otherwise – must be accurate and not misleading including by omission. Liability for misleading statements is not merely an issue for the company. As we have written elsewhere, ‘stepping stones’ liability can arise for company directors who fail to prevent the company from making misleading statements.
In the face of whole-of-company proposals, ASX-listed company Boards should seek comfort that company officers and advisers are all aligned on any response strategy and that appropriate discipline is applied in responding to any proposal.
Get ready for the dancefloor
Despite the hype in the press, hostile transactions are relatively rare. Trade buyers and financial sponsors have taken a more nuanced approach to deal-making which typically involves an invitation to participate in an unsolicited – but not hostile – dance. What’s appropriate and what’s lawful on the deal dancefloor needs careful thought and advice including on issues such as:
the scope of confidentiality obligations and ‘standstill’ commitments
the scope and duration of access to management and due diligence information
exclusivity – is a period of ‘hard’ exclusivity before an agreed deal ever justifiable?
There are a number of traps for Boards of ASX-listed entities responding to an unsolicited offer. Inadvertently handing over control of the dance and divulging confidential information to tyre-kicking third parties is a key trap. On the other hand, flatly saying no to any dance also has its risks. There are recent examples of bidders taking bold steps in the Australian market, from acquiring cornerstone stakes through swaps and after-market raids to engaging in media and other activists tactics. We expect the dance moves to evolve as macroeconomic forces and sector trends change the buy- and sell-side dynamics. For Boards, having the right advisers help anticipate and navigate the moves on the dancefloor is key.