- ASIC Chairman Greg Medcraft has recently re-opened the debate on whether Australia needs a ‘put up or shut up rule’ by including it as one of his suggested reforms to the takeover rules.
- Such a rule has been proposed on a number of occasions in recent years, especially as ‘bear hug’ proposals have become common.
- A put up or shut up rule would seek to balance a perceived tactical advantage a bidder has over a target company at the early stages of a potential change of control proposal.
- The key issue is whether introducing a put up or shut up rule in Australia would solve the issues it seeks to address.
What is the ‘put up or shut up’ rule?
A ‘put up or shut up’ rule essentially requires a bidder to formalise an offer within a set time period (say, 28 days) or become barred from making a bid for a longer period (say, 6 months).
The rule is intended to prevent a target being under siege for an indefinite period, which can have an adverse impact on the target’s business by destabilising staff and customers.
Details about how a rule would operate here are vague, so it is interesting to see how it works in the UK, one of few jurisdictions to have such a rule.
The UK rule has the following elements:
- It applies only if a bidder is named publicly as a possible bidder under a takeover bid or acquirer under a scheme of arrangement.
- This includes where the bidder is named by the target or by the bidder voluntarily or if the Panel requires disclosure following a leak.
- Once named, the bidder must, by the end of 28 days, announce a formal offer or that it does not intend to make an offer.
- The 28 day deadline can be extended by the Panel on request from a target company, but not a bidder.
- If the bidder announces that it does not intend to make an offer, it cannot bid for 6 months, subject to certain exceptions, including where the target agrees to a new bid (and the Panel consents, which it normally will) or another potential bidder makes a firm takeover offer.
If the bidder requires due diligence and/or a board recommendation (such as a ‘bear hug’ scheme proposal), the bidder will be forced to announce that it will not proceed unless the target agrees to grant due diligence or recommend within the 28 day period.
If due diligence is granted, the target would seek, and the Panel would grant, an extension to the 28 day deadline to allow due diligence to be completed so a formal bid can be announced.
The UK Panel plays a key role in policing the rule, including deciding when a potential offer has to be disclosed publicly, and providing contemplated consents such as consenting to an extension to the 28 day deadline.
Would a ‘put up or shut up’ rule work in Australia?
We question whether a put up or shut up rule would solve the issues it is meant to.
It is sometimes said that such a rule could be introduced by expanding section 631 of the Corporations Act, which requires a person who ‘publicly proposes’ to make a takeover bid, to actually make the bid within 2 months.
The shortfall some see with this rule is that it only applies to a complete, definitive takeover proposal. It does not have any application to incomplete, non–binding takeover proposals or ‘bear hug’ scheme proposals which have become common over the last few years.
We consider that it would not be an easy matter to extend section 631 to scheme proposals. For a start, it would be contrary to public policy to force a person to proceed with a hostile takeover bid when what they proposed was a friendly deal. The damage to the bidder could be irreparable. Further, it may tend to force acquirers proposing a scheme and target receiving proposals to maintain absolute confidentiality of the proposal to avoid triggering section 631. That would be contrary to the policy of having an informed market.
In any event, we doubt a put up or shut rule would have much impact in Australia.
First, for so long as a material portion of the shareholder base supports the board engaging with a potential bidder, the fact that the bidder has been ‘shut out’ by the target board’s failure to engage within the 28 day period would be unlikely to deter those shareholders from continuing to encourage or pressure the board to engage.
If, as in the UK, the rule allowed the target company to request that the Panel extend the deadline or, where the deadline has passed, lift any restriction on the bidder’s ability to make a bid, shareholder pressure would continue, as would market speculation. Little would be gained. This is borne out in the UK experience, where a significant proportion of boards agree to extend the deadline, presumably due to market factors.
Secondly, if the rule was stricter and did not allow extensions, it may have the effect of deterring private equity bidders from participating in the market, as they will generally always require due diligence access to undertake their bid.
Thirdly, the UK put up or shut up rule is one element of a timetabling system designed to avoid takeovers dragging on and to bring matters to a head quickly – this being the primary purpose of the rule’s introduction. Australia’s regime is different. Here, bids may be open for up to 12 months. Therefore, even if the bidder does ‘put up’ and make a hostile bid, a target may still face a long drawn out hostile bid.
Finally, in order to implement an effective put up or shut up rule either ASIC or the Takeovers Panel would need to take an active role in policing it, and providing approvals to act outside the rules. In Australia neither regulator is currently resourced to fill this role. This is unlike in the UK where the Panel is a well resourced, one stop shop for takeovers. This is a significant and important distinction between Australia and the UK in the context of considering adopting any UK takeover rules in Australia.
We doubt a put up or shut up rule is an easy way to alleviate concerns that target companies are disadvantaged under current rules. So long as shareholders are willing to express their views about prices at which they wish to sell and those views differ from the board’s view of value, an incentive exists for takeover and scheme proposals to be drawn out.
Input was also received from Herbert Smith