Mariner Corporation Limited (Mariner) announced an intention to make an off-market takeover bid for Austock Group Limited (Austock) on 25 June 2012.
Mariner’s proposed offer price of 10.5 cents per share valued Austock at more than $14 million. This compared to Mariner’s market capitalisation of $3.5 million.
In the announcement of its proposed bid, Mariner stated that the offer would be conditional on, among other things, Austock not acquiring or disposing of any assets or business (Disposal Condition).
On 9 July 2012, Austock announced that it had agreed to sell its funds management business to Folkestone Limited (Folkestone) for $11 million. The Folkestone sale was conditional on Austock shareholder approval. A break fee of up to $500,000 was payable to Folkestone in certain circumstances if the sale did not complete.
On 12 July 2012, Mariner made an application to the Takeovers Panel (Panel) submitting that the Folkestone sale gave rise to unacceptable circumstances because:
- the sale was intended to defeat Mariner’s proposed takeover bid; and
- the break fees agreed by Austock were uncommercial and intended to make any alternative proposal costly.
In addition to considering the matters raised by Mariner, the Panel conducted proceedings in relation to the funding and conditions of Mariner’s proposed bid.1
An unfunded bid
A person must not publicly propose to make a takeover bid if the person is reckless as to whether they will be able to perform their obligations in relation to the takeover bid (that is, to pay the bid price) if a substantial proportion of the offers under the bid are accepted. As described in its Guidance Note 14: Funding Arrangements, the Panel considers that when announcing a bid, the bidder must either have already made binding arrangements to obtain sufficient funding or have a "reasonable basis" to expect that it will have sufficient funding arrangements in place to satisfy full acceptance of its offers when the bid becomes unconditional.
Shortly after Mariner’s announcement of the proposed bid, ASIC made inquiries of Mariner as to its capacity to fund the offer price. In response to these inquiries, Mariner indicated that it had intended to obtain bridge financing to fund the bid and to repay that financing from the proceeds of the sale of certain of Austock’s businesses (including the funds management business). Mariner conceded that it had announced its proposed bid before settling any financing arrangements. It argued that the announcement of the Folkestone sale had frustrated its attempts to conclude either bridge financing or arrangements to dispose of any of Austock’s businesses. ASIC submitted to the Panel that Mariner’s proposed bid had not been properly funded. The Panel agreed and made a declaration of unacceptable circumstances.
As the Panel noted in the reasons for its decision in the Austock matter, announcing or making an unfunded bid is a serious matter. While there is nothing wrong with funding a takeover bid by means of a bridge facility (indeed, the use of such facilities has been a feature of a number of recent hostile bids, including Dulux’s bid for Alesco and the Crescent Capital led bid for ClearView), a bidder in need of funds to complete its bid must at least have a binding commitment from its financier to provide the required funding by the time it announces the bid. Mariner had no such commitment in place and did not include a financing condition in its proposed offer terms. In the circumstances, it would seem clear that the Panel correctly concluded that Mariner should not have announced its bid.
Folkestone sale a frustrating action?
As stated by the Panel in its Guidance Note 12: Frustrating Action (GN12), an action that triggers a condition of a takeover bid is a frustrating action, but whether the action gives rise to unacceptable circumstances will depend on its effect on shareholders and the market in light of the purposes of Chapter 6 of the Corporations Act, which include that the acquisition of control over the voting shares in a listed company takes place in an efficient, competitive and informed market.
Mariner submitted that the announcement of the Folkestone sale had frustrated its potential bid and had resulted in it being unable to finalise the funding arrangements for the offer. It submitted this gave rise to unacceptable circumstances. It also submitted that the high break fee payable to Folkestone left Austock’s shareholders with no commercial alternative but to approve the sale.
While Austock’s announcement of the Folkestone sale meant that Mariner was not obliged to proceed with its proposed bid because that sale amounted to a material breach of a commercially significant condition of the proposed bid, the Panel concluded that the sale to Folkestone did not constitute an unacceptable frustrating action. This was because the Folkestone sale could only proceed if it was approved by Austock’s shareholders and, as explained in GN12, if a frustrating action creates a choice for shareholders between two proposals, the frustrating action will not generally give rise to unacceptable circumstances.
The Panel also concluded that the break fee potentially payable to Folkestone did not unduly fetter Austock shareholder’s choice whether to approve the Folkestone transaction or to allow Mariner’s proposed bid to proceed, but only after Folkestone gave an undertaking to the Panel not to enforce more than $250,000 of the break fee payable. This was notwithstanding that, even as reduced by the undertaking, the break fee amounted to about 1.5% of Austock’s market capitalisation. In reaching this conclusion, the Panel noted that it is not unusual for costs actually and reasonably incurred in small transactions to exceed the Panel’s 1% guideline and had regard to evidence from the parties that Folkestone’s actual costs exceeded the amount of the break fee. The Panel did not comment on whether it would have reached a different conclusion in the absence of Folkestone’s undertaking to not enforce the full amount of the $500,000 break fee (which amounted to approximately 3.3% of Austock’s market capitalisation).
“Hair trigger” condition
Offers under an off-market bid may be made subject to defeating conditions, subject to certain restrictions. A number of those restrictions arise under the Corporations Act and include that an off-market bid must not be subject to the fulfilment of a defeating condition if the fulfilment of the condition depends on the bidder’s opinion or belief (see section 629(1)(a) of the Corporations Act). In NGM Resources Limited [ 2010 ] ATP 11 (NGM), the Panel stated that there is a policy of certainty inherent in the requirements of Chapter 6 for takeover bids and that if a bid condition is too broad or vaguely drafted it risks offending this policy and may therefore be unacceptable.
In its announcement of the proposed bid, Mariner stated that the offer would be subject to a number of conditions, including the Disposal Condition. The Disposal Condition contained no express materiality requirement. Austock submitted that the terms of the Disposal Condition gave too much discretion to Mariner as to whether or not to proceed with its bid. While it was ultimately unnecessary for the Panel to decide the matter, the Panel was concerned that the Disposal Condition might be an unacceptable “hair trigger” condition, being a condition which may entitle the bidder to withdraw its offer in response to even relatively minor events. Furthermore, and consistent with the NGM precedent, it seems likely that the Panel would have read into the Disposal Condition an overriding materiality requirement should Mariner have sought to rely on it.
Curiously, Mariner did not include a regulatory approvals condition in the offer terms despite the fact that, due to the nature of Austock’s business, it needed to obtain a number of regulatory approvals in order to proceed with the bid. ASIC argued that Mariner’s failure to include a regulatory approvals condition constituted a failure to include all relevant information in the announcement of the bid. It further argued that this omission was evidence that Mariner had announced its proposed bid recklessly as to whether the bid would be made or could be completed. Mariner ultimately sought to include a regulatory approvals condition in its proposed offer terms notwithstanding that its decision to do so may have resulted in a contravention of the requirement that the terms of a bid must not be substantially less favourable than those in the public proposal of the bid.
An interesting aspect of Mariner’s proposed bid for Austock was the extent ASIC saw fit to intervene in the bid process. This intervention included ASIC raising concerns with Mariner about the funding of its proposed bid and using its power under section 30 of the ASIC Act to require Mariner to produce books relating to its affairs. ASIC had also intended to apply to the Panel to have the bid stopped.
While it seems that ASIC has, to a large extent, been happy in recent times to leave the regulation of takeover bids to the Panel, the recent comments of ASIC’s chairman, Greg Medcraft, about the need for reform of a number of aspects of Australia’s takeover laws, including the proposed modification or abolition of the 3% creep rule and the introduction of a “put up or shut up” rule, suggest that the conduct of takeover bids is currently high on the corporate regulator’s agenda. It will therefore be interesting to see whether the extent of ASIC’s intervention in Mariner’s proposed bid is an isolated case of the corporate regulator taking action in circumstances which clearly required it do so, or an example of a wider trend of ASIC seeking to take a more active role in the administration of takeover bids, particularly those which proceed on a hostile basis.