- Takeovers Panel reaches 10-year milestone
- Freehills considers key developments over life of the Panel
- Further guidance from the Panel and ASIC expected on several major issues
As the Takeovers Panel celebrates 10 years in its current form, it is timely to assess its role over that time and its part to play in M&A activity to come. Developments in policy and practice during the last peak of the Australian takeovers market are critical to understanding the playing field for future deals. In this article, we light up ten candles for the Panel and share our predictions for the next takeovers phase.
The Panel has the power
Many will remember the controversial challenges to the jurisdiction and constitutionality of the Panel. Since then, the Corporations Act has been amended to solidify and broaden the Panel’s powers to make declarations of unacceptable circumstances, and to make a wide range of orders.
We have seen the Panel use its extensive powers to make a variety of commercially significant orders, including orders requiring CEMEX to spend tens of millions to compensate Rinker shareholders, and orders requiring divestment of shares.
With the backing of the amended legislation and the courts, we can expect to see the Panel continue to make orders of similar magnitude, where necessary to remedy unacceptable circumstances.
Enforcing truth in takeovers
Truth in takeovers is high profile and usually emotional for the parties involved. Can a bidder depart from its ‘last and final’ statement in the face of an unexpected rival? Will a shareholder be held to its statement of support for a particular transaction?
Perhaps there is an easy answer to the debate, which lies in the level of qualification. Takeover participants will not be held to a statement if it is sufficiently qualified. A statement without qualification should be very rare, but can be used strategically by a bidder, after having assessed the risk of rivals. Using qualifications effectively, bidders and shareholders can control their own destiny.
However, the business community is calling for clarification. Currently, the policy is set by ASIC and is enforced by the Takeovers Panel. We can expect to see further discussion on the issue and an alignment between ASIC and the Panel on the policy response.
Do we need a ‘put up or shut up’ rule?
Long a feature of British takeovers regulation, there has been active speculation about the introduction of a ‘put up or shut up’ rule in Australia.
According to the UK Takeovers Panel, the ‘put up or shut up’ rule prevents targets being subjected to lengthy periods of public, but conditional, interest by a bidder, and the consequences that follow. It cites distraction of senior management, harm to morale of staff and uncertainty for suppliers and customers as some of the consequences. The introduction of hedge funds to the register and share price volatility can also be said to disadvantage long-term institutional shareholders and ‘mums and dads’. Views differ on this in the Australian market. Those holding the contrary view argue that conditional announcements are important to facilitate discussions with target directors and overall lead to a more effective auction process. Watch this space.
Protecting negotiated deals]#
The Panel has rewritten its ‘lock-ups’ guidance three times in the last decade, the most recent iteration released in February 2010. The guidance has changed to respond to developments in and bidder strategy and practice, in a bid to keep up with commercial reality in negotiated deals (as well as hostile).
Lock-ups help secure a proposal and protect against costs not recoverable if the deal does not complete eg. exclusivity through ‘no talk’ or ‘no shop’, and break fees. The basic Panel policy is that ‘lock-ups’ should not unduly fetter the actions of a target.
Break fee triggers will remain under scrutiny. Any trigger that is perceived to impose a ‘penalty’ on the target is unlikely to be acceptable.
As the leverage balance shifts back to targets in stronger economic conditions, there will be a push for mutuality in deal protection, including in break fee value and triggers. We may well see Panel challenges in relation to bidders paying targets for a failed deal.
Strategic ‘information’ conditions
As the market recovers and unsolicited takeover activity builds, information conditions are likely to make a reappearance. Often referred to as ‘bear hugs’, conditions designed to extract information from targets were popular features of takeover bids for which due diligence was not possible. They can be particularly useful for private equity bidders.
The Panel has indicated that such conditions may result in extracting additional information from the target, where the information requested by the bidder is material to whether a target shareholder accepts the bid. Bidders will need to ensure that the information sought is relevant either to the price being offered for the target’s shares or to the objectives of the bid.
The role of the independent expert
An expert’s opinion is often critical to the success of an unsolicited bid. Bidders and targets are increasingly engaging independent experts to comment on bid fairness and reasonableness, even when a report is not strictly required.
]We have already seen the Panel order a target to engage an ASIC appointed expert to test the results of an expert’s report, where the Panel queried the methodologies adopted by the first expert. ASIC has recently indicated that experts should expect increased scrutiny in the context of both takeovers and schemes. The merger of Seven Network and WesTrac is the most recent example of ASIC requiring significant amendments to an expert’s report.
And yet there is very little policy on the matter. Clearer practice guidance is needed.
The Panel has hinted at addressing the issue in its just-released Consultation Paper regarding target recommendations and ‘undervalue’ statements (ie statements that the bid undervalues the target).
This guidance will be relevant to the extent that a target engages an expert to review its value judgment.
However, the role of an expert is a broader issue and requires exclusive attention. It applies to bidders, targets and the experts themselves, who must be consulted as the policy develops. This would be an appropriate project to mark the Panel’s anniversary.
Shareholder disclosure and marketing
Over the last decade, we have seen a significant increase in the number of biddersmarketing directly to target shareholders outside of the bidder’s statement, through print advertising, proxy solicitation firms or shareholder meetings.
Bidders will become increasingly sophisticated in their communication efforts, with online tools to assist shareholders to understand complicated bid structures, such as the real-time ‘calculator’ used by Viterra in its scheme bid for ABB last year to explain the multi-tiered scrip consideration structure.
The Panel will no doubt keep pace with these developments. It may well require an update to its guidance on glossy ‘wraps’ that cover bidder’s statements.
Getting to 90 per cent
In an attempt to achieve compulsory acquisition, bidders use various strategies in addition to shareholder marketing. Bidders have been known to use tactics like threatening closure, offering conditional price increases where acceptance reaches a certain percentage, and providing acceptance facilities to improve acceptance rates.
A few years ago, the Panel was thought to be considering guidance on acceptance facilities, including for the technical legal issues that can arise. No information has yet been publicly released. Given the likely increase in takeovers activity moving forward, further guidance in this area would be welcome.
Much has been said about reverse takeovers following the Gloucester Coal transaction last year.
Reverse takeovers involve a scrip bid by a bidder that is smaller than the target. There are various reasons for friendly parties to structure a deal in this way, including as a resolution to ‘soft’ management issues, or to assist with tax, stamp duty and operational efficiency. Deal certainty may be another reason, in the context of a major shareholder of the smaller party (perhaps the natural target) that does not support the deal.
The controversy is that the issue of scrip by the bidder can result in a change of control in the bidder, as well as the target. In such circumstances should this require bidder shareholder approval?
As indicated in our article ‘Takeovers Panel’s position on reverse takeovers, undervalue statements and privilege’, we can expect to see further Panel guidance on these issues.
The last instalment of this ten part review of the Panel is a comment about capital management. Many Australian companies are now sitting on healthy balance sheets and may well be considering share buybacks or other capital returns. The Panel last considered buy-backs in the context of the proposal by Village Roadshow in 2004, and accepted undertakings that the major shareholder would not vote.