The recent decision of the Takeovers Panel in Ambassador Oil and Gas Limited 01  ATP 14 (Ambassador 01) provides guidance to the market on the Takeover Panel’s current approach to intention statements and matching rights. Bidders, shareholders and their advisers need to:
- be particularly alert to the possibility of a bidder becoming associated with shareholders who agree to provide an intention statement in support of a bid;
- consider how an intention statement would be interpreted by the market, in deciding when and how to implement the stated intention; and
- be aware that the Takeovers Panel may apply a ‘fiduciary out’ to a matching right provision to ensure that target directors can act consistently with their duties.
Ambassador 01 related to a recommended off-market bid made by Drillsearch Energy Limited (Drillsearch) for Ambassador Oil and Gas Limited (Ambassador), in respect of which:
- two of Ambassador’s substantial shareholders and each Ambassador director had made intention statements to the effect that they intended to accept Drillsearch’s offer within 14 days of the opening of the offer, in the absence of a superior offer (Intention Statements);
- Drillsearch had subsequently entered into acquisition agreements with 32 Ambassador shareholders which entitled Drillsearch to acquire a 19.99% shareholding stake in Ambassador for the initial offer price (Pre-Bid Stake); and
- Ambassador had agreed to grant Drillsearch a five business day matching right, being a right to match (or improve upon) a rival proposal within five business days from receipt of the proposal. During the matching period, Ambassador’s directors were not permitted to withdraw their recommendation of Ambassador’s offer or recommend the rival proposal (Matching Right).
Three things you need to know from Ambassador 01
1. Discussions in relation to intention statements can give rise to associations between the parties involved
A representative of Ambassador asked certain Ambassador shareholders whether they would publicly state an intention to accept Drillsearch’s offer. Those discussions led to the making of the Intention Statements, which related to 19.55% of Ambassador (comprising 11.65% from the representative’s wife and the remainder from Ambassador’s directors). In the Takeover Panel's view, the discussions has been encouraged by Drillsearch. Magnum Hunter Resources Corporation (Magnum), a rival bidder for Ambassador, submitted that Drillsearch, Ambassador’s representative and the makers of the Intention Statements were associates in respect of Ambassador.
The Takeovers Panel agreed with Magnum’s submissions, pointing to a high level of orchestration between the parties in respect of Drillsearch’s offer and the almost immediate acceptance by the shareholders of an improved Drillsearch offer notwithstanding: (a) the existence of a rival bid (and thus the possibility of further increased offers) and; (b) the acceptances occurring on the fifth day of the offer period (when the shareholders had 14 days to accept under the terms of their Intention Statements). Due to its association with the Ambassador shareholders, Drillsearch had voting power of 19.55% at the time it acquired the Pre-Bid Stake and so the acquisition of the Pre-Bid Stake resulted in a breach of the 20% takeover rule (i.e. section 606 of the Corporations Act).
Ambassador 01 makes clear that a bidder should be careful to avoid associations between itself and other stakeholders when intention statements are made in respect of the bidder’s proposal. When assessing the circumstances that have led to the making of an intention statement, the Takeovers Panel will (among other things):
- consider the cumulative effect of the material put before it and draw appropriate inferences;
- based on its reasons in Ambassador 01, look at events which occur after an intention statement is made to assist it to determine whether an association existed at the time the statement was made; and
- have regard to uncommercial actions or significant events that infer a degree of orchestration – for instance, early and/or coordinated acceptances of an offer.
Moreover, even if a bidder does not directly contact or have discussions with target shareholders, an association between the bidder and the shareholders may be found to exist if the bidder indirectly encourages the making of intention statements.
2. The maker of an intention statement may be the subject of regulatory action if the maker does not act in accordance with the commercial intent of the stated intention
The Intention Statements were “acceptance statements” for the purposes of ASIC’s truth in takeovers policy, being statements of the shareholders’ intention to accept Drillsearch’s offer (see paragraphs 29 to 34 of ASIC’s ‘Regulatory Guide 25: Takeovers: False and misleading statements’). The Intention Statements required their makers to accept Drillsearch’s offer within 14 days of the opening of the offer, in the absence of a superior offer. As noted above, they each accepted Drillsearch’s revised offer on the fifth day of the offer period. Magnum submitted that in accepting Drillsearch’s offer early, the shareholders acted contrary to their Intention Statements. The Takeovers Panel agreed with Magnum, despite the shareholders having acted within the terms of their Intention Statements – that is, they had each accepted Drillsearch’s offer within14 days. In the Takeovers Panel’s view, the purpose of specifying a time period and the “superior offer” qualification must be to wait in the hope that a superior proposal emerges and a reasonable market participant would be likely to interpret the Intention Statements in that way. It also expressed the view that where an intention statement specifies an acceptance period of less than 21 days, the stated period should provide a meaningful opportunity for other bids to emerge. If it does not, the Takeovers Panel seems open to amending the intention statement to provide for that opportunity (or making other orders to remedy the circumstances).
3. A ‘fiduciary out’ may be applied to a matching right if the enforcement of such a right would be inconsistent with a target director’s fiduciary duties.
The Matching Right prevented Ambassador’s directors from withdrawing their recommendation of Drillsearch’s offer until Drillsearch had been given five business days to match (or improve upon) a competing proposal. Magnum submitted (with the support of ASIC) that the Matching Right was unacceptable because, in effect, it allowed Drillsearch to hold the benefit of a board recommendation for a full week in circumstances where at least one of the recommending directors no longer considered the offer to be in the best interests of shareholders. While the Takeovers Panel was ultimately not required to deal with the issue, it indicated that it would be likely to enforce a matching right only if it is consistent with a target director’s fiduciary duties and, if necessary, would apply a ‘fiduciary out’ to a matching right provision to ensure that target directors can act consistently with their duties.
The Takeovers Panel’s comments in Ambassador 01 go beyond the guidance it has previously given in relation to intention statements and matching rights. In relation to intention statements, the Takeovers Panel has put the market on notice that:
- literal compliance with such statements will not be sufficient if such compliance is inconsistent with what a reasonable market participant would interpret the intention statement to mean. This imposes an obligation on market participants to accurately assess what a reasonable market participant (or the Takeovers Panel) would interpret a statement to mean – this may not always be a simple task; and
- pre-bid discussions (and subsequent actions) can give rise to associations between a bidder and representatives of the target (including its directors). Given the potential consequences for those involved (e.g. breaches of section 606), a carefully planned engagement strategy is a necessity.
In relation to matching rights, a five business day matching period may not always be acceptable, particularly in circumstances where that lock-up device is coupled with other lock-up devices and/or intention statements. There is a tension here between, on the one hand, ensuring that a lock-up device does not inhibit the acquisition of control over voting shares taking place in an efficient, competitive and informed market and, on the other hand (and as acknowledged by the Takeovers Panel in Guidance Note 7: Lock-up devices), giving due consideration to the reasons why target directors agreed to the lock-up device and the commercial benefits to shareholders from the target having entered into an implementation agreement with the bidder. We expect to see matching rights (and notification obligations) remain under regulatory scrutiny, particularly where their enforcement could result in market inefficiencies.