The Takeovers Panel recently reissued its guidance note 12 on frustrating action. The revised guidance note clarifies that the policy does not apply to schemes and formulates a limited 'put up or shut up' rule for Australia.
The Takeovers Panel's policy on frustrating action applies where a target company takes a corporate action that triggers a bid condition. While conduct that triggers a bid condition is frustrating action, whether it gives rise to unacceptable circumstances will depend on its effect on shareholders and the takeover bid. The frustrating action policy is interesting as before it was developed by the Panel in 2001 and formalised in a guidance note in 2003, there was no such concept in Australian takeover law and practice. The revised guidance note shows that the Panel is adapting the policy to meet market developments.
Frustrating Action doesn't apply to schemes
The 'bear hug' has been a hot topic in recent times.
Target directors have at times bemoaned the practice of potential bidders making uncertain non-binding proposals to acquire their business by 'friendly' schemes of arrangement. In these circumstances, not only is there no firm offer for directors to recommend or for shareholders to accept but given there is a potential offer, the target directors are constrained by the Panel's policy on frustrating action from undertaking corporate actions that they may have long been considering.
This is because the Panel's frustrating action policy applies also to 'genuine potential offers' for a company. Therefore, target directors should not do anything to 'frustrate' or cause that potential offer to be withdrawn or terminated. For example, control transactions are often conditional on no further equity raisings by the company. If the target directors decide to proceed, for example, with a rights issue and the control transaction is withdrawn or does not proceed because of breach of the condition, this would effectively disenfranchise shareholders from the chance to consider the proposal.
The grey area, of course, is what is a genuine potential offer?
How this is framed will determine what kind of transaction will attract the policy. The Panel recently amended its guidance note, saying that its frustrating action policy does not apply to schemes of arrangement. This is because schemes, by definition, require target board support. If that essential condition is not satisfied, then it is irrelevant if the proposal is 'frustrated' in any other way.
This updated policy follows the Panel's decision in Transurban Group in 2010, where the Panel dealt with an application by CP2, a member of a bidding consortium that included two Canadian Pension funds. The Canadian members of the consortium had put an earlier proposal to Transurban in 2009 which was rejected. Some months later, CP2 joined the consortium and a further proposal was considered by the consortium for some time. On the eve of Transurban announcing an acquisition (the Lane Cove Tunnel) and a rights issue to fund the acquisition, the consortium wrote to Transurban with a scheme proposal, conditional on the rights issue not proceeding. This was quickly rejected. The consortium returned shortly thereafter with a second revised proposal at a lower price but without the rights issue condition, which was also quickly rejected. Transurban proceeded with its planned rights issue and CP2 complained to the Panel. The Panel found that its frustrating action policy did not apply in this case, given that the only proposals before the Transurban board were for schemes of arrangement which by their nature required board support. There was no suggestion that if the scheme was rejected a takeover bid may be made to shareholders on a hostile basis. In this respect, once the target board had dismissed the scheme proposal, the proposal was at an end. In effect, there was nothing to be frustrated.
It may be that in many cases the bidder could still ensure the frustrating action policy applies by making clear in any approach that it might also consider undertaking the transaction by way of takeover bid if a scheme was rejected. This may solve the headline 'scheme v takeover' issue. However, if the proposal remains highly conditional (eg a finance condition or board support) and indicative only, a bidder might still find itself on the wrong side of the Panel's policy. Also, in these circumstances, a potential bidder needs to take care that, if the proposal prematurely becomes public, it avoids the operation of section 631 of the Corporations Act which requires a bidder to proceed with a takeover bid within 2 months if it publicly proposes to make a bid.
Put up or shut up - putting the bidder on notice
In the UK where there is persistent rumour or market speculation about a possible bid, a target can ask the London Takeover Panel to set a date by which the potential bidder must either make a takeover bid or if it does not bid, be locked out for 6 months from making a bid. This is known as the "put up or shut up rule". The underlying philosophy of the rule is that it is not appropriate for a target company to be indefinitely under siege and distracted from its day to day business by takeover speculation.
Australian law has no equivalent rule. Well at least until now.
Given the frustrating action policy applies to genuine potential offers, the Australian Takeovers Panel has created a limited put up or shut up rule. The revised frustrating action guidance note says that, in the context of potential offers, in determining if there has been frustrating action it will take into account whether the target board notified the potential bidder that it intends to undertake a corporate action if a bid is not announced or made within a reasonable time. The guidance note goes on to state that a reasonable time will usually be 2 weeks, but it will depend on the circumstances. In essence, the Panel is providing a safe harbour from the frustrating action policy for targets under siege.
Obviously target companies will need to think about their disclosure obligations in deciding what information to give a bidder when it puts them on notice.
In any event, this change to the guidance note shows that the Takeovers Panel is aware of the challenges for target companies continuing business as usual when potentially under offer.