Takeovers policy reform is underway. The Australian Securities and Investments Commission (ASIC) is seeking to revamp numerous key guidance notes on takeovers and compulsory acquisition. ASIC policy can be crucial to deal structuring and execution. Streamlining and updating guidance will be welcomed by M&A stakeholders who have until 22 February 2013 to comment on the proposed revamped guidance. The final RegulatoryGuides are proposed to be released in May 2013.
In short, ASIC will streamline its takeovers related policy into four new Regulatory Guides covering:
- relevant interests and substantial holding notices;
- exceptions to the general takeovers prohibition (of acquiring an interest beyond 20%);
- takeover bids; and
- compulsory acquisitions and buyouts.
This structure is more intuitive and will reduce the need for stakeholders to consider multiple Regulatory Guides (which is currently the case). The guidance has also been updated to reflect ASIC’s current views, as well as provide guidance on current market practices.
Below we discuss some of the important elements of the new guidance.
- Rights issues: Since the GFC underwritten rights issues have never been far from the spotlight or ASIC’s attention. The fact that a rights issue technically falls within an exception to the 20% prohibition does not mean that it will not give rise to unacceptable circumstances and, potentially, be blocked. ASIC has now specifically stated that it may make inquires of “the directors, underwriter and others to determine whether all reasonable options have been explored, and steps put in place, to minimise the potential effect of the rights issue on control of the issuer”. A key issue is whether the control effect exceeds what is reasonably necessary for the fundraising purpose. If ASIC has concerns it may request the parties to take further action including offering other parties the opportunity to underwrite some of the shortfall, modifying the terms or structure of the rights issue or, importantly, seeking member approval. This means that if a party needs the approval of ASIC to appoint a nominee under section 615 of the Corporations Act 2001 (Act) (if foreign shareholders are excluded under the rights issue) it can be expected that ASIC will require detailed information, and will carefully consider it, before approving a nominee under that section.
- Underwriting (specific issues):In addition to the above, ASIC has raised concern over specific provisions in some underwriting arrangements. ASIC considers that an underwriting agreement under which the underwriter is relieved of its obligations following a default by the sub-underwriter does not constitute an “underwriting” that falls within certain exceptions to the 20% prohibition. This applies to both full and partial scale backs of the underwriter’s obligations. Arrangements where an underwriter has some control over the occurrence of a termination event are also not regarded as a genuine underwriting, nor are arrangements where a person “takes firm” a specific number of securities. ASIC’s view is that these arrangements do not involve the necessary assumption of risk which is essential to an underwriting. No doubt this will cause underwriters and their advisers to carefully consider the exit events under future underwriting arrangements.
- Collateral benefits: The prohibition on collateral benefits is one of the cornerstone principles of the takeovers provisions – it prevents benefits to one shareholder that are not offered to all which would be “likely to induce” that person to accept the bid or dispose of their securities. ASIC has emphasised that it only proposes to grant relief from the prohibition very cautiously, and that it assesses potential collateral benefits on a “balance of factors” approach which is wider than the “net benefits” approach. Helpfully, ASIC has provided a non-exhaustive list of factors that it will consider in determining whether a benefit is a prohibited collateral benefit (these include whether there is a link between the benefit and the acceptance or disposal, the materiality of the benefit, the overall context of the benefit including by reference to normal commercial matters and the objective effect and circumstances of the benefit). These factors will also need to be considered by scheme of arrangement proponents as ASIC will take these into consideration in deciding whether to issue a letter of “no objection”. ASIC has also affirmed its 1992 policy position that its assessment of relief applications might necessitate commercial evaluation of the benefits involved. As it is not ASIC’s role to make judgments of this nature, applicants will generally need to provide quantitative assessments, including independent expert advice.
- Substantial holder notices: ASIC has affirmed the requirement that substantial holder notices require full, rather than minimal and technical, disclosure. ASIC has provided a few pages of more prescriptive requirements as to how these documents should be completed. Given that it is not uncommon for these quite technical documents to (regrettably) be wrong, it will be interesting to see whether market accuracy will improve. ASIC has also indicated that substantial holders cannot avoid the obligation to disclose full or substantive details of their arrangements with others by accelerating their association, for example by entering into a preliminary agreement incorporating only limited terms and not disclosing the substantive details of their overall arrangement on the basis that a more fulsome agreement will be entered into later (after the initial notice is given). From this it can be expected that ASIC will monitor disclosure regarding association and could use its powers under the Australian Securities and Investments Commission Act 2001 to investigate arrangements.
- Joint bids: ASIC proposes to amend its policy on joint bids (where the bidders jointly exceed 20% voting power). The potential mischief with these joint bids is that they may deter a rival bid (because there is a greater initial lock-up of interests) and, therefore, deter an auction for control. Current ASIC policy requires that the joint bidders must accept a higher rival bid unless they match that rival bid (a higher rival bid is one where the consideration is more than 105% of the joint bidders’ consideration). Importantly, ASIC now proposes to extend the policy so that it will require the joint bidders not to vote against a competing scheme – therefore, the policy applies to both joint bids structured as schemes and rival bids structured as schemes. One exception is that the matching condition does not apply where one bidder’s interest is less than 3% (but ASIC may impose it if it is still concerned about the deterrent effect of the joint bid). Therefore, the “accept or match” condition will still likely be a disincentive to some potential joint bidders and, therefore, shareholder approval under section 611 (item 7) of the Act remains another option.
- Relevant interests: ASIC has provided detailed guidance on these important, yet technical provisions of the Act, including numerous examples and a discussion on the use of options and warrants. This will assist stakeholders in understanding whether an interest arises or falls within one of the exceptions.
- PAITREOs: ASIC proposes toamend the rights issue exception so that it applies to PAITREOs (pro-rata accelerated institutional tradeable retail entitlement offers). Under these structures rights trading occurs on market for the retail component but not the institutional component of the rights issue. ASIC has previously given case-by-case relief to facilitate these structures, on the basis that the structures do not offend the equality principle. ASIC is now proposing Class Order relief which is likely to be welcomed by participants.
- Proportional bids: ASIC proposesto modify section 618(2) of the Act for proportional takeover bids to prevent accepting shareholders from engaging in share splitting and similar devices to accept for a greater proportion of their holding than otherwise permitted. These amendments are to be welcomed, as they clearly accord with the equality principle.
Of course, amendments to the takeovers laws might follow from Treasury’s initial scoping paper released in October 2012. That paper stated that ASIC considers that the takeover laws need modernising in a number of areas including the 3% creep, use and disclosure of equity derivatives and, importantly, clarity regarding takeover proposals (namely would-be bidders approaching target boards with proposals that are structured in a way that they do not enliven the requirement for a formal offer to be made within two months). These matters have been discussed in a series of roundtables between Treasury, ASIC, the Panel and market participants. ASIC noted that the roundtables raised some interesting matters and will assist Treasury in considering the proposals going forward. Consultation on these matters may occur in due course and should be welcomed by M&A practitioners.
The consultation period closes on 22 February 2013.