- Takeovers Panel releases simplified Guidance Notes
- Largely reflective of existing policies or recent Takeovers Panel decisions
- Important new guidance on break fee triggers and lock up devices
On 11 February 2010 the Takeovers Panel (Panel) published the following revised Guidance Notes:
- Guidance Note 7 – Lock Up Devices
- Guidance Note 12 – Frustrating Action
- Guidance Note 14 – Funding Arrangements
- Guidance Note 17 – Rights Issues
The Guidance Notes are primarily a simplification of the existing notes and confirmation of current policy. They also make explicit the Panel’s policy in some emerging areas.
Below is a summary of some of the key features of the revised Guidance Notes.
Guidance Note 7 – Lock Up Devices
The Panel’s policy on lock up arrangements applies to any control transaction—not just takeovers. Key deal protection measures to which the policy applies include asset lock ups, break fees, no shop agreements and no talk agreements.
The revised Guidance Note confirms the one per cent guideline applied by the Panel in assessing the acceptability of break fees. The Panel has confirmed that in the absence of other factors, a break fee not exceeding one per cent of the equity value of the target is generally not unacceptable. In limited cases, it may be appropriate for the one per cent guideline to apply to a company’s enterprise value, for instance because the target is highly geared.
The Panel has said, however, that there may be facts which make a break fee within the one per cent guideline unacceptable—for example if triggers for payment of the fee are not reasonable (from the point of view of coercion of target shareholders). ‘Naked no vote’ break fees (ie fees payable by a target to a bidder if a takeover is rejected by the target shareholders even though there is no competing bid) may fall into this category (though the Panel does not say that they will necessarily be unacceptable).
Generally break fee triggers that are within the control of the target will not give rise to unacceptable circumstances. Further, if the fee is payable on a competing transaction successfully completing (especially where the size of the break fee is small compared with the premium paid by the over-bidder) the break fee arrangement will generally not be unacceptable.
The revised Guidance Note confirms that no shop agreements (even without a ‘fiduciary out’) will generally not be unacceptable, however no talk and no due diligence restrictions require an effective fiduciary out so as not to give rise to unacceptable circumstances.
The revised Guidance Note provides commentary on the emerging trend of requiring targets to notify bidders of approaches in relation to competing proposals, which in some cases extends to including details of the proposal and a matching right. The Panel says that in some cases the impact of these restrictions may be anti-competitive by discouraging a competing bidder from making an approach but the Panel stops short of saying that these lock up devices should be subject to a fiduciary out. The anti-competitive impact of these provisions can be mitigated by reducing the scope of the notification obligation or if coupled with provisions allowing the market to be tested (such as ‘go shop’ or ‘market check’ provisions).
The revised Guidance Note confirms that it also applies to lock up devices with major shareholders.
Guidance Note 12 – Frustrating Action
This Guidance Note deals with actions of target directors which could give rise to bids or genuine potential bids lapsing or being withdrawn as a result of those actions.
The revised Guidance Note provides some further clarity on two areas that most commonly arise for consideration in relation to frustrating actions:
- what actions can be undertaken that will not give rise to frustrating actions that involve unacceptable circumstances even though they trigger a bid condition?, and
- what steps do target boards need to take in order to preserve choice for their shareholders?
In relation to the first of these points:
- if the condition that is triggered is not commercially critical to the bid, then this is unlikely to give rise to unacceptable circumstances
- triggering a condition that is overly restrictive or inhibits activity that is being undertaken by the target in the ordinary course of business generally won’t be unacceptable (the target’s business plans and the size and nature of the transaction will be relevant considerations)
- a failure by the target board to recommend a bid where the bid (or potential bid) is conditional on board recommendation may not give rise to unacceptable circumstances, and
- where there is a legal or commercialimperative for the frustrating action to be undertaken this may not give rise to unacceptable circumstances.
Target directors’ actions will generally not be questioned where they effectively give shareholders the choice between competing proposals. Examples of the manner of which the choice may be given include:
- directors announcing that they will enter into an agreement after a specified reasonable time unless control has by then passed to the bidder (the period that the bid has been open for acceptance and the status of bid conditions will be relevant considerations in determining what period constitutes a reasonable time)
- seeking prior shareholder approval or making the frustrating action conditional on shareholder approval, or
- entering an agreement conditional on the bid failing or which contains a cooling off clause which a new management might exercise.
The revised Guidance Note confirms the Panel’s previous position that it will not view sympathetically the argument that a transaction may be lost because of the time involved in calling a general meeting to allow shareholders to choose between competing proposals.
Guidance Note 14 – Funding Arrangements
The Guidance Note confirms the principle that a bidder must have (and maintain) a reasonable basis for the belief that it will have sufficient funding to pay for acceptances under a takeover offer.
This doesn’t require that funding arrangements have been formally documented at the time of bid announcement. The bidder may still have a reasonable basis if there is a sufficiently detailed binding commitment in place when the bid is announced or the Bidder’s Statement is given to ASIC.
The consultation draft of the Guidance Note issued in May last year asked for comments on whether off market bids that are conditional on finance should be required to include a condition that precisely matched the financing condition of the financier. After consultation, the Panel decided not to include such a provision in a Guidance Note. Rather, the Guidance Note provides that it may be unacceptable if the bid becomes unconditional when the funding arrangements are conditional and there is a real risk of the funding conditions not being fulfilled.
The consultation draft also sought views on whether shares could be transferred to a bidder before payment is made or whether this should be expressed to give rise to unacceptable circumstances. Again, the Panel decided not to include such a ‘prohibition’. Rather, the revised Guidance Note provides (unsurprisingly) that it may be unacceptable circumstances if the bidder does not actually pay accepting shareholders. If this is the case, it may give rise to an order returning the shares to the accepting shareholder.
In relation to disclosure of funding arrangements, the revised Guidance Note provides that a bidder should consider making disclosure in relation to establishing that its funder has the necessary financial resources. If the funder is an Australian bank, this may require only that this is identified. However, for other financial institutions or debt providers that are not financial institutions there may need to be further disclosure (such as, for non-financial institutions, an accountant’s certificate as to the funder’s ability to meet the obligation with sufficient disclosure to allow shareholders to be satisfied as to the sufficiency of the funding arrangements).
If the bid consideration comprises foreign currency, additional disclosure regarding any exchange rate risks and their management may also be needed.
Guidance Note 17 – Rights Issues
This Guidance Note revises the Panel’s guidance on when the use of the underwriting gateways to the 20 per cent rule (items 10 & 13 in section 611 of the Corporations Act) may give rise to unacceptable circumstances.
It gives effect to the Panel’s guiding principle that the control effect of a rights issue should not exceed what is reasonably necessary for the fundraising purpose of the issue.
The Panel states that it is likely to accept the directors’ decision on whether the company needs the relevant funds if the decision appears to be reasonable and supported by rational reasons. However, the need for funds is not a safe harbour. That is, if the rights issue could have been structured in another way so as to mitigate further the control effects, the structure chosen may give rise to unacceptable circumstances.
The revised Guidance Note outlines the policy reflected in a number of recent Panel decisions to the effect that dispersal strategies for dealing with the shortfall under a rights issue should be closely explored rather than having the shortfall flow through to the underwriter and sub-underwriter. Examples of dispersal strategies include shortfall facilities or a back-end book build of shortfall shares.
The Panel will expect more disclosure in relation to the effects of a rights issue on control where the issue has a greater potential to impact control of the issuer (eg a transaction that could result in an increase in a person’s voting power from 10 per cent to 40 per cent will require more detailed disclosure compared with a transaction that could increase a person’s voting power from 51 per cent to 55 per cent).