The recent August 2012 Takeovers Panel decision in Austock Group Limited (for whom Baker & McKenzie were acting) has significant implications for prospective bidders, particularly in relation to bid funding.  The Panel made a declaration of unacceptable circumstances in relation the failure by Mariner Corporation Limited (the applicant) to arrange funding for its proposed bid for Austock.  The case contains a number of unusual aspects, including:

  • the Panel made a declaration of unacceptable circumstances in relation to the applicant's conduct, rather than in relation to the respondent's conduct as sought in the application; and
  • the Panel made a number of orders against the applicant, including cost orders which are rarely made in Panel proceedings.

The decision serves as a salient reminder that great care needs to be taken before announcing a proposed takeover bid (or initiating Panel proceedings) to ensure the bidder has appropriate funding arrangements in place, has disclosed all necessary relevant regulatory and other conditions when it announces its bid (and which conditions are appropriate), the bid complies with all applicable regulatory requirements, and the bidder generally has its own house in order.

Set out below is a summary of various interesting aspects, including a summary of key implications for prospective bidders.

Background

On 25 June 2012, Mariner announced an intention to make a takeover offer for all the shares in Austock at 10.5 cents per share.  The bid conditions did not include a regulatory approval condition.

On 29 June 2012, Mariner announced that it had increased its proposed bid to 11 cents (in order to rectify a potential breach of the minimum bid price rule as a result of acquisitions of Austock shares in the previous four months). On 4 July 2012, Mariner restated the conditions of its proposed bid, adding a regulatory approval condition.

On 9 July 2012, Austock announced that it had reached agreement with Folkestone Limited for the sale of its property funds management business to Folkestone. The Folkestone transaction was subject to Austock shareholder approval.

On 12 July 2012, Mariner applied to the Panel seeking a declaration of unacceptable circumstances submitting that the Folkestone transaction was intended to frustrate its proposed bid and that break fees agreed in the Folkestone transaction were uncommercial.

Mariner subsequently announced that it had decided to withdraw its proposed bid for Austock.  It invoked the condition that Austock make no material acquisitions or disposals, which it said was trigged by the announcement of the Folkestone transaction.

The Panel did not make any orders sought by Mariner.  The Panel instead made a declaration of unacceptable circumstances and various orders against the applicant Mariner.

Issues considered by the Panel

Mariner's failure to arrange funding for its bid

The issue regarding funding of Mariner's bid was a key aspect of the matter.  Mariner asserted that the Folkestone transaction frustrated its bid.  However, the Panel determined (as submitted by ASIC) that Mariner's bid was not a 'genuine potential bid' and that Mariner's assertion was not made out as "without a bid or genuine bid, there can be no frustrating action".

Timing for making inquires in relation funding issue

The Panel considers that when announcing a bid, section 631 requires that a bidder have a "reasonable basis" to expect that it will have sufficient funding arrangements in place to satisfy full acceptance of its offers when the bid becomes unconditional.

The Panel's general position is that that it should not normally undertake inquiries as to whether a bidder had funding or had a "reasonable basis" to believe it can obtain funding prior to lodgement of the bidder's statement (Indophil Resources NL [2008] ATP 18). However, this does not apply in all circumstances, including where the bidder may have difficulty in funding the bid.

It was clear that Mariner may have had difficulty in arranging the necessary finance having regard to Austock's market capitalisation of approximately $14 million (compared to Mariner's market capitalisation of approximately $3.5 million) at the time the bid was announced, and the fact that Mariner's net assets were negative.  Accordingly, the Panel considered it was appropriate to consider the issue of funding at the bid announcement stage (rather than the bidder's statement stage).

ASIC made separate inquiries in relation to funding issue

ASIC took an active role in this matter.  Separately to the Panel proceedings, ASIC had made inquiries of Mariner in relation to its funding arrangements.  In response to a formal ASIC notice to produce, Mariner provided to ASIC a board paper which listed investors from whom Mariner considered it might raise as much as $3 million. Mariner also provided a certificate to the effect that it had no other documents covered by the notice. In addition, Mariner provided no evidence of any definitive, binding or written agreement to finance its proposed bid.

The Panel was also concerned that Mariner had advised ASIC that it was seeking finance to pay for acceptances for only 65% of the shares in Austock on the expectation that certain Austock shareholders would not accept the bid.  The Panel did not consider it was appropriate for Mariner to assume funding of less than 100% based on a judgment of who might accept the proposed bid.

Bid should not be announced until finance has been arranged

The Panel made it clear that "a bidder should be able to pay for all the shares to which its bid relates, either because it has already made binding arrangements for a sufficient amount when it announces the bid, or because it has a reasonable basis to believe that it will have binding arrangements in place in time to pay for the shares".  In the latter case, the Panel said that a detailed terms sheet or commitment letter, at a minimum, should be signed before offers are sent.

The Panel said that announcing or making an unfunded bid is a serious matter, noting that penalties for breach of section 631 are the heaviest of any provision in Chapter 6.  It further noted that Mariner's bid should not have been announced, or allowed to proceed at all, unless and until finance had been arranged.

The Panel was not satisfied that Mariner at any stage had detailed or binding commitments to fund its proposed bid, or any reasonable basis for believing that it could pay for more than a few acceptances.  The Panel recognised that the finding was a "grave one" which gave rise to unacceptable circumstances by Mariner.

In light of these funding deficiencies, the Panel ordered that Mariner not announce another bid for Austock unless it first obtains independent verification acceptable to ASIC that is has funding, or a reasonable basis to expect it will have funding, to pay for all acceptances.  The Panel also made cost orders against Mariner (discussed further below).

Conditions of the proposed bid

The Panel raised a number of concerns in relation to certain of the defeating conditions attaching to the proposed bid.  For example, the Panel noted that the condition allowing Mariner to withdraw if Austock acquired or disposed of any assets or business was not subject to an express materiality requirement (although the heading of the condition did refer to material transactions).  The Panel noted that such a condition, as drafted, might be an inappropriate 'hair trigger' condition.

The Panel was also concerned with the condition which allowed Mariner to withdraw if the net tangible assets of either Mariner or Austock increased or decreased by more than 10%.  The Panel considered in particular that the potential reliance by Mariner on a possible increase in Austock's net tangible assets per share was not appropriate.

The Panel was also concerned with a condition that there be no alternative bid for Austock. 

The Panel was also concerned with a condition that Mariner obtain any necessary approvals from its own shareholders under the ASX listing rules, where the condition did not specify what might need approval.

In relation to Mariner's late inclusion of the regulatory approval condition (relating to a range of statutory approvals needed in order for the bid to be effective), the Panel noted ASIC's submission that Mariner's failure to include such a condition in its 25 June announcement represented a failure to include all relevant information in the announcement of the proposed bid, which was contrary to ASIC RG 59 Announcing and withdrawing takeover bids and potentially constituted a breach of section 631(1), which provides that the terms of the bid be not substantially less favourable that those in the public proposal.

However, in view of the conclusion to which the Panel had reached on the funding issue discussed above, the Panel decided it was not necessary to take its concerns regarding the bid conditions further.

Panel declined to consent to Mariner's withdrawal of application

Following the withdrawal of its bid, Mariner advised the Panel that it wished to withdraw its Panel application.  The Panel declined to consent to Mariner's withdrawal.  It said that there was a public purpose served in continuing to consider the application, given the proposed Austock general meeting and Mariner's apparent intention to possibly bid again.

Break fee of greater than 1% may be acceptable to recover costs actually and reasonably incurred

Panel guidance provides that, in the absence of other factors, a break fee not exceeding 1% of the equity value of the target is generally not unacceptable.   Following an undertaking provided by Folkestone to reduce the maximum amount of the break-fee from $500,000 to $250,000, a break-fee of up to $250,000 (which amounted to approximately 1.5% of Austock's market capitalisation) was payable by Austock to Folkestone in certain circumstances, including if Austock shareholders rejected the Folkestone transaction. 

Although the break fee was in excess of the 1% guideline, the Panel did not regard it as excessive in the circumstances.  The Panel noted that its policy on break fees contemplates the recovery of costs actually incurred and, accordingly, it is not unusual for costs actually and reasonably incurred in small transactions to exceed 1%.  Accordingly, a break fee of greater than 1% may be acceptable in small transactions to recover costs actually and reasonably incurred.

Panel makes cost orders against Mariner

The Panel rarely makes cost orders in Panel proceedings.  This is based on the principle that an applicant should be entitled to make an application without exposure to a costs order if it presents a case of reasonable merit.  However, the Panel noted that the position here merited a costs order against Mariner.  The Panel ordered Mariner to pay all of ASIC's costs and a portion of Austock's and Folkestone's costs (which reasonable costs were discounted by 50% due to the fact that the proceedings had resulted in a modification of the break-fee).  This reflects a new appetite by the Panel to make cost orders.

No media canvassing during Panel proceedings

Parties to Panel proceedings are bound by undertakings in relation to confidentiality and media canvassing, which are given at the time parties lodge their notice of appearance.  These undertakings prohibit parties from canvassing any issues in the proceedings in the media.  Despite providing such undertakings, Mariner's CEO was quoted in several newspaper articles commenting on issues in the proceeding. This prompted the Panel to make an interim order preventing Mariner from publishing any material to Austock shareholders or canvassing in the media any issue in the proceedings without the Panel's consent.  This reinforces that the Panel takes compliance with the confidentiality and media canvassing undertakings seriously.

Minimum Bid Price Rule

The minimum bid price rule in section 621(3) requires that the bid price must equal or exceed the maximum consideration given by the bidder or an associate over the four months before the bid.  Mariner's initial offer announcement of 10.5 cents would have resulted in a breach of this requirement as Mariner had acquired Austock shares at 11 cents per share within the preceding four months.  Mariner subsequently increased its bid price to 11 cents per share after this was pointed out to Mariner by Austock.  A prospective bidder should be aware of this requirement before proceeding to announce a takeover.

Key implications for prospective bidders

The decision demonstrates various principles which prospective bidders should consider before announcing a proposed bid including the following:

  1. The Panel takes bid funding very seriously.  A bidder must be able to pay for all the shares to which the bid relates, either because it has already made binding arrangements for a sufficient amount of funding when it announces its bid, or because it has a reasonable basis to believe that it will have binding arrangements in place in time to pay for the target shares.
  2. A bidder should have reasonably definitive and detailed documented funding arrangements in place before announcing a proposed bid.  At a minimum, a detailed term sheet or commitment letter should be signed before offers are made.
  3. A bidder must arrange funding to pay for 100% of the shares to be acquired, and not a lesser percentage based on the bidder's expectation of who might accept or reject the offer.
  4. A bidder must ensure that its bid announcement includes any necessary regulatory and other conditions as it should generally not be entitled to make its bid subject to additional conditions after the bid is announced.
  5. Bid conditions must be carefully drafted.  Conditions which may be regarded as "hair triggers" or are otherwise inappropriate should be avoided.
  6. A bidder should be aware of the implications of the minimum bid price rule before proceeding to announce a bid.
  7. A break fee in excess of the Panel's 1% guideline may be appropriate in certain circumstances where the costs actually and reasonably incurred by the bidder are likely to exceed 1%.
  8. Care needs to be taken when making any Panel application to ensure the application presents a case of reasonable merit, and that the applicant's own house is in order, in order to avoid the risk of an adverse declaration and orders (including cost orders) being made against the applicant.
  9. ASIC takes a keen interest in takeover and Panel matters, and has various investigative and other powers outside the Panel process.
  10. Parties to Panel proceedings must be conscious of, and comply with, their confidentiality and media canvassing undertakings