The recently concluded $2.2 billion acquisition of David Jones Limited (DJs) by the South African retailer Woolworths Holdings Limited (Woolworths) has provided a fascinating consideration of the application of the “collateral benefits” principle in the context of change of control transactions. Its rationale and outcome may well encourage the offer of collateral benefits to key target shareholders, in an attempt to get such a transaction across the line.
The material facts of the DJs acquisition are:
- on 28 October 2013 - Myer approached DJs on a confidential, conditional, non-binding and indicative basis to investigate the potential for DJs to propose to its shareholders a scheme pursuant to which Myer would acquire 100% of the shares in DJs;
- on 27 November 2013 - the Myer approach is rejected by the DJs board without disclosure to DJs shareholders;
- on 31 January 2014 – Myer discloses the Myer approach;
- upon the Myer approach becoming public, as well as the disclosure of some alleged insider trading activities by two non-executive directors of DJs, the adverse reaction results in the resignation of the then Chairman and those two directors;
- in March 2014 – Woolworths approaches DJs to discuss a A$2.2 billion cash bid for all the shares in DJs;
- in April 2014 – DJs announces that it will propose a scheme pursuant to which Woolworths would acquire all the shares in DJs (Scheme);
- on 22 May 2014 – Justice Farrell of the Federal Court of Australia makes an order convening a meeting of DJs shareholders to vote on the Scheme (Scheme Meeting);
- on 18 June 2014 – Australian Retail Investments Pty Ltd lodges a substantial holding notice confirming that entities associated with Solomon Lew had acquired 9.89% of DJs ordinary voting shares;
- in June 2014 – Lew negotiates with Woolworths the sale of an 11.8% holding in Country Road Limited (Country Road) controlled by Lew, conditional on the Scheme becoming effective;
- on 24 June 2014 - Woolworths announces an offer to acquire all of the remaining shares in Country Road (of which Woolworths then held 87.88%) for $17 per share;
- on 2 July 2014 - supplementary information regarding the Country Road offer is approved by Justice Farrell and dispatched to DJs shareholders;
- on 14 July 2014 - the Scheme is approved 89.64% of DJs shareholders present and voting, and by 96.81% of the votes cast, at the Scheme Meeting;
- on 17 July 2014 - Justice Farrell makes an order approving the Scheme, despite:
- ASIC’s refusal to provide a “no objection” letter to the Scheme;
- no independent expert’s report on the impact, if any, that the conditional acquisition by Woolworths of Lew’s Country Road shares for approximately $209 million (Lew Benefit), had on the offer price for the DJs shares; and
- the patently “opportunistic” timing and intent of Lew’s acquisition of DJs shares, namely as a means of leveraging Woolworths to provide the Lew Benefit.
There has been much discussion in the press as to whether the Country Road offer constituted a collateral benefit, which in the context of a Chapter 6 takeover would be prohibited during the offer period (Collateral Benefit Prohibition). Justice Farrell (who has also served as President of the Takeovers Panel) did not canvas in detail the technicalities of whether the Lew Benefit was in fact a collateral benefit within the meaning of Collateral Benefit Prohibition. Her Honour felt that because the DJs acquisition was a scheme of arrangement, the Collateral Benefits Prohibition did not apply.
It is not illegal for a collateral benefit to be offered or given in the context of a scheme. However, the Court will need to be satisfied that the collateral benefit is fair in all the circumstances at hand, before it will approve the scheme. The Eggleston Principles of Chapter 6 will still be relevant to this assessment, in order to ensure there is a neutrality between schemes and takeovers as a way of effecting change of control transactions.
Justice Farrell was satisfied on the fairness issue in the context of the Lew Benefit as:
- Lew abstained from voting at the Scheme Meeting; and
- the DJs shareholders had adequate information when voting to approve the Scheme.
With respect to the information provided to DJs shareholders, Lew was not a shareholder at the time the Scheme was announced. Therefore the Lew Benefit could not be dealt with in the usual way, by inclusion in an independent expert’s report in the Scheme booklet. Justice Farrell considered whether the second court hearing should be adjourned until the Country Road target’s statement (including the independent expert’s report) was issued, so that the market and the Court were in a better position to assess the nature and extent of the Lew Benefit. However, Justice Farrell declined to adjourn the second court hearing and approved the Scheme in light of:
- 96.81% of DJs shares and 89.64% of DJs shareholders entitled to vote at the Scheme meeting approving the Scheme (which is far in excess of the statutory threshold), after adequate details of the Lew Benefit had been disclosed;
- Lew voluntarily abstained from voting his DJ shares at the Scheme Meeting;
- no DJs shareholders sought an adjournment of the Scheme Meeting;
- no DJs shareholder gave notice of an intention to appear at the second court hearing to oppose the Court approving the Scheme; and
- ASIC did not oppose the approval of the Scheme. However ASIC did refuse to give the usual “no objection” letter in relation to the Scheme because it considered that the Lew Benefit offended the equal opportunity Eggleston Principle and therefore had the potential to undermine the integrity of the scheme process.
This decision highlights that the legality of a collateral benefit given in the context of a change of control transaction will be dependent on a number of factors including:
- whether full disclosure of the collateral benefit has been made (noting that an independent expert’s report will not necessarily be required) before voting at the scheme meeting;
- whether the collateral benefit has been approved by non-associated shareholders; and
- whether the Court feels that the offeror is seeking to effect the change in control by a scheme, as opposed to a takeover bid, in order to avoid the provisions of Chapter 6, which includes the Collateral Benefits Prohibition. In this regard, Justice Farrell expressly found that Woolworths was not engaging in such statutory avoidance, on the basis that the terms of its transaction funding were such that Woolworths had to be entitled to acquire all, but not some, of the DJs shares. This may have interesting strategic implications when bidders resolve the type and terms of their acquisition funding.
The DJs acquisition saga paves the way for bidders to offer collateral benefits to dissenting shareholders with key target shareholdings to get a scheme across the line (provided the above considerations are adequately managed). The dissenting shareholder to whom the collateral benefit is given may be required to abstain from voting on the scheme. However this will have the effect of moving that key shareholding to an “abstaining stake”, the arithmetic and strategic consequences of which will need to be carefully considered when determining the likelihood of achieving the scheme approval thresholds.
Another lingering concern is that a Court could accept that the circumstances in which a collateral benefit is given to an otherwise dissenting shareholder satisfy all the applicable “fairness” criteria referred to above, but also place that shareholder in a separate “class”. The effect of that classification may be to deliver to that shareholder, effective veto control over the advancement of the entire scheme, where the scheme is premised on the need or desire of the bidder to make the outcomes of the separate class scheme meetings inter conditional.