A feature of Australian M&A activity in calendar year 2011 has been the comeback of the takeover bid as a preferred means for effecting significant public corporate control transactions. Two recent examples of this are SABMiller's hostile bid for Foster's Group and Peabody Energy and ArcelorMittal's initially hostile but now recommended joint bid for Macarthur Coal.
Recent times have also witnessed an increased use of cash as a form of consideration offered under takeover bids, with renewed uncertainty in global financial markets once again making cash king.
The fragility of financial markets has made raising cash from the issue of a company's own equity a less attractive value proposition for listed bidders due to the high discount to market price that can be required to successfully complete an offer. In some instances, this has made debt financing a better option for a bidder needing to raise cash to fund its bid, despite the greater difficulty and complexity of sourcing debt funding in the post-GFC economy. Of course, for financial sponsors, debt funding remains the preferred option, where such funding is available on acceptable terms.
In light of these trends, it is timely to reflect upon the statutory regime and regulatory guidance that apply to debt financing the cash component of consideration offered under a takeover bid in Australia. In this article, we consider the level of funding certainty that a bidder must have before it announces its bid, the use of "subject to finance" conditions in Australia and the disclosure requirements which apply to bid funding arrangements. We also briefly contrast the comparatively liberal position in Australia with the "certain funds" requirement that has for many years been a feature of the UK takeovers landscape.
While the focus of this article is debt funding, the principles we outline in it apply equally to equity funding - in particular, to the use of equity commitment letters in connection with private equity buyouts.
Make sure you have a "reasonable basis" before announcing your bid
A person must not publicly propose to make a takeover bid if the person is reckless as to whether they will be able to perform their obligations in relation to the takeover bid – essentially, to pay the bid price - if a substantial proportion of the offers under the bid are accepted.
As described in its Guidance Note 14 - Funding arrangements (GN 14) and in Indophil Resources NL  ATP 18 (Indophil Resources), the Takeovers Panel considers that when announcing a bid, the bidder must 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.
A bidder that intends to obtain external debt funding to finance its bid need not have formally documented those funding arrangements by the time it announces its bid; however, the Takeovers Panel considers that a bidder would be unlikely to have a "reasonable basis" where the external funding arrangements are informal, unenforceable or on a best endeavours basis or subject to:
- ▪documentation without a sufficiently detailed binding commitment in place when it announces the bid;
- internal approval by the lender, unless the bidder is of substantial worth relative to the funding requirement, reasonably believes it has access to other sources of funds and has been informed that credit committee approval is likely;
- unusual repayment or expiry provisions that may result in the funding not being available to pay for acceptances; or
- conditions precedent to drawdown, unless it is likely that the conditions will be satisfied or waived when the bid becomes unconditional.
Finance conditions can be acceptable but care must be taken
In many cases, a bidder will need to walk a fine line between certainty of funding and accepting the conditionality that its financiers require. This can be a particular issue in the context of hostile transactions or situations in which due diligence access has been limited. In these circumstances, it may be necessary for a bidder to include a finance condition in its offer terms to safeguard against the possibility that it may lose (and be unable to replace) its funding for reasons beyond its control – for example, as a result of the failure of a condition precedent to drawdown the satisfaction of which is not solely within its control.
While it is acceptable for takeover bids in Australia to be made subject to a finance condition, the inclusion of such a condition in a bidder's offer terms is relatively unusual. A bidder that elects to make its offer subject to a finance condition must ensure that the condition is framed in a manner which complies with Chapter 6 of the Corporations Act – in particular, that the condition does not offend the general prohibition on defeating conditions which depend on the happening of an event that is within the sole control of, or is a direct result of action by, the bidder.
As can be seen from Goodman Fielder Limited 01  ATP 01 (Goodman Fielder 01), the general prohibition outlined above may act upon any element of a condition in a takeover bid which is subject to action by the bidder– for example, a finance condition which requires the bidder and its financier to sign and execute a long form facility agreement. Notwithstanding this broad statement of principle, the Takeovers Panel has taken a pragmatic approach to this issue in the context of finance conditions, as reflected by its comments in Goodman Fielder 01 to the effect that many, if not most, takeover bids are, at one time or another, subject to elements under the sole control of the bidder. With that said, we would expect the Takeovers Panel to take a hard line with any bidder that failed to take reasonable steps to satisfy a finance condition where its satisfaction was at least partly in the bidder's control.
Ensure that adequate disclosure is made in the bidder's statement
A bidder offering cash consideration is required to disclose the following details in its bidder's statement:
- the cash amounts (if any) held by the bidder for payment of the consideration;
- the identity of any other person who is to provide, directly or indirectly, cash consideration from that person's own funds; and
- any arrangements under which cash will be provided by a person referred to in the bullet point above.
The object of these disclosure requirements is to seek to ensure that target shareholders are provided with sufficient information about the bidder's funding arrangements to enable them to make an informed assessment of the capacity of the bidder to pay them the cash price that they are being offered for their shares.
In practice, ensuring that any restrictions on the availability of funds are appropriately disclosed in the bidder's statement (and any supplementary disclosures) will often require careful consideration. Logic suggests, and regulatory guidance confirms, that the inclusion of a bland statement to the effect that the relevant facility or commitment letter is subject to "usual conditions precedent for a facility of this nature" will be inadequate (market practice is constantly evolving and the views of market participants as to what is "usual" will often diverge). Reflective of this is guidance from the Takeovers Panel in GN 14 that a bidder should (among other things) consider making disclosure in relation to:
- material conditions precedent to drawdown, and any basis on which the bidder believes it will be able to satisfy the conditions;
- the status of conditions precedent to drawdown if the bid is declared or allowed to become unconditional; and
- material changes to funding terms or to circumstances which affect the availability or sufficiency of the arrangements.
Goodman Fielder 01 is an example of the importance of a bidder's statement containing adequate disclosure of the bidder's funding arrangements – and, in particular, any restrictions on the availability of those funds. When Burns Philp issued its bidder's statement, its financing arrangements were not settled and documented. While the commitment letter for one of the facilities had settled in some detail the preconditions to, and the events of default of, the loan (which were set out in an annexure to the bidder's statement), the commitment letters for the other facilities had not reached that level of finality.
The Takeovers Panel considered that Goodman Fielder shareholders should not be bound to any acceptance contract before the facilities were settled and documented as the material terms of the facilities was information that shareholders were properly entitled to receive in a bidder's statement. The Takeovers Panel's concern here was that shareholders had not received an offer whose terms were settled and disclosed in such reasonable detail and certainty to enable shareholders to make an informed and reasonable decision on the merits of the bid (including as to the likelihood of the bid proceeding). It's concerns were ultimately addressed by Burns Philp giving Goodman Fielder shareholders a right to withdraw their acceptance of the bid which was intended to apply until Goodman Fielder shareholders had been given enough information to fully inform them on the nature and status of the terms, preconditions and events of default to the settled and documented facilities.
"Certain funds" acquisitions in the United Kingdom 1
In the UK, takeover bids for listed public companies are governed by the City Code on Takeovers and Mergers (City Code). The City Code is administered by the UK Panel on Takeovers and Mergers (Panel). The City Code, through a combination of general principles and specific rules, creates the so-called "certain funds" doctrine.
General Principle 5 of the City Code, which reflects the equivalent provision of EC Directive on Takeover Bids (2004/25/EC), states that:
"An offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered, and after taking all reasonable measures to secure the implementation of any other type of consideration."
Rule 2.5(c) of the City Code, which underpins the requirement for "certain funds", states that when a firm offer is announced:
"Where the offer is for cash, or includes an element of cash, the announcement must include confirmation by the financial adviser or by another appropriate third party that resources are available to the offeror sufficient to satisfy full acceptance of the offer. (The party confirming that resources are available will not be expected to produce the cash itself if, in giving the confirmation, it acted responsibly and took all reasonable steps to assure itself that the cash was available.)"
The City Code requires this 'cash confirmation' to be repeated in the offer document. The City Code therefore requires bidders to settle and document any necessary funding arrangements at an earlier stage of the bid process than the equivalent regime in Australia. Indeed, changes to the City Code effective on 19 September will require the financing documents to be put on display from the business day following announcement of a firm offer (as opposed to the date on which the offer document is published, which had previously been the requirement). In addition to this, finance conditions are not normally permitted by the Panel.
These more onerous requirements can result in a bidder in the UK incurring financing costs at an earlier stage of the bid process than it would do in connection with a takeover bid in Australia, which costs can be significant, particularly where the bidder is subjected to protracted regulatory review.
In Australia, legislators and regulators have adopted a realtively liberal approach to the issue of funding certainty for takeover bids, as compared to the requirements imposed on bidders in the UK under the City Code's "certain funds" doctrine. In our view, the Australian model is working well and we see no reason for ASIC or the Takeovers Panel to take steps to more closely align the position in Australia with that in the UK.