Continuous disclosure obligations, David Jones and a need for regulatory guidance.

Target boards faced with an unsolicited takeover approach face a difficult decision: to disclose or not to disclose the approach. Disclose the approach and you generally ensure full compliance with your continuous disclosure obligations and avoid criticism and scrutiny from regulators. You might also find other potential bidders are stirred by an announcement which suggests the company is in play. Your share price is likely to rise.

However, disclosure can also come at a cost. There will be increased media and shareholder scrutiny as to whether a deal will be consummated or not and then when an actual bid doesn’t eventuate, your share price falls back. While the price may end up around where it started you now have the added baggage of unwanted media commentary and speculation on what just happened.

Some of these issues were recently faced by David Jones when it received an unsolicited takeover bid from the mysterious EB Private Equity (EBPE). The board determined they needed to disclose the approach yet very quickly after they disclosed the potential bid evaporated. The events have reportedly been the subject of an ASIC investigation amid concerns that the potential bid was a hoax designed to manipulate the David Jones share price to the advantage of those behind the plot.

Whatever the truth behind EBPE and its takeover approach, these events serve as a timely reminder of the issues facing target boards when they receive a takeover approach. In this article we examine the operation of the continuous disclosure rules, current market practice in relation to disclosure of takeover approaches and the David Jones matter. While every particular fact situation is different it seems clear that target boards would be assisted by some regulatory guidance on how they should approach their disclosure obligations.

Continuous disclosure rules

ASX Listing Rule 3.1 imposes an obligation on a listed entity to “immediately” notify the ASX when it becomes aware of any information concerning it which a reasonable person would expect to have material effect on the price or value of the entity’s securities.  Clearly, a potential takeover approach would have a material effect on a company’s share price.

However, LR 3.1A contains an exception to the general disclosure obligation where the information is confidential and relates to an incomplete proposal or negotiation.  A key aspect of the exception’s application to takeovers is that any takeover approach remains confidential.

LR 3.1 is given legislative force through the Corporations Act. Contravention of the legislative provision is an offence unless the person involved took all reasonable steps and believed on reasonable grounds that the listed company was complying with its obligations. Shareholders can also take civil action for breach of the continuous disclosure obligations. While not in the takeover context, several shareholder class actions have been made in respect of breach of continuous disclosure rules.

In addition, ASIC has the power to issue an infringement notice if it has reasonable grounds to believe that a listed entity has contravened its disclosure obligation. These infringement notices may include the imposition of penalties of up to $100,000. For large listed companies, when faced with an infringement notice, it is generally economically rational to pay such penalties (without admitting fault) rather than incur potentially much larger legal costs fighting them. This has meant that ASIC’s approach to issuing such notices has not been fully tested.

Disclosure of takeover approaches – the early disclosure trend

It appears to us that over the last 5 or so years there has been a trend towards earlier disclosure of takeover approaches.

Traditionally boards were reluctant to disclose takeover approaches and proposals too early in the process. In part this was to limit any unwanted publicity or external pressure that may make the finalisation of a deal harder to achieve. Another reason was to minimise any potential unwarranted share price rises followed by the inevitable decline in the share price where the deal ultimately does not proceed.

While some target boards do still take the “traditional approach”, it seems to us that many more target boards now feel obliged to disclose approaches early.

Having said that other factors may also play a part, for example, early disclosure can be a tactic to put other potential bidders on notice that the company may be in play and therefore allow them greater time to assess and come forward with potentially more attractive competing proposals.

Nevertheless the main driver would appear to be an increasingly cautious approach to disclosure (including in determining whether or not confidentiality of any approach is lost) and a desire to avoid regulatory scrutiny, criticism and fines. Indeed ASIC has in recent years issued infringement notices against Promina and Rio Tinto for alleged slow disclosure in relation to M&A matters. In these cases, ASIC issued infringement notices despite the fact that the period of alleged non-compliance was less than 24 hours (and just 75 minutes in the case of Rio Tinto). In this respect, it could be said that the adoption of a more cautious approach is hardly surprising.

There is no other offer like a David Jones offer

The shift to a more cautious disclosure approach is well illustrated by the strange events surrounding the recent takeover approach by EBPE to the David Jones board.

David Jones received an unsolicited letter from EBPE on 28 May 2012 containing a highly conditional, uncertain and incomplete expression of interest in making an offer for the company. Given the nature of the proposal, the lack of accessible commercial information as to the bidder and concerns around the legitimacy of its offer, the DJs board decided not to announce the approach. In doing so, it relied on the exception under LR 3.1A. 

On 28 June 2012 David Jones received a further letter from EBPE indicating its interest in the company. This offer was again conditional and incomplete. It also lacked any information as to the financial capacity of EBPE or its management.  The DJs board initially decided not to disclose this information to the market in reliance on the disclosure exception.

However, following receipt of the second EBPE letter, it appeared that EBPE’s proposal had become known to several third parties outside of the company. Therefore, DJs made a short announcement prior to the opening of trading on 29 June 2012 that it had received an unsolicited letter from “a non-incorporated UK-entity about which no usual public information [was] available, indicating its interest in making an offer for the Company” and advised investors to “treat any market related comment cautiously”. David Jones’ share price immediately spiked by almost 20%. 

David Jones subsequently became aware that media outlets, including Bloomberg and the Fairfax press, had details of EBPE’s offer (as contained on a newly established UK-based blogging site) and were intending to publish the information. In response, the company issued a further announcement on the same day including the name of the bidder and the proposed value of the deal ($1.65 billion) but noted that no details of EBPE’s financial capacity or management had been provided to it. Within a matter of days, following intense media scrutiny, the bid by EBPE was withdrawn because “the recent publicity around its proposal made it difficult to proceed”. DJs went into trading halt and informed the market that EBPE had withdrawn its proposal. The share price declined.  

Some commentators have suggested that David Jones may have “jumped the gun” in announcing the offer. That may be so by reference to the more traditional approach to disclosure of takeover approaches outlined above. However, in our view, the board’s responses were understandable. In particular, once the board formed the view that confidentiality had been lost they would have felt obliged to disclose. The events here are indicative of the pressure on Australian listed companies to comply with the stringent disclosure requirements which require “immediate” disclosure under threat of an ASIC infringement notices and shareholder class actions if non-compliance is detected.

Arguably, if anything DJs could have said more about the putative bidder and the very real concerns they had about EBPE’s lack of financial track record and the credibility or legitimacy of EBPE’s offer.  This may have limited any substantial (and ultimately unwarranted) share price movement. 

Having said that, hindsight is a wonderful thing and it is easy for commentators to say target board’s should have done things differently. The fact of the matter is, faced with a similar set of facts, many target boards in 2012 would have acted the same.

So what does this all mean?

In our view, there are 2 important matters to take away from David Jones and the recent trend of early disclosure:

Firstly, we think target boards should test the need for disclosure of takeover approaches. Perhaps adopt the more traditional route of not being too quick to prematurely announce a takeover approach. There are countless numbers of companies over the last 12 months that have announced takeover approaches which have come to nought, yet between the time a potential bid was announced and went away, the company’s share price went on a roller coaster ride.

There is an exception in the listing rules for incomplete and confidential approaches. If confidentiality hasn’t been lost then often it will be best to rely on the exception.

Secondly, we consider that target boards and M&A practitioners could be assisted by some regulatory guidance on key issues in the application of the listing rules exception, levying of ASIC infringement notices and on best practice in the area. And importantly by best practice we do not just mean an adoption of a mantra that more and early disclosure is good disclosure. In our view, shareholders interests are often best served by keeping confidential approaches confidential until they become agreed takeovers or, if not agreed, more certain to be made or put to shareholders. Premature disclosure often takes a share price on an unnecessary ride before returning to where it started when it becomes clear that the bid fails to proceed.

In terms of guidance, we think it would assist if ASIC could give some guidance on what circumstances will constitute a loss of confidentiality. For instance, is the posting of information by anonymous bloggers on foreign social media websites which can be notoriously unreliable, an example of a loss of confidentiality that requires disclosure?  Would a reasonable person expect that an entity should disclose such information? Separately, some guidance as to what constitutes “immediate disclosure” under the rules? It takes time to convene a directors meeting to consider a takeover approach and to properly draft an announcement. Poorly drafted announcements can often do more harm than good. The Rio Tinto and Promina precedents in particular are troubling. Is an alleged failure to disclose something in 75 minutes really a breach of the law? If so, then maybe the word “immediate” should be changed in LR 3.1. Some guidance on how ASIC will exercise its power to issue infringement notices (and the adoption of a practical and pragmatic approach) would be welcomed and helpful.

While Australia’s continuous disclosure regime is generally effective in assisting market integrity, in our view, we need to find a better balance between encouraging early disclosure of takeover approaches (more out of fear of sanction) and prematurely announcing transactions that are unlikely to proceed.

Early disclosure is not a good thing if shareholders and the market trade in expectation of takeovers that are destined never to happen.