ASX has recently released Exposure Draft Listing Rule Amendments relating to the treatment of “reverse takeovers” under Chapters 7, 14 and 19 of the Listing Rules. Under the proposed amendments, if a transaction falls into the proposed definition of “reverse takeover", it will no longer benefit from the exceptions 5 and 6 in Listing Rule 7.2. As such, bidders will be required to obtain shareholder approval for proposed issues of securities under, or to fund, a reverse takeover.
You can review the Exposure Draft Listing Rules, here.
For the purposes of the new rules, a takeover bid or scheme of arrangement will be a “reverse takeover” if the number of shares issued by the bidder either as consideration under a scrip deal or to raise the funding for a cash deal is equal to or greater than the number of shares on issue in the bidder (ie greater than 100% increase in issued capital). ASX toyed with a lower threshold, but (correctly, in our view) agreed with submissions to the effect that this would be an unwarranted intervention in the regulation of control transactions.
These proposed amendments will change the way reverse takeovers are conducted in terms of shareholder approval, disclosure, voting exclusions and the issue of securities. ASX proposes to introduce these amendments with effect from 1 October, 2017. ASX has stated that the proposed amendments would not apply to any transaction that is announced before this implementation date. However, parties contemplating a transaction of this nature should seek advice as to what form of announcement may suffice to anchor the deal under the old rules – e.g whether a statement of a conditional intent to make a takeover bid would be sufficient.
1. Regulation of reverse takeovers
ASX released a consultation paper in November 2015 on shareholder approval requirements for listed company mergers by way of reverse takeovers. ASX received 14 written submissions in response to the consultation paper and has recently released its response to this consultation, outlining proposed amendments to the Listing Rules.
Currently, neither the Corporations Act nor the ASX Listing Rules require bidders to obtain shareholder approval in a reverse takeover. Reverse takeovers, like ordinary bids and schemes, have been treated as falling into exceptions 5 and 6 of Listing Rule 7.2, and as such are excluded from the Listing Rule 7.1 restriction on issues of shares in excess of 15% without shareholder approval.
ASIC and the Corporations Act impose no blanket requirement for bidder shareholder approval in a reverse takeover scenario, albeit ASIC encourages early consultation with it in relation to scheme proposals that would entail a “change of control” in the bidder. Similarly, the Takeovers Panel has not adopted hard and fast rules on the subject. However it is clear that there is the potential for a reverse takeover to give rise to unacceptable circumstances if there is not otherwise a requirement for shareholder approval.
ASX recognises that the Corporations Act, ASIC and the Takeovers Panel are and should be the primary source of regulation of takeovers in Australia. It has stated a desire to take a cautious approach to regulation to avoid reducing the flexibility provided by the Corporations Act to companies embarking on M&A activity. Nonetheless, it also believes that the reforms bring ASX more in line with international peers (a useful survey of which is contained in the Annexure to the Exposure Draft). Interestingly, ASX analysis suggested that between 2012 and 2016, 18 scrip transactions would have fallen within the new definition of reverse takeover, out of a total of 87 transactions. That is a not insignificant proportion of 21%. Half of these were in the resources sector and more than a quarter (five of 18 deals) were at the micro-cap end of the market.
2. Proposed amendments
The proposed amendments will have the practical effect of requiring a bidder in a reverse takeover to obtain shareholder approval under Listing Rule 7.1.
Amendments to Listing Rule 7.2
Listing Rule 7.2 provides exceptions from the general Listing Rule 7.1 restriction on issues of shares in excess of 15% without shareholder approval. Under the proposed amendments, exceptions 5 and 6, which apply to issues under, or issues to fund the cash consideration of, a takeover bid or a scheme of arrangement, will no longer apply to reverse takeovers (as defined above).
Practically, this will mean that Listing Rule 7.1 shareholder approval will be required by a bidder who is undertaking a reverse takeover.
Disclosure in notice of meeting
ASX proposes to amend Listing Rule 7.3.8 to require a notice of meeting for approval of the issue of securities under, or to fund, a reverse takeover to include information about the reverse takeover. ASX will release a new Guidance Note 21 on ‘'The Restrictions on Issuing Equity Securities in Chapter 7 of the Listing Rules”, outlining the information they expect to be disclosed. Preliminary guidance suggests the notice should include a reasonable level of information about the reverse takeover, including information on the target (identity, business model, financials, principal activities), the consideration payable, information about the issue of securities, changes to the bidders board/senior management and details of any persons who will acquire control of the bidder.
ASX will not impose a requirement on companies to obtain an independent expert’s report.
ASX proposes to amend Listing Rule 14.11.1, which outlines whose votes will be disregarded in a vote under Listing Rule 7.1. Under the proposed amendments, the reverse takeover target and any person who obtains a material benefit as a result of the reverse takeover is excluded from voting on a proposed issue under, or to fund, a reverse takeover. Common shareholders of the bidder and target will not be excluded from voting merely because they are a common shareholder. The proposed new Guidance Note 21 will outline what ASX considers to be a “material benefit”. In addition, any person who is expected to participate in a proposed issue to fund a reverse takeover is also precluded from voting in such an issue.
As exists under the current Listing Rules, an associate of a person who is excluded from voting will also have their votes disregarded on the same resolution. It is proposed that a definition of “associate” be inserted in the Chapter 19 definitions, rather than referring to that definition under the Corporations Act.
Under the proposed amendments, votes will only be disregarded if they are in favour of a resolution. That means the persons mentioned above having their votes disregarded, are still able to vote against a resolution for a proposed issue under, or to fund, a reverse takeover.
Issue of securities under, or to fund, a reverse takeover
Lastly, ASX proposes to extend the current period for the issue of securities under Listing Rule 7.1 for securities being issued under, or to fund, a reverse takeover to no later than 6 months after the date of the meeting approving the issue.
In imposing a further layer of regulation on reverse takeovers, ASX’s concern is ostensibly with shareholder dilution, rather than control impacts which remain primarily the concern of ASIC and the Takeovers Panel (and the Court, in the case of schemes). However, regardless of purpose, these amendments will have an impact on the market for control. In this respect they are not costless (as ASX itself concedes), and the challenge is to find an appropriate balance between maintaining flexibility in the market for control whilst balancing bidder shareholders’ legitimate interest in minimising dilution.
The proposed Listing Rule changes continue a trend within ASX towards closer scrutiny of transactions which can exploit flexibility within the broader regulatory landscape to achieve objectives which might be contrary to the purpose of the regulation. We have seen this in the tightening of ASX admission requirements and clamp-down on back-door listing transactions. To this extent, these latest amendments are akin to anti-avoidance or integrity provisions.
In our view, the dilution threshold (100%) for a reverse takeover is appropriate. There are likely to be relatively few “pure” bids or schemes (that is, transactions in which a change of control of the bidder, rather than target, is not the primary or at least significant rationale for the transaction) that are adversely affected by the rules. In other transactions, the imposition of a bidder shareholder approval requirement is in our view appropriate, and consistent with the policy underpinnings of the Listing Rules.
However, in practice some of the rules around voting exclusions and disclosure may require some judgment. Timing might also become an issue in some cases, as it will be necessary to integrate the bidder shareholder approval with the bid or scheme process. The Corporations Act prohibits also bid conditions that are within the sole control of (or satisfaction of which is a “direct result of action by” the bidder. The Takeovers Panel has previously concluded that regulatory conditions do not breach this provision, although there is an implied obligation to pursue the relevant approvals with appropriate alacrity, The same obligation would presumably be implied in respect of bidder shareholder approval.
There is the potential for uncertainty of application and unintended consequences in the new rules, which ASX will need to closely monitor, and on which we look forward to further elaboration in the proposed Guidance Note 21.