- The Takeovers Panel has recently finalised its update to Guidance Note 1 ‘Unacceptable Circumstances’ and released new Guidance Note 22 ‘Recommendations and Undervalue Statements’.
- GN 1 now contains limited guidance on when a reverse takeover may result in the Panel making a declaration of unacceptable circumstances.
- GN 22 provides guidance on when inadequate disclosure of reasons for an undervalue statement contained in a ‘reject’ recommendation by target directors may constitute unacceptable circumstances.
The Takeovers Panel has updated Guidance Note 1 ‘Unacceptable Circumstances’ and released new guidance, Guidance Note 22 ‘Recommendations and Undervalue Statements’ in response to recent matters before the Panel relating to reverse takeovers (Gloucester Coal) and undervalue statements contained in or referrable to ‘reject’ recommendations from target directors (Tully Sugar).
In our newsletter of 7 May 20101 we considered issues arising from the Gloucester Coal matter and the Panel’s draft proposals for amending GN 1 and for new GN 22.
Reverse Takeovers and GN 1
Following on from the Gloucester Coal decisions of the Panel in the first half of 2009, the market has eagerly awaited the Panel’s guidance on reverse takeovers. GN 1 now includes the Panel’s formal guidance on the issue and the approach it will take in considering whether to make a declaration of unacceptable circumstances in respect of a reverse takeover.
A reverse takeover which will result in a change of control of a bidder, or which may have a material effect on control of a bidder because of an issue of shares as part of the bid consideration, may result in a declaration of unacceptable circumstances if:
- to use the Panel’s language, the transaction either ‘disenfranchises’ shareholders, or
- it does not meet the policy of chapter 6 of the Corporations Act.
The Panel goes on to note that a reverse takeover may also ‘lock up’ the bidder and affect competition for control of the bidder.
The comment contained in a footnote to GN 1 refers to the possible need to seek bidder shareholder consent to the transaction (the orders made by the initial Panel in Gloucester Coal) or to take other steps to ensure that the bid is compliant with both chapter 6 and its underlying policy. Such steps may include a condition that the bid is subject to no superior proposal being made for the bidder (the orders of the review Panel in Gloucester Coal that overturned the decision of the initial Panel and vested ultimate decision making in the Gloucester Coal board in that matter).
Despite the guidance, uncertainty still remains. It is clear from specific provisions of the Corporations Act that a person is permitted to go through 20% ownership of a listed company as a result of accepting a takeover bid. When referring to the policies of the Corporations Act, it is important to remember that many of those policies are contained in the specific substantive provisions of the Act that are outside of the general ‘Eggleston principles’.
Despite the specific provision permitting a person to acquire more than 20% of a listed company by accepting a takeover, there is a case to be made for asking policy questions where a person (by themselves or as part of a controlling block) obtains control of a bidder through accepting a reverse takeover offer.
Beyond that, the Panel should be slow to intervene. To declare unacceptable circumstances where a person does not obtain control but goes through 20% would cut across the direct intent of the Corporations Act. The relevant exception referred to above must mean something. It should not be ignored by the Panel. By analogy, the Panel may not like the progressive effect of the 3% creep provision, but again, the provisions that permit 3% creeping should not be ignored because they are not liked or because some feel that creeping cuts across the ‘Eggleston’ principles.
The additional ‘disenfranchisement’ test is more of a problem. To refer to the notion of ‘disenfranchising’ a major shareholder as justification for intervention when a reverse takeover results in a smaller bidder issuing shares to a widely held shareholding base may well cause more problems than the policy cure hopes to solve (and query whether that type of deal can properly be described as a reverse takeover anyway). Supporting the position of major shareholders who, for their own specific commercial objectives seek to block any control transactions, will not foster an efficient market for control of target companies. Indeed, ironically, those who will be disenfranchised will be the great bulk of other (non-major) shareholders.
Finally, the suggestion that bidders in these situations include bid conditions that are illegal (absent ASIC relief) or that require objective tests of what are or are not superior proposals (when essentially all implementation agreements in public M&A deals properly require directors to be able to form the view, particularly where there is a qualitative judgment involved such as in competing scrip bids) gives rise to its own issues. These remedies may make it all too hard for companies with blocking 20% shareholders to help all shareholders realise value. The commercial (and legal) difficulties associated with the Panel’s proposed cures to the perceived problem will mean these deals will be unlikely to announce and will not get to the broader shareholder base for approval.
The Gloucester Coal matter raised many interesting policy questions. It appears that the Panel’s policy in this area is still a work in progress.
Recommendations and Undervalue Statements
Following on from the Tully Sugar matter earlier in the year, GN 22 sets out guidance on when the Panel may make a declaration of unacceptable circumstances with respect to target director ‘reject’ recommendations which contain or are based upon, either express or implied, undervalue statements.
In recognising the importance of target shareholders obtaining sufficient information for them to be able to assess the merits of an offer, the Panel has stated that it may make a declaration of unacceptable circumstances if:
- a ‘reject’ recommendation is made which relies on a statement that the offer does not represent fair value or is undervalue, and the reasons supporting the recommendation and the undervalue statement are not clearly disclosed
- the directors, upon receipt of an offer, make a ‘reject’ recommendation with a commitment to subsequently disclose their reasons and they did not make the initial ‘reject’ recommendation in good faith or do not promptly provide their reasons, and
- the reasons given for the recommendation and/or undervalue statement are not soundly based or reasonable. To make such an assessment the Panel will look to see what internal analysis or external advice supports the recommendation and undervalue statement and whether shareholders have sufficient information to make an informed assessment of them.
Consistent with existing practice, the Panel has stated that the form and content of the recommendation and the reasons in support are matters for the relevant directors and has not adopted a prescriptive approach. Although target directors should provide some guidance as to the value of the target to assist shareholders in making an informed decision, target directors are not required to necessarily state a value or put an upper limit on the value of the target.
The guidance is sensible on its terms. Hopefully future Panels will stay broadly within the scope of the guidance.