- ASIC’s much-anticipated new regulatory guides to consolidate and update its takeovers policy have now been released.
- Most aspects of the final policy are consistent with the consultation draft.1
- Having considered submissions, including from Herbert Smith Freehills, ASIC has made some (mostly very welcome) changes and clarifications to the consultation draft in areas including joint bids, underwriting agreements, acceptance facilities and collateral benefits.
New regulatory guides
The new regulatory guides are:
- Regulatory Guide 5 Relevant Interests and substantial holding notices (RG 5)
- Regulatory Guide 6 Takeovers: Exceptions to the general prohibition (RG 6)
- Regulatory Guide 9 Takeover bids (RG 9), and
- Regulatory Guide 10 Compulsory acquisition and buyouts (RG 10)
In general, the new regulatory guides provide welcome clarity and present comprehensive guidance in a digestible form. The consultation process seems to have worked well, with aspects of the draft policy which had raised practical issues having been ironed out in the final policy.
Only in relation to joint bids and collateral benefits (to a lesser extent) has the final policy departed from the consultation draft in a way we consider adverse. However, in the case of joint bids this is mitigated by other aspects of the new joint bid policy.
Key changes and clarifications since the release of consultation draft
- ASIC has signalled new flexibility in that it may not impose its ‘match or accept’ joint bid relief condition where one of the joint bidders already controls more than 50% of the target’s securities.
- On the flip-side, ASIC has indicated a more restrictive approach to joint arrangements relying on shareholder approval under s611 item 7 and s609(7) of the Corporations Act 2001 (Cth) (Corporations Act).
- ASIC has made its policy more workable in relation to market practice underwriting agreements, reflecting welcome changes from the consultation draft.
- ASIC no longer maintains that an institution-only acceptance facility can only be offered if restricted to those institutions whose mandates preclude them from accepting a conditional bid.
- ASIC continues to prefer the broader ‘inducement’ test for collateral benefits, rather than the ‘net benefits’ test which is favoured by the Takeovers Panel.
Recap on policy developments proposed in the consultation draft, which are now reflected in the regulatory guides
Major policy or guidance developments proposed in the consultation draft which are now reflected in the new guidance include:
- practical guidance on relevant interests, association and completing substantial shareholder notices, including ASIC’s expectation that where a preliminary agreement causes a change in voting power before other (oral or written) agreements contributing to the overall situation have been finalised, the notice must still contain full details of those other negotiated arrangements
- a key focus on matters associated with rights issues and underwriting which have the potential to affect control of an entity, including arrangements that should not be considered ‘underwriting’ – although note that the final policy has benefited from some helpful tweaks to the consultation draft as described below
- ASIC has adopted a ‘balance of factors’ approach when considering whether a benefit is ‘likely to induce’ a recipient to accept a bid or to dispose of its securities
- Class Order relief to confirm that a bidder does not obtain a relevant interest in securities at the time those securities are tendered into an acceptance facility established by the bidder
- expanded guidance on bid funding arrangements, including that ASIC may make further enquiries of a bidder about its funding arrangements (and reasonable basis) if this is not sufficiently evident from the bidder’s statement
- ASIC will apply its joint bid policy to schemes as well as takeover bids
- various technical amendments in relation to compulsory acquisition and buyouts
Good and bad news in relation to joint bids and schemes
Joint bid policy now also applies to schemes
ASIC will apply its joint bid policy to schemes as well as takeover bids. This means that the four joint bid relief conditions, including the ‘match or accept’ condition, will now apply to joint schemes as well as to joint bids.
Exception to ‘match or accept’ condition where one joint bidder starts with more than 50% or less than 3%
ASIC’s consultation draft suggested that ASIC may not impose the ‘match or accept’ condition where one of the joint bidders starts with less than 3% in the target’s securities. In a significant new concession, ASIC has now indicated that it may also not impose the ‘match or accept’ condition where one of the joint bidders starts with over 50%. Unsurprisingly, ASIC may still impose the ‘match or accept’ condition if there are other relevant factors – e.g. if ASIC believes there has been cute structuring to ensure that one party started with more than 50%.
Where the ‘match or accept’ condition is not imposed, ASIC will require the joint acquirers to promptly consult with ASIC if a bona fide third-party proposal arises. ASIC will also require target shareholders to be provided with all material information about the proposal and sufficient time to consider it.
Shareholder approval is no longer a clear alternative to joint bid conditions
Recently, there have been a number of ‘joint bids’ structured as shareholder-approved transactions under which unrelated shareholders have approved the joint arrangements under s611 item 7. The Corporations Act (s609(7)) allows potential joint bidders to take this path instead of seeking ASIC relief so long as they obtain shareholder approval for the arrangements within three months of reaching their agreement to act jointly. ASIC has, in the past, granted relief to allow four months for the shareholder approval instead of three.
However, ASIC has now indicated that it will generally no longer grant those extensions without imposing its joint bid conditions. Even if an extension of time is not required and the joint bidders could obtain target shareholder approval within three months, ASIC has indicated that it may object to the Takeovers Panel on the basis that the joint bidders are seeking to avoid the protections imposed under ASIC’s usual joint bid relief.
The combination of applying joint bid conditions to schemes and shareholder-approved arrangements is a significant new restriction. In our view, this restriction is unnecessary. We consider that s609(7) is a clear path provided by statute to facilitate transactions such as joint bids. Such transactions can only proceed if approved by shareholders unrelated to the bidders, and we query the policy need to impose the ‘match or accept’ condition rather than leaving it to unrelated shareholders to decide. However, having said that, ASIC’s concession that it will not impose a ‘match or accept’ condition where one joint bidder starts with over 50% is a significant mitigant to this policy change. It appears that most (although not all) of the joint bid type transactions which have been implemented over the past few years in reliance on the s609(7) shareholder approval process would still be possible under the new policy without the ‘match or accept’ condition being imposed because one party typically started with more than 50% or less than 3% in the target’s securities.
ASIC clarifies which arrangements will be considered ‘underwriting’
ASIC’s position clarified on what will be considered ‘underwriting’
ASIC has taken into account submissions received under the consultation process in relation to underwriting and provided welcome clarification having regard to market practice.
Arrangements that permit the underwriter to terminate following the occurrence of events over which the underwriter does not have effectivecontrol, for example:
- a materially adverse event (e.g. a deterioration in economic or political circumstances), or
- an adverse change in the financial position or prospects of the company
will generally not be considered a termination right within the effective control of the underwriter, even if the underwriter need only have a reasonable or bona fide view as to matters such as the materiality or effect of the event, to invoke the relevant termination clause.
Examples of what ASIC does not consider to be ‘underwriting’
On the other hand, examples of arrangements which ASIC does not consider to be underwriting include arrangements that permit the underwriter to walk away:
- on the basis of a default by a sub-underwriter – either entirely through termination of the agreement, or by reducing the amount of the underwriting commitment by the amount of the default, or
- on the basis of an event that is certain, or near certain, to occur (e.g. a token fall in a relevant market index).
A more commercial position reached on acceptance facilities
Relief confirms bidders do not acquire relevant interest in securities tendered into acceptance facilities
ASIC has issued Class Order relief confirming that a bidder does not acquire a relevant interest in securities (and therefore possibly breach s606), as a result of a holder tendering into an acceptance facility.
ASIC has not proceeded with the restrictive condition floated in its consultation draft – to the effect that institutional facilities must be limited to those institutions restricted from accepting a conditional takeover bid by their investment mandates or alternatively, the acceptance facility must be open to all institutional and retail shareholders.
Instead, under the final policy, acceptance facilities in respect of conditional bids can be open to specified holders only (for example, institutions). Only where the bid is unconditional must an acceptance facility be open to all holders – but there is less need for an acceptance facility once a bid is unconditional.
ASIC reaffirms stricter line on collateral benefits
ASIC’s ‘balance of factors’ approach
In its consultation draft, ASIC proposed a (non-exhaustive) list of factors that it would commonly consider when examining whether there is a prohibited collateral benefit. The consultation draft acknowledged the Takeovers Panel’s guidance on collateral benefits, however ASIC was silent as to whether it agreed with the ‘net benefits’ test which forms part of the Panel’s policy.
ASIC has now provided guidance that it considers a benefit that constitutes an inducement to accept a bid or to dispose of bid class securities may be a collateral benefit contrary to law, even if it is not a net benefit or is on ‘arm’s length’ terms.
Interestingly, although ASIC indicated in the consultation draft that its approach to collateral benefits would also be relevant to schemes, including in considering requests for a ‘no objection’ letter about schemes, no similar statement appears in the final policy.
Further details of the changes proposed in the consultation draft, most of which are now operative, are contained in our earlier article ‘ASIC releases updated and consolidated takeover guidance’ which appeared in our November 2012 edition of Mergers & Acquisitions Update, which is available here.