Summary

  • The Takeovers Panel declines to make a binding declaration on whether the ‘truth in takeovers’ policy extends to non-cash items, such as franking credits.
  • The Dulux / Alesco proceedings highlight a weakness with the Australian takeover regime, in that market participants are unable to obtain, prior to committing to a course of action, a binding declaration on whether their conduct constitutes ‘unacceptable circumstances’. Instead, participants may be forced to countenance a train wreck in order to find out the view of the Panel.
  • The Dulux / Alesco takeover bid sees the introduction of a novel target-sponsored acceptance facility which is available to both retail and institutional investors.

Background

The background to the Dulux / Alesco takeover bid is set out in our earlier article ‘Parties paint themselves into the ‘truth in takeovers’ corner’.1

However, to briefly recap, on 23 July 2012 Dulux announced a ‘best and final’ offer (the $0.42 Proposal) of $2.05 per Alesco share. In addition, Dulux proposed that it would allow Alesco shareholders to retain up to $0.18 per share in franking credits without deducting this amount from the offer price. In order for shareholders to receive $0.18 per share in franking credits, Alesco’s board would need to declare a fully franked dividend of $0.42 per share. The amount of this dividend would be deducted from Dulux’s offer price of $2.05. As such, under the $0.42 Proposal, Alesco shareholders would receive $1.63 per share from Dulux and $0.42 per share from Alesco in the form of a fully franked dividend.

On 15 August 2012, Alesco rejected the $0.42 Proposal and stated that its board could recommend a $2.05 per share proposal incorporating a $0.75 per share dividend which would provide up to $0.32 per share in franking credits to Alesco’s shareholders – the proposal would be conditional on Dulux acquiring a relevant interest in 90% of the Alesco shares and agreeing to commence compulsory acquisition (the $0.75 Proposal).

On 29 August 2012, Alesco made an application to the Takeovers Panel seeking, amongst other things, an order that the ‘truth in takeovers’ policy, which may have been enlivened by Dulux announcing that the $0.42 Proposal was ‘best and final’, should not prevent the implementation of the $0.75 Proposal.

Developments

On 4 September 2012, the Takeovers Panel announced that it had declined to conduct proceedings in relation to Alesco’s 29 August 2012 application.

On the same day, Alesco announced that it intended to establish the Alesco Shareholder Acceptance Facility (ALSAF) – with the ALSAF available to both retail and institutional Alesco shareholders. Shares delivered into the ALSAF would only be accepted into the takeover bid if Dulux would then have a relevant interest in 90% of Alesco shares.

On 7 September 2012, as previously announced, Alesco paid a $0.15 per share fully franked dividend. The Alesco board said that, given existing limitations under its banking facilities and covenants, it could only facilitate the payment of a further fully franked dividend of up to $0.27 per share (Additional Dividend) in certain circumstances (including that Dulux becomes the holder of at least 90% of the Alesco shares and agrees to commence compulsory acquisition). Alesco stated that the purpose of the ALSAF was to allow Alesco shareholders to support Dulux’s takeover offer ‘without the risk of losing their Alesco [s]hares’ in circumstances where Dulux’s offer becomes unconditional and no Additional Dividend has been paid.

On 7 September 2012, Dulux announced an intention to declare its offer unconditional and accelerate payment to shareholders on or after 1 October 2012 once it had an interest in at least 50.1% of the Alesco shares.

Summary of parties’ positions

As at the time of the Takeovers Panel application, the state of affairs in relation to the consideration proposed to be paid in connection with the takeover could be summarised in the following (simplified) table:

Click here to view table.

Truth in takeovers

The Takeovers Panel declined to commence proceedings and make a binding declaration on whether the ‘truth in takeovers’ policy applied to prevent the implementation of the $0.75 Proposal, leaving market participants guessing.

The Takeovers Panel stated that:

  • there was no agreement between the parties in relation to Dulux’s takeover offer or the $0.75 Proposal;
  • although the Takeovers Panel is the main forum for resolving disputes concerning takeover bids, in the present circumstances ‘there is no dispute about whether the ‘truth in takeovers’ policy applies to the revised bid [the $0.75 Proposal] as there is no revised bid’; and
  • given the above, the situation is unchanged from the circumstances in Re Alesco Limited (No 1 and No 2). Specifically, ‘[i]t is impossible to make any determination about whether and how truth in takeovers policy will apply in the absence of a concrete proposal’.

However, the Takeovers Panel hinted that they thought the ‘truth in takeovers’ policy may prevent the implementation of the $0.75 Proposal, stating:

'We have not had the benefit of submissions, and indeed the matter is not before us as there is no agreement on the $0.75 Proposal, but on everything we have seen we are inclined to the view … that so far we have seen nothing that provides us with any confidence that the $0.75 Proposal would be permitted.’

One is left to speculate whether the Takeovers Panel would have been prepared to make a binding declaration if the parties had agreed that the $0.75 Proposal would proceed.

Commentary on the Takeovers Panel’s approach to binding declarations

A broader issue highlighted by the Dulux / Alesco Takeovers Panel proceedings, and a common source of frustration for advisers, is the apparent unwillingness of the Takeovers Panel to make a binding declaration in advance on whether certain proposed conduct that does not breach the Corporations Act would or would not constitute ‘unacceptable circumstances’.

It would seem that, rather than allowing the parties to approach the Takeovers Panel to seek a binding declaration on an aspect of takeover policy, parties are, in effect, required to countenance the possibility of a train wreck by committing themselves to a course of action before finding out whether their conduct is permissible. In the current circumstances, this would mean that Dulux may have had to announce that it was proceeding with the $0.75 Proposal, with the potential reputational and financial risks associated with a declaration of unacceptable circumstances, before finding out whether their conduct was permitted.

We have previously highlighted the uncertainty created by the apparent unwillingness of the Takeovers Panel to make binding declarations in advance in the context of downstream acquisitions that would otherwise fall squarely within the operation of the exemption in item 14 of section 611 of the Corporations Act (see ‘ASIC releases updated policy on downstream acquisitions’2).

As readers would be aware, there has recently been significant public discussion (including from ASIC) on possible reforms to the Australian takeovers regime. Giving the Takeovers Panel express power (or express encouragement) to make advance declarations on unacceptable circumstances where there is no breach of the law is a reform that we believe would be strongly welcomed by market participants. In other words, the Panel would be making a declaration on policy grounds, rather than a declaration on the application of the law, which it cannot do for constitutional reasons.

Commentary on the Alesco acceptance facility

The introduction of a target-sponsored shareholder acceptance facility was a novel development. The possible risk to Dulux at the time the ALSAF was introduced was that if the facility had gained momentum, institutions may possibly have moved from the existing Dulux (bidder-sponsored) institutional acceptance facility to the ALSAF – with Dulux losing control of the acceptance process as a result.

When the facility was initially introduced, it was going to be interesting to see whether the lure of a possible $0.12 of additional franking credits would be enough to encourage Alesco’s shareholders to support the ALSAF, particularly in circumstances where:

  • Dulux had said that, once it crossed 50.1%, it intended that it would, in the absence of a board recommendation, declare its offer unconditional and provide accelerated payment terms; and
  • not all Alesco shareholders are able to utilise the benefit of franking credits.

However, given that acceptances over only 1% of Alesco’s shares were received by the ALSAF by 28 September 2012, when an agreement was finally reached between Alesco and Dulux, it appears that Alesco’s shareholders found Dulux’s offer and accelerated payment terms more compelling.

One may speculate on how a target-sponsored shareholder acceptance facility could be used in the future. One possibility is that a target could establish such a facility if there was a rival transaction or other corporate opportunity available which had target board support. The facility could be used as a means for target shareholders to demonstrate their support for that rival transaction or opportunity. In other words, such a facility could operate as an alternative to, or even in tandem with, ‘public statements of support’ which target shareholders should be held to under the ‘truth in takeovers’ policy.