- New Hope made its bid conditional upon the inclusion of specified information in the target’s statement.
- Targets are not required to disclose information in a target’s statement for the sole purpose of satisfying a bid condition. However, the bidder may use the omission of such information to support the breach of a bid condition if reasonable to do so.
- Experts’ reports should be clear, concise and certain, and are to be written with the knowledge that they are for the benefit of shareholders.
The recent decision of the Takeovers Panel involving New Hope Corporation Ltd’s bid for Northern Energy Corporation Ltd highlights several issues about gaining information from target companies and the need to ensure that expert’s reports are clear and simple.
Off-take agreement pricing
Several months before the bid was launched, Northern Energy had announced that it had entered into an off-take agreement for 65% of mine output for a particular mine and said that the coal would be purchased at ‘a price set with reference to the prevailing benchmark prices for Queensland hard coking coal’. The announcement said that, at current coking coal prices, this would result in revenue of approximately $700 million assuming a mine life of at least 10 years.
New Hope wanted more information about how the coal price payable was to be benchmarked or whether the price was subject to any discounts or other arrangements calculated by reference to the benchmark.
So New Hope included a bid condition that confirmation be included in the target’s statement that the price at which coal will be purchased under the off-take agreement is ‘equivalent to the average quarterly price for Peak Downs, Saraji and Goonyella hard coking coal, adjusted for quality variations and/or penalties’.
The target’s statement did not contain this information, nor did the report of the independent expert.
Unhappy with this result, New Hope commenced proceedings before the Panel and argued that there was insufficient information available for it to establish with any degree of certainty what it could justify paying shareholders and that this was contrary to the policy underpinning the legislation.
The Panel rejected the complaint. The Panel pointed out that the independent expert had adopted a 3% discount and presumed that this must have reflected the terms of the actual agreement. The Panel reiterated the principle that a target need not disclose information in response to such a condition, following the principles it first adopted in the takeover involving Goodman Fielder in 2003. The Panel was also wary about a bidder making an application in order to extract due diligence information from a reluctant target.
Two further comments can be made.
First, the precise circumstances in which a target can refuse to disclose information are unclear. Some things will be off-limits, especially if the information is commercially sensitive, but there is a practice of routinely disclosing other information (such as contracts with change of control clauses). Drawing the line can be difficult.
Secondly, although the issue was not raised in the proceedings, what would be the Panel's attitude if the bidder relied on a breach of the condition to terminate its bid?
The decisions in Goodman Fielder in 2003 and NGM Resources in 2010 suggest that, although the Panel will not require a target to disclose information to satisfy a bid condition, unless shareholders also need that information, the Panel will not prevent a bidder from including such a condition, or relying on a breach of the condition, in the reasonable interests of the bidder itself.
In the Northern Energy matter, the Panel found that the discount applied by the independent expert reflected the effect of the pricing clause in the off-take agreement. This may imply that New Hope already had as much information as it could reasonably require on that issue, and that it could not reasonably rely on breach of the condition.
The only escape from that conclusion would be if New Hope, as an industry participant, reasonably required technical details which would be immaterial to shareholders, for whom the financial effect of the agreement should be sufficient.
Independent expert’s report
New Hope also complained about aspects the independent expert’s report. This is not the place to go through each complaint, but, suffice to say, the Panel was mildly critical of some parts of the report. However, the Panel declined to make an order as the target and the expert undertook to release a supplementary report to clarify some of the issues of uncertainty.
The independent expert’s report was approximately 80 pages and a technical adviser’s report was a further 55 pages. The Panel said that they are not untypical examples of these reports and said:
we wonder how much such documents assist shareholders over a document that, in many fewer pages and without the repetition or historical background (which is usually provided elsewhere in a target’s statement or a bidder’s statement), sets out clearly the expert’s conclusions, assumptions and reasons. …While an expert report is often technical, which can make it difficult to simplify, it would be more helpful to shareholders if written with them clearly in mind.
There have been a few other Panel decisions which have been critical of expert’s report. This is consistent with the Panel’s long term objective of improving the quality of documents in the market.