- Bidders who solicit, induce or procure intention statements from substantial shareholders may, depending on the facts and circumstances, risk becoming associates of those shareholders and acquiring voting power in the shares held by those shareholders, which voting power will count towards the 20% rule.
- The Panel will likely only enforce a matching right if it is consistent with the target’s directors fiduciary duties.
- On the facts of this case, the Panel said it would have applied a fiduciary out to the matching right which prevented the target directors from changing their recommendation for 5 business days.
On 28 May 2014, Drillsearch Energy Limited (Drillsearch) and Ambassador Oil and Gas Limited (Ambassador) jointly announced a recommended takeover bid by Drillsearch for Ambassador.
It was also announced that:
- Drillsearch had entered into agreements with 32 shareholders acquire 19.9% of the Ambassador shares (Pre-Bid Stake), and
- 2 substantial shareholders and 3 directors of Ambassador intended to accept the offer within 14 days of it opening (Intention Statements). These people held, in aggregate, 25% of the Ambassador shares. One of the substantial shareholders was Mrs Fotoula Hatziladas, the wife of Ambassador’s financial adviser (Mr Kleo Hatziladas).
On 10 June 2014, Magnum Hunter Resources Corporation (Magnum) announced a competing takeover bid.
On 12 June 2014, Drillsearch’s offer opened and, on 16 June 2014, Drillsearch increased its offer and declared it unconditional. On the same day (just 4 days after Drillsearch’s offer opened), the 2 substantial shareholders who had made the Intention Statements and 2 of the directors (collectively representing 24% of the shares) accepted Drillsearch’s offer.
On 17 June 2014, Magnum increased its offer and declared it unconditional and the next day applied to the Panel.
Association and breach of the 20% rule
The Panel found that Drillsearch had an agreement, arrangement or understanding with each of Mr and Mrs Hatziladas and the directors of Ambassador for the purpose of controlling or influencing the conduct of Ambassador’s affairs and that they were acting in concert. Accordingly, the Panel held that they were associates – with the result that Drillsearch had voting power in their shares. The Panel did not make a finding of association between Drillsearch and the second substantial shareholder that had made the Intention Statements.
In reaching this conclusion, the Panel considered a variety of evidence which suggested a level of orchestration between Drillsearch, Mr and Mrs Hatziladas and the directors of Ambassador in relation to Drillsearch’s offer.
The Panel found that, although Drillsearch may not have initiated contact, or had any discussions, with any Ambassador shareholder regarding any intention statement, Drillsearch “did not simply sit passively, it took steps to ‘lock in’ various shareholdings”. For example, before the announcement of Drillsearch’s initial offer, Drillsearch told Mr Hatziladas that it required the Pre-Bid Stake and that the Intentions Statements ‘would be beneficial to Drillsearch’s offer’. Also, Drillsearch’s general manager of business development, had sent an email to the managing director of Ambassador which attached an example of a shareholder intention statement – curiously, no words were contained in the email. The form of the Intention Statements were significantly more favourable than the formulation attached to Drillsearch’s email.
In addition, the Panel noted that there was no reason for the shareholders who had made the Intention Statements not to have waited the full 14 days before accepting Drillsearch’s offer. The decision to accept early was uncommercial and precluded the opportunity of a counterbid arising.
Furthermore, the Panel noted that if Drillsearch had desired a 19.9% pre-bid stake, that could have been obtained from the shareholding of Mrs Hatziladas and the Ambassador directors. This would have been much simpler than obtaining it from 32 individual shareholders.
The finding of an association meant that Drillsearch had voting power of approximately 19.55% of Ambassador before acquiring the Pre-Bid Stake. The acquisition of the Pre-Bid Stake therefore increased Drillsearch’s voting power in Ambassador above 20% in breach of the 20% rule.
The Panel concluded:
“It is legitimate for shareholders who wish to make a supporting statement to indicate their intention, even in a way that binds them under the ASIC policy. It is not legitimate if this is the mechanism used when some agreement, arrangement or understanding has been reached, or the parties are acting in concert, to achieve an end.”
The Panel ordered, among other things:
- the acceptances by the shareholders who had made the Intention Statements, be reversed and that those shareholders must wait 14 days after the release of a supplementary bidder’s statement before deciding whether to accept the offer,
- all other shareholders who had already accepted the offer be given the right to withdraw their acceptance,
- the agreements with 32 shareholders under which Drillsearch amassed its Pre-Bid Stake were declared voidable – with each of those shareholders having the opportunity to get out of these agreements, and
- Drillsearch was required to keep its offer open for at least 21 days after the date of publication of a supplementary bidder’s statement.
Another important issue that arose in this matter related to the matching right that Ambassador had granted to Drillsearch.
As is customary, the bid implementation agreement provided that:
“During the Matching Right Period no Ambassador Director is permitted to change his or her recommendation of the Offer or to make any public statement to the effect that he or she may do so at some further point in time…”
ASIC and Magnum submitted that the 5 day matching right, when coupled with the Intention Statements, was anticompetitive and unacceptable.
The Panel did not need to deal with this issue because of the orders it made in respect of the Intention Statements, but it nevertheless said it would likely enforce a matching right only if it was consistent with the fiduciary duties of the target’s directors and that, on the facts of this case, it would have applied a fiduciary out to the above mentioned matching right.
Significantly, however, the Panel did not suggest that it would have applied a fiduciary out to the other limb of the matching right in this case. That limb prevented the target from entering into an agreement with a rival bidder for a period of 5 business days. In addition, the Panel did not go so far as to say that, going forward, every matching right needs to be subject to a fiduciary out.
Although the Ambassador Oil & Gas decision very much turned on its own unique facts, the Panel’s decision serves as a warning that a bidder who solicits, induces or procures intention statements, to which ASIC’s truth in takeovers policy applies, from one or more substantial shareholders may, depending on the facts and circumstances, risk becoming an associate of such shareholders. If this occurs, the bidder will acquire voting power in the shares of those shareholders – such voting power will be counted for the purposes of the 20% rule.
It is disappointing that the Panel felt the need to express views in relation to whether the matching right in this matter needed to be subject to a fiduciary out, as, on the Panel’s own acknowledgment, it was not necessary for it to do so in in order to decide this matter.
Before this decision, it was widely accepted in the market that matching rights did not need to be subject to a fiduciary out. Although this decision turned on its own facts, it has muddied the waters in this regard, at least in relation to matching rights linked to changes in director recommendations.
This important development is something that would have been more appropriately dealt with through a public consultation process – as happened in the United Kingdom when the UK Takeover Panel decided to outlaw all exclusivity arrangements (including matching rights) - as it involves a significant policy question.