Key takeouts

  • Macmahon's recent proposal to enter into a control transaction with AMNT after a self-imposed deadline had expired reinforces old weaknesses and highlights potential new weaknesses in ASIC's 'truth in takeovers' policy.
  • The weakest point of ASIC's 'truth in takeovers' policy has always been reluctance by ASIC and the Takeovers Panel to enforce it to deny shareholders additional value or the opportunity of a deal.
  • ASIC's refusal to hold Macmahon to its self-imposed deadline on its deal with AMNT again suggests that ASIC is reluctant to deprive shareholders of a deal by enforcing its 'truth in takeovers' policy.
  • Macmahon's approach suggests a new weakness that ASIC's 'truth in takeovers' policy can be manipulated by presenting statements as part of a broader 'non-binding' proposal.

ASIC's 'truth in takeovers' policy

 

ASIC's 'truth in takeovers' policy is contained in ASIC Regulatory Guide 25 - Takeovers: False and misleading statements. The Takeovers Panel has endorsed this policy as a "fundamental tenet" of Australia's takeover regime.

ASIC Regulatory Guide 25 provides that a person who makes a statement in relation to a takeover bid should be held to that statement, and cannot depart from the statement, unless the person clearly and expressly qualifies it at the time of making it.

ASIC Regulatory Guide 25 states that a 'last and final statement' is a statement by a market participant that they will or will not do something in the course of a bid. The same principles apply to a statement by a bidder that it will not extend the offer period, known as a 'no extension statement'.

ASIC Regulatory Guide 25 makes it clear that, whatever language is used, if a right is to be reserved, the statement must clearly convey the message to all holders of securities. ASIC Regulatory Guide 25 gives examples which highlight the need for any qualification to be proximate to the statement.

Macmahon's self-imposed deadline

On 1 March 2017, Macmahon announced to ASX that it had entered into a Heads of Agreement under which it agreed to negotiate a transaction with Indonesian miner AMNT, under which AMNT would obtain control of Macmahon in consideration for granting Macmahon a mining contract and selling it equipment (the AMNT Proposal).

The announcement of the AMNT Proposal included the following statement as a term of the Heads of Agreement:

“The parties will cease all negotiations between them concerning the Proposed Transaction after 13 April 2017, if they have not signed the Implementation Deed by that date.” (emphasis added)

(the No Extension Statement).

The No Extension Statement is unusual. Agreements in respect of potential proposals will typically include a sunset date, after which either party may terminate the agreement. In this case, however, the Heads of Agreement in respect of the AMNT Proposal went further by specifying that the parties will cease all negotiations after a sunset date.

It is unclear why Macmahon made the No Extension Statement, rather than simply including the common termination right but, given that the No Extension Statement was made during CIMIC's takeover offer for Macmahon, part of the rationale for Macmahon's course of action may have been driven by Macmahon's desire to defeat CIMIC's takeover offer.

Regardless of the rationale, given its unusual construction, the No Extension Statement appears to be a statement that Macmahon would, or would not, do something during the course of CIMIC's takeover offer. As such, the No Extension Statement appears to attract the application of ASIC's 'truth in takeovers policy', namely as a 'last and final statement' of the type contemplated by ASIC Regulatory Guide 25, and is analogous to a 'no extension statement'.

The No Extension Statement clearly and unambiguously states that Macmahon would, or would not, do something during the course of CIMIC's takeover offer.

Macmahon walks away from its self-imposed deadline On 18 April 2017, Macmahon announced to ASX an update to the AMNT Proposal, which included the following statement:

“Transaction documentation and regulatory approval work streams are now well advanced, and both parties remain committed to finalising binding documentation on terms substantially consistent with the previously announced Heads of Agreement, as soon as possible…” (emphasis added)

(the Continuation of Negotiations Statement).

The Continuation of Negotiations Statement is the exact opposite of the No Extension Statement. That is, by making the Continuation of Negotiations Statement, Macmahon undertook the exact conduct that it said that it would not undertake when it made the No Extension Statement.

ASIC took no action in response to the Continuation of Negotiations Statement and did not seek to hold Macmahon to the No Extension Statement. Accordingly, Macmahon was permitted to continue negotiating with AMNT for several weeks until the AMNT Proposal became a binding transaction to be put to Macmahon shareholders for approval.

ASIC did not explain why it took no action in response to the Continuation of Negotiations Statement.

Macmahon's conduct highlights old weaknesses in ASIC's application of its 'truth in takeovers' policy

Macmahon argued that it was permitted to act inconsistently with the No Extension Statement. The rationale was that, if forced to act in accordance with the No Extension Statement, Macmahon would be prevented from pursuing a transaction with AMNT where the Macmahon Board considered that transaction to be in the best interests of Macmahon.

In other words, Macmahon argued that it should be entitled to act contrary to the No Extension Statement because that would benefit Macmahon shareholders, and to be held to the No Extension Statement would deny shareholders a transaction.

Whilst it is unclear why ASIC did not enforce the No Extension Statement, it is possible that ASIC took the view that the 'truth in takeovers' policy did apply but to enforce the policy would have unfairly denied Macmahon shareholders the possibility of voting on a binding transaction considered to be in the best interests of Macmahon.

If that is correct, ASIC's approach is similar to the position taken in CEMEX's offer for Rinker. In that case, CEMEX sought to allow Rinker shareholders to retain the benefit of a dividend, contrary to CEMEX's last and final statement. ASIC did not ask the Takeovers Panel to order CEMEX to be held to its last and final statement but, instead, ASIC proposed a compensation order, contrary to the approach set out in ASIC policy that "A bidder cannot depart from a no increase statement, even if it compensates those who have sold on-market, or accepted into a market bid or competing bid."

Similarly, in respect of FLSmidth's 2012 takeover bid for Ludowici, the Takeovers Panel permitted FLSmidth to depart from an earlier 'no increase' statement and increase its offer price on the basis that FLSmidth compensate shareholders who had traded Ludowici shares in reliance on the statement.

The Macmahon example further reinforces the perceived inconsistency in application of ASIC's 'truth in takeovers' policy; particularly, a reluctance to enforce the policy to deny shareholders additional value or the opportunity of a deal. It appears that ASIC and the Panel take the view that a superior outcome for target shareholders trumps a strict application of ASIC's 'truth in takeovers' policy.

Macmahon's conduct suggests a new weakness in ASIC's 'truth in takeovers' policy

Macmahon argued that it was permitted to take action inconsistent with the No Extension Statement as the Heads of Agreement was 'non-binding'. However, the contrary argument is that the non-binding nature of the Heads of Agreement is not an express qualification of Macmahon's clear statement that Macmahon would, or would not, do something during the course of CIMIC's takeover offer. Further, the mere fact that the AMNT Proposal may have never turned into a binding transaction does not qualify an express statement that the parties will stop negotiating if it has not turned into a binding transaction by a deadline.

The contrary argument appears to be more consistent with ASIC's 'truth in takeovers' policy than Macmahon's argument. This is because ASIC's 'truth in takeovers' policy requires that, if a market participant intends to reserve the right to depart from its statement on the happening of an event, it must clearly qualify its statement.

The No Extension Statement itself had no clear qualification – the market would need to itself deduce that Macmahon never meant to be bound by that statement as a result of the non-binding nature of the Heads of Agreement.

The ability of readers to make that link was made more difficult by the lack of proximity of the terms regarding the non-binding nature of the Heads of Agreement to the No Extension Statement. The No Extension Statement was included in the 'back-end' of the Heads of Agreement on page 7, together with terms that by their nature a reader would expect the parties to intend to be bound by, including confidentiality and payment of expenses. The term that the Heads of Agreement was non-binding was included on page 2, far away from the No Extension Statement. That lack of proximity appears inconsistent with ASIC policy that any qualification must be proximate to the statement.

If Macmahon's argument is correct, and express statements that Macmahon would, or would not, do something during the course of CIMIC's takeover offer can be displaced by simply making them under the cover of a non-binding document, then this suggests a new weakness that ASIC's 'truth in takeovers' policy can be manipulated by presenting statements as part of a broader 'non-binding' proposal.

What does this mean for bidder conduct going forward?

If Macmahon's argument is correct, then bidders may be able to avoid being held to express statements that they will, or will not, do something during the course of a takeover offer by simply making those statements under the cover of a non-binding agreement. The practical implications are concerning.

Consider, for example, the following hypothetical scenario:

  • A bidder holds a 19.9% stake in a target and would ideally like to achieve control of the target.
  • The bidder makes a takeover bid for all of the shares in target that it does not already own.
  • After launch of the offer, the bidder agrees with the target that if one or more major shareholders in target who together hold 30% of target shares immediately accept the bidder's offer, then the bidder will extend the offer for at least three months. That agreement is contained in a non-binding Heads of Agreement announced to ASX.
  • The major shareholders accept the bidder's offer but (contrary to the statement included in the non-binding agreement) the bidder does not then extend the offer and closes the offer on its scheduled close date, having reached its goal of 50% ownership and not wanting to pay for any further acceptances.
  • Other target shareholders did not rush to accept the bidder's offer before it was closed, as they thought it would be extended for a further three months. As is common, most acceptances of a takeover offer happen in the last week of the offer period. The question for ASIC and the market is whether this type of conduct should be allowed? If not, what will the likely consequence be of ASIC's reluctance to strictly enforce its policy?