The Situation: The Australian Securities and Investments Commission ("ASIC") recently released its report on its corporate finance regulatory activities for the first half of 2019.
The Result: While ASIC's report makes clear that the number of control transactions decreased on the previous period, consistent with the previous period, ASIC's numbers show that foreign acquirers led the charge, accounting for around 70% of deal value and that schemes of arrangement remained the preferred means to execute large deals.
Looking Ahead: ASIC's focus seems primarily directed toward schemes of arrangement. In this context, if you are pursuing a scheme transaction, it is becoming increasingly important to look ahead to identify potential issues that may attract ASIC scrutiny, so as to limit the risk of transaction timetable impacts or other legal obstacles emerging.
Observations on Public M&A Activity Based on ASIC's Reported Deal Statistics
ASIC's figures paint an interesting picture. Key points include:
- The number of control transactions for the six months ending in June 2019 was down notably—approximately 34% on the prior six months.
- Consistent with ASIC's previously reported 2018 half-year ("HY18") statistics, for the first half of 2019, while the number of control transactions undertaken by takeover and scheme of arrangement were similar, parties executing larger value deals prefer to proceed by way of schemes. Bids remain materially more popular for lower value deals (sub $50 million).
- Again, in figures which are strikingly similar to HY18, for the first half of 2019, offshore acquirers accounted for around 73% of deal value and approximately 48% by number of deals.
- Of the largest five control transactions reported by ASIC, three of them involved private equity/asset manager acquirers—including the largest control transaction for the period.
- Four of the top five control transactions involved cash offers. Consistent with HY18, there has been a prevalence of cash (rather than scrip) offers in Australian public M&A.
ASIC's Key Concerns and Areas of Focus in Public M&A
ASIC's regulatory interventions in control transactions are skewed toward schemes of arrangement—with offer terms, "truth in takeovers" statements, shareholders classes and bid structures all being on ASIC's hit list.
Of the schemes which attracted ASIC regulatory intervention, nearly 70% of those were classified as "disclosure only" issues.
Fairness and Equality in Schemes of Arrangement—Class Issues
The report notes that, given the flexibility inherent in the scheme structure and in light of ASIC's statutory role in schemes, ASIC has reinvigorated its focus on ensuring fairness and equality in these types of deals.
ASIC's report draws out the largest control transaction for the period as an example—the acquisition of Healthscope Limited. In that high-profile, contested deal, ASIC intervened to oppose the court convening the scheme meeting on the basis that an interested party—being a party to the property asset elements of the broader control transaction—should form a separate class. ASIC's contention was that, commercially, the "magnitude and nature" of the arrangements—being a series of interlocking arrangements between the party and Healthscope entered into following the party's acquisition of a strategic investment in Healthscope by way of a derivative—positioned the party similarly to a proponent of the deal, justifying that party being placed into a separate class.
While the court had regard to ASIC's arguments in terms of the class composition, it ultimately formed the view that no separate classes should be formed, and in any event, the party's votes were not determinative of the outcome of the scheme.
Target Company Director Benefits in Schemes of Arrangement
Despite market practice having been relatively settled for some time, there has been a lot of heat and light in recent months in relation to the role of, and disclosure around, target directors providing a recommendation to target shareholders in circumstances where the relevant director is entitled to a "benefit" in connection with the outcome of the relevant scheme. These benefits include the acceleration of preexisting incentives and also one-off "transaction" or "exertion" bonuses.
Prominent disclosure in the scheme booklet has long been the way through any perceived issues in these types of scenarios, and the recent decisions—especially those of the Federal Court of Australia—have only served to reinforce this message (despite some inconsistencies in the recent judgments). Indeed, some recently issued scheme booklets have seen the disclosure elevated from the "additional information" section of the scheme booklet to the front of the chairman's letter.
These benefits should also be consistently disclosed in any other scheme-related disclosures (e.g., shareholder information line scripts), so as to limit any assertion that the outcome of the scheme vote has been compromised.
Practitioners also need to be cognizant of whether the relevant director should be taking their own advice, and also whether the relevant director is available to, does not desire to or is not justified in making a recommendation (with regard to the Corporations Regulations requirements). In this regard, flexibility may also need to be appropriately drafted into the implementation agreement depending on the facts at hand.
Some Timely Disclosure-Related Reminders
- Disclosures outside the scheme booklet: ASIC reminds practitioners that it regularly monitors disclosures made outside the scheme booklet and will intervene if it is concerned that the relevant disclosures do not meet (or are inconsistent with) the scheme booklet standard. ASIC gave the example of an announcement that merely recited the recommendation of two proxy advisers without the supporting information underlying those recommendations.
- Supplementary disclosures: ASIC's view is that it considers an acquirer's declaration that an offer will not be increased should be sent to target shareholders via a supplementary dispatch. There have been a few schemes in recent times, where acquirers have made these declarations in the context of some vocal target shareholder criticism of the scheme terms.
- Substantial holding notices and "any relevant agreements": With reference to the Healthscope transaction, ASIC raised concerns with a party's substantial holding notice, from which it was apparent that a number of related ancillary agreements—entered into at the time of agreement included with the original notice—were not disclosed. A revised notice was released to address ASIC's concerns.
Four Key Takeaways
- Offshore acquirers account for the clear majority of the larger public M&A deals executed in the Australian market, with schemes of arrangement continuing to be the clear choice for executing substantial ($1bn plus) deals.
- Private equity/asset manager bidders have been involved in three of the top five Australian public M&A deals for HY19.
- Schemes of arrangement are attracting ASIC's focus: in particular, issues going to fairness and equality, class, target director "benefits" and offer structures are under the microscope.
- ASIC is on the lookout for sloppy disclosure—whether it be disclosures outside the scheme booklet, circumstances in which a supplementary dispatch should be made or completeness of substantial holder notices.