If a takeover bidder's share price falls materially, can the bidder withdraw its bid or lower its bid price? If not, how can the bidder protect itself in a volatile market?
Under Australian rules, a bidder cannot normally withdraw its bid because of a fall in the bidder's share price or a market correction.
A bidder cannot normally lower its bid price. The bid cannot be made at a lower price than the highest price paid by the bidder and its associates in the last four months. The bidder must proceed with its bid on the announced terms, within two months of the announcement.
There are additional problems under the Australian rules if the bid is a scrip bid and the bidder has paid cash for shares in the previous four months. The scrip bid ratio may need to be improved as the bidder's share price falls.
As a consequence of all these restrictions, there is normally no mechanism by which a bid can be withdrawn or a bid price can fall with the equity market.
A bidder can protect itself with an appropriate condition in its bid. A bid condition based on a specified material fall in an equity market index should be lawful and effective. A condition based on a fall in the bidder's own share price may be unlawful, and would in any event create perverse market incentives.
A material adverse change condition (MAC) may, but is unlikely to, protect the bidder. MACs can give rise to uncertainty and disagreement as to whether they have been triggered. MACs are also subject to the risk that they will be interpreted legally as being subject to supervening tests, such as that the relevant adverse change will have a medium or long term adverse effect on the value of the target. A MAC may provide illusory comfort to a bidder.
As always, it is important to ensure that any condition in the bid finance agreements is picked up in the bid conditions. Being a bidder bound to proceed with a bid, but without finance, is a bad place to be.
On the upside, falling share prices may create relative or absolute value opportunities.
And, as noted above, it is possible for a bidder to protect itself during the bid period against the bid price risk created by market volatility, by the use of an appropriate market index fall condition.