In brief

  • The Takeovers Panel is inviting submissions on what guidance it should provide on reverse takeovers.
  • The Panel is also inviting submissions on whether it should give guidance to the effect that the basis for any ‘undervalue statement’ by a target director must be disclosed.
  • The Panel has confirmed that claims to withhold documents in Panel proceedings on the basis of legal privilege will be decided by the Panel.  

The Takeovers Panel has invited submissions on two important and topical areas, namely:

  • reverse takeovers, and
  • ‘undervalue statements’ – that is, statements by target directors to the effect that a bidder’s offer is less than the value of the target’s securities.

The Takeovers Panel has also finalised its position on how claims to withhold documents in Panel proceedings on the grounds that they are legally privileged will be resolved.

Reverse takeovers

Reverse takeovers became topical in Australia last year when (the smaller) Gloucester Coal announced an all-scrip takeover bid to acquire (the larger) Whitehaven Coal. Gloucester’s 21% shareholder, Noble, subsequently announced its own takeover bid for Gloucester and challenged the legitimacy of the reverse takeover.

Despite finding that Gloucester’s reverse takeover would not have resulted in a change of control of Gloucester, and that Gloucester’s shareholders did not need to approve the reverse takeover, the Takeovers Panel found that the absence of a ‘fiduciary out’ on the part of Gloucester—which would have enabled Gloucester to walk away from the Whitehaven bid if a ‘superior proposal’ for Gloucester was made—was an unacceptable lock-up as it denied Gloucester’s shareholders the chance to consider other proposals for Gloucester (such as Noble’s bid).

However, the Panel made orders that gave Gloucester’s board free hand to choose whichever deal it preferred—Noble’s offer or the original Whitehaven deal.

Unfortunately, the Panel gave no clear guidance on the circumstances in which a reverse takeover should be conditional on:

  • the approval of the bidder’s shareholders, or
  • no ‘superior proposal’ being made for the bidder.

At the end of last year, ASIC re-issued a Regulatory Guide containing comments on reverse takeovers. However, despite making extensive submissions in the Gloucester Coal proceedings, ASIC did not clarify when it thought a reverse takeover should be conditional on such matters. ASIC’s policy position remains elusive.

In light of the ongoing market uncertainty 12 months on from the conclusion of the Gloucester Coal proceedings, the Takeovers Panel has invited submissions on, among other things, whether it should provide guidance on what constitutes a change of control for the purposes of a reverse takeover and whether the triggering of that definition should result in the requirement for a vote of the bidder’s shareholders.

It is hoped that the outcome of this consultation process will be that the Panel will confirm that it is only reverse takeoversthat will result in a change of control of the bidder, where the transaction may need to be conditional on approval by the bidder’s shareholders.

It is also hoped that the Panel will take the opportunity to provide some guidance on the circumstances in which it would expect a takeover bid to be subject to a ‘no superior proposal’ condition. In the Gloucester Coal proceedings, the Panel stated that it did ‘not think that such a condition is a necessary part of all reverse takeovers, although it is more likely to be appropriate for a reverse takeover than an ordinary takeover’. The Panel’s suggestion that there may be circumstances where certain ‘ordinary takeovers’ may need to be subject to such a condition was curious and has created uncertainty.

‘Undervalue statements’

The Takeovers Panel has recognised the importance that target shareholders place on their directors’ recommendation and has invited submissions on what guidance it should provide in relation to recommendations and, in particular, ‘undervalue statements’.

The Panel has indicated that if, as part of the recommendation, there is an express or implied ‘undervalue statement’, the target directors must have a reasonable basis for that statement. The basis for such a statement must be disclosed, if not in the initial response announcement, in the target’s statement.

The Panel made it clear in the Tully Sugar proceedings earlier this year that if an ‘undervalue statement’ is made this does not imply that the target directors should obtain an independent expert’s report valuing the target’s shares. The Panel has also indicated that it does not expect target directors to put an upper limit on the value of the target company nor to necessarily state a specific value for the target company. Nevertheless, the Panel has made it clear that it believes that target’s directors are obliged to provide some guidance in relation to the value of the target’s securities.

Privilege claims

The Takeovers Panel has recently released its revised Procedural Rules. Most of the changes are in the minor and technical category, although they do represent sensible improvements. However, one change that may have an impact in certain proceedings relates to the issue of whether the parties should be required to produce legally privileged documents in Panel proceedings.

In an earlier consultation paper, the Panel indicated that, even if a document was legally privileged, it may still require the production of the document. Thankfully, the Panel has steered away from this position. However, the compromise is that if a party believes a document is privileged it must make a claim to that effect. The Panel will then decide whether the claim is established based on the information supplied and any submissions made.

It is perhaps a little surprising that the Panel decided that it was not appropriate to leave it to the party asserting the claim for privilege, acting on the advice of its commercial lawyers and in accordance with its statutory duties to the Panel, to determine whether a particular document is privileged.

It will be interesting to see how the Panel handles claims for privilege at a practical level. In a court case, it is not uncommon for the parties to request that the presiding judge not decide any claim for privilege, and that instead a different judge consider the claim. This is because the relevant judge that decides the claim may need to review the very document that a party is seeking to withhold from the proceedings. It will be interesting to see if the Panel adopts a similar approach and defers claims of privilege to a member of the Takeovers Panel who is not one of the sitting panel members.

Going forward, there will also be an important role for the members of the Panel Executive who will need to provide the legal advice on which the relevant Panel members will rely in deciding whether a particular claim for privilege is made out.