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Focus: Mergers & Acquisitions – February 2007

Takeovers Panel draft Guidance Note – 'Insider participation in control transactions'

In brief: The Takeovers Panel has released a draft Guidance Note and issues paper relating to insider participation in control transactions. Partner Ewen Crouch (view CV) and Lawyers Matthew Ireland and Mark Boyd-Boland, discuss the reasons behind the development of these guidelines, their key points and how bidders and target companies should proceed with takeover negotiations.

How does it affect you?

  • Following significant recent media attention, corporate directors and managers (and their advisers) will be acutely aware of the increased potential for conflicts of interests (or perceived conflicts of interest) to arise where persons with a pre-existing connection to a target company (referred to as insiders in the draft Guidance Note) become associated with a bidder or may benefit if a bid is successful. 
  • Directors and managers of a company which may, or has become, the subject of a takeover offer where an 'insider' is associated with the bidder should have regard to guidelines proposed by the Takeovers Panel, which seek to address the practical issues in the ongoing management of the target company and the response to a proposal in such circumstances, and seeks to maintain the broader purposes of Chapter 6 of the Corporations Act, particularly the maintenance of an efficient, competitive and informed market.
  • In developing and pursuing takeover proposals, acquirors (including private equity groups) should be mindful of the market perception of conflicts of interests and be aware of the framework proposed by the Takeovers Panel in relation to the conduct of takeover negotiations where insiders at the target company are intended to be involved in, or benefit from, a proposal.

Background

Corporate governance has, in recent times, become increasingly focused upon potential conflicts of interest where, in the context of a possible change in control transaction, persons with a pre-existing connection to a target company are, or are perceived to be, associated with the bidder. Some of the key issues to be addressed in such circumstances include the fulfilment of directors' fiduciary duties, the absence of actual or perceived undue influence and the provision of information to the market and rival bidders.

Such issues have attracted significant media attention, particularly in relation to the proposed management buy-out of Alinta, the privatisation of Flight Centre, the Airline Partners Australia takeover bid for Qantas, and the possible buy-out of Multiplex by Brookfield Asset Management and Roberts Family Nominees. These examples, which have each involved private equity, demonstrate the scrutiny directed towards directors and management in such circumstances.

The Takeovers Panel (the Panel) has sought to address these issues in control transactions, and, on 21 February 2007, released the issues paper together with the Guidance Note. The issues paper confirms that one of the Panel's motivations for considering this subject is the growth of private equity takeover bids, however, the Guidance Note specifies that its application is not restricted to private equity bids, with the focus of the Guidance Note being 'participating insiders' generally.

The Panel acknowledges in the Guidance Note that the issues it covers cut across various aspects of directors' or employees' duties and other aspects of the law (including in relation to the terms of engagement of advisers), but that its concern is to determine whether unacceptable circumstances exist in the context of a bid, rather than to ensure compliance with those duties and other aspects of the law. We note that the Australian Securities and Investments Commission has indicated in the media that it is considering releasing its own policy on these matters, which will presumably have a more general application.

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Who is a participating insider?

The Guidance Note is directed at 'insiders', who are defined as persons in possession of non-public information about a target company by virtue of holding a position of trust with that company, including senior management, directors and advisers. A 'participating insider' for the purposes of the Guidance Note is an insider who enters, or proposes to enter, into an agreement with a potential bidder to gain or benefit from the bidder making a successful bid. The Guidance Note indicates that it is not intended to apply in circumstances where:

  • a potential bidder offers to continue a person's existing arrangements or proposes to enter into arrangements on similar terms; or
  • there is an arrangement between the target and a target adviser under which the adviser would gain or benefit from the bidder making a successful bid (for example, a contingent fee arrangement).

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Addressing potential conflicts of interest

The Guidance Note proposes that boards should develop a governance structure under which an 'insider' must inform the board as soon as the company is approached by a potential bidder and seek the board's consent before taking any action, entering into discussions or providing any information on any possible bid. At that point, further controls (or protocols) should be developed to apply to any communications by participating insiders with the potential bidder.

In the Guidance Note, the Panel identifies a significant role for independent directors (through a sub-committee of non-participating directors), who should prepare and apply appropriate protocols and otherwise supervise the target company's engagement with the bidder. While it is intended that protocols be left to the discretion of a target board, and tailored to individual circumstances, generally, the Panel has suggested that protocols may restrain the role of 'participating insiders', manage the confidential distribution of information to a bidder and ensure that the company has independent (legal and financial) advisers.

The Guidance Note sets out examples of protocols that the target board (or its sub-committee of non-participating directors) may consider adopting and indicates that the Panel would expect to see protocols no less effective than its proposed protocols in ensuring an efficient, competitive and informed market for the target company's securities.

The Panel's example protocols include requiring that:

  • a representative of the target (appointed by the target board or its sub-committee) be present at all meetings between participating insiders and the bidder or potential bidder; and
  • participating insiders to stand aside or resign from their management/board positions in order to pursue the proposed bid.

Target boards need to consider carefully the potential fall-out of requiring a director or manager to stand aside or resign or of quarantining key management team members from the ongoing management of the company.

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Provision of information to rival bidders

The Guidance Note identifies the potential for co-operation between 'participating insiders' and a bidder to allow that bidder access to more information about the target company (particularly the target's strategies) than that made available to other rival bidders. The Panel is not seeking to enforce a principle that rival bidders must always have equal access to information, but the Guidance Note suggests that the Panel would heavily scrutinise the reasons why, and the circumstances under which a target company withheld certain information from a particular rival bidder where that information had been disclosed to the bidder associated with management.

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Disclosure to shareholders

In the Guidance Note, the Panel proposes that disclosure in the bidder's statement or target's statement should cover the identity of any 'participating insiders', details of any incentive offered to those 'participating insiders', and a description of the protocols adopted by the board (or its sub-committee of non-participating directors). 

Further, as a general principle, the Panel has suggested that the information disclosed in the target's statement should address the level and detail of information otherwise provided to the bidder, and the target company should seek to ensure that a bidder associated with the target's management does not have an information advantage over shareholders.

The purpose behind the Panel releasing the Guidance Note and the issues paper is to invite comment upon the policy issues underpinning insider participation in a takeover offer or buy-out transaction and to develop a process for consultation between the Panel and the market. While each of the principles outlined above remain subject to review and comment, the Guidance Note and the issues paper cover many of the issues that need to be addressed by persons developing a takeover bid in conjunction with 'insiders', and provide a useful perspective on the appropriate conduct of a target company and its officers and advisers in such circumstances.

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Key things to remember

When preparing or responding to a takeover proposal where persons with a pre-existing connection to a target company are associated with the bidder, the main things to remember are:

  • to be aware of actual or perceived conflicts of interest;
  • to consider engaging independent (legal and financial) advisers;
  • the board or a sub-committee of non-participating directors should control the target's response;
  • to think carefully about communications between the bidder and the target, the information which should be provided and who should be involved in any discussions; and
  • directors and officers of target companies must always keep in mind the duties they owe to the target.

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