In brief 12 min read
Bidders and targets must exercise caution in securing shareholder support over more than 20 per cent of target shares for bids and schemes, as ASIC continues its clamp down on shareholder intention statements and prepares to issue new guidance on 'truth in takeovers'. In this article, we take a closer look at ASIC's policy concern and recent market practice, and set out our views on the right way forward for shareholder intention statements.
Background
Since the Takeovers Panel decision in MYOB in 2008,1 a market practice has developed under which a bidder will seek to 'tie-up' more than 20 per cent of the shares in the target by requiring, effectively as a condition of the bidder's willingness to make a bid or propose a scheme, that one or more major shareholders make statements to the market (usually contained in the bidder's announcement of the bid or the target's announcement of the scheme) that the shareholders intend to accept into the bid, or vote in favour of the scheme, in the absence of a superior proposal. A shareholder intention statement like that enlivens ASIC's 'truth in takeovers' policy,2 effectively binding the shareholder to that statement once made.
The background to this is that Australian takeover law prohibits a person from acquiring a 'relevant interest' in more than 20 per cent of a target's shares, except pursuant to a bid or scheme. If a bidder was to obtain contractual undertakings from major shareholders over more than 20 per cent of the shares to accept into the bid, or to vote in favour of the scheme, the bidder would breach this prohibition. However, obtaining an appropriately caveated shareholder intention statement over more than 20 per cent, which then becomes binding under 'truth in takeovers', has been seen as a way of overcoming this issue.
Since its decision in MYOB, the Takeovers Panel's approach has been that obtaining a shareholder intention statement is likely to be acceptable, provided the statement is expressed to be subject to no superior proposal, and allows a reasonable period of time for a superior proposal to be received. This is because a statement which is caveated in this way will not kill off any auction for control. Note that the Takeovers Panel is an administrative body, not a court, and doesn't have to make a declaration of unacceptable circumstances, even if the 20 per cent prohibition in the Corporations Act 2001 (Cth) (the Act) has been breached.3
The issue here is that ASIC doesn't like the practice, because it says solicitation by a bidder of a shareholder intention statement over more than 20 per cent of the shares gives the bidder a 'relevant interest' in those shares and breaches the 'black letter' law, even if the statement is expressed to be conditional on there being no superior proposal. In recent years, ASIC has become more active in trying to curb this practice, although its enforcement continues to be sporadic, at best.
Earlier this month, ASIC released its latest report into its regulation of corporate finance in Australia.4 In that report, ASIC indicated it will continue its campaign against bidders soliciting shareholder intention statements over more than 20 per cent. Also, ASIC will shorty release, for consultation, revisions to its regulatory guide on 'truth in takeovers', which could potentially include an express prohibition on this practice
As ASIC is reviewing its 'truth in takeovers' regulatory guide, we take a closer look at ASIC's policy concern and recent market practice, and set out our views on the right way forward for shareholder intention statements.
What is ASIC's concern?
As discussed above, ASIC takes issue if a bidder has, effectively as a condition of its willingness to make a bid or propose a scheme (or, in fact, to increase the consideration under a bid or scheme), obtained an acceptance or voting intention statement from major shareholders whose shareholdings, when aggregated with the bidder's, exceed 20 per cent. Often, these statements of intention are contained in the bidder's announcement of the bid, or the target's announcement of the scheme, and are attributed to the major shareholder. Including such a statement in the bidder's or target's announcement requires the shareholder's consent. In those circumstances, the only logical explanation for the intention statement appearing in the announcement would seem to be that there has been some pre-existing agreement, arrangement or understanding between the parties..
ASIC's view is that this sort of agreement, arrangement or understanding will give the bidder a relevant interest in the major shareholder's shares in breach of the 20 per cent prohibition in the Act. ASIC points out a contractual undertaking from the major shareholder in this form would breach the Act, and that bidders should not be free to avoid this simply by convincing the major shareholder to make a 'truth in takeovers' statement instead.5 ASIC's view is that, even where the communication between the bidder and major shareholder is indirect (such as through the target, per the Unity Mining scheme in 2016)6, a breach of the Act may still arise.
ASIC's intervention in recent transactions
It is not uncommon for ASIC to look behind shareholder intention statements to determine whether there was any agreement, arrangement or understanding between the bidder and the major shareholder who made the statement, whether direct or indirect through the target, which could cause the bidder to acquire a relevant interest in breach of the 20 per cent prohibition in the Act. Some recent examples include the followingthe Act. Some recent examples include the following:
Tawana Resources scheme of arrangement
In this transaction, shareholders holding, in aggregate, 39.5 per cent of the target shares had made statements confirming their intention to vote in favour of the scheme in the absence of a superior proposal. Prior to the first court hearing, ASIC reserved its position as to whether those arrangements had given the bidder a relevant interest in more than 20 per cent of the target, in breach of the Act. ASIC also required the target to 'tag' the votes of those shareholders who had given the statements. That way, ASIC could appear at the second court hearing to object to the scheme if those votes ultimately proved determinative of the scheme's approval.
ASIC's approach in Tawana Resources was similar to its approach in the Unity Mining scheme in 2016 (where the shareholder intention statements were, in fact, given to the bidder through the target after the bidder had indicated it would increase the scheme consideration if the major shareholder made a 'truth in takeovers' statement). Although the court in Unity Mining and Tawana Resources found the shareholders who made the statements did not constitute a separate class for the purpose of voting on the schemes as a result of their statements, it remains to be seen what a court would do if, in the future, there was a challenge to the fairness of a scheme that would not have been approved by the requisite majority without the votes in favour of those 'tagged' shares.
Oz Minerals' takeover bid for Avanco Resources
Oz Minerals' announcement of its offer included a statement that it had entered into a pre-bid acceptance deed with Appian in respect of 18.45 per cent of the target shares, and that funds and accounts managed by Blackrock (which owned 11.6 per cent of the shares), intended to accept the bid for all of their shares in the absence of a superior offer, and subject to the satisfaction of the bid conditions.
A few days later, Oz Minerals further announced ASIC had asked it to clarify Blackrock's statement of intention, that Blackrock was not bound by its intention statement, and that Blackrock reserved the right to deal with its Avanco shares in its absolute discretion.
Billabong scheme of arrangement
Billabong's announcement of the scheme noted the bidder, Boardriders, had an existing 19.3 per cent relevant interest, and that Centerbridge, another 19.3 per cent shareholder, intended to vote in favour of the scheme in the absence of a superior proposal.
In that matter, ASIC sought details of any discussions between Oaktree and Centerbridge which may have caused Centerbridge to agree to that shareholder intention statement. Here, there was no such relevant agreement, arrangement or understanding because Boardriders had not sought the statement from Centerbridge. Rather, the target board had wanted the assurance Centerbridge would support the scheme, given Centerbridge's support was vital to the transaction proceeding.
Investa Office Fund scheme of arrangement
In the IOF transaction, Blackstone sent the target a letter which was released to the ASX, stating it was prepared to increase the consideration under its scheme to acquire IOF if the 19.95 per cent shareholder, ICPF, issued a public statement within two days stating it intended to vote in favour of the Blackstone scheme in the absence of a superior proposal. ICPF then issued a public statement in those terms, and Blackstone increased the scheme consideration.
Again, ASIC sought details of any discussions between Blackstone and ICPF which might point to an agreement, arrangement or understanding to make the public statement. Here, Blackstone argued there was no such arrangement – it had simply stated publicly it was prepared to increase the consideration on condition that ICPF make the public statement, and then ICPF had satisfied that condition. Despite this, ASIC maintained Blackstone had acquired a relevant interest, and required that a substantial holder notice be filed.
Inconsistencies in ASIC's approach
While ASIC has intervened in some transactions, there are still examples of 'truth in takeovers' statements from the past year where ASIC does not appear to have taken any action, eg:
- in NextDC's bid for APDC, the bidder's announcement of the bid indicated 360 Capital, a 67 per cent shareholder, intended to accept the bid in the absence of a superior proposal. 360 Capital then accepted the bid four days later; and
- in the Wattle Hill/Roc Capital scheme for Capilano Honey, the target's announcement of the scheme included a statement that Wroxby, a 20.6 per cent shareholder, intended to vote in favour of the scheme and to elect to receive the scrip alternative consideration, rather than cash consideration, in the absence of a superior proposal.
Additionally, while ASIC has intervened in some transactions, its interventions have mostly been limited to making submissions to the court on a scheme, seeking to have the votes tagged, or requiring clarification by the maker of the 'truth in takeovers' statement. ASIC hasn't yet prosecuted a bidder in court for breach of s606 of the Act.
Our view: finding the right way forward
Our view (which we submitted to the Panel when it consulted on Guidance Note 23: Shareholder intention statements in 2015), is that shareholder intention statements should not be unacceptable or unlawful, provided they are expressed to be subject to a 'no superior proposal' qualification, and allow a reasonable period for a superior proposal to emerge. So long as an intention statement leaves open the possibility of an auction for control, then no policy objection can arise. Rather, such statements may in fact promote an efficient market for control of listed companies by facilitating bids and schemes which would not otherwise proceed, and are therefore consistent with the policy underlying our takeovers laws.
For this reason, back in 2015, we recommended ASIC issue class order relief so that a bidder who obtains an appropriately caveated shareholder intention statement does not acquire a relevant interest or voting power in the underlying shares. While that would be a step in the right direction, it would be better still to avoid the whole charade of bidders seeking to bind major shareholders through 'truth in takeovers' statements to the market, by allowing bidders instead to obtain appropriately structured pre-bid undertakings from major shareholders holding more than 20 per cent of target shares. ASIC could issue class order relief,7 allowing bidders to enter into pre-bid agreements with major shareholders, under which the shareholders undertake to accept the bidder's bid in the absence of a superior proposal made, say, within four weeks of the bidder despatching its takeover offer. This could be done easily by the relief disregarding any relevant interest obtained by the bidder as a result of the pre-bid agreement.8 This would be both simple and consistent with the principles underlying the takeovers provisions of the Act.9
The other argument ASIC makes against the practice of obtaining shareholder intention statements is that the major shareholder effectively binds itself before seeing the bidder's statement or scheme booklet, and that this is inconsistent with the policy underlying the legislation that they should have the benefit of the relevant disclosure document before making that decision. ASIC is particularly concerned that shareholder intention statements could be obtained from multiple retail target shareholders before those shareholders see the bidder's statement or scheme booklet. That objection could be addressed, however, by ASIC's class order relief only applying in respect of statements or undertakings by institutional shareholders.
It is worth remembering that, as part of the CLERP reforms to the Act in 2000,10 it was originally proposed the changes to the takeovers laws introduce a mandatory bid rule, like those found in most other major jurisdictions, allowing a bidder to acquire shares in excess of the statutory threshold, provided it makes a follow-on bid. That part of the reforms was rejected by the Senate in 2000 and did not become part of the law. In 2004, the Takeovers Panel put a different proposal to Treasury, recommending amendments to the Act to allow for pre-bid undertakings to accept into the bid, subject to a 'no superior proposal within a reasonable period' qualification. That proposal did not proceed (largely due to political constraints), but ought to be revisited as it would do directly what the Panel's policy on shareholder intention statements does indirectly.
Adopting a cautious approach for now
ASIC's recent enforcement activity has certainly impacted the market. In Hancock Prospecting's recent bid for Riversdale Resources, Hancock (which already held 19 per cent of Riversdale) made clear in its bidder's statement that the commitments it had obtained from shareholders (holding, in aggregate, 16.5 per cent of Riversdale) to accept the offer in the absence of a superior proposal were not binding under the 'truth in takeovers' policy, and could be withdrawn at any time.
So, for the moment, great care must be taken by bidders, targets and major shareholders when discussing shareholder intention statements prior to the announcement of a bid or scheme.
While not all such discussions will give the bidder a relevant interest in the underlying shares,11 that may occur if the bidder effectively requires a shareholder intention statement as a pre-condition to its announcing the bid or proposing the scheme. While the Panel may not object if the statement is subject to a 'no superior proposal' qualification, ASIC may have a different view on the black-letter law.
As mentioned above, ASIC is currently reviewing its 'truth in takeovers' regulatory guide and is likely to say more on this issue in its revised draft, once released. We understand that revised draft will be open to a period of public consultation, prior to finalisation.