In brief 6 min read
COVID-19 continues to impact ASX-listed entities across all sectors. Market volatility, disruption in credit markets and the uncertain business outlook has made M&A extremely challenging in the immediate term.
However, as the initial shock of COVID-19 and its related social and economic disruption subsides, it is likely that well-resourced parties will be keenly focussed on identifying and pursuing opportunities. Various factors may lead bidders to adopt hostile tactics with greater frequency than we have observed in the Australian market in recent years.
ASX-listed boards should carefully examine their state of preparedness to deal with a range of hostile tactics so that they are best placed to serve shareholder interests.
The value gap and terms of engagement – hostility on the rise?
Given current market volatility and the immediate financial impacts of COVID-19, there is likely to be a widening gap in the valuation expectations of target boards and potential bidders. Boards may rightly see proposals as opportunistic, even those that are pitched at a material premium to current trading prices.
In circumstances where a board is unwilling to engage or there is a perception that engagement will be protracted, bidders may see value in delivering a proposal directly to shareholders and place less emphasis on obtaining a board recommendation.
The usual rule will apply for those bidders who believe they have identified an opportunity – move quickly or lose it. Where there are likely to be multiple parties seeking similar opportunities and the commercial landscape is moving quickly, determination to act fast may mean bidders see merit in (at least initially) bypassing a board in order to expedite an outcome and maximise prospects of executing a transaction.
This could mean an uptick in bidders employing hostile tactics in the period ahead. These tactics may take the form of:
- hostile takeover bids;
- bidders acquiring pre-bid stakes at attractive values;
- bidders entering into arrangements to 'tie-up' major shareholders; and
- bear-hugs or otherwise utilising public tactics to unsettle a target and the process.
For a refresher on takeover process, tactics and the rules that govern takeovers see our handbook on takeovers in Australia.
Being prepared to respond to a bidder in the current environment
In the COVID-19 world, some of the usual learnings for takeover defence preparedness may take on a different complexion. What has not changed is the need for target boards to respond in a clear and considered manner in order to best protect shareholder interests.
A board may have little time to respond to a public proposal. Key decisions may need to be made and messaging settled in a matter of hours. In the context of a takeover bid, a board may have fewer than 30 days to produce a fulsome public response (in the form of a target's statement).
Importantly, there are preparatory steps that boards can undertake in advance to ensure they are well placed to deliver a clear and considered response to any hostile action.
- Maintain a valuation and measure the impact of COVID-19. For a board to capably respond to a takeover proposal, a clear understanding of the company's fundamental value is required. For the majority of ASX-listed entities, undertaking a valuation has recently become more complicated. Most boards will understand well that current share price may not be reflective of the long-term value of their company – however, measuring the impact of COVID-19 on value is likely to be complex and uncertain. This exercise may remain for some time and should not be undertaken on the run. A board should start early in undertaking an assessment of valuation impacts and continue to monitor valuation material on an ongoing basis. It will be critical for the board to be able to properly explain the fundamental value of the company and the expected process of recovery, so that the market can look through current share price weakness and fully appreciate long-term value.
- Establish your takeover defence team. The company should identify individuals and advisers to be centrally involved in responding to a takeover proposal. In the context of COVID-19, careful thought should be given to the executives to be included in this team – key members of senior management will need to continue to run the business as well as being ready to respond to pressing needs thrown up by the ongoing COVID-19 crisis. Once a defence team is established, regular communication is important.
- Firm up a communications plan. A target company should have a stakeholder communication plan in place, outlining a clear strategy for response to a proposal. Ordinarily, this is prudent to enable clear and timely communications to shareholders, employees, commercial stakeholders and media. In the present crisis, competing urgent priorities make it essential. In the current context, it is vital the communications plan captures messaging in relation to valuation and the financial impacts of COVID-19, and highlights the company's 'path to recovery'.
- Understand the consequences of a change in control. It is important for a target company to understand the consequences for its business in a change of control scenario or where a hostile bidder attains a specified percentage of its shares. That analysis is critical for two reasons:
- First, it is important for the market, any bidder/counter-bidder and shareholders to understand (and for any disclosure document required to set out) the consequences of a change in control.
- Second, from an internal perspective, it is critical to understand and prepare for those consequences, particularly where they could arise during the course of a proposal (eg at the point a hostile bidder acquires 50.1% of the company's shares).
In addition to a review of contractual arrangements and authorisations, it may be sensible to capture the potential impact of COVID-19 on specific government policies and concessions which may be vital for the business in the short term.
- Monitor and engage with your shareholders. Understanding the composition of the shareholder register is critical to responding to any proposal. Pre-emptive engagement with major shareholders will ensure lines of communication are open and, in the immediate period following a proposal, shareholder reaction can be ascertained and the board's communications can be effectively delivered. This also allows the company to monitor and better identify possible acquisitions or movements in the register.
- Ensure your house is in order. There are various other preparatory steps that can be taken, which can save valuable time and resources when a proposal arrives.
- There may be merit in early engagement with an independent expert. By undertaking a preliminary review of a target's assets and business, the expert will gain a familiarity with the current state of the business that allows them to respond quickly in the event of a hostile approach.
- Preparing drafts of key documents (like a non-disclosure agreement, an implementation deed and/or a pro-forma target's statement) and focussing on particular disclosure issues now.
- Establishing and maintaining a data room.