A look at recent a decision from the Takeovers Panel 6 min read
Australian takeover laws require bidders to disclose their funding arrangements to ensure target shareholders have sufficient information to assess the bidders' capacity to pay the bid consideration. For private capital investors—who are becoming increasingly active in Australian takeovers—this requirement can pose challenges. Typically, private capital investors have complex upstream funding arrangements and heightened commercial sensitivities around the disclosure of their upstream investors and capital commitments.
So how much information does a private capital bidder really need to provide when it comes to its funding arrangements in a take-private transaction? In this Insight, we look at a recent decision from the Takeovers Panel (the Panel) that has helped to clarify how funding certainty and disclosure apply to private capital bidders. We also address some of the other issues for private capital investors to consider in their funding arrangements.
Unlike in certain foreign jurisdictions, Australian takeover laws do not require a bidder to have 'certain funds' before launching a takeover bid or before a target shareholder meeting is convened to vote on a scheme of arrangement. Rather, the bidder is required to have, and disclose, a reasonable basis to expect that it will either have funding in place to pay for all acceptances when a takeover bid becomes unconditional, or to pay the aggregate scheme consideration when due in accordance with the terms of the scheme.
In the context of a cash takeover bid (and by analogy a scheme) the Corporations Act 2001 (Cth) requires the bidder to disclose cash amounts held by the bidder, the identity of any other person who is to provide, directly or indirectly, cash consideration from that person's own funds and any arrangements under which the cash will be provided by those persons.
Historically, ASIC has interpreted these requirements strictly. ASIC's regulatory guidance makes it clear that the bidder must disclose the ultimate source of the debt facilities or other funding. The guidance is that this disclosure must include details of any arrangements to fund, such as conditions to the funding and risks, as well as any restrictions on the availability of external funding.1 This has created uncertainty and unease for private capital investors as, notwithstanding their upstream limited partners and other managed clients are usually entirely passive, they are indirect providers of consideration to the bidder and therefore potentially caught by these disclosure requirements.
Helpfully, the application of the disclosure requirements to private capital bidders has been recently clarified. In Nitro Software Limited 02  ATP 3 (Nitro Decision),2 the Panel considered the funding disclosures of local private equity firm, Potentia Capital. Relevantly, Potentia Capital had made offers for two potential control transactions—a takeover bid for Nitro Software Limited and a proposal to acquire all of the shares in Tyro Payments Limited by way of scheme of arrangement—both of which were live at the time of the Panel application.
Potentia Capital disclosed in the bidder's statement for its offer for Nitro Capital that 'the funds required by [the special purpose bid vehicle managed by Potentia Capital] to pay the Offer Amount will be made available to the Bidder by Potentia Capital', where those funds would be sourced from a number of managed investment trusts managed by Potentia Capital. Potentia Capital's first supplementary bidder's statement disclosed that Potentia Capital had 'access to committed funding from the following sources:
(i) Potentia Fund 1 which closed in December 2020 with total funding of $458 million.
(ii) Potentia Fund 2 which closed in June 2022 with total funding of $635 million.
(iii) $112 million of funds committed to Potentia outside the fund structures referred to above'.
Details were also included about its co-investor, HarbourVest, and the funds it managed, but it was not possible to ascertain the amount committed or designated as available (and which would remain available) for use as bid consideration under each of the funding sources. The question the Panel was asked to consider was whether Potentia Capital had provided adequate disclosure in connection with its bid funding, arrangements with its co‑investor and the redeemable preference shares offered as part of an alternative scrip consideration structure, and this required an examination of how various funding commitments interacted with other commitments made by the relevant funds.
Ultimately in this case Potentia Capital agreed to make supplementary disclosure, which mitigated the Panel's concerns and no declaration of unacceptable circumstances was made. However, in its reasons, the Panel provided some helpful clarification as to how funding disclosure obligations apply to private capital bidders.
The key takeaways from the Panel's reasons are:
- Typically, passive investors do not need to be identified, nor their funding arrangements disclosed: ASIC submitted, and the Panel appears to have accepted, that there will be many bids made by private capital sponsors with passive investors that will not require disclosure of the investors’ identities and relevant funding arrangements. Conversely, disclosure may be required where those investors are in a position to influence the conduct of the bid or the bid vehicle. In the Panel's view, consideration ultimately needs to be given to the totality of the circumstances. We agree. This is a welcome clarification, particularly given the identity of many private capital investors' upstream limited partners and the details of their commitments are commercially sensitive.
- Funding share between the bidder's funds and any co-investors must be disclosed: while the Panel accepts that the precise amount of funds available for deployment at any given time by a private capital bidder may be commercially sensitive information, this does not excuse such bidders from providing at least the minimum levels of necessary disclosure regarding overall funding availability. A bidder should generally disclose the split of funding between the bidder and its co-investors and, if the bidder's funding sources include multiple funds, the aggregate amount of committed funding across those funds. The Panel's reasons suggest that—where a bidder intends to draw on different funds—it is not necessary to disclose the precise split of funding between each fund, provided it is clearly disclosed that the bidder has sufficient funds committed (and which will remain committed) across those funds in aggregate for use as consideration under the offer (although, interestingly, Potentia Capital's supplementary disclosure did ultimately provide such detail). Importantly, the Panel also noted it is not necessary to disclose the total uncommitted amounts available in such funds—rather, a bidder can disclose it has 'at least' a particular amount. Put another way, any incremental dry powder available to the bidder that is not committed under the offer need not be disclosed.
- Complex upstream funding (labyrinths) need not be disclosed: the Panel acknowledged that there is a point at which going into labyrinthine detail of complex funding arrangements that sit upstream to a private capital bid vehicle is unlikely to be understood by (or useful to) retail shareholders, and is therefore not effective disclosure. We agree. In this respect, the Panel continues to require disclosure in summary of the material steps, terms and conditions and key risks of any bid funding arrangements, along with adequate information regarding the sources of bid funding.
- Conditions to the availability of equity commitments are relevant (even if these are complicated): Potentia Capital's funding commitments were complex, particularly due to the number of parties contributing funding and the multiple vehicles through which funding was being channelled for both general investment purposes and specifically in relation to the Nitro bid. However, the Panel found that this detail - particularly around disclosure of the conditionality of funding - was important to Nitro shareholders' understanding of the inter-conditionality of the funding given the scheme proposal that Potentia Capital had made for a different entity. It was, for example, not sufficient to state that certain equity commitments were 'not subject to any conditions which the Bidder considers may not be satisfied' without clearly stating what the relevant conditions were.
It is also worth noting that in the context of scheme transactions, the courts have also recently focused on the form of, and conditionality in, equity commitments for private capital bidders bidding through newly incorporated special purpose vehicles. In particular, the courts have looked to ensure the equity commitment is subject only to the scheme becoming effective (and not, for example, conditional on the contemporaneous or prior funding of any other debt or equity commitment) and that the target has direct enforcement rights under the equity commitment.3 This can prove challenging for some private capital bidders who have strict forms of equity commitment letters and limited scope for departures from their house form (so leaving the equity commitments to the last minute is best avoided!).
It is important for private capital bidders to understand the requirements for funding disclosure before launching a bid or making an offer. Properly considered disclosure will avoid an unnecessary skirmish in the Panel or a delay at the first scheme court hearing. In saying that, it is clear that ASIC and the Panel have an understanding of the different commercial sensitivities that apply to private capital bidders, particularly in relation to funding availability and disclosure. It will be interesting to see whether ASIC or the Panel update their respective formal published guidance to address private capital bidders—until then the Nitro Decision provides helpful context for private capital bidders in future take-private transactions.
See ASIC Regulatory Guide 9 on Takeover Bids and Takeovers Panel Guidance Note 14 on Funding Arrangements.
Allens acted for Nitro Software Limited in these proceedings.
Re Spark Infrastructure RE Limited  NSWSC 1564.