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With increased short selling and the advance of activist short sellers in the Australian market, it is time for companies to put themselves in the best position to stand tall against potential attacks.
Public submissions recently closed on the Takeovers Panel’s consultation draft of a new guidance note on shareholder intention statements in the context of public company takeovers. The proposed guidance follows recent Panel decisions concerning Ambassador Oil and Gas Limited and Bullabulling Limited. In these cases statements either made by, or attributed to, target shareholders were found to either be misleading or to give rise to an association resulting in breach of the Corporations Act. Anecdotally ASIC has also recently increased its scrutiny of such shareholder statements.
We expect that the Panel will have received a range of submissions from interested parties. This article provides a summary of the key points, along with some of our submissions on the proposed guidance.
Shareholder intention statements – the context
In Australian public company takeovers it has become commonplace for major shareholders of a target company to publicly state whether or not they intend to accept a takeover bid or vote in favour of a scheme of arrangement proposal. On the Takeovers Panel’s own statistics, 45% of takeover bids and 86% of schemes in 2014 were announced along with a statement attributed to a major shareholder concerning their intentions. To date in 2015 they remain a common feature of public company transactions, with notable recent examples such as the proposed $1.4 billion acquisition by DUET Group of Energy Developments and Independence Group’s $1.8 billion acquisition of Sirius Resources featuring public statements of support from major shareholders holding over 20% of the target company.
Used appropriately, these statements are a legitimate and important part of public company takeovers. They provide transparency for all shareholders and, at times, can give bidders the confidence to proceed with a transaction.
In the above context, the proposed guidance from the Takeovers Panel, which will give some more certainty to the validity of the use of shareholder intention statements, is very welcome. It could be said that the draft guidance is light-on in some respects in relation to association and relevant interest matters (see further below). To ensure the guidance is most helpful, it is hoped that the final guidance note fills in the gaps.
The legal framework: the 20% rule and truth in takeovers
The Corporations Act restricts a bidder obtaining a relevant interest, or reaching any agreement, arrangement or understanding as to voting or disposal in respect of more than 20% of the target company prior to commencing a takeover or scheme transaction. Therefore, to the extent a major shareholder is willing to sell into or accept an offer, the bidder can only reach an agreement for the shareholder to accept a bid or vote in favour of a scheme up to 19.9% of the target company.
However the ‘20% rule’ does not inhibit a shareholder (or shareholders collectively) holding more than 20% from publicly stating that it intends (or they intend) to accept a bid or vote in favour of a scheme. ASIC’s Regulatory Guide 25 Takeovers: False and Misleading Statements classifies these statements as a ‘last and final statement’ which then needs to be followed through. The policy, often referred to as the ‘truth in takeovers’ policy, could be said to effectively bind shareholders to act consistently with public intention statements without the bidder necessarily having any agreement with the shareholder that it do so.
Accordingly, it is not unusual to see:
The proposed draft guidance
The Takeovers Panel’s proposed draft guidance note sets out the Panel’s view on when a statement by a major shareholder may be misleading. The key points include:
Is it misleading?
The draft guidance in effect provides that a shareholder statement could be misleading (or at least confusing) if:
These are all sensible guidance points. Shareholder intention statements are only effective if the market can clearly understand the effect and implications of the statement – it should be clear how many shares are affected, the timing by which acceptance will be made and the circumstances in which the shareholder does not need to accept.
When will an intention statement give rise to unacceptable circumstances?
The Panel’s draft guidance follows its key decision on these matters in MYOB Limited in 2008.
Statements should feature the following key components:
a) Superior proposal qualification: Where a statement may take the bidder’s relevant interest in the target beyond 20%, the shareholder’s intention should be expressed to be in the absence of a superior proposal. In MYOB, shareholders holding 34% of the target stated an intention to accept as soon as the offer opened without any such qualification, effectively binding themselves to accept regardless of whether a superior offer arose. The Panel found this unacceptable.
b) Time to accept: Following the MYOB decision, shareholder intention statements are typically qualified to allow 2 or 3 weeks for a competing proposal to emerge before acceptance. Under the Panel’s draft guidance, if the shareholder does not wait for "a reasonable period" to elapse before accepting, unacceptable circumstances can arise. The Panel appears to be considering whether 2 or 3 weeks after the offer opens is a reasonable period. The Panel recently made a declaration of unacceptable circumstances in Ambassador Oil & Gas where a shareholder acted inconsistently with their statement by accepting early.
We agree that these two key components are important to ensure that a competitive market can continue. One of the Panel’s consultation questions is whether the guidance should specify an appropriate waiting period before a shareholder can accept. The Takeovers Panel has in the past indicated that 3 weeks is an appropriate period. We generally agree that a 3 week period should give a serious potential counter bidder sufficient time to put together a proposal. We also agree with the Panel where it flagged that the appropriate time period will depend on the circumstances. In our view, circumstances where a shorter period may be appropriate include where the target has already tested the market via a sale process or where there is a significant period between announcement of an offer and dispatch of bidder’s statements (which commences the offer period in a takeover bid).
As a separate matter, parties need to take care that any shareholder intention statement does not give rise to an unacceptable arrangement or understanding that could give the bidder a relevant interest in the shareholder’s shares, or render the bidder and the shareholder ‘associates’ in breach of the 20% or substantial holding rules in the Corporations Act.
The draft guidance touches very briefly on the need to avoid these issues and to circumstances where an association may arise. ASIC provides some guidance on when a relevant interest and association might arise, but that guidance does not refer to shareholder intention statements in the context of a takeover bid or scheme. Given its power to declare unacceptable circumstances, this is guidance the Takeovers Panel is best placed to give.
There is currently a range of views amongst advisers, market participants and regulators in respect of the circumstances in which a relevant interest or association may arise, and when a relevant interest or association may be found unacceptable. We think the final form of the guidance note should make clear that the making of an intention statement from a shareholder, including after discussion with the bidder, will not, without more, be considered to give rise to an association or to the bidder having acquired a relevant interest in the relevant shareholder’s shares, provided certain safeguards are included. In our view, where a statement of support for a transaction is made by a shareholder (including in circumstances where the shareholder and bidder’s aggregate voting power exceeds 20%) that:
a) is made with the shareholder’s consent;
b) is expressed to be subject to a superior proposal; and
c) allows sufficient time for a superior proposal to arise,
such a statement should generally not give rise to an association or a relevant interest. In our view, these circumstances do not lend themselves to inhibiting an efficient, competitive and informed market for the shares in the target company.
We think it would be very helpful for the Takeovers Panel to give clear guidance on these matters in the final guidance note.
Consent to be named
The draft guidance indicates that any shareholder intention statement should only be published by a bidder or target if the shareholder(s) has consented to the statement being made. Other than where a shareholder is already on the public record as to its intentions, this seems a sensible approach to ensure that other target shareholders and the market generally are not misled by inaccurate/unverified statements.
It would be helpful if the final guidance note clarifies that obtaining consent alone does not give rise to an agreement or understanding between the bidder and the shareholder which constitutes an ‘association’.
Guidance on shareholder intention statements is certainly welcome: the current market practice would be assisted by greater certainty in this area and, in our view, the draft guidance generally strikes the right balance between a competitive market and allowing shareholders to make their positions clear at the time a bid is announced (or shortly thereafter). Having said that, we would welcome the Takeovers Panel's final guidance note extending to clear guidance on the association and relevant interest issues.