Australian Takeover Defence Series Part 1: Before the approach is made

Australia's takeover laws and regulations limit aggressive defensive tactics commonly seen in other jurisdictions. ASX-listed companies also face additional restrictions during control transactions. However, Australian takeover targets are not without defences and strategic and advanced planning is essential to resist undervalued bids and maximize value.

In Part 1 of HopgoodGanim's ten-part series, we discuss the steps that directors can take before an approach is made. This period of time is critical to a successful takeover defence (or achieving a fully-valued sale) and is best used in establishing the appropriate procedures and systems in preparation for what may ultimately be a lengthy process.

Establish the defence team

It is desirable to have in place existing infrastructure and management such that the Target is quickly able to identify potential bidders, react quickly to a hostile bid and possibly influence the outcome of the bid for the benefit of shareholders.

The Target should establish relationships with and retain key external advisers to advise the Target in the event that an approach or a bid is received. Key advisers include a corporate adviser, legal advisers and public relations advisers.

Each of these advisers plays a key role prior to an approach actually being received.

For example:

• the legal advisers will be able to assist the board to identify and advise on any governance/independence issues and brief the board on Australian takeover laws and procedures and how their obligations and duties interact; and
• the financial advisers will be able to assist the Target with developing key investment themes and with the valuation and monitoring tasks noted below.

If the Target does not already have a Defence Manual in place, one can be tailored and established for the Target at the outset so that on receipt of an approach the board is well placed with an understood set of processes it can follow. The Defence Manual will be a key source of information in the early stages of a takeover process and will contain various template announcements, scripts and Q&A type documents that are invaluable at this stage of the process. Your legal adviser will be able to assist in the preparation of a Defence Manual appropriate for the size, scale and industry that your company operates in.

Reverse due-diligence

This process is really about getting the Target’s house in order, particularly ahead of receipt of a formal proposal and the restrictions that come from that.

Despite the name, this is not just a legal process (although your legal adviser will be well placed to run this process) and involves numerous teams working together.

Some key questions to be answered in this process are:

1. Do all of our executives and employees have up-to-date agreements in place that provide them with the necessary legal protections and incentives to work through a potential protracted and disruptive takeover process?
2. Do we know which material contracts contain ‘change of control’ clauses that may be triggered by a control proposal? It may be the case that where a sale process is contemplated by the board or a transaction is considered likely / inevitable that a data room is established.
3. Does the Target have a register of confidentiality agreements that it has entered into with various corporate counterparties? Note that this question can become particularly interesting where those confidentiality agreements also contain “standstill” provisions on that corporate counterparty acquiring additional shares in the Target which a prospective bidder may seek to have the Target contractually enforce in the binding exclusivity phase.
4. Are all issues of securities being made in a timely cadence? For example, if the Target is receiving regular notices of exercise of options does the Target action these as received or bundle them together until the last possible date for action to reduce the administrative burden? While a bundled approach may make sense from an administration perspective, it can leave a Target in an awkward situation upon receipt of a non-binding indicative proposal (NBIO) and the need to cleanse shares issued on exercise of options for secondary trading.
5. How will our executive and management team run a takeover process and their business-as-usual processes in parallel – should any additional arrangements be made to ensure that the Target has the necessary “bench strength”?
6. Is the Target able to fairly compensate non-executive directors for their potential “overtime” work on a takeover defence / special committee?

Implement defence strategy

The strategy ultimately adopted will depend on a number of factors, including the perceived vulnerability of the Target to a control transaction (taking into account the size and nature of the share register and current prevailing market sentiment) and whether historical approaches have been made.

However, in broad terms, once the initial preparatory defence work has been completed, the tasks that remain for a vigilant defence include:

1. Monitoring the share register 

This is a key early warning system and the ability to spot unusual activity can be a key clue to an impending approach. As part of this monitoring process, tracing notices should be issued to custodial / nominee holdings at a regular cadence. Although this workstream is not bulletproof due to the ability for a prospective acquirer to disguise their interest in various ways (i.e. a less than 5% acquisition or through delayed derivative reporting) it should nevertheless form a key defence workstream.

2. Maintaining lines of communication with key shareholders

While this goes without saying, the support of key shareholders is paramount in defending against a hostile approach. There are other obvious benefits in maintaining lines of communication, including potential early warning of a major shareholder proposal.

3. Understanding valuation and the universe of potential acquirers 

This workstream is driven by the financial adviser and places the board in the enviable position of being able to readily assess value on receipt of a proposal and have a working plan for engagement with other potential bidders if a decision is ultimately made to run a competitive process.

4. Assessing other strategic alternatives for the Target and its assets 

If a view is reached that the Target’s valuation is being constrained by legacy assets or that there is the potential for value to be unlocked through a spin-out, then there is real strategic advantage in firming and announcing those plans in advance of a control proposal (pre-announced transactions can fall outside the Takeover Panel regime on “frustrating actions” which will be explored in a later instalment of this series – Part 9 - Restrictions on defensive tactics and “frustrating action”).

Don't miss the next part of the Australian Takeover Defence Series where we will consider the approaches that may be made by a bidder. Subscribe to our Corporate Advisory and Governance mailing list here.