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 2 of our Australian Takeover Defence Series, we discuss the approach. There are two broad categories of approach made by potential acquirers in Australian M&A transactions, the “friendly” (or at least less aggressive!) approach and the aggressive / hostile approach.
In our experience, a person that intends to make a control proposal in respect of a company (Target) (either by way of a takeover offer or merger by way of a scheme of arrangement) will first make an informal approach to the Target, usually by contacting the Chair, MD or CEO.
With that said, a potentially devastating tactic that can be employed against an unprepared Target is for a bidder to lob in a formal bidder’s statement just before 5.00pm on a Friday, or the day prior to a public holiday or other holiday period. The Target is then forced to scramble to locate key executives and advisers as the statutory clock governing the Target’s response has started ticking.
While the extreme hostile approach has become perhaps less common (particularly given that it usually proceeds by necessity without due diligence), it does reveal that there is a broad spectrum of potential approaches that an Australian takeover target may face.
The friendly approach
Generally, the purpose of a friendly approach is to determine whether the Target is prepared to have an initial meeting to discuss the possibility of a takeover offer being made.
In our experience, the key motivating factors behind the majority of friendly informal approaches are:
- to attempt to obtain board support for a transaction (as statistically speaking, board supported deals have historically enjoyed greater success); and
- to obtain due diligence access so that the bidder can confirm its understanding of the Target and any implications that may arise under a change of control.
The spectrum of ‘friendly’ or non-public approaches is detailed in the table below. Note that the ‘informal approach’ often immediately precedes the ‘indicative proposal’.
| "Friendly" informal approach | "Friendly" indicative proposal |
|---|---|
| This will usually take the form of a telephone call or informal conversation with the Chair or other executive director – the bidder in this process is attempting to determine the potential for a recommended transaction. | An indicative, confidential, non-binding proposal or “NBIO” is submitted in writing – this usually sets out the proposed terms and conditions (including price), seeks due diligence and envisages a short process to finalise a binding transaction. |
| While this provides the Target with advance warning, a written proposal is usually required before meaningful engagement occurs. | The identity of the proposed acquirer and terms of the proposal will inform the response strategy. |
| Whether disclosure of the approach is required will be an immediate consideration for the board (refer to Part Three in this series – the Response). | |
It goes without saying, but just because the initial approach is ‘friendly’, that unless some form of transaction or process document is entered into during this approach, a friendly bidder may quickly turn hostile.
The hostile approach
Although it is less common, a potential bidder may have formed the view that Target board support is unlikely to be forthcoming or has otherwise bravely determined to proceed on a pure hostile basis. As noted earlier, one possibility in this scenario is that the first time the Target becomes aware of the approach is on receipt of the formal bidder’s statement just before 5.00pm on a Friday or the day prior to a public holiday or other holiday period.
The spectrum of ‘hostile’ or public approaches is detailed in the table below:
| "Bear Hug" | Acquisition of substantial holding | Takeover offer or intention to make takeover bid announced |
|---|---|---|
| The bidder approaches the Target and states that if it receives a recommendation within say 48 hours, it will make a takeover bid. | Approach to a major shareholder to acquire a meaningful stake in the Target. | Unsolicited takeover offer or announcement of intention to make such an offer. |
| The “Bear Hug” is one of the most difficult approaches to navigate for a Target director. | A potential bidder may acquire up to a 19.99% interest in the Target (subject of course to any requirement for FIRB approval or special legislation restricting ownership in the Target’s industry), with disclosure of its acquisition becoming public within 48 hours of it exceeding a 5% interest. | Immediate response from the Target board is required. |
| A potential bidder may generally acquire a strategic foothold of 4.99% in the Target without any obligation of disclosure arising. |
Note that depending on the nature of the approach and the proposed deal structure, the acquisition of a direct stake in the Target may paradoxically be seen as less desirable for the acquirer. This is particularly the case in a potential friendly approach which intends to proceed by way of scheme of arrangement, as the acquirer is unable to vote any shares that it holds on the scheme (thereby artificially “increasing” the voting power of the balance of the Target shareholders).
Part 3 of this series will consider the response to the approaches detailed in this article.
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.