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 7 of HopgoodGanim Lawyer’s Australian Takeover Defence Series, we considered the conditions to the transaction and how best to navigate the negotiation of such conditions. In Part 8 we consider the potential treatment of convertible securities in a control transaction.
ASX listed companies will often have securities on issue other than ordinary shares, such as options and performance rights. For a bidder to effectively acquire 100% of a Target company, these other securities must be acquired, cancelled or converted to shares that are acquired as part of the takeover. This avoids a scenario later down the track where a bidder has acquired 100% of a Target’s shares but there remain other securities on issue which if exercised, would result in the issue of shares to the option holders or other security holders, leading to the bidder ceasing to hold 100% of the Target’s shares (which has a number of implications for the bidder and will usually mean that the bidder is also keenly focused on compulsory acquisition rights).
Information about a listed Target’s classes of securities is available on the Target’s ASX platform and in the Target’s annual report.
Convertible securities converted to shares are acquired as part of the takeover
Convertible securities will often have conversion rights or will vest upon a change of control. What constitutes a change of control will be defined in the terms and conditions of the relevant convertible security (which should also be available on the Target’s ASX platform or in the explanatory notes of a notice of general meeting, if the convertible securities were issued with shareholder approval).
Vesting or conversion may be triggered by a takeover or by the Target board’s discretion after a takeover is announced, and the securities may become ordinary shares during the offer period.
A bidder in a takeover bid is required by law to make a decision at the outset as to whether or not its bid will extend to shares issued during the offer period (i.e. as a result of the exercise of options). In our experience, it is fairly common practice for a bidder to include a term to this effect, particularly where 100% of the target is desired.
Acquisition and cancellation of convertible securities
The common methods for acquiring or cancelling convertible securities are:
- the bidder making a simultaneous takeover bid or proposing a simultaneous scheme of arrangement for each class of convertible securities (this is obviously an expensive process and commonly only used where there are large numbers of convertible security holders); or
- the bidder entering into contractual arrangements with each convertible security holder and the Target under which the convertible securities are to be acquired by the bidder or cancelled (usually on the condition that the bidder obtains a relevant interest in more than say 50% of the Target’s shares, and the bid is unconditional, or if the scheme becomes effective).
Depending on the precise terms of what is proposed, it may be the case that a waiver is required from the ASX Listing Rules to allow for the cancellation of options for consideration, or the amendment of terms to permit acquisition.
Generally speaking, cancellation via contractual arrangement is the most commonly adopted approach. However, there are many factors to consider when deciding which approach to take, including:
- the number of convertible security holders and the likelihood of obtaining individual consent by way of private contractual arrangements from each of them, as opposed to meeting the thresholds of approval under a bid or a scheme of arrangement; and
- the tax outcomes (which are generally clearly understood for the cancellation process).
The consideration for the acquisition or cancellation of convertible securities needs to be carefully calculated to ensure that it is not more than the fair market value so as not to raise issues of collateral benefit/inducement. Companies generally use one of three methods to determine the value of their convertible securities, being the Black-Scholes method, the intrinsic valuation method and the binomial method. In recent times, the Black-Scholes method has become the more prevalent method, however intrinsic value will always be preferred for convertible securities that are “in the money”.
The form of consideration offered for convertible securities may comprise cash, shares, other securities, or a mixture of each.
From a takeover defence perspective, a bidder will need to give much more thought to its processes in acquiring a Target with multiple classes of convertible securities on issue. While even the most complicated capital structure can be overcome by a sufficiently motivated bidder, from a takeover defence perspective, there may be something to be said for maintaining a structure that causes a bidder to pause and think carefully before launching their approach.
In the next part of this series, we will consider restrictions placed on target companies in their use of defensive tactics and the concept of “frustrating actions”.
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.