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.
Once a takeover bid has been communicated (either publicly or privately) to the target’s directors by a bona fide bidder, the target board is restricted from undertaking certain actions which would trigger a proposed condition of the bid, or otherwise cause the bid to not proceed. Should the target company nevertheless elect to proceed with any of those actions (referred to as “frustrating actions”), the Takeovers Panel may make a declaration of “unacceptable circumstances”.
The thinking behind this policy is that when the company is “in play” in this manner, that decisions about the control and ownership of the company should be made by its shareholders and not its directors.
Relevantly, these “frustrating actions” may include:
- as an ASX listed company, issuing new shares or repurchasing shares (except in certain specific circumstances - see Listing Rule 7.9);
- issuing securities convertible or exercisable into a significant number of bid class securities;
- acquiring or disposing of a major asset, including making a takeover bid;
- incurring significant liabilities;
- declaring a special or abnormally large dividend; and
- significantly changing company share plans.
However, anything which occurs in the ordinary course of business, or which has already been announced to the market generally before the target became aware of the bid, will not give rise to unacceptable circumstances. Similarly, “frustrating actions” are unlikely to be unacceptable if there is a legal or commercial imperative for them or shareholders are offered a choice (i.e. through making the relevant action subject to shareholder approval).
The Takeovers Panel has made it clear through its decision in AMP Shopping Centre Trust and its “frustrating actions” policy, that attempts to frustrate a bid or introduce poison pills to prevent a bid without appropriate disclosure and approval will not be tolerated.
This does not mean that the directors of a takeover target are entirely hamstrung and prevented from deploying defensive tactics in appropriate situations.
Common and well understood defensive tactics in response to an unsolicited approach include:
- obtaining shareholder intention statements from key shareholders to the effect that they do not support the bid and intend to reject it (subject to the inclusion of usual qualifying language to such intentions);
- in collaboration with the financial advisor, seeking to procure alternative bidders to make a better offer. Unlike the position in the United States in certain takeover situations, there is no positive duty placed upon target directors to seek alternative bidders. With that said, where a target is faced with the real prospective of an unsolicited control transaction, the target directors would be well advised to seriously explore this option;
- criticising the bid, usually on the basis that it is opportunistic, highly conditional and undervalues the target. Care must be taken in this approach, particularly to ensure that any such criticism has a reasonable basis and sets out any underlying assumptions or limitations involved;
- obtaining an independent expert’s report to be presented together with the target’s statement that independently values the target in the context of the bid. Obviously, there is some risk in proceeding down this path, particularly if the independent expert’s report in fact determines that the bid is fair and reasonable;
- in specific circumstances, applying to the Australian Takeovers Panel to seek a declaration of unacceptable circumstances in respect of the bid. This step is ordinarily reserved for circumstances where there is a fundamental flaw in how the bid is structured or the disclosure that is presented in the bidder’s statement. The goal of any such application should be to ‘get the bid back on track’, and orders sought may include that corrective disclosure be made and the dispatch of offers under the bid are restrained pending that corrective disclosure. Although pure tactical applications to the Takeovers Panel are to be avoided, a properly made application dealing with a fundamental issue in a takeover bid can have an ancillary benefit for the target in extending the timeframes available to it in order for a competing proposal to arise or an expert to progress its work on an independent expert’s report for inclusion in the target’s statement.
In the final part of our series, we consider how a target board can best respond to competing proposals, both in circumstances where the target is subject to an Implementation Deed and also where it is not.
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.