14 November 2011
A controversial case currently playing out before the UK Takeover Panel has reignited debate about a key takeovers rule in Australia – and the need for a regulatory solution in the interests of market certainty.
In March, uranium miner CGNPC Uranium announced that it may make a takeover bid for Kalahari Minerals at a given price. It had not, however, indicated a firm intention to make such an offer.
In response to the Fukushima crisis in Japan, CGNPC proposed to reduce its proposed offer price for Kalahari – a right it had not expressly reserved. The UK Takeover Panel refused to allow such a move, forcing CGNPC to now wait three months before it can announce a fresh offer at a lower price.
Had CGNPC made a "firm" offer, it would have been prevented under UK takeover rules from making a further bid at a lower price for an even longer period, of 12 months.
While Australia's takeover rules could similarly prevent a prospective bidder from changing its offer price following an unqualified statement as to price, we do not have anything equivalent to the UK's three months or 12 months quarantine period.
That's not to say that we don't have a quarantine period: It's just that no-one is quite sure what it is.
Although commentators sometimes refer to a "four month rule" or a "three month rule" in Australia, within which a failed bidder can't launch a new bid, there is in fact no such rule. Without guidance as to the period, the market is left guessing as to when a new bid can be launched – creating uncertainty for both prospective bidders and targets.
ASIC's Truth in Takeovers policy says that a bidder or other market participant can't depart from an unqualified statement to the market because that would be misleading or deceptive. This commonly applies in the context of "best and final" statements, where a bidder may declare a final offer price and "drop-dead" date for closing its bid. This practice is intended to encourage target shareholders to accept the bid at the current price. Unless the bidder expressly reserves the right to change its mind, that price and Closing date are then set in stone.
But what happens if the bidder fails to secure enough acceptances, or if there is an unforeseen material change affecting the target's business or the bidder's offer – as happened with Kalahari Minerals and CGNPC?
The most that ASIC has had to say on the matter (in private comments to industry participants) is that there would be a breach of the Truth in Takeovers policy if a person departed from a statement after waiting only a "minimal" period of time.
Uncertainty around this issue in Australia is not new. When the consortium bidding for Qantas let its bid lapse after making a "no increase" statement in 2007, the market was divided as to whether and when the consortium could make a fresh bid at a higher, or even the same, price. There was similarly great uncertainty as to how long AMP needed to wait before making a higher bid for AXA after declaring its indicative scheme proposal "best and final" without qualification in late 2009.
There's also confusion about the circumstances in which a bidder may change its offer price in response to an unanticipated change of circumstances. Our Takeovers Panel appears to take a slightly less restrictive view than ASIC on this issue.
Some commentators have suggested that these and other conundrums would be solved by a Takeovers Panel "truth in takeovers" guidance note or rule. This could spell out how long statements will be binding and in what circumstances they may be departed from, somewhat like the rules that apply in the UK. This proposal appears attractive on the surface. It would give market participants some certainty around when the Takeovers Panel would enforce the truth in takeovers policy.
However, it would not be a complete solution.
For example, if a three or four month delay was not justified, there is no mechanism under which a bidder could get approval from the Takeovers Panel in advance to launch a fresh bid within the quarantine period. It would have to launch its bid and then hope for the best.
Another problem is that a Panel rule would not automatically protect bidders from investor class actions.
The only real protection against class action risk would be legislative reform or guidance from the courts. The likelihood of Parliament narrowing the scope of the misleading and deceptive conduct provisions in our corporations and financial services legislation is extremely low.
That being the case, the most that prospective bidders can hope for is that ASIC will bring a test case to address the ongoing uncertainty around the existence and operation of the "unknown" quarantine period.
Pending either of those outcomes, a joint policy review in this area by ASIC and the Takeovers Panel would be a good start.
This was written by Karen Evans-Cullen and Adam Foreman and was first published in the Australian Financial Review Dealbook on 24 Jun 2011