Whose truth in takeovers?

By Alison Groves.

Key Points:
Surveys of target shareholders are a common takeover defence tactic. The Takeovers Panel says that they shouldn't always be relied on.

S8's failed bid for Breakfree may have revealed a gap between ASIC's Truth in Takeovers policy and the Takeover Panel's approach to statements made to the market by bidders and targets.

Third party statements

The ASIC policy is directed against public statements that may "mislead or confuse" target shareholders. It deals with:

• statements made by bidders about their own intentions
• statements made by bidders about the intentions of target shareholders
• statements made by target companies about the intentions of target shareholders.

In general terms, the policy requires such statements to be truthful and unambiguous.

Takeover target Breakfree published a statement that a survey showed that shareholders holding a majority of its shares would not accept S8's scrip bid and that a majority of the interviewed shareholders would not accept a $1.50 cash bid.

S8 subsequently withdrew its scrip bid. Breakfree went off to the Panel to complain about the withdrawal. S8 argued that it had withdrawn the bid because the ASIC policy meant that Breakfree's statements about its shareholders' intentions had to be true - which meant that S8 would not get to its minimum acceptance level.

Unconvincing

The Panel said that S8 should not have relied on Breakfree's statement because it was "unconvincing".

What had Breakfree said?

"BreakFree's adviser in these matters, ABN AMRO Morgans, has undertaken a telephone survey of some of the major individual shareholders [in BreakFree] to ascertain their likely acceptance of the current scrip offer.

Based on the survey responses, ABN AMRO Morgans has advised the Board that shareholders holding a majority of shares indicated that they would not accept the current all scrip offer from S8."

According to the Panel's Media Release on the case, there were a few reasons why this statement about the survey was "particularly unconvincing":

• Breakfree didn't claim to be speaking on behalf of its shareholders
• the statement attempted to "encapsulate the views of a disparate group of many people"
• it would be reasonable to expect that individuals within such a large group might change their minds as a bid progressed.

The Panel's Media Release said that the market knows "the manner in which such surveys are conducted" and should not place much weight on them (especially not as an indication of how the surveyed shareholders would actually behave). It was, therefore, not reasonable for S8 to have relied on Breakfree's statement as indication of the shareholders' intentions.

The Panel did think that Breakfree's statement about the shareholder survey had been pushing the envelope, because:

(a) surveyed shareholders were told that their responses were non-binding and were not told how Breakfree intended to use their responses

(b) the shareholders' responses were quite diverse, and a number of shareholders attached their own qualifications to them

(c) the survey results did not appear to support BreakFree's statement (ie, shareholders were not asked for their views concerning a possible cash offer by S8, but Breakfree stated that a majority of survey shareholders would not accept a $1.50 cash offer by S8).

The Panel went so far as to express a concern that Breakfree's statement had been misleading. However, since Breakfree wasn't "on trial", the Panel didn't rule on whether it had acted unacceptably.

Comment

Arguably, the Panel has misconstrued ASIC's Truth in Takeovers policy.

A large part of the Panel's reasons in its Media Release rested on its comment that the market "knows" how shareholder surveys are conducted. Accordingly, said the Panel, little weight should be placed on the results of such surveys.

The trouble is that the Panel used "the market" and "market participants" interchangeably.[1] By "the market", the Panel appeared to mean full-time market players (stockbrokers, bankers, traders, etc). However, especially in a takeover context, there are considerably more "market participants" than this.

That difference lies at the heart of much of ASIC's Truth in Takeovers policy.

This is made quite clear in the part of the policy dealing with "present intention" statements (ie, "we do not presently intend to increase our offer"). The "market" knows that a "present intention" statement isn't worth the media release it's printed on. ASIC acknowledges this, but makes the point that the Truth in Takeovers policy isn't directed just at the cognoscenti of the market:

"[P]resent intention language may be insufficient to counterbalance the effect of the last and final statement on holders, including ordinary investors ... . The overall impression that the statement conveys, particularly to the ordinary investor, may be that the statement is firm and final. We recognise that some parties, including some wholesale investors, market participants and their advisers, may read a 'present intention' statement as a disclaimer. However, market participants making such a statement must have regard to its effect on the entire audience, including retail investors." (emphasis added)

Translated to statements about shareholder surveys, this policy would require the evaluation of the effect of a statement on all target shareholders including retail investors, not just the "market". The real question is not whether such statements bind the shareholders surveyed. It is how the statements affect target shareholders and the market generally.

While the "market" might take shareholder surveys with a grain of salt, those market participants who are ordinary retail investors could react quite differently. Faced with a statement that "shareholders holding a majority ... indicated that they would not accept", the average small investor is unlikely to look for evidence that the majority have given binding undertakings not to accept the bid. The investor is more likely to conclude that the bid is dead in the water. It is that, rather than the binding effect of the statement, that may impel a bidder to kill the bid.

None of this, of course, is to suggest that the Panel made the wrong decision in BreakFree: every Panel application has its own dynamic (as the Panel pointed out, the maker of the statement in this case was the party making the complaint, not the party being complained about). Nevertheless, the question remains whether the decision in Breakfree removes shareholder surveys (and similar takeover battle devices) from the retail investor focus of ASIC's Truth In Takeovers policy.

When ASIC announced its policy on "present intention" statements, there were considerable rumblings of discontent from M&A players. Extension of that policy to shareholder surveys and similar tactics is also unlikely to be popular!

Postscript

After this was written, the Panel published the full reasons for its decision.

The full reasons employ slightly different language from the original announcements in the Panel's Media Release. However, on the issue of the "market's" approach to shareholder surveys, the Panel still held to its "everybody knows" approach:

"Where:

(a) the Declarant does not advise the market that it has authority to make a Third Party Statement ...;

(b) the Third Party Statement is not publicly endorsed by the Third Party; and

(c) authority for the Declarant to make the statement is not necessarily inferred ...,

the market should, and we believe does, reasonably accord a Third Party Statement little weight.

...

In light of the market’s knowledge of the manner in which such surveys are conducted, in general a Third Party Statement based on responses to such a survey should be, and we believe is, accorded little weight, especially in forming any expectations about the future actions of those shareholders."

_______

[1] For example:

"In order for it to be reasonable for market participants to place reliance on a Third Party Statement, the Panel considers that the statement must be made with express authority from, or be publicly supported by, the Third Party in circumstances where it is expressly recognised that the Third Party knows that it will not be able to depart from the statement."

 

"In light of the market's knowledge of the manner in which such surveys are conducted, in general a Third Party Statement based on responses to such a survey should be accorded little weight, especially in forming any expectations about the future actions of the surveyed shareholders."

For further information, please contact Alison Groves.