17 August 2004
Key Points:
The Panel will give a bidder time to consider its options when a defeating condition has been triggered.
What are a bidder's options once a defeating condition has been triggered?
There are two schools of thought on this, but the Takeovers Panel appears to be taking an approach that is favourable to bidders.
Objective v subjective
The Corporations Act says that a bidder can't make a bid conditional on the bidder's state of mind. Bid conditions must be objective. (In other words, a bid can be conditional on the sky being blue tomorrow, but not on the bidder's favourite colour being blue.)
Most bids are drafted in such a way that the triggering of the condition gives the bidder the right - but not an obligation - to withdraw the bid. What happens if a defeating condition is triggered some considerable time before the scheduled close of a bid?
Under the Corporations Act, a bidder is not required to declare a bid free of a defeating condition until a week before the end of the bid.
On one view, this effectively gives the bidder a "free look" between the time the defeating condition is triggered and the time that the bidder has to make its go/no go decision. In effect, the argument runs, the triggering of the defeating condition hands the bidder a "Get Out Of Jail Free" card which it can play any time it wants. This, it is said, effectively gives the bidder a discretion on whether to continue with its bid, no different from a subjective defeating condition.
The Panel's view
The Takeovers Panel view is that, unless there are special circumstances, a bidder is under no obligation to make up its mind as soon as a defeating condition is triggered.
Ruling on the takeover bid for Novus Petroleum, the Panel pointed out that, in modern takeovers, shareholders tend to wait until near the end of the bid before deciding whether to accept. Therefore, there's no real disadvantage to shareholders in allowing the bidder to hold off on its final decision.
This is subject to a couple of important qualifications.
A known uncertainty
Even though a bidder doesn't have to immediately make up its mind on a triggered defeating condition, it still has to keep the market adequately informed.
Informed about what? According to the Panel in Novus, the bidder should keep the market informed of the uncertain state of its bid following the triggering of the condition. In other words, tell the market that the condition has been triggered, that the bidder is currently considering its course of action and the expected timetable for that process:
"So long as the market knows that there is uncertainty, the nature of that uncertainty and the timetable for resolving it, there is no vice in the bidder waiting until the date set under section 630 for its decision whether to waive defeating conditions, before making an announcement as to its attitude to the conditions in its bid. The market is able to trade on the basis of a known uncertainty. The market deals with prices and trades efficiently where a known uncertainty exists, for example with respect to mining exploration companies and their future results of exploration. This does not make a market false or inefficient, provided that it is informed of developments in a timely way."
The same policy was put in more concrete terms in the ruling on S8's bid for Breakfree:
"It would have been sufficient for S8 to indicate to the market that it regarded the BreakFree Statements as indicating that it was almost certain that the Scrip Proposal, as currently formulated, would not become unconditional if offers were made pursuant to it and that, in light of this, S8 was seeking legal advice as to whether sections 631 and 670F would require it to make offers as a result of its announcement of 11 July 2003 and that it was otherwise reviewing its alternatives in relation to making a takeover bid for BreakFree. This would have allowed the market to trade on the basis of a known uncertainty."
Special circumstances
The other qualification to the Panel's policy is that there may be special circumstances which require a bidder to make an early decision about the fate of the bid.
This was the case during the battle for Anaconda. MP Global was making separate bids for Anaconda shares and for rights that Anaconda was issuing. The timetable for the (largely unregulated) rights bid required that the rights bid close several weeks before the share bid. The Panel required MP Global to announce a decision on a triggered defeating condition three days before the close of the rights bid and almost a month before the close of the share bid.
The policy here appears to be that there may be circumstances in which target shareholders need to make a decision well in advance of the close of the bid, and so need to be told whether the bid is still going to be available to them.
Although the Anaconda bid was unusually structured, it's not difficult to think of more "mainstream" situations in which the bidder may be required to show its hand early. The most obvious is frustrating action votes. There, shareholders may be asked to vote on a frustrating deal some time before the bid closes. If a defeating condition to the bid (unrelated to the frustrating action) has been triggered before the meeting, the Panel may well require the bidder to make an announcement, before the vote, about whether it will rely on the defeating condition.
Every case is different
Finally, it's important to note that the Panel judges each case in its merits.
For example, it might take a dim view of defeating conditions that were deliberately crafted to be triggered early in a bid. The Panel's frustrating action policy distinguishes between defeating conditions that are genuinely related to the bidder's business objectives (eg MAC clauses) and defeating conditions that have little commercial significance to the bid. Similar policy considerations might lead the Panel to force bidders to early disclosure of the status of triggered defeating conditions that were of little commercial consequence to the bidder.
Some bidders are pro-actively addressing this issue, by including in their bid provisions that address the possibility of conditions' being triggered. Such provisions aim to balance target shareholders' need for certainty against the bidder's need to have sufficient time to gather the information necessary in order to be able to assess the commercial impact of the triggered condition.
For further information, please contact Karen Evans-Cullen.
