02 December 2004
Key Points:
IAFs provide certainty for bidders and institutions, especially in the race to the wire that marks many bids nowadays.
Although slow to establish themselves, institutional acceptance facilities now appear to be entrenched as a part of the M&A landscape.
Australia's first IAF appeared in the 2001 Mayne bid for Faulding (in which Clayton Utz advised Mayne).
That was also the last IAF to appear in Australia until this year, when they cropped up in no less than three bids: TABCorp/TAB, PBL/Burswood and Macquarie Office Trust/Principal America Office Trust (in which Clayton Utz advised Macquarie).
This would suggest that IAFs will soon become a standard feature in many bids. When one considers their potential benefits, it's easy to see why this should be so.
We first alerted clients to the main features of IAFs after the Mayne bid (Encouraging acceptance into conditional bids).Now that they're moving into the mainstream, it's appropriate to look at them in a bit more detail.
Certainty and flexibility
There are two groups of investors who benefit greatly from institutional acceptance facilities: institutional investors and arbitrageurs.
Institutional investors whose mandate requires them to maintain an index weighting want to lock in the premium from a bid, but don't want to sell out too early in case the bid falls short of 90% and the target remains listed. These investors are also reluctant to accept conditional bids, given the very limited withdrawal rights under the Corporations Act and their desire to retain control over their shares until they are confident a bid will succeed and they will get paid. For their part, arbitrageurs bank upon a bid's succeeding… but not too quickly.
An IAF allows both groups of investors to improve a bid's chances of success without losing control of their discretionary ability to tip into the bid or otherwise dispose of their shares.
While bidders would undoubtedly prefer binding acceptances, the current reality is that IAFs will, in all probability, be increasingly expected by large investors.
At heart, an IAF allows a target shareholder to flag its willingness to tip into a bid once a particular bid condition has been satisfied - or, more relevantly, is reasonably assured of being satisfied.
Most commonly, this will apply in the case of minimum acceptance conditions.[1] Institutions will often be unwilling or unable to tip into a bid until the bidder is assured of getting to 50.1% or 90%. Through an IAF, institutions and other large shareholders can indicate their intentions in this regard. Once sufficient institutions have joined the IAF, they and the bidder can be assured that the minimum acceptance level will be reached. The institutions can then accept the bid.
Although an IAF is a relatively simple communication tool, the permutations of the Corporations Act ensure that its mechanics are far from simple.
The Act effectively prevents shareholders from working out a common response to a bid (such discussions would effectively make them associates and, in practical terms, contravene Chapter 6 of the Act). The first requirement for an IAF, therefore, is that it must not create any associations between shareholders.
At the same time, it's important that neither the bidder nor the body running the IAF ends up with a relevant interest in the shares while they're in the IAF.
Mechanics
A typical IAF works like this.
The bidder (or in a friendly bid, possibly the target) contracts with a third party to establish and operate the IAF. This third party is called an "acceptance collection agent".
The acceptance collection agent invites institutional shareholders to participate in the IAF.
If an institutional shareholder wishes to participate in the IAF, it provides its acceptance documents for the takeover bid to the acceptance collection agent.
The institutional shareholder also gives the acceptance collection agent a letter which directs the acceptance collection agent to hold the acceptance documents on behalf of the institutional shareholder and to deliver them to the bidder if the acceptance collection agent receives confirmation from the bidder that the "trigger event" has occurred.[2]
The letter from the institutional shareholder to the acceptance collection agent also states that the institutional shareholder may withdraw or amend its acceptance documents at any time before the acceptance collection agent receives confirmation from the bidder that the trigger event has occurred.
In each IAF to date, the trigger event has been that "acceptances" reach a certain level (90% or 50.1%). These "acceptances" are measured as the sum of formal acceptances and acceptance documents lodged in the IAF. For example, if a bidder has received formal acceptances for 25% of the bid shares and institutions have tipped another 50% into the IAF, the total "acceptances" for the purposes of the IAF will be 75%.
When the trigger event has occurred, the bidder gives written notification to the acceptance collection agent of that fact.
On receiving the notification, the acceptance collection agent delivers the acceptance documents to the bidder and they are processed as formal acceptances.[3]
Tip-toeing through the Act
An IAF avoids any Corporations Act complications, for the bidder, the participating shareholders or the acceptance collection agent.
Shareholders deal with the acceptance collection agent on a one-to-one basis. Because they don't communicate with each other, they don’t become associates under the Corporations Act.
The acceptance collection agent does acquire a relevant interest in the shares. However, because the agent acts as a bare trustee on behalf of the institutions, that relevant interest is generally disregarded under section 609(2) of the Act.[4]
Because the acceptance collection agent is under the direction of the target shareholders, the bidder has no control over the shares in the IAF and hence has no relevant interest in them.
Notwithstanding the bidder's non-interest in the shares, current practice is that the bidder notifies ASX of acceptances into the IAF in the same way that it lodges substantial shareholder notices for formal acceptances. Although not required by Chapter 6, this ensures that the market is kept informed of the bidder's progress towards its minimum acceptance condition. Both ASIC and the Takeovers Panel have indicated that they expect all IAFs to follow this practice.[5]
The Takeovers Panel has also laid down guidelines for disclosing IAFs to the market. Dealing with the possibility that Bruandwo would establish an IAF during its bid for ALH, the Panel said that, on establishment of such a facility (or on any material change to the facility), Bruandwo should disclose each of the following:
Presumably the same requirements would apply to a target who established an IAF.
Issues
IAFs appear to be a win-win situation, combining a degree of certainty for bidders and reasonable flexibility for large shareholders. It would not be surprising if they soon became a regular feature of most sizeable bids.
That said, it must be emphasised that each IAF has to be carefully constructed and run. The takeovers rules in the Corporations Act are complex and, particularly in the area of deemed associations and relevant interests, can easily be triggered inadvertently. Care must also be taken to navigate other regulatory mazes, such as stamp duty and tax laws. Our work with the Mayne/Faulding and Macquarie/Principal America IAFs has shown us what these issues are and how they can be addressed in practice.
Looking wider afield, it is known that ASIC is currently reviewing IAFs from a policy point of view. At this stage, it is not believed that ASIC has any significant policy concerns with IAFs as they have manifested themselves to date.
[1] In Mayne/Faulding and Macquarie/Principal America, this was a standard minimum acceptance condition (ie. the bid would fall away unless the bidder achieved a threshold level of acceptances). In TabCorp/TAB and PBL/Burswood, the minimum acceptance condition was tied to an increased bid price (the bidder would increase the bid price if it achieved the threshold level of acceptances).
[2] If the investor holds the securities through a custodian, the set-up is slightly different. Rather than sending an acceptance form to the bidder, the acceptance collection agent delivers a completed and signed direction to the custodian to accept the bid.
[3] Or a direction letter to the custodian.
[4] Section 609(2) states that a bare trustee will not have a relevant interest if the beneficiary of the trust also has a relevant interest. To attract the exception, it is necessary for the beneficiary to have a right to control the securities. This should be satisfied for an IAF because the beneficiary, being the institutional shareholder, has the right to withdraw its acceptance documents from the IAF until the trigger event occurs. Once the trigger event occurs, it is important to make sure that the timing is such that the institutional shareholder relinquishes its rights at the same time as the bidder acquires a relevant interest, otherwise the acceptance collection agent may be left holding the relevant interest in the intervening period.
If the acceptance collection agent is a financial services licensee, its relevant interest may also be disregarded as a result of section 609(3). That provision applies to financial services licensees who regularly deal in shares or who hold shares as a custodian.
[5] The Panel formally stated its position when ruling on the Coles/Macquarie challenge to Bruandwo's bid for ALH: Media Release TP 04/99. ASIC's position has been conveyed informally to industry participants.
[6] Media Release TP 04/99.
For further information, please contact Karen Evans-Cullen.
