ASIC has released a major update of its policies and Class Orders relating to mergers and acquisitions.
As well as updating its policies to reflect legislative changes since 1999, ASIC has taken the opportunity to set out some new policy positions. Most of these were flagged in the Consultation Paper which the Commission released late last year. The final policies largely reflect those proposals, albeit with some changes.
Substantial holding notices
The requirement to lodge a substantial holding notice is the Chapter 6 provision most commonly encountered by shareholders, even if they're not contemplating a takeover bid. ASIC's revised policy on substantial holding only makes one significant change to that process.
Substantial holding notices must be accompanied by the agreement/s that gave rise to the changed shareholding. In ASIC's view, this requires the disclosure of all relevant documents, not just those which trigger the legal requirement to lodge a notice. It specifically counsels against entering into and disclosing a preliminary agreement, which triggers the notice requirement, but omitting to disclose the substantial details of the transaction on the basis that they have not yet been legally finalised.
The takeovers exceptions
Section 611 allows shareholders to go above 20% of a company without having to make a takeover bid, in certain specified circumstances. The revised policy makes some changes to ASIC's exercise of its discretionary and enforcement powers in relation to that section.
Perhaps the most controversial aspect of the proposed policy changes in this area was ASIC's crackdown on what it regarded as the unacceptable use of the underwriting exemptions. This focused on underwriting arrangements which, in ASIC's view, were not genuine underwriting because they gave the underwriter too much freedom to walk away from its obligations.
In response to submissions, ASIC has now modified its policy slightly. While not resiling from its general position, the final policy states that arrangements are not a genuine underwriting if they "effectively give the 'underwriter' a general discretion to terminate the underwriting arrangement from the outset" because of events over which the underwriter "has effective control". This is in contrast to the proposed policy, which attacked underwriting arrangements that could be terminated by events over which the underwriter "may have some control".
Recognising that there are some termination events that require a mixture of objective and subjective evaluation (eg. material adverse changes), ASIC has also made it clear that there is nothing objectionable in arrangements that allow an underwriter to walk away on the basis of its reasonable or bona fide view of the materiality of an event over which it had no control.
The new policy also confirms that ASIC will not allow a shareholder to disregard any involuntary dilution when making a 3% creep if the dilution did not reduce the shareholder's stake to below 19%.
One area in which ASIC appears to have departed from the Takeovers Panel is collateral benefits.
The Panel generally takes the view that a side-deal (such as an asset sale or purchase) will constitute a collateral benefit to a target shareholder where the deal gives the shareholder more than he or she would have received on an arm's-length basis (the so-called "net benefit" test).
ASIC view is that the core of the ban on collateral benefits is whether the side-deal induced or was likely to induce the shareholder to accept the bid. It acknowledges that this is not the same as the Panel's net benefit test:
"our guidance is focused on the ‘inducement’ test that applies under the law rather than the considerations relevant to determining whether unacceptable circumstances exist. While we acknowledge that consideration of whether a ‘net benefit’ is given may be relevant in considering the legal prohibition … the inducement test is broader—in particular, under the ‘inducement’ test a benefit given on arm’s length terms could still contravene s623 if it induces target holders to accept into a bid or dispose of bid class securities;
our guidance takes into account similar factors to the ‘net benefits’ test but emphasises that the overall test is inducement. For example, one element is the ‘materiality’ of the benefit, which incorporates similar considerations; and
conceptually, we think a benefit that in fact induces a person but does not meet the ‘net benefits’ test should be prohibited. [Panel] GN 21 also acknowledges that there may be inducement without a ‘net benefit'."
Another controversial issue related to the ban on collateral benefits is ASIC's apparent insistence that it applies to schemes of arrangement. The new policy refers approvingly to the iSoft scheme in 2011, where ASIC intervened behind the scenes to require a separate class meeting for a shareholder whom, it believed, was receiving a collateral benefit.
This view runs contrary to both the letter of the law (the 2002 Ranger case established that the bar on collateral benefits does not apply to schemes) and to current judicial trends when considering schemes of arrangement (where the emphasis is squarely on the benefits that shareholders receive within the terms of the bid, rather than under any side-deals).
Institutional acceptance facilities have become a standard feature of M&A in Australia. They are primarily designed to allow institutions to flag their intended acceptance of a bid without formally tipping into the bid until it is unconditional and certain of success. This ensures that institutions do not end up breaching their investment mandates or are not otherwise required to lock up their shares by accepting a conditional bid when there is no certainty of either outcome or timing. In recent times, acceptance facilities have been used more broadly for all target shareholders to replicate withdrawal rights, which have never been a feature of Australia's takeover regime.
Last year, ASIC proposed some welcome – and some unwelcome – changes in relation to acceptance facilities.
The positive change was to make it clear that a target shareholder's "accepting" into an institutional acceptance facility did not give the bidder a relevant interest in that shareholder's holding. Unfortunately, ASIC proposed to make this relief available only where the facility was restricted to institutions whose investment mandates actually restricted them from accepting conditional bids.
Not all institutions have investment mandates that prohibit their accepting a conditional bid, so this would have meant that institutional acceptance facilities would be unviable. As a result, ASIC has modified the exemption. Institutional acceptance facilities will now be allowed for conditional bids and need not be restricted to institutions that are barred from accepting conditional bids. Bids which are unconditional will only be able to use acceptance facilities that are open to all comers – institutions and retail investors alike.
Another welcome change relates to the role of acceptance facilities towards the end of a bid.
Under section 624(2)(b), a bidder can, during the last seven days of a bid, obtain an automatic extension of time for a bid if its voting power goes above 50%.
If the bidder has an acceptance facility, it may know that it has effectively secured more than 50%. However, it does not obtain the voting power legally until:
- it has given a notice to the operator of the facility;
- the operator has instructed brokers to process the legal transfers; and
- the brokers have processed the transfers.
This means that the bidder may not actually acquire voting power of more than 50% until some time after it has given the notice, and maybe not before the original closing date of the bid (which would deny the bidder the automatic extension). To alleviate this, ASIC originally proposed to give case by case relief that would deem the bidder to have obtained the voting power as soon as it gave the notice to the operator of the acceptance facility. ASIC has now gone one step further, and granted this relief by Class Order, which is a common sense approach.
A joint bid involves two or more bidders whose agreement with each other to bid for a company may, by aggregating their voting power in the company, result in their acquiring more than 20% of the company and hence breaching section 606. ASIC allows joint bidders to disregard that combined voting power provided that they satisfy certain conditions.
The revised policy now includes four new elements:
- ASIC may not impose the "match or accept any higher bid" requirement where one or more of the joint bidders has started off with less than 3% of the target – this largely reflects what ASIC has been doing in practice;
- the "match or accept any higher bid" requirement may also be waived where one of the joint bidders has started off with more than 50% of the target, because such a majority holding would already have a significant deterrent effect on rival bids by itself – this was not flagged in ASIC's original proposals last year, and is a response to submissions received on those proposals;
- the policy will be applied to schemes of arrangement (eg. by preventing joint bidders from voting against a rival scheme that offers a higher price to target shareholders);
- ASIC will consider going to the Takeovers Panel if joint bidders try to avoid its policy by making the aggregation of their shareholdings conditional upon target shareholder approval under item 7 of section 611 –
"the fact that joint bid or scheme arrangements are made subject to approval under item 7 by the joint bidders or acquirers does not, in practice, alter the potential deterrent effect that the joint bid or scheme arrangements may have in discouraging rival bids and any resulting auction for control of the target during the period in which the joint bidders or acquirers are relying on s609(7). It is this potential deterrent effect that the protections in ASIC’s relief are designed to address, and that may otherwise mean that the joint bidders or acquirers’ acquisition of control over the target does not take place in an efficient, competitive and informed market … ."
For the last 10 years, the principles governing bid funding have largely been those established by the Takeovers Panel: even though there is no legal requirement to have bid funding in place, a bidder may be acting unacceptably if it launches a bid without having a reasonable expectation that it will be able to pay for acceptances.
ASIC's revised policy on bid funding fleshes out the Panel's policy. Where a bidder does not have funding already in place, a failure to disclose the basis on which it expects to obtain that funding may, in ASIC's view, constitute a breach of the Corporations Act as well as unacceptable circumstances.
We understand that ASIC has begun to review its policy on prospectus disclosure in relation to employee share schemes. This has been prompted by the fact that modern employee share schemes are frequently constructed in such a way that they do not qualify for ASIC's existing prospectus relief (eg. where they grant performance rights which are technically derivatives rather than securities).
Performance rights also have the potential to be an issue in takeovers, again because they may be derivatives rather than securities. ASIC is now prepared to grant case-by-case relief to allow the holder of 90% of a class of shares to compulsorily acquire any outstanding performance rights that relate to shares in the bid class.
Unsurprisingly, the new policy does not address the issue of equity derivatives and whether they should be taken into account when determining relevant interests.
ASIC says that there will be no movement on this front until Treasury has finished evaluating the responses to its scoping paper on takeovers issues (the one which was triggered by ASIC's belief that the creep provisions are being misused). That presumably means that:
- Treasury may recommend legislative amendments to Ch 6 (which would head off any action by ASIC);
- Treasury may recommend that there is no need to amend Ch 6; or
- Treasury may recommend that ASIC use its modification powers to require disclosure of equity derivatives.
Pending the outcome of Treasury's deliberations, therefore, takers of cash-settled derivatives should continue to follow the Takeovers Panel's guidelines.
As well as significant policy changes, ASIC has made a number of technical amendments to the relief that it grants from various takeover requirements.
As previously flagged, ASIC has extended the rights issue exemption to PAITREOS. An amended Class Order 09/459 now provides that PAITREOS, which allow retail shareholders to trade rights ahead of institutional investors, will qualify for the rights issue exemption in section 611, even though the different trading rights mean that the terms of the offers are not the same for all investors.
Section 642(2) has been modified so that, where an offer is automatically extended, it will end at the time of day when it would have ended but for the extension. Without this modification, the bid would end at midnight on the closing day, a situation which ASIC considers to be confusing and potentially uncommercial.
In 2007, the Federal Court held that bid acceptances for CHESS securities are not effective until the acceptance has been processed through CHESS (APL v Alinta). ASIC has modified the Corporations Act so that the offer is taken to have been accepted when the shareholder gives the bidder a completed acceptance form and authority to process the acceptance. This means that the bidder will be deemed to have acquired a relevant interest in the shares before the transfer is fully processed through CHESS.
There are three technical changes in relation to compulsory acquisition:
in applying the 90% test, only relevant interests that the bidder has through section 608(3)(a) will be excluded while deemed interests under section 608(3)(b) will be included; this means that, to meet the test, the bidder will require acceptances from entities which it does not control but in which it has more than 20% voting power;
a bidder who gives a compulsory acquisition notice following a bid will not also have to give the holdout shareholders a buy-out offer;
ASIC has created new compulsory acquisition notices that eliminate the need to create and lodge an individualised notice for each holdout shareholder.
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