23 Jul 2015

When is a "blocking stake" not a blocking stake?

by Mark Paganin, Stephen Neale, Thomas Parker

Amcom's successful scheme with Vocus demonstrates why communication with target shareholders should be an integral part of any takeover strategy.

Eight months after receiving Vocus' initial approach, Amcom has now implemented its $1.3 billion scrip for scrip merger with Vocus by way of scheme of arrangement.

The merger was the catalyst for a period of major consolidation and activity in the Australian telecommunications sector. The announcement of Amcom's scheme was followed by Vocus' acquisition of a 14.99% stake in Macquarie Telecom, TPG's merger proposal to iiNet, M2's competing proposal for iiNet, TPG's acquisition of a 19.9% stake in Amcom, TPG's superior proposal for iiNet, and Vocus increasing its Macquarie Telecom stake to 16.02%, all of which occurred while Amcom's scheme was on foot.

This significant activity is a reaction to the National Broadband Network and the growth of Telstra, with key driving factors being for participants to increase market share, realise synergies and secure a strong position in the market once the NBN is complete.

Facing a blocking stake

The Amcom scheme process featured a range of complex legal issues, including those resulting from Vocus' acquisition of its substantial stake in Macquarie Telecom and, what would represent a significant challenge to the scheme's success, TPG's acquisition of a 19.9% stake in Amcom.

The challenge from TPG arose from its somewhat unusual public statement, at the time of acquiring its stake, that it intended to vote against the scheme and had no intention to make a counterproposal to the scheme. As the scheme was required to be approved by target shareholders holding at least 75% of the total votes cast on the resolution, TPG's 19.9% holding was considered a "blocking stake" that would ordinarily be very likely to prevent a scheme being successful.

While Vocus held a 10% interest in Amcom and there was nothing at law to prevent it from voting its shares in favour of the scheme, there remained uncertainty if it did vote, as to whether or not those votes would have been eligible to be included in the voting thresholds to approve the scheme.

An outcome of Vocus' divestment of its 10% interest was to remove this uncertainty. The divestment also had the effect of allowing all Amcom shareholders to participate in the scheme so that the market could determine the outcome.

The key then was to encourage Amcom's 8000+ shareholders to cast a vote in relation to the scheme.

Rallying shareholders to vote

Shareholders, and particularly retail shareholders, can tend to be uninterested in actively casting their vote in scheme processes as they have a perception that, while they may support the scheme, their vote will not make a difference. This can play into the hands of holders of significant stakes in the target company.

With the 75% approval threshold and TPG's 19.9% stake, the scheme's success turned on Amcom's ability to rally its, mostly retail, shareholders to cast their vote and hopefully vote in favour of the scheme.

Amcom was already conducting a comprehensive and co-ordinated communications and proxy solicitation strategy with its advisers Lazard and FTI Consulting, with extensive input from Clayton Utz (as Amcom's legal advisers). The strategy became of increased importance with TPG's stated voting intention.

Amcom's communication strategy included:

  • use of social media;
  • video messages to shareholders;
  • sending postcards to shareholders;
  • media interviews, including on the ABC and Sky News;
  • shareholders information lines;
  • call centres contacting Amcom shareholders; and
  • regular contact with custodians, brokers and nominees of shareholders.

Of course, it took a telecommunications company to make use of such diverse communication methods (with similar tactics now ironically being used for iiNet's current scheme with TPG, as noted in the media).

Going into the Amcom scheme meeting, media speculation and the general mood from the market was that the scheme would be voted down.

The result? Amcom shareholders voted in unprecedented numbers, with 88.2% of total shares on issue being voted at the scheme meeting. The support for the scheme was compelling:

  • 77.2% of votes were in favour of the scheme;
  • 3,600 shareholders were in favour, with only 40 against (including TPG); and
  • excluding TPG's votes, 98.8% of votes were in favour.

Following shareholder approval, the scheme was approved by the Federal Court of Australia, and was implemented on 8 July 2015.

Lessons learned

  • Getting the message across: conducting a comprehensive and co-ordinated communications strategy across a range of media avenues assists in encouraging shareholder participation in the vote.
  • Knowing your shareholders: understanding the composition of the register and engaging with retail shareholders, custodians, brokers and nominees should form a key part of any communications strategy.
  • Consistency of communications: caution should be taken to ensure that communications released do not provide information that is material to the scheme other than what has been disclosed in the scheme booklet or other court-approved disclosures.
  • Encouraging but not barracking: a scheme company should be mindful that it can encourage shareholders to cast their vote in relation to the scheme, but cannot tell shareholders how to vote.
  • Independence of the chair: a chair of the scheme meeting should ensure they remain independent, impartial and non-partisan during the scheme process and throughout any communications strategy.
  • Information to all shareholders: communications must be sent to all shareholders and not selectively, so that all those voting have the same information.
  • Contingency planning: while taking all actions towards the success of a scheme, consideration should be given to contingency planning in the event the outcome is uncertain or may be unsuccessful.
  • It's not over until it is over: companies and their advisers should anticipate and be responsive to changing circumstances and challenges and continually revisit and update the communications strategy throughout the scheme process.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.