25 Jun 2015
Mariner decision gives directors of bidders greater latitude when announcing takeover bids
by Fred Prickett, Xuelin Teo
The Federal Court has made clear that a bidder need not have certain, guaranteed, binding or unconditional arrangements in place at the time a takeover bid is announced, at least in order to satisfy the requirement in section 631.
Bidders and their directors can be more confident they will not breach the Corporations Act by announcing proposed takeover bids even if they have not arranged firm funding, following the Federal Court decision last Friday in Australian Securities and Investments Commission v Mariner Corporation Limited  FCA 589. Clayton Utz acted for one of the successful defendant directors, the former CEO, in the proceeding. 
The case is a significant decision on both takeovers and directors' duties. It also serves as a forceful reminder that the approach taken by the Takeovers Panel, expressed in its Guidance Notes and decisions, as well as by ASIC in its Regulatory Guides, are not binding on a Court when determining the legal meaning of specific provisions of the Act.
The decision is the first on the Act's prohibition on bluffing bids in section 621(2). In essence, the Court held that the requirement of recklessness in the section sets a high bar so that a contravention will only occur in egregious circumstances, such as where there is no genuine intention to follow through with the bid. The Court rejected the proposition that the prohibition means that a bidder must have reasonable grounds to believe that it will be able to perform its obligations if a substantial proportion of offers under the bid were accepted.
At the same time, the Court made a number of significant points in relation to directors' duties, including their ability to invoke the business judgment rule.
Mariner puts a toe in the water – and Austock in play
Mariner was a listed company which targeted and engaged in mergers and acquisitions in the small cap sector. It had set its sights on Austock, based on an assessment that Austock's market cap did not reflect its true value, which would be unlocked if its separate parts (a property business and a life insurance business) were sold off.
On 25 June 2012, Mariner announced a proposed off-market bid for Austock. At that time, Mariner did not have enough resources of its own to satisfy its obligations under the bid. It would need external resources, which would only be available if the arbitrage opportunity was attractive enough. It had had discussions with a keen prospective purchaser of Austock's property business and other potential sources of finance, but had not confirmed anything as at 25 June. So what was it doing?
The bid was announced at a price which was not much higher than the then current market price and around half the value for which Mariner considered the assets of Austock could be realised. It was also highly conditional, including a minimum acceptance condition of 50%. In these circumstances, it was likely that the directors (who controlled approximately 35% of the shares) would strongly recommend rejection of the bid. Accordingly, the likelihood of the minimum acceptance condition being satisfied at the initial bid price was low.
With this in mind, the bid was described as “a low-risk bid … a toe in the water to put Austock in play”. It was simply intended to “shake the tree”.
ASIC's view was that the bid breached section 631(2)(b) of the Corporations Act, which says:
"A person must not publicly propose, either alone or with other persons, to make a takeover bid if the person is reckless as to whether they will be able to perform their obligations relating to the takeover bid if a substantial proportion of the offers under the bid are accepted."
Justice Beach of the Federal Court disagreed.
Recklessness of a bid is in the mind of the director
The first question is whether ASIC only had to prove Mariner ought to have been aware of a substantial risk that it could not perform its obligations under the bid (an objective question) – or whether ASIC had the harder task of proving Mariner was actually aware of that risk (a subjective question)?
Justice Beach said the test is subjective. In doing so, he noted that a contravention of section 631(2) is a criminal offence, for which some of the more severe sanctions in the Act are provided, which is a further indication that the legislature intended that the provision would apply only in egregious circumstances.
So, in this case, the real questions for the Court were whether:
- Mariner, by its directing mind(s), was actually aware of a substantial risk that Mariner would not be able to perform its obligations if a substantial proportion of offers under the bid were accepted; and
- having regard to the circumstances known to Mariner, it was unjustifiable to take that risk.
This meant looking at:
- what Mariner’s obligations were going to be if a substantial proportion of the offers were accepted;
- when those obligations were likely to arise;
- what was Mariner’s actual and anticipated ability to meet those obligations at the relevant time;
- what others had told Mariner about their willingness to provide funding for the bid;
- whether Mariner could have obtained or readily been able to obtain sufficient funding for the bid from other sources;
- generally, whether there was a risk that Mariner would be unable to perform its obligations relating to the takeover bid if a substantial proportion of the offers under the bid were accepted; and
- whether Mariner was actually aware of that risk.
On the facts of the case, Mariner was not reckless – its directors subjectively thought that, at most, there would only be 65% acceptances of its off-market bid. They also thought that the bid could be easily funded if and when required in light of the significant arbitrage involved (Mariner estimated the break-up value of Austock at nearly twice Austock’s market capitalisation).
Even if the test were objective, said Justice Beach, ASIC had not shown Mariner did not have reasonable grounds to believe it could perform its obligations under the bid.
A substantial proportion of the offers is not less than 50% of the shares in play
"A substantial proportion of the offers" is one of those concepts that seems clear at first blush, but becomes increasingly unclear upon reflection. Does it mean more than 50%? Less than 50%? And 50% of what – shares or shareholders?
Justice Beach said that "whatever 'substantial proportion' means, it ought not to embrace less than 50% of the shares that are anticipated to be the subject of the offers to be dispatched."
No misleading or deceptive conduct
ASIC also alleged that Mariner had breached section 1041H of the Act, on the basis that its announcement of the proposed bid constituted a misleading statement that it had a reasonable expectation about being able to buy Austock. The Court dismissed this claim as well, finding that there was no basis to say that an announcement that a person proposes to make a bid conveys a representation that the person has reasonable grounds to believe that it will be able to pay the bid consideration for all of the shares in the target company.
Impact of the Mariner decision on future bids
The Mariner decision goes against the weight of rulings by the Takeovers Panel, which has tended toward reading the section as requiring firm funding arrangements in place when announcing takeover bids, albeit in the different context of deciding whether there are unacceptable circumstances.
The Federal Court has made clear that a bidder need not have certain, guaranteed, binding or unconditional arrangements in place at the time a takeover bid is announced, at least in order to satisfy the requirement in section 631. All of the surrounding circumstances of the announcement must be taken into account. In this case, the Court accepted the view of the directors that a "drover's dog could have funded the bid" in light of the significant arbitrage involved.
The Court backs the judgment of the directors
The prohibition in section 631 applies to Mariner as the bidder, not its directors. ASIC sought penalties and banning orders against the directors on the basis that they breached their duty to Mariner under section 180 to exercise reasonable care and diligence, by causing Mariner to contravene section 631 or putting Mariner at risk of such a contravention. The Court dismissed the claim against the directors under section 180, irrespective of whether or not Mariner had contravened section 631.
In doing so, Justice Beach relied on earlier authority which rejects the proposition that if a director causes a company to contravene a provision of the Act, then necessarily the director has contravened section 180.  The role of the director is to balance risk and reward. In this regard, Justice Beach said:
" No contravention of s 180 would flow from such circumstances unless there was actual damage caused to the company by reason of that other contravention or it was reasonably foreseeable that the relevant conduct might harm the interests of the company, its shareholders and its creditors (if the company was in a precarious financial position).
. . .
 Further, relevant to the question of breach of duty is the balance between, on the one hand, the foreseeable risk of harm to the company flowing from the contravention and, on the other hand, the potential benefits that could reasonably be expected to have accrued to the company from that conduct.
. . .
 After all, one expects management including the directors to take calculated risks. The very nature of commercial activity necessarily involves uncertainty and risk taking. The pursuit of an activity that might entail a foreseeable risk of harm does not of itself establish a contravention of s 180. Moreover, a failed activity pursued by the directors which causes loss to the company does not of itself establish a contravention of s 180."
In this case, the potential rewards outweighed the potential risk of harm to Mariner:
" Even if one or more of the alleged risks of harm to Mariner were reasonably foreseeable, the actual jeopardy that those risks posed to Mariner’s interests were, in context, minimal. Further, and in any event the potential countervailing benefits to Mariner of pursuing the proposed takeover bid were significant and outweighed such risks."
On this basis and applying the business judgment rule in s180(2),  the Court could not fault the directors. Justice Beach said:
" . . . [T]he directors had extensive backgrounds and expertise in mergers, acquisitions and finance. Such backgrounds no doubt informed their judgment calls, assessments of risk and the strategies they pursued in relation to the transaction the subject of this proceeding. It is necessary to bear this in mind when assessing the case of a regulator second guessing such judgment calls with the benefit of hindsight, using a largely paper based analysis and viewing the events from a timeframe perspective divorced from the reality of the speed at which the events occurred in real time. . . . [I]n looking at the transaction in question, it is important to adopt an ex ante perspective where one is not just looking at potential risks and downsides but also the potential benefits. That was the directors’ framework at the relevant time. And that is necessarily the framework within which s 180 must be analysed. A retrospective analysis of a transaction which did not proceed has the tendency to overlook that latter dimension."
In other words, it was entirely proper for the directors to view the cup as half full, rather than half empty, and make a balanced commercial judgment call accordingly.
At this stage it is not known if ASIC will appeal.
 Clayton Utz did not act for Mariner in respect of the takeover bid. [back to article]
 ASIC v Maxwell (2006) 59 ACSR 373 per Brereton J at  and ; ASIC v Warrenmang Ltd (2007) 63 ACSR 623 per Gordon J at -; ASIC v Rich (2009) 75 ACSR 1 per Austin J at  [back to article]
 Section 180(2) of the Act provides that:
"A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold. [back to article]