Joint bids

The global economic crisis has had a profound impact on the Australian M&A landscape. The current difficult financial conditions may see the emergence of a greater number of takeover bids for companies being made jointly. Joint bids can be made by:

• two or more persons in their names jointly or using an agent or nominee, or
• a joint venture bid vehicle formed by the joint bidders.

The key advantages of making a joint bid in the current environment include greater access to financial resources to fund the bid and the ability to share risks between the joint bidders.

In this article, we briefly examine the key issues involved in making a joint bid.

Pre-bid agreement between the bidders

Joint bidders normally enter into a bidding agreement before making the bid. The agreement deals with the conduct of the bid and with operating the target if the bid is successful.

For tactical reasons, however, the agreement does not usually go into much detail regarding operating the target. Any detail included must be disclosed in the bidder’s statement, and the bidders are often keen to avoid exposing any valuations to criticism from the target or encouraging other potential bidders.

Associations and the 20 per cent rule

A joint bid arrangement could create an association between the bidders and, perhaps, relevant interests in each other’s target shares.

These possibilities raise two issues: first, any association between the bidders must be disclosed; and secondly, depending on the interests held by the joint bidders, the arrangement might breach the 20 per cent rule.

Association

Parties are associates if they act, or propose to act, in concert in relation a body’s affairs. In summary, this means that the parties must entertain, be a party to and act on an understanding between them, and pursue a common objective through that understanding. While there are ways to try to defer bidders becoming associates, a joint bid arrangement is an association, and an association that can crystallise before any formal agreement is signed.

As associates, the bidders must file a combined substantial shareholding notice if their joint interest in the target is greater than five per cent. The notice must annex the joint bidding agreement or at least describe any arrangement, and must be filed within two business days of the formation of the relevant association. Joint bidders should therefore give careful consideration of when and how they begin discussions regarding a possible joint bid.

The 20 per cent rule

Section 606 of the Corporations Act 2001 (Cth) (Act) prevents any person from acquiring shares in a company if it would result in that person and their associates having voting power in the company of 20 per cent or more. Where two or more parties who together hold more than 20 per cent of the voting power in the target company wish to make a joint bid, there is a significant risk that the parties will
be in breach of section 606.

Courts have been unpersuaded by arguments that there is no association or no relevant interest based on technicalities and the formal structure of a joint bidding agreement. In Edensor Nominees Pty Ltd v ASIC, for example, two parties holding 28 per cent and 12 per cent respectively of the target’s shares entered into joint bid agreement. To avoid breaching the 20 per cent rule, they included a clause providing that each bidder remained free to dispose of its existing shares in the target at any time. The Court nonetheless found that the parties had an overriding understanding between them that they would
not do so and would conduct a joint bid for the target. It therefore found them to be in breach of the 20 per cent rule.

However, ASIC is willing to facilitate joint bids provided that the other shareholders of the target are not disadvantaged by the block created when two or more bidders come together to make the bid. ASIC’s policy is that it may grant relief to facilitate a joint bid, where the joint bidders’ pre-bid stakes in the target collectively exceed 20 per cent, if the bid complies with the following conditions:

1. the bid must contain a minimum acceptance condition of 50.1 per cent of target shareholders not associated with the joint bidders, a condition which the bidders cannot waive
2. if a higher rival bid is made, the joint bidders must accept or match it (and ASIC’s view is that the joint bidders must sell not only shares acquired under the joint bid, but also shares held before the
   bid was launched)
3. the joint bidders must use their best endeavours to have the target engage an independent expert to prepare a report on the bid (to help non-associated shareholders determine whether the price
   offered is fair and reasonable, similar to the requirement under section 640(a) of the Corporations Act that a target’s statement include an expert report if the bidder’s voting power in the target is 30
   per cent or more), and
4. the joint bidders must immediately terminate any relevant agreements or arrangements relating to the joint bid if the bid fails or does not proceed.

Condition 2 obviously represents a significant risk to the joint bidders. If, however, one joint bidder does not have a relevant interest in the target, ASIC may grant relief without imposing condition 2.

The ‘collateral benefits’ and the ‘minimum bid price’ rules

Often one or more of the joint bidders is an existing shareholder of the target. Any agreement between those bidders to deal with the target’s assets could be considered an agreement to give a benefit to a shareholder other than what is being provided under the takeover offer. The agreement could therefore breach the rule against collateral benefits under the Act.

Strictly, bidders can avoid breaching the rule by reaching agreement before the offer period commences and settling only after the offer period closes. Importantly, though, the Takeovers Panel has suggested in its Guidance Note 21 that pre-bid benefits are potentially in breach of the equality principle in section 602 and might be declared unacceptable. However, joint bidders can take some comfort from a preliminary view given by the Panel that it has no problem with benefits received by a bidder in its capacity as a joint bidder in a bona fide joint bid in the GasNet matter.

In addition, any acquisition by a joint bidder (or any of its associates) of shares in the target will set the floor price for any bid made in the four months following the acquisition.

Pre-bid asset sale agreements with a third party

Rather than launching a joint bid, companies could try to achieve a similar economic outcome by the bidder, prior to launching a bid, entering into an agreement with a third party to sell certain assets of the target if the bid is successful. These agreements can create difficult problems, however, where the third party is an existing target shareholder, or if less than 100 per cent of the target is acquired under the bid. For example, Listing Rule 10.1 prevents a company disposing of an asset with a value of more than five per cent of shareholders’ funds to a substantial shareholder (or an associate of a substantial
shareholder) without shareholder approval.

Conclusion

While a joint bid is a useful way to pool resources and share risk in a takeover, it may have significant structuring implications, particularly where the bidders hold pre-bid stakes in the target that collectively exceed the 20 per cent limit. Companies contemplating a joint bid should give careful consideration to these implications before beginning discussions with possible joint bidders.

More information

For information regarding possible implications for your business, contact