Truth in takeovers: the whole truth and nothing but the truth?....well maybe…

Has the time come for ASIC to revisit and update its ‘Truth in Takeovers’ policy?

While the policy has made an important contribution to improving market integrity, the application of some aspects of the policy in practice is not without difficulties. In addition, there is a view that the policy has been relied upon, or sought to be relied upon, in recent control transactions in ways which are well beyond the original purpose of the policy.

Recap on the existing policy

Under the ‘Truth in Takeovers’ policy, if a market participant (ie a bidder, target or shareholder) makes a public statement that it will or will not do something (for example, a bidder will not increase or extend a bid), then all other stakeholders in the market should be able to rely on the accuracy of that statement. A market participant who then departs from its statement risks regulatory action for misleading or deceptive conduct or an application to the Takeovers Panel for a declaration of unacceptable circumstances.

There can be no doubt that the policy is a key part of maintaining market integrity and confidence. However, the practical application of the outer reaches of the policy is not without difficulties. Separately, some aspects of the policy may go too far.

Are the extremities of the existing policy on sound foundations?

Existing ASIC policy states that it is not acceptable for a bidder to say that it ‘does not presently intend to increase our offer’ without clear language that it reserves its right to do so. Similarly, the policy says it is inappropriate for a bidder to say that it considers its ‘offer is full and fair and that it does not have any information to justify an increase in the offer price’ without an unambiguous qualification.

But as a legal matter, is an unambiguous qualification really necessary?

Would a court find that a bidder had breached the misleading conduct provisions if the bidder had made a statement that it did not presently intend to increase its offer (without qualification) and then later on increased its offer?

Permitting such an increase would be contrary to the existing policy. There is also 20 year old case law to suggest a positive unqualified statement may be misleading if the relevant circumstances show the need for a qualification or the possibility of a change of position to be disclosed.

However, would a court today find such conduct to be misleading if, at the time of the statement, the bidder genuinely believed it would not increase its bid (and had, for example, board minutes or other evidence to prove it)? What if some new event occurred or new information arose which justified an increase in the price?

To take another example: say it is September 2008, and a fund manager holding 20 per cent in a target company in the mining industry publicly states that it has no intention of accepting a bid for the target company which it considered to undervalue the company. The financial markets then melt down, commodity prices collapse and the fund manager’s investors seek to withdraw their funds. The fund manager has a need to accept the bid which may now no longer undervalue the company. Should the manager be able to accept the bid? The policy would suggest the bid could not be accepted. In such circumstances, would a court consider the earlier no acceptance statement to be misleading?

We live in uncertain and interesting times. Not unrelated is that the plaintiff class action lawyers (with support of litigation funders) have been increasingly active.

Does this mean that every market participant should qualify all of its statements or otherwise risk action for misleading conduct? A standard form disclaimer could be added to the bottom of each public statement. Would that be a good thing?

Is the policy being used to stretch the meaning and scope of statements beyond the maker’s intentions?

There is a view that some participants in the market are now seeking to stretch the meaning and scope of statements so as to use them for other purposes. In addition, there are some difficulties with applying the policy in practice. Some issues and examples follow:

No increase statements

The classic application of the policy is to statements that a bidder will not increase its offer price.

What if the statement is that the bidder has no present intention to increase but there is no qualification that it reserves its rights to do so? Should an increase be prevented if new information later arises, for example if the target company unexpectedly wins a new large contract or, if it is a mining company, it unexpectedly finds a large new mineral resource? Why should the policy stop the bidder increasing its offer price so that all shareholders gain….with the obvious exception of shareholders who have sold out into the market in reliance on the ‘no increase’ statements?

In Rinker Group Ltd 02R [2007] ATP 19, the bidder declared its offer price ‘best and final’ but later allowed target shareholders to keep a dividend paid by the target. While the Takeovers Panel found the change in position to be unacceptable, it had some difficulty framing an appropriate remedy. The Takeovers Panel decided not to force the bidder to keep to its original statement (which would have deprived accepting shareholders of the dividend). Instead, the Panel required the bidder to compensate any shareholder who sold their shares in the period between the bidder declaring the offer final and the bidder announcing shareholders could keep the dividend. (The matter remains subject to appeal in the Full Federal Court).

An order that the bidder abide by its original statement would have meant that accepting shareholders could not keep the dividend, but could withdraw their acceptance. While depriving accepting shareholders of the upside, this outcome would have been more true to the foundation of the policy and market integrity principles.

Acceptance statements

It has become common for shareholders to make public statements that they intend to accept the offer.

At times, this may come about because the bidder already has 20 per cent or more and cannot buy any more shares without making a bid and yet has had discussions with the major shareholder about its position regarding a possible takeover bid. The acceptance statement then allows the shareholder to publicly signal or affirm that the price is acceptable. Pursuant to the truth in takeovers policy, the shareholder cannot then resile from the public statement.

But where the bidder and the shareholders have negotiated the price or discussed what else may result in an acceptance, does the making of an acceptance statement really amount to an ‘understanding’ to accept the bid, giving the bidder a relevant interest in the shares in breach of the 20 per cent rule in section 606 of the Corporations Act?

In MYOB Ltd [2008] ATP 27, the bidder, in its initial announcement of the bid disclosed that four specified shareholders in the target, who together held in aggregate 34 per cent of the target, would accept the bid as soon as it was open. This statement was repeated in the bidder’s statement with the consent of the shareholders. The Takeovers Panel considered that the unqualified statements to accept on the first day of the bid were highly unusual and evidenced the bidder had an understanding with four shareholders that they would accept the bid. Therefore, the understanding with each shareholder amounted to a ‘relevant agreement’ and gave the bidder a relevant interest in the shares in excess of 20 per cent in breach of section 606.

Following from the Panel’s decision in MYOB, it seems that shareholders making statements of intention to accept should qualify the statement so that they remain free to accept any superior proposal. If not, the statement of intention may be considered to reflect an understanding and agreement between the bidder and shareholder. In addition, statements that the shareholder will accept as soon as the bid is open may also cause difficulties. If the parties consider it desirable to specify a time for acceptance, it may be preferable that the statement make clear that the shareholder will not accept until the bid has been open for a minimum period of time, say two weeks or until the target’s statement has been released.

What if a major shareholder says it will accept in the absence of a higher offer or that it will accept within two weeks of the offer opening (in the absence of a higher offer) and then accepts on the first day the offer is open? Is that unacceptable?

Has the market been mislead into thinking that the shareholder will allow some time for a higher bid to emerge? Is acceptance as soon as the offer opens evidence that there is a pre-existing agreement between the bidder and shareholder for the shareholder to accept the bid? What then if a higher offer does emerge?

In a recent transaction involving competing takeover bids, a major shareholder in the target company stated that it intended to accept a (cash) offer from one bidder (the first bidder to emerge) in the absence of a superior offer. A not uncommon statement. A second bidder then made a higher cash bid. The major shareholder said nothing in response.

In this scenario, does ‘Truth in Takeovers’ require the shareholder to accept the higher bid to avoid misleading conduct? On one view, the shareholder has signalled to the market that it is a seller and must sell to the highest bid. The other view is that all the shareholder has said is that it would accept one offer, if it remained the highest bid. The shareholder had not announced an intention to accept any bid which happened to be the highest.

It would seem right that the shareholder should not be forced to sell into another bid just because it is higher. There may be many reasons why the shareholder may not choose to sell to a particular bidder. It may have concerns with the higher bidder or some other strategic reason for not wanting that bidder to acquire the target company. Further, the shareholder has not stated that they will accept any other bids. It has just said that it would accept one bid if it is the highest.

Voting intention statements

While the ‘Truth in Takeovers’ policy is, as the name suggests, about takeovers, the policy is often extrapolated to schemes of arrangement and other transactions involving shareholder votes.

In schemes of arrangement, where there is often a concern that an agreement to vote in a certain way will result in the shareholder being in a separate class for the purpose of the scheme, a practice has evolved where shareholders publicly state that they intend to vote in favour of a scheme proposal in the absence of a superior proposal.

What if a shareholder states its voting intention and some new facts emerge and the shareholder changes its mind on its voting intentions? Is that misleading? What if it was a genuinely held its intention at the time of the statement?

This situation arose in Summit Resources Ltd [2007] ATP 9 where the bidder declared it would vote in favour of resolutions proposed by the target to authorise a placement of shares to, and a joint venture with, a third party, but later withdrew support for the resolutions following an increase in its scrip bid which secured a target board recommendation and success of the bid. The Takeovers Panel made a declaration of unacceptable circumstances. However, as events had moved on, the Panel considered that it would not have been appropriate to force the target to hold a shareholder meeting and enter into a joint venture which would have disadvantaged target shareholders (who had accepted a scrip bid and become shareholders of the bidder). As a result, the Panel felt there was no sensible order which could be made to remedy the unacceptable circumstances.

The key point is that the Panel considered there to be unacceptable circumstances, even though the surrounding circumstances had changed. However, the case also showed the difficulty of enforcing the policy in practice.

What then about a shareholder who requisitions a meeting and has the voting power to decide, or substantially affect, the outcome of resolutions? Usually, this would be accompanied by statements about why it is important that the resolutions are passed, which carry the obvious implication about how his shares will be voted. What is the consequence if he then votes the other way (or sells his shares immediately prior to the meeting to someone intending to vote the other way)? ‘Truth in Takeovers’ might mean that the shareholder should be held to his statements, express or implicit. Anyone who expected the shareholder to vote a particular way (and acted on it) may claim loss and maybe ASIC should hold the shareholder to its (implicit) intentions.

Conclusion

ASIC’s ‘Truth in Takeovers’ policy is an important and necessary part of our regulatory framework.

However, developments in market practice has seen the policy used as justification for practices for which the core policy was not intended. The sophistication of our M&A market has also thrown up unique facts and circumstances with which the current policy does not sit well.

Perhaps then the time has come for ASIC to reconsider parts of its policy and update it to give the market some further guidance.

More information

For information regarding possible implications for your business, contact