Last year was a busy year in terms of takeover activity, but 2011 is predicted to see even more activity as Australia and the global economy emerge from the GFC. As companies seek exposure to global growth regions and to consolidate their access to resources, Australia will reaffirm its status as a key target for takeover activity.
The following are themes that were developed toward the end of 2010 and the beginning of 2011 that we expect to see expanded upon in 2011.
(Cash bids favoured) With the broader market remaining volatile, bids which include a substantial cash premium remain highly attractive. As a result of capital raisings, many Australian companies continue to have spare cash on the balance sheet which can be deployed for further acquisitions.
Foreign investors with access to low cost financing may also be in a position to make attractive cash offers.
(Payment of dividends to improve cash consideration) In concert with the move toward cash deals, this is a tactic that can use the strength of a target company's balance sheet to improve the overall payout to target shareholders. Three of the four proposed deals described in this update flag the payment of a special or ordinary dividend to shareholders in addition to the consideration payable under the offer.
(Expansion beyond resources sector) Much of the takeover activity in Australia in the past few years has been concentrated in the resources sector. While we expect this activity to continue, we also expect to see an expansion in takeover activity in other areas of the economy, such as agriculture, financial services and industrials.
LEGAL MATTERS – CHILLING A TARGET
An announced bid (or even a private genuine proposed bid) can have the effect of materially constraining the actions of the Target.
In a hostile bid, the chilling effect can be a significant factor for a Bidder and something that a Target needs to be aware of so they can actively defend it.
This chilling effect arises due to the operation of a takeover rule regarding 'frustrating actions'.
Bid conditions which, if not satisfied, would allow a Bidder not to proceed with its bid or which would result in the lapse of a bid, are generally known as Defeating Conditions.
Defeating Conditions include conditions which are proposed in a genuine potential bid which has been communicated to target directors publicly or privately but which is not yet a formal bid.
'Frustrating actions' are actions by a Target, whether taken or proposed, which would trigger a Defeating Condition (ie. enable a Bidder not to proceed with its bid or which could result in the lapse of a bid).
Depending on the circumstances, a Target may require shareholder approval to carry out a frustrating action.
In obtaining that approval, in most cases, the Target would be advised to obtain an independent expert opinion in relation to whether the Target's proposed action is 'fair and reasonable' to the Target shareholders as a whole, compared with the alternative takeover offer.
The purpose of the frustrating action rule is, in appropriate circumstances, to give Target's shareholders a choice between the Target's proposed actions and the announced or proposed bid.
For a Bidder, the rule preserves the status quo in the event of a bid or genuine potential bid, until the Target's shareholders have an opportunity to consider the bid.
For a Target, the rule could have the consequence of materially delaying the implementation of a strategic initiative.
The Takeovers Panel has issued a Guidance Note where it has indicated that the following actions by a Target in the face of a bid or genuine potential bid may require shareholder approval:
- issuing new shares
- acquiring or disposing of a major asset
- materially changing the terms of outstanding debt
- declaring a special or abnormally large dividend
- entering into a joint venture.
Considerations that the Panel will take into account in deciding whether shareholder approval is required include:
- how long the bid has been open and its likelihood of success
- whether it is 'unreasonable' for a bidder to rely on the condition (eg whether the condition is overly restrictive or requires the target's co-operation such as allowing due diligence)
- whether the frustrating action was undertaken by the target in the ordinary course of its business.
- whether there is a legal or commercial imperative for the frustrating action
- whether the frustrating action materially affects the financial or business position of the target
- the "chilling effect" that the frustrating action has on any potential auction.
- Defending the potential chilling effect of the rule requires awareness of the prospects of a bid and a long term defence strategy involving appropriate disclosure of potential actions and initiatives.
© DLA Phillips Fox
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.