Australia: Wraps and broker valuations - Southcorp Panel decision

Last Updated: 11 April 2005
Article by Fiona Gardiner-Hill

The Takeovers Panel has considered in detail for the first time the use of a 'wrap' document and given greater focus to the use of broker valuations by bidders.

The key aspects of the Panel's recent decision regarding Foster's bid for Southcorp relate to:

  • a 10-page wrap that Foster's proposed to bind with the bidder's statement to be sent to Southcorp shareholders but did not lodge with ASIC with its bidder's statement; and
  • Foster's use in the wrap of an average value for Southcorp shares derived from the numerical average of the nine most recent stockbroker reports on the value of Southcorp shares before Foster's announced that it had acquired an 18.8per cent interest in Southcorp.

Background

When Foster's lodged its bidder's statement with ASIC and sent it to Southcorp and ASX, it did not lodge any wrap with it. However, following correspondence between the solicitors for Foster's and Southcorp, Foster's indicated that it intended to include a wrap with the bidder's statement to be dispatched to Southcorp shareholders. An advanced draft of the wrap was provided to Southcorp one week after the bidder's statement had been lodged.

The wrap was 10 pages and included important dates, a letter from the Foster's Chairman to Southcorp shareholders, pages headed 'Features of the Offer', 'Why You Should Accept' and 'What you Should Do' and the table of contents of the bidder's statement. It included a statement on the premium of the offer price above the 'average broker valuation' for Southcorp. This was supported by a note explaining that the average broker valuation was based on the valuation published by nine brokers in the most recent broker research reports available to Foster's prior to the day it announced the purchase of the 18.8per cent stake.

Foster's had released information on broker valuations before it lodged its bidder's statement with ASIC.

Southcorp's contentions

Southcorp contended that the wrap contained information which the Corporations Act required to be included in the bidder's statement lodged with ASIC one week earlier and that, as a result, the directors of Southcorp had not had a reasonable time to consider all material information that should have formed part of the bidder's statement.

Southcorp also maintained that:

  • the statements regarding broker valuations were material information which should have been included in the bidder's statement
  • Foster's should have obtained the consent of the brokers to use the valuations in the wrap
  • the statements were misleading and deceptive as they were not accompanied by a discussion of the brokers' methods, assumptions and qualifications and the average broker valuation should have been updated when the brokers updated their reports.ASIC 'strongly supported' its stated policy position that the brokers' consents should have been obtained to the issue of a statement based on their views.

The Panel's decision—only a 'rap' on the 'wrap'

The Panel considered that Foster's should have lodged the wrap with the bidder's statement, and that 'unacceptable circumstances' existed when Foster's lodged the bidder's statement with ASIC and gave it to Southcorp without the wrap. However, the Panel ultimately decided that the unacceptable circumstances no longer existed and that it would not be in the public interest to make any declaration of unacceptable circumstances or any orders.

Following concern expressed by the Panel during the proceedings, Foster's undertook to send to each Southcorp shareholder a clarifying letter explaining the period over which the broker reports had been issued and stating the range of the valuations.

The Panel concluded that Foster's was not required to obtain the consent of the nine brokers to include the average valuation in the wrap and that the use of the average valuation without further information (such as the brokers' identities and the assumptions and methodology of their valuations) did not constitute unacceptable circumstances.

Wrap

Section 636(1)(m) of the Corporations Act requires a bidder's statement to set out 'any other information that is material to the making of the decision by a holder of bid class securities whether to accept an offer under the bid' and 'is known to the bidder'.

Section 633(6) of the Corporations Act contemplates that a bidder can send additional information to target shareholders with its bidder's statement, provided the information is also sent to ASIC, the ASX and the target company, at the time the bidder sends the bidder's statement to the target shareholders.

The Panel considered that part of the wrap was clearly material to a shareholder's decision and that Foster's (despite its arguments to the contrary) also clearly considered it to be material, given the prominence and presentation of the wrap. Under the principle that target directors should have reasonable time to assess the merits of a takeover, Southcorp directors should have had that information in the form that it was proposed to be presented, no later than they had received the bidder's statement.

The Panel accepted that a bidder can send separate documents with the bidder's statement under section 633(6). However, the Panel said that that was subject to the proviso that any information or statements in the wrap which were material to a Southcorp shareholder's decision should also have been included in the bidder's statement. Further, the presentation of the additional information should not be materially different from the way the information was presented in the bidder's statement lodged with ASIC.

Although the Southcorp directors did not receive the full two weeks normally required for them to consider the information in the bidder's statement, the Panel was not inclined to make orders delaying dispatch of the bidder's statement solely on the basis that the wrap had not been lodged at the same time as the bidder's statement. The time available to the Southcorp directors (one week) was sufficient given their previous exposure to the content and the fact there were only three substantive pages they needed to address.

The Panel made it clear that this decision does not stand for the proposition that broker valuations will always be material information required to be disclosed under section 636(1)(m).

Broker valuations

The Corporations Act requires a bidder to obtain the consent of a person to the use in a bidder's statement (or accompanying document) of a statement said to be made by the person or to be based on a statement made by the person.

The Panel recognised ASIC's strong support for its stated policy that brokers' consent should have been obtained. However, it regarded the use of the broker reports as resembling the use in a bidder's statement of market prices, and not as resembling an independent expert's report. The Panel considered that because the average valuation does not convey something said by any one of the nine brokers, consents of the brokers were not required for Foster's use of the average valuation, nor the use of the end points of the range of broker's valuations in the explanatory letter to shareholders.

The Panel found that the use of the average value without the brokers' identities and assumptions and methodologies of their valuations did not constitute unacceptable circumstances.

The Panel noted that the policy behind section 636(3) is to prevent a bidder from shielding themselves from liability for a statement by attributing that statement to someone else, unless that person accepts liability by consenting to the use of their statement in that context. However, the Panel was of the view that this policy has no sensible application to the averaged broker valuation, as it could not meaningfully be attributed to any one of the brokers and for which no one of them could meaningfully take liability.

The Panel also commented that:

  • bidders and targets should be free to use aggregated valuations as a useful (but not infallible) indicator of market sentiment where it is useful information for shareholders
  • care should be taken in presentation of broker valuations (such as the disclosure of the range of values) and relevant and current valuations excluded only for good and specific reasons
  • bidders should disclose carefully the period from which the valuations come and the bidder's reasons for choosing the period
  • in the particular circumstances, there was no requirement for Foster's to update the average broker valuation and that if Southcorp considers there has been a material change in the average value it was open to provide its view of the correct value to Southcorp shareholders
  • although it was not misleading or deceptive to include a note inviting shareholders to request copies of the broker reports, this was counterproductive if shareholders would not be able to obtain the reports if not already a client of the broker.

The Panel's concern with the use of broker forecast averages without the further information subsequently sent out by Foster's was that they may suggest that there was a greater consensus among analysts than was actually the case.

In particular, the broker valuations used by Foster's had a range of $2.00 to $4.00 and were prepared over a period of five to six months.

The Panel indicated that it would refer the issues raised in the proceedings concerning the use of broker valuations and consent to the wider Panel with a suggestion that a guidance note on the subject be considered.

Implications

The Southcorp decision says that material information should go into a bidder's statement, not an unlodged wrap. But more importantly it sets the test of materiality not just in terms of contents but also in terms of how it is presented. The more the information is presented as important to a shareholder, the greater the risk that it will be found to contain information which is material to a shareholder's decision whether to accept the offer. Given the 'selling' purpose of a wrap, this leaves limited scope for it to contain information which is not also set out in similar form in the lodged bidder's statement. While the Panel did not make an order of unacceptable circumstances in the context of the Foster's wrap, now that the Panel has given some guidance, it seems likely to give more than a 'gentle rap' next time.

On 21 January, ASIC has released a draft replacement to Practice Note 55, which concerns consents to quote statements in disclosure documents. The consent area is clearly one to watch.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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