Potential bidders are urged to exercise caution before entering into pre-bid negotiations with a target's major shareholder, following a landmark declaration of unacceptable circumstances from the Australian Takeovers Panel. The decision is also a warning to target directors to be mindful of conflicts between their interests as shareholders and their duties as directors.
In Ambassador Oil and Gas 01, the Panel found that negotiations between Drillsearch Energy Limited (Drillsearch) and Mr Kleo Hatziladas, who controlled a significant shareholding in Ambassador Oil and Gas Limited (Ambassador), in relation to an 'acceptance statement' gave rise to an association under s 12(2) of the Corporations Act (the Act) in relation to the affairs of Ambassador, which also included Mr Hatziladas' wife (in whose name Mr Hatziladas' shares were held), and the directors of Ambassador. The effect of this association was that Drillsearch acquired a relevant interest in the shareholdings of Mr Hatziladas and each of the Ambassador directors, with the consequence that Drillsearch breached the 20% prohibition in s 606 of the Act when it entered into agreements to acquire a pre-bid stake of 19.9%.
The Panel's reasons, published on 14 August 2014, also clarify the Panel's position on truth in takeovers statements and further restrict the use of lock-up devices, particularly matching rights, in an anti-competitive manner.
Shaun Clyne (Partner), Ebony Keenan-Dunn (Special Counsel) and Claire Thompson (Associate) acted for NYSE-listed Magnum Hunter Resources Corporation (Magnum Hunter) which was ultimately successful in achieving a declaration of unacceptable circumstances in relation to the affairs of Ambassador.
In April and May 2014, certain discussions took place between representatives of Drillsearch and Mr Hatziladas, occasionally also involving the Managing Director of Ambassador, Mr Guglielmo. Mr Hatziladas took an active role in negotiations with Drillsearch, including procuring 32 shareholders willing to sell shares to Drillsearch amounting to 19.9% of Ambassador's issued capital. Mr Hatziladas did all this without any apparent authority from the Ambassador board to negotiate on its behalf.
On 28 May 2014, Drillsearch announced an all-scrip recommended takeover bid for Ambassador (Drillsearch Offer) and entered into a Bid Implementation Agreement (BIA) with Ambassador. Among other things, the BIA contained a matching right provision which prohibited any director of Ambassador from publicly changing his or her recommendation or making any announcement "to the effect that he or she may do so at some future point in time" for a period of 5 business days following notification that a director was considering changing their recommendation.
In the announcement of the Drillsearch Offer, Drillsearch included a statement that "Mrs Fotoula Hatziladas and Eye Investment Fund Ltd, who collectively hold 17.6% of Ambassador, have advised Ambassador that they intend to accept the offer within 14 days from the opening of the offer in the absence of a superior offer."
Later that day, Ambassador made its own announcement, which included a statement that "all the directors of Ambassador have today advised Ambassador that they intend to accept the offer within 14 days of the opening of the Offer Period, in the absence of a superior proposal" (together with the statement above, the Acceptance Statements). The directors' shareholding represented a further 7.4% of Ambassador.
On 10 June 2014, Magnum Hunter announced a competing bid for Ambassador, offering Magnum Hunter scrip as consideration (Magnum Hunter Offer).
On 12 June 2014, Drillsearch despatched its Bidder's Statement to Ambassador Shareholders and the Drillsearch Offer opened.
At 10.03am on 16 June 2014, Drillsearch increased the consideration under its offer to add 5 cents cash per share and declare its offer unconditional (Drillsearch Revised Offer). Ambassador went into trading halt soon after this announcement.
At 12.59pm on 16 June 2014, Ambassador announced that it recommended the Drillsearch Revised Offer and that Mrs Hatziladas, Eye Investment Fund Ltd, the Chairman and the Managing Director of Ambassador had accepted the Drillsearch Revised Offer. These acceptances had occurred less than 2 business days after the opening of the offer, despite the acceptance statements giving a time period of 14 days for acceptance. In that same announcement, the directors of Ambassador (including the Chairman and the Managing Director) recommended that Ambassador Shareholders accept the Revised Drillsearch Offer in the absence of a superior offer.
On 17 June 2014, Magnum Hunter increased its offer to 1 share of Magnum Hunter stock for every 23.6 Ambassador shares held and declared its offer unconditional.
Talking to major shareholders
The Panel was prepared to infer that Mr Hatziladas had orchestrated the Acceptance Statements and the acquisition of the 19.9% pre-bid stake for Drillsearch and that Mr and Mrs Hatziladas and the Ambassador directors were associates of Drillsearch.
The Panel specifically noted the "high level of orchestration" with which Mr Hatziladas organised the 19.9% pre-bid stake and the Acceptance Statements. The Panel also noted the way in which the Ambassador directors acquiesced to Mr Hatziladas' conduct, and the timing of the bid announcements, intention statements, announcement of the Drillsearch Revised Offer and the haste in which the shareholders who had made Acceptance Statements accepted the Drillsearch Revised Offer. From these circumstances, the Panel found that Drillsearch and Mr and Mrs Hatziladas, and each of the directors of Ambassador were associates under s12(2)(b) of the Act for the purpose of controlling or influencing the conduct of Ambassador's affairs, or alternatively under s12(2)(c) of the Act in relation to Ambassador's affairs. Accordingly, the Panel found that Drillsearch had voting power of at least 19.55% when it acquired its 19.9% pre-bid stake on 28 May 2014. The pre-bid stake was therefore acquired in contravention of the 20% prohibition in s606 of the Act.
Truth in takeovers
The Panel found that the Acceptance Statements were 'truth in takeovers' statements, which attracted the regime in ASIC's Regulatory Guide 25. The Panel found that these statements were intended to deliver control to Drillsearch, and that they were part of an agreement, arrangement or understanding, or acting in concert. The Panel noted "it is legitimate for shareholders who wish to make a supporting statement to indicate their intention, even in a way that binds them under the ASIC policy. It is not legitimate if this is the mechanism used when some agreement, arrangement or understanding has been reached, or the parties are acting in concert, to achieve an end."
In doing so, the Panel confirmed that the judgement as to whether a competing bid constitutes a "superior proposal" is the judgement of the person who has made the acceptance statement, rather than a reference to the definition used in a bid implementation agreement, or as determined by the board of the target.
The Panel also found that by not waiting 14 days following the opening of the Drillsearch Offer before accepting, Mrs Hatziladas, Eye Investment Fund Ltd, the Ambassador Managing Director and the Ambassador Chairman departed from their respective Acceptance Statements. While it is common for major shareholders to wait until later in an offer period to accept, this demonstrates that the Panel considers that persons who make acceptance statements should not accept until the end of their stated timeframe for acceptance. The Panel said "The purpose of specifying a time period and the qualification must be to wait in the hope that a superior proposal emerges." It also shows that, like in MYOB Limited, the Panel can be expected to closely examine the circumstances surrounding the making of intention statements by major shareholders.
Further, the Panel noted that, given the statutory minimum bid period of one month, 21 days would be an appropriate period to wait before acting on a stated intention to accept an offer and this time period should be taken into account by any party seeking to provide a statement in support of a bid.
In response to submissions from Magnum Hunter and ASIC that the 5-day matching right effectively "locked out" a competing bidder, the Panel re-iterated its guidance in Ross Human Directions that "a matching right cannot be for a duration that removes any practical likelihood that a potential competing bidder will be prepared to put a proposal to the target".
The Panel noted that in circumstances such as those before the Panel, it would expect to see a 'fiduciary out' to the matching right provisions in the BIA. Given the orders made in relation to the Acceptance Statements, the Panel noted that the matching right was no longer a live issue, and no remedy was required. However, the Panel did note that should the matching right become an issue before the Panel, it would not enforce the matching right period unless it was consistent with directors duties, or the Panel would be prepared to apply a 'fiduciary out'.
This decision and the wide reach of the Panel's orders highlights the need for potential bidders to exercise caution in the way in which they seek to use 'lock-up' devices to enhance the prospects of success for their bid. In particular:
- bidders must carefully consider the manner in which they conduct pre-bid negotiations, especially in circumstances where one or two major shareholders have effective control of the target, or when seeking truth in takeovers 'acceptance statements';
- bidders should carefully consider the balance between the commercial benefit of a matching right and its potential anti-competitive effect in structuring a takeover, and targets should seek to ensure such a matching right contains a 'fiduciary out'; and
- major shareholders who may be inclined to give a truth in takeovers 'acceptance statement' are urged to ensure that such statements are clearly worded and are accurate and appropriate statements of that shareholder's intention. These shareholders should be aware that they will be expected to refrain from accepting until the end of their specified period.