A bidder in a takeover will often want to divest a particular asset or business of the target company in the event that its bid is successful. In fact, in certain cases, the divestment of the asset will be central to the bidder’s decision to launch a takeover offer. Recent transactions have shown that a bidder might seek to sell target assets before making its takeover offer for various reasons, including:
- concerns about the competition law implications of acquiring the business subject to the pre-bid sale agreement
- the business proposed to be divested may not fit within the bidder’s future plans for the target company
- assisting with the finance of the bid.
This article outlines the legal issues to consider where, before launching its takeover offer, a bidder wishes to enter into an agreement with a third party purchaser to sell some of the target company’s assets in the event that its bid is successful. It also addresses the issues that arise if the takeover is effected by way of scheme of arrangement.
There are various ways in which a bidder can structure a sale or divestment of the target company’s assets. These include:
- Entering into a pre-bid sale agreement under which the bidder will procure to sell the unwanted assets to a third party if the bidder acquires control of the target company. An example of this is Sunov Petroleum Pty Ltd’s (Sunov) bid for Novus Petroleum Ltd (Novus), where Sunov entered into a pre-bid sale agreement with Santos Ltd (Santos) to procure, conditional on Sunov acquiring control of Novus, that Novus entered into an agreement to sell specified assets to Santos.
- The bidder offering, as part of the bid consideration, securities which are convertible into shares in a company which owns or will own the unwanted assets, or which will be redeemed in cash out of the proceeds of sale of the unwanted business. Examples of the former include Smorgon Steel Group Ltd’s (Smorgon) bid for Email Ltd (Email) and Metcash Ltd’s (Metcash) original bid for Foodland Ltd (Foodland). In each case, the bidder offered as part of the bid consideration, securities which would be redeemed for, or convert into shares in a company which owned the unwanted business of the target (which, in Smorgon’s case was Email’s Major Appliances Business and in Metcash’s case was Foodland’s New Zealand business).
- The bidder agreeing to procure that the target effects a dividend in specie of shares in a company that owns the unwanted assets. An example of this is Toll Holding’s Ltd (Toll) bid for Patrick Corporation Ltd (Patrick), where Toll has promised to procure that Patrick declares a fully franked in specie dividend of 0.3 Virgin Blue shares for each Patrick share if Toll acquires control of Patrick.
If the bidder is reliant on the divestment of the assets to finance its bid, it could do so (subject to tax implications) by:
- obtaining a loan from the purchaser, repayable by the transfer of the assets the subject of the pre-bid sale agreement after the bid is successful
- obtaining a bridging loan from a finance provider, secured by the pre-bid sale agreement
- reducing the amount of cash consideration payable by it under its bid and adopting the second or third ‘Sale structures’ outlined above.
A pre-bid sale will create an association between the bidder and the buyer. Important consequences flow from this, including:
- the bidder and the third party’s holding in the target are aggregated to calculate their voting power (which could mean that a substantial holder notice, attaching a copy of the sale agreement, must be given and/or the 20 per cent threshold is breached)
- any purchases of target shares made by the buyer would set the floor for the bid price.
Therefore, discussions and the time of agreeing the pre-bid sale agreement will need to be carefully managed to avoid the need for premature disclosure of an imminent bid and other pitfalls.
Collateral benefits and Eggleston principles
If the purchaser is a shareholder of the target company, care is needed to ensure that the opportunity to purchase the arget’s assets does not constitute the giving of a collateral benefit not available to other target shareholders in intravention of section 623 of the Corporations Act. If the transaction is on arms length terms it is arguable, applying the net benefit test favoured by Takeovers Panel (eg in PowerTel Ltd (No 3)) that the pre-bid sale agreement does not confer a prohibited collateral benefit on the purchaser. In any event, it would be prudent to enter into the pre-bid sale agreement before the offer period commences and ensure that it completes after the offer closes so as not to fall quarely under section 623. If the sale forms part or all of the consideration given by bidder for the shareholder’s shares in the target, additional issues arise in relation to the floor price rule in section 621(3) (which requires the bid price to be no lower than the highest price paid for target securities by the bidder and its associates in the four months before the bid).
Although the collateral benefits prohibition and floor price rule do not apply to schemes of arrangement, a scheme of arrangement can not be used for the purpose of avoiding section 623. If the purchaser is a target shareholder, depending on how the sale is structured, the buyer may be a separate class of shareholder for scheme purposes. This may be because its rights are so dissimilar to other target shareholders that it is impossible for them to consult together with a view to their common interests. If the buyer is a separate class, it will vote on the scheme separately from other target shareholders. Even if the buyer is not a separate class, if the scheme is approved only because the buyer voted for it, the court may exercise its fairness discretion to reject the scheme.
Significance of achieving 100 per cent
Target minority shareholder approval is often required if the target is not fully owned by bidder for a number of reasons, including the related party rules in ASX Listing Rule 10.1 and Chapter 2E of the Corporations Act, directors’ duties and the financial assistance prohibition in section 260A of the Corporations Act. Of course the minority target shareholders will be those shareholders that did not accept the bidder’s offer and therefore they might generally be expected to vote against the proposed sale. In some circumstances, it may be possible to undertake a sale without minority shareholder approval, but this would not be without risk.
This additional significance of obtaining full ownership can itself lower the bidder’s ability to obtain full ownership because:
- the bidder’s ability to waive its conditions (thus allowing or encouraging institutional shareholders and arbitrageurs to accept the offer) is curtailed both by:
- contractual limitations in its prebid sale agreement and financing documents (which usually require the bidder to obtain the buyer’s/financier’s approval to waive conditions), and
- the increased risk and cost of having to refinance the acquisition if full ownership is not achieved and a sale is not approved by minority target shareholders
- interlopers may be encouraged to take a blocking stake, knowing that the 90 per cent minimum acceptance condition is less likely to be waived
- the requirement to disclose the sale price can indicate to target shareholders the target is being undervalued by the market and that the bidder is not paying a full price.
A scheme will deliver a binary outcome, so the bidder will either obtain full ownership or nothing. The issues referred to above regarding waivers of conditions will therefore be less problematic. However, the terms of the financing and sale agreements need to be drafted having regard to the requirement that at the second court hearing when the court is asked to approve the scheme, all conditions must have been satisfied or waived.
Freehills advised Sunov in its bid for Novus, Metcash in its bid for Foodland and Smorgon in its bid for Email.
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.