The Takeovers Panel’s (Panel) recent decision in CEMEX’s bid for Rinker highlights the traps in offering foreign currency under takeover bids.*
Foreign Currency Offer Structure
CEMEX is currently offering Rinker shareholders US$13 a share. Under the offer, shareholders can elect to receive their consideration in Australian dollars, converted at an exchange rate which depends on the date of acceptance and the date of payment relating to a particular accepting shareholder.
The effect on shareholders of the fluctuating exchange rates was apparent right from the early stages of CEMEX’s bid—at the time the offer was announced, the CEMEX offer price was equivalent to just less than A$17 a share. However, the appreciation of the Australian dollar since the offer was announced reduced the implied Australian dollar offer price. At the date of CEMEX’s first supplementary bidder’s statement (which CEMEX agreed to send in response to a number of concerns raised by the Panel), the US$13 consideration had dropped to the equivalent of A$16.53.
Rinker’s Panel application raises some interesting questions about the potential disconnect between foreign currency bids and Chapter 6 of the Corporations Act.
Currency Conversion — Shareholder Equality?
Rinker challenged CEMEX’s offer structure on the basis that shareholders who elect to receive Australian dollars could receive differing amounts of Australian dollars if they accept at different times, depending on the exchange rate prevailing at the time of payment. Rinker submitted to the Panel that this breached the key Eggleston principle of equality of opportunity and was therefore unacceptable.
The Panel considered that the structure did not infringe the equality principle. The Panel drew an analogy with a scrip bid, under which the prevailing market value of the consideration offered varies on a daily basis.
However, the Panel had several concerns with the currency aspects of the bid, and required CEMEX to make supplementary disclosure exposing the currency and execution risks under its bid.
Conversion Facility — Transfer of Risk to Shareholders
The Panel was concerned about CEMEX’s proposed currency ‘conversion’ mechanism. The sum involved was so large that the Panel was concerned that the conversion had potential to have a material effect on the US/A$ spot exchange rate.
The Panel sought clarification from CEMEX. CEMEX agreed to use a combination of ‘foreign exchange execution strategies’ to limit the effect of its conversion mechanism on the prevailing exchange rate. The Panel required CEMEX to provide additional disclosure on these strategies.
While there have been foreign currency bids in the past, it is likely that the dilutive effect on the exchange rate has not been considered due to the significantly smaller size of those bids. This was the first bid with the potential for billions of dollars to be exchanged at any one time which placed the currency risk on target shareholders.
The Panel’s Solution — Additional Disclosure
It is clear that the Panel does not have a philosophical objection to a bid which imposes foreign exchange risk on target shareholders, as long as the risks are disclosed appropriately. In CEMEX’s case, the Panel considered that the risks had not been adequately disclosed in the bidder’s statement and the Panel would have been reminded to make a declaration of unacceptable circumstances in the absence of additional disclosure by CEMEX, including disclosing the following:
- the risk that the exchange rate prevailing on the day a particular shareholder accepted the offer may differ from the rate prevailing at the time of payment
- the risk that there may be a significant shift in the exchange rate, which may affect the value of the offer in Australian dollar terms
- the risk that different shareholders who accept the offer on different days may receive different Australian dollar amounts, and
- the risk that CEMEX’s own trading strategies may contribute to exchange rate fluctuations.
Is a Foreign Currency Bid a ‘Cash’ Offer?
The Panel left undecided how a foreign currency bid is treated under the minimum bid price rule and the on-market purchase rule. The Corporations Act rules are drafted on the assumption that the value of a cash sum offered is constant. If, for example, a bidder offers $2.00 per share under the bid and then buys on-market for $2.10, it is clear that the offer has to increase to $2.10 per share. But the rule does not work so simply when the bid price is in foreign currency. There is no mechanism in the ‘cash bid’ parts of the law for valuing the foreign currency or setting a date (and corresponding exchange rate) to make the comparison.
On the CEMEX facts, the minimum bid price rule did not come into play. CEMEX undertook to the Panel not to make onmarket purchases in A$ during the bid, which meant that the Panel did not need to decide the issue. So the question remains for another day whether ‘cash’ means A$—and if not, how these rules apply to foreign bids.
*Freehills acts for Rinker in relation to the CEMEX takeover bid.
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