On 7 June 2007, the Takeovers Panel released a guidance note on insider participation in control transactions (Guidance Note).
The Guidance Note provides guidance on when involvement by management, directors or external advisers of a target company with a bidder may be inappropriate, and seeks to clarify the process that management of a target company should take in this situation.
The Guidance Note was a response to the increase in the number of private equity bids and other buy-outs, such as the proposed management buy-out of Alinta by Macquarie Bank earlier this year. It deals with unacceptable insider participation arising from a breach of section 602 of the Corporations Act, which requires an efficient, competitive and informed market for a company's securities where the company is subject to a takeover bid.
What is an 'insider'?
'Insiders' are defined as officers or advisers of the target company who are in a position to influence the target's consideration of the bid, or any person with significant non-public information in relation to the target obtained through that person's role as an officer or adviser of the target company. A 'participating insider' is an insider who is given an understanding by a potential bidder that they will gain a benefit from the bidder being successful. Benefits can include obtaining equity in the target or the bidder and employment arrangements, but do not include arrangements which already exist.
The Guidance Note provides that an entity which has 'insider' information through its role as an adviser to the target will not be regarded as an insider where it is acting in a different capacity in relation to a bid or potential bid, if there are appropriate and effective Chinese walls in place and the relevant non-public information is sufficiently quarantined. This maintains the ability for an advisory company to act in two roles, provided those roles and the information obtained in each role are kept separate.
Process of addressing potential conflicts
The Guidance Note provides that "insiders should promptly inform the board or the relevant sub-committee of any approaches which might lead to a proposal for a change of control". Insiders should obtain the board's consent before they provide any non-public information to a bidder.
The board should establish appropriate protocols, such as those relating to information disclosure and access, confidentiality and ensuring that the shareholders' best interests are advanced. An Independent Board Committee (IBC)should be appointed,consisting of directors who are not participating insiders. The IBC will be responsible for overseeing the application of the protocols and managing the interests of the shareholders. An IBC should adopt protocols and processes to monitor, manage and control the flow of information to actual and potential bidders.
Equal access to information
There is no requirement for a target company to provide equal access to information to rival bidders. However, the Guidance Note suggests that where a bid involves participating insiders, it would attract the close scrutiny of the Takeovers Panel if less information is provided to rival bidders. A target board would need to have good reasons for not providing the same information to rivals as they have to the bidder.
Disclosure to target shareholders
The IBC should ensure that a bidder who is involved with participating insiders does not have an advantage over shareholders in relation to material information about the target company. As such, the IBC should consider carefully what information is required to be disclosed to shareholders to ensure that they know the identity of participating insiders, the benefits the participating insiders will enjoy, the protocols and processes adopted by the IBC and the identity of the people behind the bidder.
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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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