|Services:||Corporate & Commercial|
|Industry Focus:||Financial Services, Insurance , Life Sciences & Healthcare, Property|
What you need to know
- On 1 December 2016 the Takeovers Panel released its updated Guidance Note 12 on 'frustrating actions', following a public consultation process.
- The Panel has clarified its approach to deciding whether actions of the board of a target company amount to 'unacceptable circumstances', where they cause or may cause a bid not to proceed.
- Helpfully for target boards, there is more clarity around when frustrating actions will not constitute unacceptable circumstances, particularly where the bid is unlikely to be completed or where target boards seek member approval to significant transactions so that the ultimate choice rests with the shareholders.
On 1 December 2016 the Takeovers Panel released its updated Guidance Note 12 on 'frustrating actions', following a public consultation process. The updated guidance provides new clarification on the circumstances in which the Takeovers Panel may declare that 'frustrating actions' amount to 'unacceptable circumstances'.
Recap on the role of the Takeovers Panel
The Takeovers Panel regulates the conduct of takeovers in Australia.
The Panel has power to declare circumstances to be 'unacceptable circumstances', whether or not the relevant party's actions breach the Corporations Act. In addition to making such a declaration where a party has breached the law, the Panel may declare circumstances to be unacceptable:
- because of the existing or potential effect on control or potential control of a company or the acquisition of a substantial interest in the company
- because they are contrary to the core principles at the heart of our takeovers laws.1
One of the 'core principles' is that holders of shares all have a reasonable opportunity to participate in the benefits of a proposed acquisition. In considering whether shareholders have reasonable opportunity to participate in a potential change of control transaction, the Panel must take into account the actions of the directors of the target. This includes actions that have caused or contributed to the change of control not proceeding (labelled 'frustrating actions'). Where frustrating actions amount to inappropriate defensive tactics the Panel may declare them as 'unacceptable circumstances'.
Why has the Panel reviewed Guidance Note 12?
The Panel reviewed Guidance Note 12 in response to comments from market participants that:
- there was not enough clarity about when a frustrating action might amount to unacceptable circumstances
- this uncertainty could unduly limit a target board from continuing to operate the business in the normal course while a bid is underway.
In conducting the review, the Panel also observed that the position of target directors had become more difficult due to bidders often incorporating long and restrictive lists of conditions into their bids, including those that would potentially restrict the target's business operations or require that the target assist the bidder.
The Panel's stated aim in reviewing Guidance Note 12 is to provide clearer guidance on its approach, including circumstances in which frustrating action is unlikely to be unacceptable. However, the list of considerations is non-exhaustive so that the Panel retains flexibility to decide what will or will not be unacceptable depending on context.
What are the key changes?
Guidance Note 12 has been significantly re-written and re-arranged. Overall, the Panel has streamlined the list of actions that might amount to frustrating action and focussed more on core principles. This 'substance over form' approach should provide greater clarity to boards in that they will be able to weigh up their particular circumstances and options in light of those guiding principles.
The new Guidance Note promotes the definition of frustrating action to the front page. This clarifies from the outset that a frustrating action comprises action of a target, whether taken or proposed, by reason of which:
- a bid may lapse or be withdrawn
- a potential bid2 may not proceed.
Examples include significant issues or repurchases of shares, acquiring or disposing of major assets and declaring abnormally large dividends – each of these would potentially breach conditions in a takeover offer that there be no material changes in the target.
There is greater emphasis on the principle that frustrating action may prevent a change of control transaction at a time when the decision about control of the company should properly be taken by the shareholders. This means that a target board's proposal to, for example, undertake a share issue or M & A transaction should be referred to shareholders even though such a decision would normally be within the power of the directors if the target were not subject to a takeover.
A new section identifies situations where a frustrating action is unlikely to give rise to unacceptable circumstances, including where:
- the bid or potential bid does not give shareholders a genuine opportunity to sell their shares. For this purpose, the Panel will consider:
- whether the opportunity is not real because of a fundamental flaw such as lack of funding or a condition incapable of satisfaction (eg approval from a third party which has already communicated its disapproval)
- whether there are other reasonable grounds to conclude that the bid would not succeed. The Panel will need compelling evidence to reach this conclusion. Examples include:
- the bid has been open for a long time and had had few acceptances
- the bid is opposed by key shareholders
- there is a superior competing bid
- the bid is conditional on the target directors recommending the bid.
- the frustrating action had already been announced before the bid emerged
- the company has a legal obligation to engage in the action (for example to comply with licence conditions)
- the frustrating action is necessary to avoid a material adverse financial issue such as insolvency
- it is unreasonable for the bidder to rely on the condition that has been triggered by the frustrating action because, for example, the condition:
- is overly restrictive
- requires the cooperation of the target board (in recommending the bid)
- requires the target to engage in material transactions outside its current strategy.
What hasn't changed?
The Panel will not usually find unacceptable circumstances where the target:
- does not support a bid
- looks for an alternative bid
- recommends rejection of a bid
- offers shareholders a choice (in other words, where the board proposes a significant transaction which might trigger a bid condition, subject to shareholder approval).
The Panel would not normally excuse a board from a finding of unacceptable circumstances where they propose a major transaction without seeking shareholder approval and justify this approach because of the delay associated with calling a general meeting.
The Panel does not enforce directors' duties but may find unacceptable circumstances even where board actions did not amount to a breach of those duties.
What are the implications for directors of target companies in light of the new guidance?
Directors' fundamental duties of acting with appropriate care and skill in the best interests of the company remain on foot throughout a takeover process. It is an appropriate exercise of duty for directors of a target to question the genuineness of a bid, criticise the conditions of a bid as being unreasonable or share a considered view that the bid undervalues the target.
However, directors' freedom to make decisions may be constrained while a bid is underway. Where a bid is communicated to a target, shareholders are entitled to a genuine opportunity to consider it and respond if it is attractive.
Directors also need to be prepared for the possibility that the Panel may override their decisions even if they were made in a manner consistent with their duties.
1 The core principles are in section 602 of the Corporations Act:
- acquisition of control takes place in an efficient, competitive and informed market
- the target's shareholders and directors know the identity of any person who wishes to acquire a substantial interest, and have reasonable time and proper information to consider a proposal
- as far as practicable holders of the same class of shares are treated equally
- there is an appropriate procedure for compulsory acquisition at the end of a takeover.
2 'Potential bid' means a genuine potential bid communicated to the target directors publicly or privately but not yet formally launched.
This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories