- Takeovers Panel changes rules to limit further use of pre-bid agreement successfully used in Brookfield's takeover of Multiplex.
In an unheralded move in mid-April, the Takeovers Panel made a substantive change to its Guidance Note on Unacceptable Circumstances. The change would limit the use of one of the mechanisms that Brookfield used to secure a pre-bid stake in Multiplex.
Specifically attracting the Panel's attention was a provision, in an agreement between Brookfield and the Roberts family, preventing disposal of the family's stake in Multiplex (other than to Brookfield) for three months. This was one of the more interesting aspects of the arrangements between Brookfield and the Roberts family.
Brookfield wanted to make a full takeover bid for Multiplex.
The Roberts family held 26 percent of Multiplex. Brookfield held 2 percent directly and had swaps over a further 2 percent. Before it announced the bid, Brookfield wanted to acquire a pre-bid stake in Multiplex from the Roberts family.
The Corporations Act prevents a person's acquiring a relevant interest in more than 20 percent of a listed entity except pursuant to limited exceptions such as a takeover bid. Together, Brookfield and the Roberts family controlled 28 percent of Multiplex's securities. Therefore, Brookfield could not acquire all of the Roberts family holding. This meant that the family was faced with the possibility that a considerable percentage of its Multiplex holding could not be acquired except through a formal bid. The family was also concerned that, should the bid fail, they could be left with a rump holding of just under 10 percent of Multiplex.
The put and call options
The mechanism that Brookfield and the Roberts family eventually agreed upon was a put and call option.
The put and call option allowed Brookfield to call for the delivery of the Roberts holding or the Roberts family to require Brookfield to take its holding. The existence of a bare option would have given Brookfield a relevant interest in more than 20 percent of Multiplex. To overcome this, part of the option was conditional upon Multiplex securityholder approval under item 7 of section 611 of the Corporations Act or ASIC relief. Section 609(7) provides an exception for an acquisition which is subject to this condition, provided that the acquisition agreement does not restrict the voting rights or restrict disposal of the securities for more than three months.
Essentially, this provided a legal mechanism to tie up the 26 percent stake for three months.
As a challenge to the Takeovers Panel remained a possibility, Brookfield also had the capacity to scale back the option to less than a combined 20 percent and waive the securityholder/ASIC relief condition. The practical effect of this was that Brookfield had the ability to require the Roberts family to deliver the maximum number of Multiplex securities allowable under the Act.
Although it was never the subject of an application to the Takeovers Panel, the Panel appears to have taken a dislike to this aspect of the deal. In mid-April, it revised its Guidance Note on unacceptable circumstances by inserting the following paragraph:
"(vii) Where a person has entered into an agreement restraining disposal of a parcel of voting shares in reliance on the exception in section 609(7), the efficient, competitive and informed market for control of voting shares in a company may be adversely affected, and unacceptable circumstances occur, if:
a) the person's voting power would, absent the exception in section 609(7), increase to more than 20 percent as a result of the agreement; and
b) prior to either non-associated shareholder approval under item 7 of section 611, or an exemption from ASIC under section 655A, the person who has entered into the agreement restraining disposal announces a takeover or scheme of arrangement without at the same time lifting the restraint on disposal, for example, by varying the agreement to allow free competition for the shares, or publicly stating that the person will not enforce their right to restrict disposal of the shares."
In plain English, the Panel appears to be saying that any section 609(7) acquirer who has imposed a disposal restriction on the seller must drop that restriction once they announce a takeover or a scheme (presumably only in relation to that part of the parcel above 20 percent).
The Panel does not state any rationale for this position, although it appears to relate to a concern about "premature lockout of rival bids". If that is the case, it is to be hoped that the Panel applies the policy on a considered basis as there are circumstances where this would not be the case.
Price protection for residual stake?
It was possible that Brookfield could acquire a large pre-bid stake from the Roberts family, make a takeover bid and then see the bid fail because it did not go unconditional. With a much-reduced percentage of Multiplex, the family would be in a weaker bargaining position if it tried to dispose of its residual holding.
To offset this possibility, Brookfield agreed to underwrite the sale price of any such residual holding if its bid did not become unconditional, through a mechanism which relied on the "creep" provisions of the Act (these allow a person to acquire more than 20 percent of a company through acquisitions of 3 percent every six months):
- every six months, the Roberts family could offer to sell 3 percent of the residual securities to Brookfield, for the same price that Brookfield could have acquired shares under the put and call option;
- if Brookfield did not take up the offer and the family subsequently sold the 3 percent to someone else within a short period at a price lower than the option price, Brookfield would pay the difference to the Roberts family.
A simpler mechanism may have been a put option allowing the family to require Brookfield to take Multiplex securities. However, that would have given Brookfield a relevant interest in the Multiplex securities and so was not legally possible.
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