Future reverse takeover plans will have to take account of the Panel decision on Gloucester Coal.
The Takeovers Panel's decision to open up the Gloucester Coal - Whitehaven Coal reverse takeover to a competition for control was a clear signal to the market: there is no such thing as a bullet-proof deal structure if that structure disenfranchises target company shareholders and locks out competing proposals.
Clayton Utz advised Noble Group, the Gloucester shareholder which made the successful application to the Panel.
The reverse takeover had effectively been structured by Gloucester's directors and Whitehaven to prevent a rival bid, even one which would deliver superior value to Gloucester shareholders.
To give Gloucester shareholders a way out of this bind, our strategy involved:
- Noble making its own bid for Gloucester; and
- a Panel application designed to ensure that Gloucester's directors (and the company itself) were not locked into the Whitehaven bid.
Some participants in the Australian M&A market were sceptical about Noble's prospects of success, since the Gloucester/Whitehaven deal apparently satisfied all the "black letter" requirements of the Corporations Act. This view ignored the fact that the Takeovers Panel is more concerned about "unacceptability" than whether all the statutory boxes have been ticked.
On the other hand, those of us who closely observe the Panel were not surprised when the Panel agreed that Gloucester's directors had unacceptably locked their company into the Whitehaven deal. That finding ultimately opened the way for Gloucester shareholders to consider Noble's bid.
Gloucester announced that it would make a scrip bid for Whitehaven. Whitehaven was twice the size of Gloucester, so this was a reverse takeover: Whitehaven shareholders would end up owning 67 percent of Gloucester. Gloucester's existing shareholders would be diluted down to 33 percent.
One Whitehaven shareholder, FRC Whitehaven, would clearly end up with 21.68 percent of Gloucester as a result of the reverse takeover. Normally, a person cannot acquire 20 percent or more of a company without making a formal takeover bid or by a scheme of arrangement. However, there is a specific exemption for a person who acquires more than 20 percent voting power by accepting a scrip takeover bid.
The deal was backed up by an implementation agreement under which Gloucester was, in effect, irrevocably committed to making the bid, without any ability to pursue an alternative superior proposal for Gloucester.
Noble Group already held 21.7 percent of Gloucester and was itself interested in making a bid for Gloucester. That ambition would be thwarted if the Whitehaven deal went ahead.
Noble immediately announced its intention to make a bid for Gloucester, conditional on the Whitehaven bid not proceeding. It also asked the Panel to declare the reverse takeover to be unacceptable and to order Gloucester to pull out of the Whitehaven bid if it received a superior proposal or to seek shareholder approval for the Whitehaven bid.
Noble argued that the bid for Whitehaven was unacceptable because it would kill off any realistic chance for an auction for Gloucester and deny Gloucester shareholders the ability to make their own decision about a transaction affecting control of their company.
Gloucester mustered a large array of counter arguments. These ranged from disputes about the relevant facts to policy arguments about the Corporations Act.
We had to destroy the village to save it
Gloucester argued that the reverse takeover was the only guaranteed way of ensuring that Noble could not block a bid by Whitehaven.
The Panel's response was to point out that it wasn't only Noble who would be prevented from having any say about the Whitehaven takeover: "this structure does not just exclude Noble, it excludes all Gloucester shareholders". This ran counter to the principle that shareholders should have the chance to consider transactions affecting the control of their company.
Everyone else does it
Gloucester also argued that reverse takeovers without the approval of the bidder's own shareholders are an accepted - and legal - way of neutralising a large shareholder who might oppose a takeover for their company. On that basis, a Panel decision to force Gloucester to obtain shareholder approval would amount to "regulatory ambush".
The Panel said that the presence of a large shareholder on the bidder's share register was no justification at all. The Panel also dismissed Gloucester's argument that requiring shareholder approval would be "regulatory ambush". It was true that section 611 of the Corporations Act allows a target shareholder to acquire 20 percent of the bidder in a scrip bid, but the Panel has long said that a control transaction can be unacceptable even if it complies with the Corporations Act.
In addition, the Panel pointed out that ASIC has a longstanding policy that reverse takeovers without shareholder approval can raise regulatory issues. ASIC has acted on this policy several times during the last year.
One of the Eggleston Principles underpinning the Panel is that target shareholders should have a reasonable opportunity to participate in the benefits of a takeover bid for their company.
There were two potential takeovers of Gloucester on the table: the reverse takeover by Whitehaven and the bid by Noble. However, as things stood, Gloucester's shareholders would not get the chance to consider the alternative proposed by Noble, because the directors of Gloucester had locked themselves (and their company) into making the bid for Whitehaven: there was no "fiduciary out" clause which would allow them to call off the bid if Noble made a superior proposal.
In two separate decisions, the Panel concluded that the resulting lack of a meaningful auction for Gloucester was unacceptable. The first Panel ordered Gloucester to submit the Whitehaven bid to a shareholder vote. A review Panel imposed a different remedy: it amended the Whitehaven bid to allow Gloucester's directors to call off the bid if there were a superior alternative proposal.
Once that happened, Gloucester was effectively up for auction. Noble upped its offer price, the Gloucester directors acknowledged that it was a better deal for their shareholders and the bid for Whitehaven was called off.
Acceptances then began to flow to Noble.
The Gloucester case leaves a large question mark over reverse takeovers and how the Panel might deal with them in the future.
The review Panel's decision is particularly problematic. It ordered Gloucester to include a condition in its bid that would allow the Gloucester directors to withdraw the bid for Whitehaven if, in their opinion, a superior proposal was made for Gloucester itself. The Panel was at pains to say that not every bid - or even every reverse takeover bid - must include such a condition. However, it was required for Gloucester's bid because of what the Panel said were "unique features".
Since the review Panel did not specify what those unique features were, planning for future reverse takeovers is going to be interesting. The Corporations Act specifically prohibits bid conditions that depend upon the bidder's opinion, so bidders may face a dilemma:
- include a "Gloucester" condition in their bid and risk breaching the Corporations Act; or
- don't include a "Gloucester" condition and risk a declaration of unacceptable circumstances by the Panel.
Even if this problem is overcome, there are also the views of the initial Panel to contend with. It held that reverse takeovers like the Whitehaven bid need approval of the bidder's shareholders before they can proceed. In similar circumstances, another Panel is just as likely to be convinced that decisions about the control of a company should be the preserve of its shareholders and not its directors.
Looked at more widely, the Gloucester transaction shows just how important it is to avoid a "black letter" approach to takeover planning. Clayton Utz' advice to Noble was based on an understanding not only of what the Corporations Act says, but of how the Panel thinks. The end result was a superior outcome for Gloucester's shareholders and a successful bid by Noble.
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.