Two-tiered Offer Debate In Atlas Arteria

IN BRIEF

• Two-tiered offers remain a legitimate and important tool for bidders, but must be structured to operate effectively in all circumstances, including where the relevant acceptance threshold is to be tested at the end of the offer period.
• In IFM's bid for Atlas Arteria, the Panel accepted undertakings and ASIC relief to address timing risks associated with a 45% threshold trigger, including an automatic 14-day extension if the 45% threshold was reached in the final 7 days of the offer.
•  The Panel encouraged bidders to carefully consider how two-tiered structures will operate in practice, how obstacles will be managed, and what disclosure should be made — but cautioned against heavy-handed regulatory intervention that could unduly limit bidder strategy.

Two-tiered offers have been used in Australian takeover practice for many years, going back (at least in my experience) to the 1990s. The basic model is that the offer price (say, $2.00 per share) will increase to a higher price (say, $2.50) if the bidder’s relevant interests reaches a specified level, such as 50% or 90%, by a certain date (for example, 7 days before the close of the offer or even at the close of the offer). 

The original model was to build this bid structure into the terms of the offer,¹ but that can give rise to issues under the legislation (including under the rule that shareholders must be paid within a certain time). With the broad acceptance of the ‘truth in takeover’ principle, the more common model these days is for the bidder to announce that, if the precondition is satisfied, it will increase the offer using the formal mechanism under the legislation (that is, lodging a notice of variation, sending it to the target and to all shareholders). That gives greater certainty, including the timing for paying the increased sum to anyone who has accepted earlier: section 650B(2A).

IFM’s bid for Atlas Arteria adopted the common model. The offer price was $4.75 per share, increasing to $5.10 if the bidder’s relevant interests reached 45% before the close of the offer. The top tier of the offer was declared ‘best and final’ from the outset. 

Sounds simple, but Atlas Arteria successfully challenged a few aspects in the Takeovers Panel. There were three arguments.

First, Atlas Arteria argued that, because the increase was not self-executing, IFM could reach 45% on the last day of the offer period and not have enough time to go through the statutory process to effect a formal increase before the offer closed. That could mean that the price increase may not be effected in time and shareholders could miss out on the higher price, despite the 45% threshold having been met. It was accepted that this risk would not arise if the price increase was triggered at 50% as, in that case, the law provides for an automatic extension of 14 days which would give plenty of time to effect the variation.

IFM replied that this scenario was ‘hypothetical and incredibly remote’ and that the Panel could make orders to remedy the situation if it occurred, but it also sought ASIC relief to the effect that the offer would be extended automatically for 14 days if IFM reached 45% during the last 7 days of the offer (and the price had not already been increased to $5.10). ASIC said it would grant the relief. This satisfied the Panel on the issue as it ensured there would be enough time to complete the variation.

Second, there was an argument about a standard term in the formal offer which gave IFM a discretion to treat as valid any acceptances received after the close of the offer if they were post-marked before the offer closed.² Atlas Arteria argued that this term meant that the 45% threshold could be reached, but no one would know until after the formal closing of the offer. In response, IFM offered an undertaking not to use that discretion if that would cause the 45% threshold to be reached. The Panel accepted this as dealing with the point.

Finally, there was a complex argument about the institutional acceptance facility, including that it did not protect shareholders from the risk of the bid being declared unconditional before the $5.10 tier was operative. The Panel gave these arguments short shrift. It considered that sophisticated shareholders are equipped and able to assess whether to use the facility, bearing in mind its terms.

Comment

Two-tiered offers, including other conditional improvements to an offer (such as waiving conditions if acceptances increase the bidder’s stake to a certain level by a specified date), can be an important tool for bidders to employ. They provide an incentive for shareholders to accept an offer, create momentum for a takeover bid and often help to drive behaviour of shareholders. 

The Panel in the Atlas Arteria matter made the following comment about two-tiered structures:

As a general observation, we see its benefits as a tool that may enable bidders to offer a higher price or otherwise assist in their bid strategy. Adopting a heavy-handed or interventionist regulatory approach in this area could potentially risk unduly limiting bidders in this regard. That said, a consideration structure that does not work in all circumstances may be inconsistent with an efficient, competitive and informed market. We encourage bidders to carefully consider how such structures will operate in practice and how any obstacles will be managed (as well as what disclosure should be made in relation to this).

That has to be right. The comments probably also apply to a two-tiered scheme or bid structure where the price payable under a scheme of arrangement is higher than the price under the takeover bid if it fails (like the Healthscope example and others that followed it).

I think the market is operating well in this respect. I am not aware of instances where shareholders have been confused or misled by a two-tier bid structure. The discussion in Atlas Arteria should further minimise that risk in the future.

Footnotes

1. In one takeover I advised on in the early days, shareholders had the right to accept conditional on the higher price level being triggered. I have not seen that model replicated.

2. Students of contract law will recognise this is a classic example of the postal acceptance rule taught at university. Anyone remember Byrne v Van Tienhoven (1880) 5 CPD 344? Is that case still taught?