On-market Purchases By A Bidder - More From The Takeovers Panel

In brief

• On-market acquisitions by a bidder at prices above the announced bid price are not inherently unlawful or unacceptable.
• The Takeovers Panel expects prompt disclosure, but a delay may not necessarily constitute unacceptable circumstances.
• This is especially true where the volume of shares acquired is small.

On-market purchases by a bidder – Additional note

We previously published a short article on the Takeovers Panel's decision in New World Resources Ltd 02 shortly after it was handed down in July. The Panel has now released its formal reasons, prompting this follow-up commentary.

Recap

To summarise the situation before the Panel:

• A takeover bid was announced in the morning at 5.3 cents per share.
• At 11:13am, the bidder acquired approximately 5% of issued shares at 5.5 cents per share via a special crossing and subsequently began purchasing additional shares on-market at the same price.
• Legally, this triggered an increase in the bid price to 5.5 cents.
• However, no announcement of the increased bid price was made until 6:03pm, when the target company disclosed the acquisitions and confirmed the revised bid price.
• A rival bidder challenged the acquisitions undertaken after 11:13am, arguing they created unacceptable circumstances. The argument was that, had the market known the bidder was behind the purchases and that the bid price had increased, shareholders might have acted differently.

Relevant considerations

There is no specific legal requirement for a bidder to announce it intends to purchase shares at a price higher than its current bid price before acquiring shares. Historically, ASX rules required brokers acting for bidders to disclose an increased price prior to undertaking any trades — typically triggering a one-hour suspension. This rule was removed during a "simplification" of the trading rules in March 2000, seemingly inadvertently.

The central issue before the Panel in New World Resources Ltd 02 was therefore whether the acquisitions over the bid price breached the principle that share transactions during a takeover should occur in an "efficient, competitive and informed market."

The Panel concluded that the transactions did not give rise to unacceptable circumstances and declined to make the declaration sought by the rival bidder.

A key factor was that the shares acquired after the 11:13am special crossing represented only 0.058% of the company's issued capital — an amount too small to confer any competitive advantage.

We agree with the Panel's decision to dismiss the application. However, one lingering question remains: why was the initial special crossing (involving 5% of issued shares) not discussed in the reasons? The matter appears to have been considered narrowly, focusing only on subsequent acquisitions. This leaves unresolved whether the initial crossing transaction occurred in an "efficient, competitive and informed market." The seller in the special crossing may have acted differently had they known the sale would trigger a bid price increase. It might have been that the seller was aware of the buyer's identity, but that is not clear from the reasons.

Another point not discussed is the role of the target company. It was told just before 2pm that the bidder had purchased shares at the higher price. It is not clear why the target did not immediately make an announcement or seek a trading halt once it was clear there was price sensitive information that was not known to the market. It is easy to imagine a slightly different fact scenario with greater trading volume or a larger price difference where lack of disclosure would give rise to serious concerns.

One other comment should be made. The trades took place before the formal offer period had opened and the rule against collateral benefits operated. Otherwise, the special crossing would have been illegal.

Will ASIC introduce a specific rule?

Readers may recall the Panel's decision in Virtus Health Ltd 03 in 2022. We published an article about it at the time. Following that decision, ASIC indicated it would consult on a potential rule requiring bidders to announce an increased price before purchasing shares at that price.

To date, no consultation has occurred. A possible rule could require full market disclosure before any higher-priced purchases by a bidder, potentially accompanied by a one-hour trading suspension (like the old days). Such a rule could also extend to acquisitions after a proposed scheme of arrangement is announced (which are not presently covered).

However, it is worth considering whether additional regulation is necessary. Shareholders who sell on-market after a bid or scheme announcement do so with the understanding that they may forgo the benefits of a competitive auction. They trade certainty for potential upside. Do they need further protection? Takeover bids are already difficult to execute and adding another hurdle for a bidder would make them harder.

If a rule is warranted, a balanced approach might be for ASIC to require that any price increase be announced reasonably promptly after the purchase. This would align with the requirement under section 647 of the Corporations Act for a supplementary bidder's statement to be issued "as soon as practicable" (which probably applies anyway).

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.