The Australian Takeovers Panel (Panel) has recently proposed changes to its guidance on "frustrating action".1 If implemented, the updated guidance will provide welcome clarity for target companies in carrying on their business during a bid period, as well as somewhat realigning the "balance of power" that exists between a bidder and a target in a takeover.
In this alert, Partner Michele Muscillo and Senior Associate Luke Dawson highlight and comment on the proposed changes to Guidance Note 12 – Frustrating action (GN12).
Background and overview of policy
A "frustrating action" is an action taken or proposed by a takeover target, by reason of which:
- a bid may be withdrawn or lapse; or
- a potential bid is not proceeded with.
However, whether a frustrating action will also be "unacceptable" depends on a number of factors (of which a non-exhaustive list is provided in GN12).2
The underlying policy behind the frustrating action regime is that decisions about ownership and control of a target company should be properly made by its shareholders, and not the directors. However in our view, the frustrating action policy in its present form has had the unintended effect of shifting the "balance of power" too far in favour of a bidder to the detriment of commercial certainty/ability of a target.
This general imbalance of power, coupled with the inability for target companies to seek advance rulings, has often left a target's board of directors in a hostile takeover in the unenviable position of either continuing to operate under the assumption that they are commercially hamstrung or otherwise risking a declaration of unacceptable circumstances should they undertake a relevant commercial transaction without shareholder approval.
Important proposed changes to GN12
Genuine opportunity to dispose of shares
A key change proposed for GN12 is the expansion of the concept of whether or not a bid proposal actually gives shareholders a genuine opportunity to dispose of their shares.
The revised GN12 provides that in considering a frustrating action, the Panel considers that a bid proposal will not give shareholders a genuine opportunity to dispose of their shares (and accordingly, a frustrating action will likely not give rise to unacceptable circumstances) if:
- it is not genuinely available to them because, due to a condition or structural or other feature, it cannot be implemented or completed;
- there are reasonable grounds to expect that it will not be successful; or
- it is dependent on target directors recommending it.
- Bid not generally available due to a condition, structural or other feature meaning it cannot be implemented or completed
The Panel provides two examples of where a bid will not generally be available due to a condition or feature of the bid, being:
- a bid made without funding (this reflects the decision of the Panel in Austock Group Limited [2002] ATP 12 at [42] where the Panel considered that the bidder's bid in that case was not frustrated because it was not capable of being implemented due do it having not been properly funded); and
- a bid which has a condition incapable of satisfaction (one example given by the Panel is a condition that requires the target to give the bidder confidential information so that it can conduct due diligence).
Both examples provided above highlight the care needed to be taken by bidders in structuring (and disclosing) both the funding of their bid and the conditions applicable to the bid.
- Reasonable grounds to expect that a bid will not be successful
The Panel notes that it will require very strong evidence from target companies to reach this conclusion. Relevant factors identified by the Panel include:
- where the bid has been open for a long time and has had few acceptances;
- where the bid is opposed by key shareholders; and
- where there is no superior competing bid.
If these changes are implemented, it will be interesting to see how they are applied in practice. For example, the mere fact that a bid is opposed by key shareholders does not necessarily translate into shareholder support for the relevant frustrating action (which if put to a shareholder vote would necessitate appropriate disclosure of the frustrating action, and also allow shareholders the opportunity to vote on the relevant frustrating action).
- Bid dependent on target directors recommending it
The Panel notes that its policy in respect of a bid which is conditional upon the target's cooperation (i.e. director recommendation) should not be afforded the protection of the frustrating action policy. The rationale behind this is that by choosing to make a bid conditional on target cooperation, the bidder should be placed in the same position as it would be under a scheme (which are generally conditional on receiving the recommendation of the target directors and not afforded protection under the frustrating action policy).
Considerations when assessing unacceptable circumstances
As per its prior iteration, the revised GN12 provides a non-exhaustive list of considerations that the Panel will have regard to when assessing "unacceptable circumstances". Relevantly, and building on the concept discussed above (whether the bid provides a "genuine opportunity to dispose of shares"), a new consideration has been added to this list, namely whether "the target has notified the bidder that it intends to undertake an action if the bidder does not remedy a feature of the bid which otherwise renders the bid not genuinely available to shareholders".
While perhaps seen as counterintuitive to a traditional takeover defence, in our view this represents a sensible position having regard to the underlying policy behind the frustrating action regime.3 If the directors of the target entity form the view that a bid is not genuinely available to shareholders and, accordingly, propose to undertake a relevant corporate action, then it should be incumbent on those same directors to notify the bidder of that fact so as to provide the bidder the opportunity to remedy that aspect of its bid which renders it not genuinely available (or otherwise ventilate the issues before the Panel).4 Otherwise, the target directors will effectively usurp a decision that should rightly be made by the target shareholders.
Circumstances in which it would be unreasonable to conclude that a frustrating action is unacceptable
Similar to the existing guidance, the revised GN12 provides a non-exhaustive list of circumstances in which it would be unreasonable to conclude that a frustrating action is "unacceptable".
One welcome aspect of the revised GN12 is the expansion of the concept provided in sub-paragraph 21(e), which provides:
21. Notwithstanding that a bid proposal provides a genuine opportunity for shareholders to dispose of their shares, a frustrating action is unlikely to give rise to unacceptable circumstances where:(e) a bid condition has been triggered and the bidder...has varied the terms of the bid, such as increasing the bid price, but has not waived the condition or the breach.
In our view, the ability of a bidder to rely upon a previous trigger of a bid condition by a target (i.e. a frustrating action) should be extinguished at the point in time at which a price increase bid variation is announced (having regard to the high degree of analysis that is associated with the bidder having made such a determination).5
Concluding thoughts
The proposed changes to Guidance Note 12 – Frustrating action, if ultimately implemented, will provide welcome clarity for target companies in carrying on their business during a bid period, as well as somewhat realigning the "balance of power" that exists between a bidder and a target in a takeover.
Footnotes
1 HopgoodGanim Lawyers have provided submissions to the Panel on the proposed changes to Guidance Note 12 – Frustrating action (GN12).
2 For example, if a target seeks prior shareholder approval for a frustrating action (or makes the relevant frustrating action conditional on such approval), it is unlikely to be "unacceptable" as shareholders are offered a choice between the bid and the relevant frustrating action.
3 Namely, decisions about ownership and control of a target company should be properly made by its shareholders, and not the directors.
4 One caveat to this may be the situation in which a bid is not genuinely available to shareholders and is also incapable of remedy due to some aspect of the structuring of the bid.
5 This position should however be contrasted with a bid variation that is merely a short extension of the offer period (which may have been made so as to allow the bidder to determine its position), which in our view is less determinative as to the bidder's "state of mind".
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