Strategic considerations for a prospective acquirer
- Threshold matters for a prospective acquirer to consider include: transaction structure; whether it is seeking 100% or just control; form of offer consideration; due diligence requirements; friendly or hostile deal; and the potential acquisition of a pre-bid stake.
- The initial approach to the target is usually conducted verbally, and followed by a written confidential, non-binding and indicative proposal. The target generally has no obligation to announce such a proposal – unless it ceases to become confidential – but could decide to do so for strategic reasons.
- If a target grants due diligence access it will usually only do so on the basis of a confidentiality agreement, which restricts the use of that information to implement a friendly transaction. The target may also require a ‘standstill agreement’ whereby the prospective acquirer cannot acquire target securities for a specified period except under a friendly transaction.
- A prospective acquirer can seek to bolster its position by acquiring a pre-bid stake (subject to the 20% takeovers rule, insider trading rules, any need for secrecy and other considerations).
- If the target is not receptive to an approach, a prospective acquirer can launch a hostile takeover bid, make a ‘bear hug’ announcement or initiate a board spill.
10.1 Threshold matters
In Australia, it has traditionally been difficult to successfully conclude a control transaction without the co-operation and favourable recommendation of the target’s board of directors at some point in the process.
It is therefore not surprising that a prospective acquirer will almost always seek the upfront recommendation of the target board. In a scheme of arrangement or trust scheme transaction, the target board’s recommendation is a pre-requisite.
In a control context, the prospective acquirer’s first contact with the target is customarily a verbal, informal sounding-out (by the chairman or a senior executive of the acquirer or by the acquirer’s external financial adviser) of the target’s appetite for a control transaction. Depending on the outcome of that discussion, the prospective acquirer would commonly submit to the target a written, confidential, indicative and non-binding proposal and seek due diligence.
But before any contact is made with the target, there are some threshold matters that a prospective acquirer will have considered with the assistance of its external financial, legal and accounting advisers. These include the following. (For simplicity the table looks only at company targets (rather than trust targets as well).)
Does the prospective acquirer have a preferred transaction structure – takeover bid or scheme of arrangement? See section 6.2.
Control or 100%?
Is the prospective acquirer seeking to acquire 100% of the target, or would it be satisfied with simply obtaining a controlling interest and maintaining the target’s ASX listing? This will inform the decision on transaction structure – a scheme of arrangement is often ideal for a 100% acquisition, whereas a proportional takeover bid is the only way to guarantee an acquisition of less than 100%. See sections 6, 7 and 8.
How much is the prospective acquirer prepared to offer? Is the prospective acquirer prepared to engage in a bidding war if a rival bidder emerges? If the offer/purchase consideration is or comprises cash, how will that be funded – through existing cash reserves, existing or new debt facilities, new equity raising or otherwise? If the consideration is or comprises equity securities issued by the prospective acquirer, the prospective acquirer will need to be prepared to provide detailed information about itself to target securityholders. If the prospective acquirer is a non-Australian company but the target largely comprises Australian investors, is the prospective acquirer prepared to undertake a secondary listing on ASX to attract target securityholder acceptances or approval?
How much due diligence on the target does the prospective acquirer need? It is normal to seek due diligence access at the time of submitting a written proposal. Ideally, the prospective acquirer will have a broad understanding of the target and what are likely to be ‘dealbreaker’ issues, based on publicly available information and industry knowledge and experience.
Friendly or hostile
Will the prospective acquirer be prepared to undertake a hostile takeover bid if the target is not receptive to a deal, or is the prospective acquirer only willing to undertake a friendly transaction? To a large degree this will depend on whether the prospective acquirer is prepared to undertake a transaction without the benefit of detailed due diligence.
Is the prospective acquirer interested in acquiring an initial stake in the target to increase the chances of a successful deal, or to use as the platform for a hostile bid, or to exert pressure on the target or to act as a blocking stake against rival bidders? The prospective acquirer’s ability to acquire a pre-bid stake will be impacted by insider trading rules to the extent it is granted due diligence or otherwise acquires information that is confidential and price-sensitive. Also, a bidder should be aware that it will be unable to vote any target shares it holds on the scheme of arrangement.
Regulatory approvals and conditions
What, if any, regulatory approvals does the prospective acquirer need in Australia and elsewhere in order to undertake the deal, and what is the likelihood of obtaining those approvals? Common regulatory approvals are Australian foreign investment approval and competition approvals.
Is the prospective acquirer comfortable with the risk of being ‘outed’ as a potential bidder for target, notwithstanding that it has submitted a confidential and non-binding proposal? The target could voluntarily announce the indicative proposal or be forced to do so under its continuous disclosure obligations.
Some of these matters are examined in more detail below.
10.2 The initial approach
A prospective acquirer’s initial approach to the target is usually an informal, verbal one conducted between the chairman or senior executives of the two entities (or between respective external financial advisers). The purpose of such approach is to sound-out the target’s appetite for a friendly control transaction. If it transpires that the parties have fundamentally different views on value which are unlikely to be bridged, then the prospective acquirer might decide to leave things at that. But if preliminary discussions indicate that a deal is possible, the prospective acquirer might be encouraged to submit a written proposal.
Written proposals are normally submitted on a confidential, indicative and non-binding basis. There are two key reasons for this.
First, there are strategic benefits for the prospective acquirer in maintaining the confidentiality of an approach. The submission of a confidential takeover proposal will usually not trigger an ASX announcement obligation on the target’s part. This is because, while a takeover proposal will qualify as price-sensitive information that an ASX-listed target is prima facie obliged to disclose under its ASX continuous disclosure obligations, there is an exception for information that is confidential and concerns an incomplete proposal or negotiation. A confidential, indicative and non-binding proposal falls within the exception.
Notwithstanding that, some companies have in the past voluntarily announced the receipt of a confidential proposal – whether to seek to generate a bidding auction or due to a conservative approach to disclosure, or otherwise. Unfortunately, there is little that a prospective acquirer can do to prevent this. Note that a target’s announcement that it has received an indicative proposal does not usually impose on the prospective acquirer any obligation to proceed with a takeover. Note also that an ASX-listed target is not required, under its continuous disclosure obligations, to announce the receipt of an incomplete and confidential proposal for so long as it remains confidential.
Where the proposal is ‘leaked’ in the media or to the market, confidentiality may be lost and the target will then be obliged to announce the receipt of the proposal.
(b) Due diligence and board recommendation
Secondly, a prospective acquirer is often not willing to be bound to proceed with a takeover unless and until it has had an opportunity to conduct due diligence on the target and has secured the target board’s recommendation , and will be unable to proceed with a scheme of arrangement unless it has secured the target board’s recommendation. As a takeover bid cannot be made subject to a general due diligence condition (see section 7.3(h) above), if there are due diligence issues to be addressed that will need to be done ahead of the offer being announced. There may be other pre-conditions which need to be satisfied, such as the prospective acquirer obtaining indicative financing commitments.
10.3 Due diligence and confidentiality agreement
Given that ASX-listed entities in Australia are subject to fairly extensive reporting requirements and have an obligation to publicly release all price-sensitive information (otherwise known as ‘continuous disclosure obligations’), a preliminary due diligence exercise based solely on publicly available information should give a prospective acquirer a reasonable understanding of the target and of what matters it should probe.
Obviously there are limits to relying on publicly available information. Much information relating to a company’s business is not disclosed either because it is not price-sensitive or is price-sensitive but need not be disclosed due to an exception to the continuous disclosure rules (eg the information is confidential and is generated for internal management purposes or is a trade secret). Information which may not be price-sensitive to an investor and not publicly available can nonetheless be commercially sensitive and of interest to a prospective acquirer. For instance, internal management budgets and forecasts are likely to affect value, as will the existence of change of control provisions in contracts.
A target in most circumstances has no obligation to provide due diligence access to any person, nor to provide a particular level of access once granted. However, it would be consistent with a board’s duty to act in the best interests of shareholders to take reasonable steps to facilitate a proposal that, if implemented, would maximise value for shareholders.
A target will almost always require a prospective acquirer to sign a confidentiality agreement before granting due diligence access. Under a standard confidentiality agreement, the prospective acquirer agrees to keep due diligence information confidential and to use it only for the purposes of a target-recommended transaction.
10.4 Standstill agreement
Under a standstill agreement, the prospective acquirer agrees not to acquire any interest in any securities in the target for a specified period. From the target’s perspective, the standstill agreement serves a number of purposes:
- it enables a target board to enter into discussions knowing that the other party will not then turn hostile on the target, or acquire a stake to attempt to block a competing transaction subsequently recommended by the target board;
- it means that if that other party does then acquire target securities (assuming it can do so without contravening insider trading laws), the target does not have to prove that that party used confidential information in acquiring the shares in breach of the agreement – only that the standstill agreement has been triggered; and
- it provides some protection for the target from potential liability for ‘tipping’ under the insider trading provisions of the Corporations Act – ‘tipping’ is where a person discloses non-public, price-sensitive information to a person who the first person believes would be likely to acquire target shares.
10.5 Pre-bid acquisitions
A prospective acquirer may seek to acquire a ‘pre-bid’ stake in the target (ie. a relevant interest in target securities in advance of acquiring securities under a control transaction). A pre-bid stake can be used as a platform for a hostile takeover bid, or to exert pressure on the target to agree to a deal or to act as a blocking stake against rival bidders. A pre-bid stake can take various forms, ranging from conditional or unconditional security acquisitions to put and call option arrangements to agreements to accept a takeover bid or vote in favour of a scheme.
The key constraints and considerations relevant to a pre-bid acquisition are as follows.
- 20% takeovers rule The prospective acquirer must ensure that it does not have a relevant interest in more than 20% of the target securities, or otherwise voting power of more than 20% in the target, as a result of any pre-bid acquisitions. Otherwise it will breach the 20% rule (see section 2). Negotiations for the acquisition of a pre-bid stake from an existing target shareholder need to be managed to avoid forming any agreement, arrangement or understanding as to how the target shareholder will vote or dispose of the balance of their shares – otherwise the prospective acquirer will become an associate of the target shareholder and the prospective acquirer’s voting power in the target will increase by reference to the target shareholder’s total holding.
- Foreign investment approval requirements If the prospective acquirer is a ‘foreign person’ it may need to obtain Australian foreign investment approval (FIRB approval) to acquire securities in the target (see section 12.1).
- Insider trading If non-public price sensitive information is provided by the target to the prospective acquirer in the due diligence material, technically this would prevent the prospective acquirer from acquiring any target securities. This is because such acquisitions would constitute unlawful insider trading. (Note, though, that the insider trading rules do not prohibit a prospective acquirer from trading in target securities merely because the prospective acquirer intends to make a takeover bid – this is because there is an ‘own intentions’ exception).
- Substantial holding disclosures Where the prospective acquirer holds a relevant interest in 5% or more of the target’s voting securities, or otherwise voting power of 5% or more in the target, as a result of any pre-bid acquisitions, the prospective acquirer will need to disclose its interest via the filing of a substantial holding notice (see section 5). Importantly, a substantial holding notice must have attached to it a copy of all relevant agreements, such as the share purchase agreement or pre-bid acceptance agreement (as applicable). Therefore, where a prospective acquirer seeks to acquire a secret pre-bid stake it should limit itself to less than a 5% interest – however, note that a prospective acquirer’s relevant interests will need to be revealed if the target issues tracing notices on the registered holder of the relevant shares.
- Minimum bid price The price which a prospective bidder or an associate agrees to pay for target securities within the 4 month period before a takeover bid sets a floor price for the bid price (see section 7.3(d)).
10.6 Going on the offensive
For a prospective acquirer’s perspective, the ideal sequence of events is that the target responds favourably to an approach, quickly grants due diligence access and works co-operatively with the prospective acquirer in negotiating and settling a bid or scheme implementation agreement. However, a prospective acquirer should consider its strategic options should the target reject an indicative proposal and the prospective acquirer does not wish to walk away. There are a number of options, including as follows.
(a) Hostile takeover bid
The prospective acquirer can launch a hostile takeover bid and thereby put its proposal directly to target securityholders. The hostile bid option is not suitable for everyone. Certain companies may have a policy or practice of only undertaking friendly deals – hostile deals in Australia can be unpleasant and protracted, and often involve Takeovers Panel proceedings and public relations battles. Also, a hostile bidder needs to be prepared to buy the target without having undertaken detailed due diligence. It is not permissible to make a bid subject to a general due diligence condition, though it is possible to craft due diligence-type conditions linked to objectively determinable outcomes (eg that the target maintain a specified minimum cash position) (see section 7.3(h)). Further, a prospective acquirer that had sought to acquire 100% of the target under a scheme of arrangement will need to be comfortable with the possibility of acquiring less than 100% under a takeover bid if it does not have a 90% minimum acceptance condition or waives such a condition to encourage acceptances (see section 7.3(k)).
(b) Bear hug announcement
The prospective acquirer could unilaterally announce that it has submitted an indicative and non-binding proposal to the target, but stop short of announcing a hostile takeover bid. The announcement would set out the indicative terms and conditions of the proposal, and outline why the prospective acquirer believes it would be favourable for target securityholders. This is known as a ‘bear hug’. The aim is to pressure a target board to engage in negotiations lest it be criticised by its securityholders for failing to do so. The prospective acquirer’s announcement needs to be carefully worded so that it is not considered to trigger the 2-month rule for a takeover bid (see section 7.3(a)).
(c) Board spill
If a prospective acquirer holds 5% or more of a target’s shares it can requisition a general meeting of target shareholders to vote on changes to the target’s board of directors. Obviously, the larger the shareholding, the more likelihood of success at the general meeting.
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