Strategic considerations for a target
- The directors of an Australian company (or responsible entity of an Australian trust) will, given their fiduciary duties, usually seek to maximise shareholder value and, to that end, will usually consider the reasonableness of any takeover proposal.
- The overriding principles are that: (i) the directors of an ASX-listed Australian company (and responsible entity of a trust) must at all times act bona fide in the interests of the company (or trust unitholders), and for a proper purpose; and (ii) in respect of a takeover bid, target directors should not take actions, without securityholder approval, which causes the defeat of a control proposal.
- A board can prepare for a possible takeover approach by: preparing a takeover defence manual and undertaking other pre-approach tasks, such as monitoring the share register, maintaining a valuation of itself, preparing for the grant of due diligence to a bidder, and preparing draft ASX announcements.
- Key immediate decisions for a target following receipt of a takeover proposal are whether to: make an ASX announcement and engage with the bidder.
- If the target board concludes a takeover proposal to not be in the interests of shareholders, it should consider an appropriate defence strategy. This could involve seeking counter-bidders or establishing the inadequacy of the bidder’s proposal.
11.1 Threshold matters
In planning and executing any takeover response strategy, the directors of an ASX-listed Australian company need to have regard to the following fundamental principles. (For simplicity this section 11 refers to ASX-listed Australian ‘companies’ only but it is equally applicable to ASX-listed Australian trusts.)
(a) Directors’ duties
Directors are at all times subject to fiduciary and statutory obligations, including to act bona fide in the interests of the company as a whole, and for a proper purpose. Depending on the circumstances, the directors can seek to discharge their duties in a takeover proposal context by (among other things):
- recommending or supporting a takeover proposal which the directors reasonably consider to be in shareholders’ interests, in the absence of a superior proposal;
- rejecting, or refusing to recommend or support, a takeover proposal which the directors reasonably consider to be at an undervalue;
- engaging in discussions with a prospective acquirer with a view to extracting a higher price;
- seeking alternative superior proposals; or
- investigating alternative transactions that do not involve a change of control by a third party.
(b) Frustrating actions
The Takeovers Panel has developed a policy regarding actions by a target which could cause a takeover bid or genuine potential takeover bid to be withdrawn or not proceeded with. (However, note that the policy only applies to takeover bids, and not to takeover proposals that specify that a transaction is to be conducted only via a scheme of arrangement dependent on the target board of directors recommending it.)
These actions are known as ‘frustrating actions’. In general terms, it is unacceptable from a takeovers policy perspective for target directors to take any action which causes the defeat of a control proposal, without having given the shareholders a choice (eg seeking prior shareholder approval for the frustrating action). The underlying principle is that transactions that have an effect on the company’s control should be left to shareholders, not directors.
An action can constitute a frustrating action even if it is consistent with a director’s fiduciary duties. For instance, if a takeover bid contains a condition that the target not acquire any major assets and the target nonetheless does so in breach of the condition, the bidder can rely on the breach and walk away. The target directors’ actions could constitute frustrating actions.
Frustrating actions are not unlawful. However, the Takeovers Panel has the power to make orders if it declares actions to be unacceptable, eg orders to unwind a transaction or require it to be put to target shareholders for approval.
Note that the frustrating actions policy does not prevent a target from seeking alternatives to a bid or recommending the rejection of a bid. Nor is it intended to interfere with a target’s ordinary course of business.
11.2 Pre-approach planning
While the circumstances of every takeover proposal are different and require decisions to be made at the time, there are certain things that a company’s board can do to prepare for a possible takeover approach. A common approach is for a company to prepare, in conjunction with its legal and financial advisers, a takeover defence manual which sets out some pre-approach work that can be undertaken as well as the immediate actions to be undertaken if a proposal is received.
A typical pre-approach defence plan would deal with the following matters.
Takeover defence team
The company should identify who is to be centrally involved in responding to a takeover proposal. A defence team will usually include: company executives, directors, financial advisers, legal advisers, accounting advisers and a public relations firm.
Monitoring of register
The company should regularly monitor who holds its shares, by examining the share register (which will disclose registered holders) and substantial holding notices (which will disclose persons who have voting power of more than 5%) and issuing ‘tracing notices’ to registered shareholders (usually in order to obtain details of persons who have relevant interests of less than 5%). This exercise should reveal whether any potential bidders have acquired interests in the company’s shares.
Identify potential bidders
The company should compile a comprehensive list of potential bidders, and identify potential alternatives to a takeover proposal, including internal proposals and ‘break up’ models. Integral to that process is an understanding of the synergy opportunities open to potential bidders and understanding the particular characteristics of the likely bidders.
The company should commence and maintain a program of valuing itself and its businesses according to various takeover scenarios. The analysis should include a census of existing broker/analyst valuations.
Due diligence preparation
The company could establish an online data room containing material documents to enable the prompt granting of due diligence access to a potential bidder. In conjunction with this, a draft confidentiality and standstill agreement could be drafted by the company’s legal advisers (see sections 10.3 and 10.4). In addition, the company could undertake a due diligence exercise on its material contracts, to confirm the impact of a change of control transaction.
There should be a protocol regulating who is authorised to speak on behalf of the company to the media, shareholders, employees, customers, suppliers and other persons in relation to takeover matters.
The company should have ready a handful of draft ASX announcements that it can quickly complete and release as immediate responses to a takeover proposal. It is advisable to at least prepare a draft ‘holding response’ which notes that a takeover proposal has been received and that the board will consider it.
11.3 Immediate response to an approach
As discussed in section 10.2, a prospective acquirer will usually initiate contact verbally at a senior executive or chairman level, and then follow that with a written, confidential, indicative and non-binding proposal to undertake a recommended takeover transaction.
In the event a company receives such a proposal, the key immediate steps are normally as follows.
- Inform the board and external advisers.
- Consider whether an ASX announcement and/or trading halt are necessary.
- Commence various workstreams where applicable:
- valuation stream – this is focused on analysing the value of the specific proposal compared with potential counter-proposals and internally generated alternatives (such as demerger, asset sales and capital returns);
- contestability stream - focusing on analysing alternatives to the proposal, particularly if at an undervalue;
- communications stream – responsible for communicating and liaising with the company’s key stakeholders should the proposal cease to be confidential; and
- regulatory and legal stream - responsible for ensuring compliance by the company with legal and regulatory requirements, and monitoring compliance by the prospective acquirer.
- Having regard to the outputs of the valuation and contestability streams, the board needs to decide whether to engage with the prospective acquirer. The board should not feel compelled to make an immediate decision on whether to recommend the proposal, and in most cases is not in a position to do so where the proposal is indicative only. Normally the threshold decision is whether to grant due diligence to the prospective acquirer. It may be that the board believes the proposal is at an undervalue, but is nonetheless prepared to grant due diligence to facilitate discussions on a possible price increase.
11.4 Defensive tactics
A target’s course of action following the initial response will depend on whether it decides to engage with the bidder. A decision to engage can mark the first step in an ultimately successful transaction. A decision to reject a proposal can result in the bidder walking away and the target continuing with its business as normal, or alternatively can result in the bidder going on the offensive, eg making a hostile takeover bid (see section 10.6). If a takeover bid is made, the target board has statutory obligations to respond to the bid (see section 7.2).
A target which is faced with a public takeover proposal at what the target board considers to be at an undervalue will obviously want to understand the constraints on the range of defensive tactics at its disposal. As noted earlier, all target director actions need to comply with fiduciary duties and (where it applies) not fall foul of the Takeovers Panel’s policy on frustrating actions. Given their fiduciary duties, the directors of an Australian company (or responsible entity of an Australian trust) will usually seek to maximise shareholder value and, to that end, will usually consider the reasonableness of any takeover proposal.
The table below contains a selection of possible defensive actions, divided into those which are likely to be acceptable from a fiduciary duties, Takeovers Panel and regulatory perspective, and those which are unlikely to be acceptable from that same perspective. It covers actions which could be undertaken prior to or after receipt of a takeover proposal, and it is assumed that the target board has reached an informed, reasonable view that the relevant takeover proposal is at an undervalue and not in the interests of shareholders. (Note that the acceptability or otherwise of an action will depend on the circumstances, so the below should not be taken as a fixed checklist.)
Target actions LIKELY to be acceptable from a fiduciary duties, Takeovers Panel and regulatory perspective
Seeking or facilitating a higher rival proposal.
Publicly criticising the commercial merits of the proposal, such as its value, conditionality and execution risk, vis-à-vis the prospects of the target as a stand-alone entity.
Taking action in the Takeovers Panel or the court against what the target reasonably considers to be unlawful or unacceptable conduct on the bidder’s part (eg alleged misleading statements by the bidder).
Commissioning an independent expert to undertake a valuation of the company, which can support a board recommendation to reject the proposal.
Investigating alternative proposals (which may ultimately need to be made subject to shareholder approval) eg demerger or sale of key assets and subsequent capital return.
Target actions UNLIKELY to be acceptable from a fiduciary duties, Takeovers Panel and regulatory perspective
Establishing a US-style shareholder rights plan which gives all shareholders, other than the bidder, a right to subscribe for additional shares at a discount.
Issue of shares to a friendly party where there is no pressing need for the funds raised.
Entering into pre-emptive rights arrangements with third parties (such as joint venture counter-parties) over significant company assets after a takeover bid has been announced, or before a bid has been announced and that is not immediately disclosed to the market.
Announcing or undertaking any action or transaction that would breach a takeover bid condition, and such action is not subject to shareholder approval or not in the company’s ordinary course of business or was not disclosed to the market prior to the receipt of a takeover proposal.
Incurring significant liabilities or materially changing the terms of the company’s debt arrangements, which the company would not otherwise have done.
Foreign Investment in Australia
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