Australia: Incentivising Shareholders To Accept Takeover Offers

Recent takeover activity has seen the use of various methods to incentivise shareholders to accept a takeover offer. This has included:

• the use of acceptance facilities, which allow shareholders to deliver an acceptance without actually accepting the bid, and

• varying the bid by public announcement, typically subject to receiving acceptances over a specified level or some other newly imposed conditions, but without formally varying the formal takeover offers.

While these techniques have been around for many years, their recent use has attracted some attention and questions have been raised about whether they are an appropriate feature in Australian takeovers practice.

Many shareholders are reluctant to accept a conditional bid. This may be due to a fear of having their shares locked up for a period of time or, more fundamentally, their investment mandates may preclude them from doing so. This can exacerbate the normal difficulty a bidder has in gaining the last few acceptances needed to reach the 90 per cent compulsory acquisition threshold.

To overcome this problem, a technique has developed whereby, instead of accepting a bid in accordance with its terms, the shareholder merely delivers its acceptance to a third party (typically the investment bank advising the bidder). This is on the understanding that:

• the shares can be withdrawn from the third party at any time by the shareholder, and

• the acceptance is only to be delivered to the bidder once the aggregate of shares subject to the acceptance facility plus those subject to formal acceptances will together satisfy the 90 per cent condition.

As the third party holds as a bare nominee, it is not regarded as gaining a relevant interest in the shares.

These facilities have been around for some time. The earliest well-known example is the use in the Mayne Nickless / FH Faulding takeover in 2001. Most recently, it was used in the PBL/Burswood bid. These arrangements should be borne in mind when considering whether a transaction is to proceed by takeover bid or scheme of arrangement.

While a facility may assist the bidder reaching 90 per cent, the facility does not trigger any obligation on anyone to file a new substantial holding notice. This is contrary to the Chapter 6 objective that takeovers should occur in an informed market. There is potentially a risk that, in some extreme cases, these facilities may give rise to 'unacceptable circumstances' if no one, except the bidder and the third party, know of the true level of acceptances.

This is a simple matter of the bidder announcing that, upon a certain event occurring, the bidder will vary its bid in a particular way. In the meantime, shareholders act as if the bid has been formally varied.

A typical example of this is where a bidder states that, upon receiving the acceptances of a certain level, say 50 per cent or 90 per cent, it will increase the bid price or declare the bid free from defeating conditions.

In accordance with ASIC's Truth in Takeovers policy, the bidder is regarded as bound by any such statement.

This has the advantage for the bidder in enabling a very quick change in the terms of its bid, without necessarily complying with the formalities of the legislation.

It may also be used to introduce a new condition during the course of the bid, which may radically alter the fundamental nature of the bid. In the Smorgon Steel bid for Email in 2000, it was used to effectively introduce a 90 per cent condition to the bid that was previously only subject to a 50 per cent minimum acceptance condition. Smorgon Steel merely announced that it would waive a breach of a key bid condition if it reached the 90 per cent threshold, which had become crucial to the transaction after it reached its joint bidding agreement with OneSteel.

The only difficult issue is where shareholders accept the bid with the intention that their acceptance is only effective if the condition for the variation is satisfied. They may like the increased price if 90 per cent is reached, but not the lower price if it is not reached. Yet typically, there is no choice or withdrawal right given to the shareholder. There is potentially a risk, particularly where the underlying bid is already unconditional, of an 'unacceptable circumstances' declaration if the condition is not met and the shareholder cannot get their shares back. The consequences of acceptance in those situations would need to be spelt out.

While the Australian takeovers law is often thought to be inflexible, these techniques show that, with a little imagination, it is possible to facilitate the success of an offer and encourage shareholders to accept, even though it may be outside the detailed rules in Chapter 6. There may be some risks if the techniques are abused, but the same applies to any takeover tactics. On the whole, these techniques are not coercive and, when used properly, are consistent with the general policy of the legislation.

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.