Upcoming Mallesons seminarsPrivate equity firms involved in control transactions as well as listed companies and their directors, senior executives and advisers.
What do you need to do?Consider the implications of the draft policy for current and future control transactions.
Jason Watts
Partner
Jason Watts
Partner
T +61 2 9296 2489
Sydney
Michael Barker
Tim Bednall
Peter Cook
David Friedlander
Greg Golding
Melbourne
Alison Lansley
Stephen Minns
Craig Semple
Perth
Nigel Hunt
Brisbane
John Humphrey
Canberra
David Briggs
Hong Kong
Dieter Yih
(葉禮德)
On 21 February 2007 the Takeovers Panel responded to the increase in private equity transactions by releasing for public comment a draft Guidance Note and Issues Paper on insider participation in control transactions. Submissions are due by 6 April 2007. The draft Guidance Note considers when the conduct of such transactions may give rise to unacceptable circumstances.
Background
The recent spate of large private equity transactions in Australia and offshore has attracted both press and regulatory commentary about the conduct of such transactions1. The potential for conflicts in transactions where senior management and directors participate has come under particular scrutiny.
The draft Guidance Note is intended to provide market participants with guidance where there is actual or potential involvement by the management, directors or external advisers of a target with the bidder in a bid. Following submissions, the Panel will consider whether a final Guidance Note should be issued.
The Panel is focused on the particular principle that takeovers should be conducted in an efficient, competitive and informed market.
What types of transactions are covered by the draft Guidance Note?
The draft Guidance Note applies to insider participation regardless of the nature of the bidder. While the Panel considers that insider participation issues have wider application than private equity transactions, its consideration of these issues was primarily motivated against the background of private equity bids both locally and offshore.
When does insider participation arise?
Under the draft Guidance Note:
- “insiders” include people with significant inside or non-public information concerning the target, gained by virtue of a position of trust eg senior management, directors, financial and other advisers; and
- “participating insiders” include insiders who, through an arrangement with the bidder, stand to gain from that bidder’s successful bid, for example through acquiring equity or options in a bid-related vehicle or agreeing to enter employment agreements on significantly favourable terms.
The above definitions are not intended to be exhaustive. They cover people who are likely to have conflicts of interest which may affect the efficient, competitive and informed market for the target’s shares.
The broad way in which the definitions are to be applied as outlined in the Issues Paper are cause for concern. For example, the Panel has sought to include professional advisers with a previous association with the target who then seek to advise a bidding consortium. These matters should already be sufficiently addressed through professional obligations and duties to avoid conflicts and take no account of the passing of time or other matters that may negate conflicts or perceptions of conflict.
How are potential conflicts addressed under the draft Guidance Note?
To address potential conflicts the Panel considers that:
- insiders should inform the target’s board “as soon as they are approached” by a potential bidder and before taking any action, including providing non-public information or commencing discussions with the bidder. This requirement is extremely broad and undefined - for example, would it extend to an informal inquiry or a casual or preliminary conversation?
- insiders should seek board consent before taking any action, entering into any discussions or providing any information in relation to any possible bid;
- where the target board becomes aware of a bid with likely insider participation, the board should establish protocols to take control of the bid process. This will typically involve forming an independent board committee (IBC) of non-participating directors. Such protocols should seek to:
- establish rules concerning information disclosure, access and confidentiality;
- preclude influence by participating insiders on the target’s response to any proposal;
- ensure that the IBC has appropriate advice; and
- ensure that shareholders’ best interests are advanced, including through the IBC’s approach or attitude to potential rival bidders.
The draft Guidance Note suggests example protocols. The Panel does not prescribe what processes or protocols should be adopted. However it expects that alternative protocols to the suggested examples be no less effective in ensuring an efficient, competitive and informed market for the target’s securities.
Where appropriate protocols have not been established and followed, the Panel is more likely to find that unacceptable circumstances exist.
Some of the example protocols proposed by the Panel, for example that participating insiders be required to stand aside or resign from management/board positions, do not seek to distinguish between the particular circumstances of different transactions.
Will private equity transactions be treated any differently from other control transactions?
The Panel has stated that it is not trying to discriminate between private equity and other control transactions. However there are various areas noted in the draft Guidance Note and the Issues Paper which suggest closer scrutiny of certain aspects of private equity transactions.
- The Issues Paper asks whether a target the subject of a takeover bid which includes insiders should be required to conduct an actively managed auction, or other form of competitive process, for control of the company. There is currently no positive duty under Australian law requiring directors to actively pursue the “best price” for shareholders. Nevertheless, once a company is “in play” directors are often encouraged by the market to maximise the company’s value at a sale for the benefit of shareholders.
- Unlike the position in the United States and the United Kingdom, the Panel has not to date sought to impose a requirement on target companies to provide equal information to rival bidders. The draft Guidance Note suggests that if participating insiders are involved in a takeover bid, the Panel would likely “scrutinise very closely” instances of potential rival bidders being given less information than that given to the bid involving participating insiders. Provided an independent board committee acts in accordance with its fiduciary duties, there does not appear to be any reason to distinguish a recommended private equity bid from other control transactions which have the support of the independent directors of a target. There may be other good reasons why information is not made equally available - for example where rival bidders are competitors or perceived as mere “tyre kickers”. The Panel also fails to address how the well-established “no talk” and “no shop” arrangements under recommended bids would sit with any “equal access” requirement.
- The Issues Paper raises the issue of whether, through the extensive due diligence usually undertaken, private equity bidders have better information about the value of the target than target shareholders, particularly where participating insiders are involved. Particular attention is drawn to the longer range forecasts which may be available to such bidders than those normally provided to shareholders. The Panel notes that it is more likely to find that unacceptable circumstances exist where a bid featuring participating insiders has an information advantage over shareholders. There is no reason why the disclosure of such information should not continue to be governed by the general test of whether the information is of a kind that shareholders would reasonably require to make an informed assessment about whether or not to accept the bid.
- The draft Guidance Note calls for adequate disclosure in target’s and bidder’s statements of any incentive, participation and fees offered to participating insiders as well as entities behind a private equity fund which provide equity funding for a bid. Again, it would seem that the materiality of the information should be the guiding criterion for disclosure as with any other bid.
The Panel also comments in the Issues Paper on certain practices which it considers to be anti-competitive. One example is where a target’s adviser favours bidders who fund their bid with a “stapled debt package”, a pre-approved debt package offered by the target adviser to accelerate the sale process. Such packages have been a feature of some recent private equity deals.
Do the comments in the draft Guidance Note and Issues Paper extend to schemes of arrangements?
Many public to private transactions in this market are undertaken by scheme of arrangement. The Panel exercises jurisdiction over certain aspects of schemes of arrangement, subject to the court’s supervisory role. As it did with Guidance Note 7: Lock up Devices, the Panel is likely to extend the application of any final Guidance Note to control transactions by scheme of arrangement.
For more information
- View a copy of the draft Guidance Note
- View a copy of the Issues Paper ”Insider Participation in Control Transactions”
We will continue to monitor developments in this area. Please contact us if you have any queries about the draft Guidance Note, Issues Paper or takeover law issues more generally.
Footnote
1 For example, in November 2006, the UK Financial Services Authority released a discussion paper “Private equity: a discussion of risk and regulatory engagement”.