Alert

Who does this affect?

Private 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 now finalised policy for current and future control transactions.

Author
Jason Watts  
Partner

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Jason Watts  
Partner
T +61 2 9296 2489

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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)

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On 7 June 2007 the Panel released Guidance Note 19: Insider Participation in Control Transactions. While the guidance note should have wider application, it is primarily focussed on insider participation in control transactions involving private equity participants.

Background

In February the Takeovers Panel released a draft guidance note and issues paper on insider participation in control transactions. The Panel received fifteen submissions in response to its draft guidance note and the subsequent published version addresses some of the issues raised. For an overview of the draft guidance note and some potential issues please have a look at our publication: Takeovers Panel responds to increased private equity activity - 23 February 2007.

The Panel has also published a Public Consultation Response Statement which sets out the main submissions and the Panel’s approach in dealing with them.

Definition of insiders

The definition of participating insider has not changed materially from the draft guidance note. It is those insiders who, through an arrangement with a potential bidder, stand to gain from the bidder’s successful bid. However the Panel did not consider it appropriate to limit the definition to those who were able to influence the target’s consideration of the bid.

Who are insiders?

The Panel has defined insider to mean either or both:

• officers or advisers of a target who are in a position to influence the target’s consideration of the bid.
• persons with significant non-public information about the target or its business obtained through their role as a present or former officer or adviser.

In its Public Consultation Response Statement the Panel gives the example of an employee who may not be in a position of influence but may have useful non-public information that can be passed to potential bidders in the event the employee decides to participate with the bidders.

Who aren’t insiders?

In response to a number of submissions on the draft guidance note, the Panel has included an exemption for former advisers where:

• the adviser acts in a different capacity regarding the bid
• there are effective Chinese walls in place, and
• the non-public information is quarantined from the bid advisory team.

Managing conflicts

The issue

The draft guidance note contained a requirement for insiders to inform a target board as soon as they are approached by a potential bidder. The Panel received a number of submissions stating this was overly restrictive as many companies receive informal, high level approaches about potential strategic transactions which do not eventuate into a firm proposal.

The response

The published guidance note suggests insiders should inform the board of any approaches that might lead to a change of control proposal being tabled. The requirement to obtain board consent before an insider discloses any non-public information to a potential bidder is consistent with the statutory and common law duties applying to officers and employees.

The Panel continues to recommend the adoption of protocols and the appointment of an independent board committee to manage conflicts, consistent with accepted market practice. The Panel recognises that processes and protocols for managing conflicts should not be prescribed. Each target board will need to consider the appropriate processes and protocols depending on the particular circumstances.

Auctions

The issue

The Panel’s Issues Paper asked whether a target the subject of a bid involving insiders would be required to conduct an actively managed auction for the company.

The response

There is currently no positive duty under Australian law requiring target directors to actively auction a company which is in play. In remaining consistent with this, the Panel has not included any such requirement in the published guidance note.

Equal access to information

The issue

There was concern the draft guidance note suggested a departure from the principle that a target is under no obligation to provide equal access to information to rival bidders (confirmed in Goodman Fielder 02 [2003] ATP 5).

The response

The Panel has confirmed this principle in the published guidance note. However, it also stated that where participating insiders are given more information than other bidders, the Panel is likely to scrutinise the reasons given by the target directors for doing so.

Disclosure of information to shareholders

The issue

A number of submissions on the draft guidance note expressed concern that the Panel was prescribing that a target company release the same information to shareholders as that given to bidders with insider participation.

The response

In its Public Consultation Response Statement the Panel has clarified that a target should seek to ensure that a bidder who is involved with participating insiders does not have an advantage over shareholders in relation to material information.

Ongoing concerns

There is concern that if information such as management projections are required by a bidder before finalising its offer terms, the information is likely to be material to target shareholders. The provision of such information should 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 Australian Securities and Investments Commission (ASIC) has for some time cautioned against the disclosure of projections without reasonable grounds even if the information has formed the basis for estimating future performance for internal planning purposes (ASIC Policy Statement 170). It would be rare that long range projections would meet the tests of reliability and reasonable grounds required in ASIC’s Policy Statement. Notwithstanding this, bidders and their financiers will often require such information in formulating their offer terms. In such a case, there should be a clear distinction between information that a bidder is prepared to rely on and information which is reliable enough to warrant disclosure in a target’s statement given to shareholders.

Further information

View Mallesons’ publication on the draft guidance note: Takeovers Panel responds to increased private equity activity - 23 February 2007

View a copy of the published Guidance Note

View a copy of the draft Guidance Note

View a copy of the Issues Paper

View a copy of the Public Consultation Response Statement