Takeovers are back: Lessons learned from recent Panel litigation

Like the premature obituary of Mark Twain, some M&A practitioners and commentators have lamented the apparent death of the takeover.  Recent Takeovers Panel proceedings demonstrate those claims are overstated.  Takeovers are alive and well, and are a viable pathway to obtaining control of an ASX-listed entity.  

This note highlights some key learnings from three key Panel proceedings in which we were involved:[1] Atlas Arteria[2] and Atlas Arteria 02,[3] involving the hostile takeover of an ASX-listed entity with a market capitalisation of over A$7 billion, and Cue Energy Resources Limited,[4] involving a cash and scrip off-market takeover with various bespoke features including a conditional pre-bid agreement.  

While each of the proceedings involved context-specific and complex issues, the Panel’s reasons highlight three themes.  First, appropriately structured pre-bid agreements can provide a bidder with support for its offer.  Second, there are limits on bid structures – the fact that a structure may have been used before is not a complete answer as to whether it is lawful or gives rise to unacceptable circumstances.  Third, the Panel’s reasons in Atlas Arteria 02 provide an example of an area where takeover regulation and policy may benefit from further clarification.    

Right on Cue

In Cue Energy Resources,[5] the Panel declined to conduct proceedings in relation to Horizon Oil Limited’s off-market takeover bid for Cue.  The bid involved a 19.99% pre-bid agreement with Cue’s largest shareholder, Echelon Resources Limited, and an associated ‘truth in takeovers’ statement that Echelon would accept the bid for its remaining shares after 21 days, in the absence of a superior proposal.[6] 

The Panel reaffirmed several well-established takeover principles. It confirmed that a major shareholder’s commitment to accept into a bid after 21 days, absent a superior proposal, was consistent with Guidance Note 23 in the circumstances. It also reaffirmed that allegations of association require a sufficient evidentiary foundation. Commonplace arrangements such as pre-bid agreements and ordinary commercial relationships do not, without more, support an inference that parties are acting in concert. Finally, the decision provided helpful guidance on the competing duties of nominee directors where major shareholders launch bids, recognising that conflicts can be appropriately managed without prior notification to independent directors in suitable circumstances. 

Atlas Arteria and two-tiered price structures 

The first Atlas Arteria proceeding involved a takeover bid structure with the characteristics of Schrödinger’s cat.  In a single sentence, the bidder’s statement represented that the offer price of $4.75 would be increased to $5.10 ‘if the Bidder’s Relevant Interest in Atlas Arteria Securities is 45% or more prior to close of the Offer’.  Like the aforementioned and potentially ill-fated cat, it appeared the offer (as drafted in broad ‘truth in takeovers’ language) could be in a range of states prior to its purported close, despite the requirements of section 650D of the Corporations Act which prescribe procedural steps to vary offers under a bid.[7]  When the target pointed this out in Panel proceedings, the bidder subsequently remedied this issue by applying to ASIC for relief to modify section 624(2) of the Corporations Act so that the offer period would be extended automatically by 14 days in the event that the specified 45% threshold was met and the offer had not already been validly increased in accordance with section 650D of the Act.[8]  With ASIC relief in place, it was unnecessary for the Panel to poke the cat and provide more general guidance on two-tiered price structures.[9]  However, the end result reminds bidders that they should not use two-tiered price structures without prudent planning and disclosure (as well as applicable relief, if necessary). 

Atlas Arteria 02 and target disclosure

In Atlas Arteria 02, the bidder sought, and failed to obtain an order for, early disclosure of matters which the target submitted would be disclosed in its target’s statement as required under section 633 of the Corporations Act.  In its reasons, the Panel restated earlier observations that target companies have ‘greater care’ than normally required to ensure that, once a bid is made, all communications to shareholder and the market are not misleading; or, as the Panel has said elsewhere, target companies must apparently prepare ASX releases ‘with the highest degree of care, as it would be if the directors were issuing a prospectus’.[10]  While these broad statements are intended to ensure the market and target shareholders are fully informed of relevant facts, how do they align with the specific statutory disclosure requirements under sections 633 or 674 of the Corporations Act?  The Panel stated that “It is not the role of the Panel to police Chapter 6CA (continuous disclosure) and the ASX Listing Rules.  However, there is some overlap with the continuous disclosure requirements and an efficient, competitive and informed market.”[11]  In that context, the Panel’s reasons identify two key scenarios where it may enforce early disclosure of matters by a target ahead of a target’s statement (neither of which applied to Atlas Arteria): first, where the target makes misleading disclosure in advance of issuing its target’s statement which should be corrected; and, second, where a target is aware of material information that would breach a bid condition and does not disclose it following release of the bidder’s statement.  It remains to be seen in what circumstances the second scenario would apply where continuous disclosure rules do not compel disclosure.      

A final word on creep 

The Cue and Atlas Panel cases provide useful illustrations of tips and tricks in takeover structuring.  Other learnings and questions remain, including the continued existence of the ‘creep’ exception in item 9 of section 611.  Like the bidder in the Boral takeover, the bidder in the Atlas transaction used the ‘creep’ exception to build a significant, near controlling stake, before launching a takeover bid to accelerate its previous creeping activity.  That tactic highlights that the creep exception is not incremental.  It can be used by a bidder to gain control – or position itself near to control – without making an offer to all shareholders or disclosing its intentions in relation to the target.  Is that an acceptable policy setting?  The creep exception has been abolished in other countries and its continued existence in Australian takeovers law is a jurisdictional oddity.  While there have been loud calls for reform of schemes of arrangement,[12] time might be better spent fine tuning takeover regulation.