Takeovers Panel updates guidance on bidder's and target's statements

Summary

• The Takeovers Panel has updated its guidance on preparing bidder's statements and target's statements. The Panel is encouraging takeover participants to include summary sections after the Chairman's letter.
• The Panel acknowledges that the contents appropriate for the summary section will vary from case to case, but has nevertheless prescribed a list of headings for the summary section that it 'considers most likely to be of importance'. This guidance is less prescriptive than the approach the Panel put forward in an earlier consultation paper.
• Bidders and targets are now faced with a tension between (on the one hand) following the Panel's guidance and (on the other hand) potentially either adding to the length of their takeover documents or blunting some of the key messages in them: the detailed reasons on whether to accept or reject the offer.
• Consistent with this tension, market practice has been very mixed during the nine months since the Panel's initial consultation paper was released. Five principal approaches emerged from the deals over that period valued at more than $50 million:

Background

On 10 January 2014, the Takeovers Panel released a consultation paper regarding proposed changes to its Guidance Note 18: Takeover documents (GN 18), including a consultation draft of a revised GN 18.

The consultation draft contained new guidance that bidder's statements and target's statements (in this update, takeover documents) should contain a summary section at the front, 'normally' following the usual Chairman's letter. While the Panel's draft guidance did not purport to prescribe a mandatory structure for the summary, it set out 'best practice guidelines', including a minimum font size and preferred headings for the summary. Those headings covered the offer consideration, reasons to accept/reject the offer, target directors' recommendation (for target's statements), key dates, conditions of the offer, information about the bidder, a summary of any independent expert's report, the key risks of accepting or rejecting the offer, how to accept the offer and any other key issues particular to the bid. Further details were prescribed under each heading.

The Panel's intention was to encourage takeover documents that are accessible (i.e. 'clear, concise and effective'), especially for retail shareholders. A shareholders' comprehension may also be assisted by their becoming familiar with a semi-standardised form of summary, should a market practice emerge in this regard. Although the Panel indicated that summary sections should be short enough to be able to be comprehended quickly, it did not prescribe a page limit.

The Panel also noted that inclusion of a summary could remove, or reduce, the need for other summary features. This appears intended to refer primarily to the customary 'frequently asked questions' section (FAQ section), to which we return below.

Outcome of submissions

The Panel received four submissions, all of which expressed the view that the consultation draft of the updated GN 18 was unnecessarily prescriptive, and that accessibility would best be promoted by drafters of takeovers documents being able to exercise discretion. Three of the four submissions objected to the Panel setting out a 'best practice' structure for a summary.

In response, the Panel revised the final GN 18 so that it:

• expressly noted that the contents of a summary would depend on the particular case, downgrading the significance of the prescribed issues so that they were now only 'an example of what the Panel considers most likely to be of importance';
• described the summary section as 'most naturally' following the Chairman's letter (rather than 'normally' doing so); and
• omitted the reference to a minimum font size.

However, the Panel added a reference to part of ASIC Regulatory Guide 228: Prospectuses: Effective disclosure for retail investors, noting that it set out additional matters that should be considered when preparing a summary section.

Decisions for drafters of takeover documents

The Panel's guidance casts light on two related issues:

• There is a degree of overlap between the Panel's proposed summary section and the customary FAQ section. FAQ sections typically contain around 20-30 questions, addressing the information identified by the Panel and other information regarding the mechanics of the offer that is often helpful to retail shareholders. Drafters of takeover documents face a decision on whether to include both a summary section and an FAQ section. To do so would typically mean presenting much of the same information in different formats, which may well aid comprehension, particularly for retail shareholders. It could however slightly increase the overall length of the takeover document.
• In light of this, the drafters of a takeover document might decide to give greater prominence to the conventional FAQ section and not include a summary section at all. The Panel's guidance indicates a preference for the summary section to appear immediately after the Chairman's letter. That guidance would apply equally to an FAQ section taking the place of a summary section. However, FAQ sections often run to six or eight pages. If the drafters of a takeover document did this, it would reduce the prominence of the detailed reasons why shareholders should accept or reject an offer. Many bidders and targets could be reluctant for this to occur, as those reasons are some of the key messages in the takeover document and so should arguably be given at least the same (if not more) significance than a number of the issues identified by the Panel (e.g. explaining shareholders' ability or inability to withdraw acceptances).

To assess how these issues were being dealt with in practice, we reviewed the takeover documents for all bids valued at more than $50 million which were lodged with the ASX between the release of the consultation paper on 10 January 2014 and 30 September 2014.¹ (The update to GN 18 was published on 21 July 2014.) There were a total of 25 such takeover documents, on which 13 law firms advised on Australian law. Of the 25 takeover documents, 18 were published during the consultation period and a further 7 after the update to GN 18 was finalised.

We observed significant divergence in practice between the 25 documents and frequently a divergence in practice between different documents on which the same law firm advised. The divergence may reflect differing views between takeover participants as to the best way to resolve the tension discussed above, as well as the fact that the guidance in the consultation paper did not until recently represent concluded policy and the Panel's guidance is not expressed in mandatory terms.

There were five principal approaches:

• one case of a summary without an FAQ section;
• five cases of a summary and an FAQ section;
• seven cases of the Panel's guidance (or draft guidance, as the case may be) being apparently addressed using an FAQ section alone (i.e. where no summary was included, but the FAQ section appeared after the Chairman's letter and before the detailed reasons on whether to accept or reject the offer);
• eight cases where the drafters appeared to disregard the guidance (i.e. where no summary was included and the FAQ section did not appear until after the detailed reasons on whether to accept or reject the offer); and
• four cases of a 'hybrid' approach, involving a section longer than the Panel's suggested summary, but shorter than the customary FAQ section. In half of those cases, the hybrid summary appeared before the detailed reasons to accept or reject the offer. The issues omitted from the hybrid summary typically related to the more mechanical aspects of the offer.

Of the seven takeover documents published since the update to GN 18 was finalised, only one included a summary section broadly consistent with the Panel's guidance. Five takeover documents included an FAQ without a summary section, and one other included a hybrid section. This could suggest some resistance in the market to the Panel's guidance, but more data are required before firm conclusions can be drawn.

Conclusion

Takeover participants may be concerned to observe the Panel's guidance in order to mitigate the risk of an interested party seeking to impugn the takeover document before the Panel on the basis that the drafters have departed from that guidance.

However, this risk should be kept in perspective. The Panel does not have legislative power and cannot specify a particular structure to which all takeover documents should conform; nor did the Panel attempt to do so. The Panel's power to make orders only arises when it considers that circumstances are unacceptable having regard to specific matters set out in the Corporations Act (e.g. the effect of the circumstances on the control of a company). While all bidders and targets should be expected to ensure their takeover documents are as clear, concise and effective as possible, it is unlikely that the Panel would ever make a declaration of unacceptable circumstances merely for the absence of a summary section if the document was otherwise properly informative and not misleading.    

The mixed market practice since the release of the consultation paper appears to bear this out. Different takeover participants are taking different views as to the most clear, concise and effective way of presenting information to the readers of takeover documents. We would expect a degree of consolidation in market practice in the future, but any market practice is unlikely to be entirely uniform, as drafters will remain focussed on the basic question about how information can presented in the most clear, concise and effective manner possible.