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In this article, we discuss the potential for major shareholders to come together to make a joint bid without having to put their stakes at risk with a condition requiring them to "match or accept" a higher third party bid. Joint bids can resolve liquidity and control impasses and enhance the range of value realisation opportunities for shareholders.
A "joint bid" is where two or more parties agree to come together to make a bid for a company.1 Usually, this involves the formation of a bid vehicle in which each of the parties has or is to have an equity interest. Normally they will pre-agree a shareholders agreement for the governance of the bid vehicle and the target company to apply if the bid is successful.
Where a company has two or more major and long term shareholders, liquidity in the market for the company's shares is limited. There will often be a perception that the prospect of a bid for control by any one of the major shareholders is remote, since a bid by an individual major shareholder can be blocked by another major shareholder. Or each of the individual major shareholders may have an appetite to increase its holding but may not be capable of buying 100% on its own. The presence of these factors would tend to depress the market price of the free float
Bringing major shareholders together to make a joint bid can resolve these impasses.
Where the major shareholders together have an aggregate shareholding of more than 20%, any agreement between them to make a joint bid is likely to result in a breach of the 20% threshold in s.606 of the Corporations Act, on the basis that the parties may expressly or tacitly agree that they will each retain their shares pending the outcome of the bid (or roll them into the bid vehicle if the bid is successful).
For example in ASIC v Yandal Gold (1999) 32 ACSR 317, Edensor (associated with the Gutnick family) held around 12% of the shares in Great Central Mines and Normandy held around 28%. Edensor and Normandy formed Yandal Gold as a vehicle to make a takeover bid for Great Central Mines. The agreement between Edensor and Normandy specifically stated that neither party had any control over the voting or disposal of the other's shares. However the Court held that in the circumstances there must have been an agreement, albeit perhaps not legally enforceable, between the parties that each would retain its shares and not accept the bid by Yandal Gold. Those circumstances included a statement in the bidder's statement (Part A statement was the terminology at the time) that neither party would be accepting the bid, and the fact that the financing obtained by Yandal Gold would have been sufficient only to pay for Great Central Mines shares other than those held by Edensor and Normandy.
In 2001 ASIC first formulated a policy to grant relief to enable joint bids which might otherwise breach s.606. This policy is now set out in Regulatory Guide 159. There are four conditions which ASIC will typically impose:
The last condition - the "match or accept" condition - has been a major and usually insurmountable hurdle for shareholders mulling the prospect of a joint bid. The shareholders may be quite happy with their investment in the company concerned. However, if they make a joint bid to acquire a greater interest, they risk either being bid up to a price which they cannot fund (or which gives them no upside on their investment case) or being required to exit their investment altogether.
ASIC considers that a "match or accept" condition is necessary to preserve a competitive market - the prospect of an auction for control. Without that condition other potential bidders would effectively be locked out while the joint bid is on foot - a takeover bid can be extended for up to 12 months. In the absence of a competing bid, target shareholders may well be induced to accept the only bid on the table.
Until last year, the circumstances under which ASIC was prepared to give joint bid relief without a "match or accept" condition were limited to situations where an existing shareholder with more than 20% joined with a non-shareholder to make the bid. Examples include:
A current live example is the proposed acquisition by Foxtel and Liberty Global of Austar by scheme of arrangement.
ASIC's view in these situations appears to have been (see Regulatory Guide 159.297) that if there is no overall increase in the aggregate relevant interest of the joint bidders - because only one of them has a pre-existing shareholding - there would be no adverse impact on the market for control of the company. The existing shareholder already has a relevant interest in more than 20% so the market will have already factored in the impact of the major stake as a potential bid deterrent, and there is no increase in the major stake.
Section 609(7) of the Corporations Act provides that no relevant interest is created by an agreement if the agreement:
The potential application of s.609(7) is obvious in the context of agreements for the sale and purchase of shares, where the purchase would result in an increase in the purchaser's relevant interest beyond 20%. The application of s.609(7) is not, however, limited to straight sale and purchase agreements. It applies to any agreement which would otherwise result in the creation of a relevant interest.
Accordingly, in its terms, s.609(7) can be used in the context of a joint bid agreement. If a joint bid agreement has provisions which satisfy the criteria in s.609(7) (including the approval of shareholders other than the joint bidders and their associates under item 7/611) there should be no need for ASIC relief. ASIC relief is only required so that relevant interests which are (or are likely to be) created by a joint bid agreement can be disregarded. If the joint bid agreement has provisions satisfying the criteria in s.609(7), s.609(7) will have that effect. If ASIC relief is not required, the joint bid could proceed without a "match or accept" condition.
The use of s.609(7) outside the context of straight sale and purchase agreements has been rare. Until last year it had not been used in the context of a joint bid agreement. That is possibly because, given ASIC's explicit and relatively long standing policy on joint bid relief and the "unacceptable circumstances" overlay to the black letter of Chapter 6, parties have considered its use that context to be open to challenge by ASIC. However, there are now two examples of joint bid acquisitions where the joint bid agreement met the criteria in s.609(7) and ASIC was content that no joint bid relief, and hence no "match or accept" condition, was required.
The first example is Horizon Roads' acquisition last year of the units in the ConnectEast Group stapled trusts. Horizon Roads was formed as a wholly owned subsidiary of CP2. CP2 had a relevant interest in 35% of ConnectEast. Horizon and CP2 entered into separate Subscription Agreements with 8 pension or sovereign wealth funds under which the funds would subscribe for shares in Horizon in order to finance Horizon's acquisition of the remaining units in the ConnectEast trusts. The acquisition was to be made under a trust scheme - that is, amendments to the trust constitutions by special resolution. The amendments would provide for the compulsory transfer of all issued ConnectEast units to Horizon in exchange for cash (in the case of units not held by CP2) or shares in Horizon (in the case of units held by CP2).
There was an issue whether the entry into the Subscription Agreements would carry with it an understanding between each fund subscriber and CP2 that CP2 would not dispose of its units in ConnectEast pending the outcome of the scheme, thus giving each of the fund subscribers a relevant interest in CP2's 35% unit holding. If so, there would also be some (albeit small) increase in the aggregate relevant interest since some of the fund subscribers had small pre-existing holdings of ConnectEast units. Horizon sought ASIC joint bid relief without a "match or accept" condition on the basis that CP2's 35% holding was longstanding, and any increase in the aggregate relevant interest would be so small it could be disregarded. ASIC was not prepared to give that relief upon the parties' entry into the Subscription Agreements. ASIC wanted to consider that relief application in the context of all the other relief which is typically required for trust schemes - and ASIC normally wants to consider trust scheme relief in the context of all the disclosures in the scheme booklet. The booklet was yet to be prepared by ConnectEast and would not be prepared until after Horizon secured all the necessary funding pursuant to the Subscription Agreements.
This "chicken and egg" problem was overcome by the Subscription Agreements providing that, to the extent that any relevant interests would otherwise be created by the Subscription Agreements, the agreements were conditional on item 7/611 approval or an ASIC exemption. The Subscription Agreements also had other provisions which met the other criteria in s. 609(7). ASIC was content with this application of s.609(7).
Ultimately, ASIC granted joint bid relief without a "match or accept" condition. This obviated the need to seek item 7/611 approval for the joint bid agreement.
Section 609(7) was subsequently used in a starker joint bid situation. Rio Tinto had 75% of the shares in Coal & Allied Industries and Mitsubishi held 10%. Rio and Mitsubishi formed a vehicle, Hunter Valley Resources, to acquire all the outstanding shares in Coal & Allied by a scheme of arrangement. The joint bid agreement had provisions satisfying the criteria in section 609(7), including a condition of shareholder approval of the joint bid agreement under item 7/611. That approval would be sought immediately before the meeting at which the scheme would be voted on.
ASIC had no objection to this use of s.609(7), in fact it granted relief such that the item 7/611 approval could be obtained within 4 months (rather than 3 months) after the agreement was entered into. ASIC considered the commercial benefits in convening the item 7/611 meeting and the scheme meeting on the same day, and the time required to prepare an independent expert's report. Ultimately Coal & Allied shareholders approved both the joint bid agreement and the scheme.
An analogous use of s.609(7) was made in Santos's acquisition last year of Eastern Star Gas (ESG).
Santos proposed to acquire all the shares in ESG, other than those held by it and TRUenergy, in exchange for Santos shares under scheme of arrangement. Santos held 21% of ESG and TRUenergy held around 3%. Santos separately agreed to acquire TRUenergy's ESG shares for cash. The cash consideration was to be set off against the cash which TRUenergy had agreed to pay for some of ESG's assets which would be sold to TRUenergy if the scheme was implemented. The acquisition by Santos of TRUenergy's shares was subject to ESG shareholder approval under item 7/611. As was the case with the Rio/Mitsubishi acquisition of Coal & Allied, ESG shareholder approval under item 7/611 was to be sought on the same day as the scheme meeting.
Whilst this transaction was not a joint bid, it involved a major shareholder agreeing to acquire a further shareholding from another shareholder which would take its relevant interest above the 20% threshold in the context of a scheme of arrangement for the major shareholder to acquire all other shares.
Both the ConnectEast and the Coal & Allied acquisitions were to be effected by security holder approval (trust scheme or company scheme) rather than by a takeover bid. In either case, if the unit holders or shareholders were minded to approve the acquisition they would approve the joint bid agreements, and vice versa if they were minded to reject.
Could section 609(7) be used where the acquisition is to proceed by way of a takeover bid? Could the bid be made conditional on a meeting of the target company shareholders at which the joint bid agreement is approved? There seems to be no reason why this should not be possible. If shareholders are minded to accept the bid, they will approve the joint bid agreement at the item 7/611 meeting. Indeed, they may approve the joint bid agreement simply to maintain their optionality.
Practical difficulties may arise if the target company is not co-operative in calling an item 7/611 approval meeting promptly, but that could be addressed by the joint bidders requisitioning the meeting under s.249D (for companies) or s.252B (for trusts). Under those provisions the meeting must be held within 2 months of the requisition. An item 7/611 meeting involves significantly fewer complications than a scheme meeting, in particular there is no need to involve the Court, although it is ASIC's policy (albeit not a legislative requirement) that an Independent Experts Report should normally be commissioned by the target company. It is possible that if the joint bidders requisition an item 7/611 meeting immediately upon the announcement of their bid, this will not leave sufficient time for the IER to be prepared. That may leave it open to ASIC or the target to claim that there are unacceptable circumstances - in particular, shareholders will not have enough information to assess the merits of the proposal (s.602(b)(iii)). However this possible issue should not arise if the joint bidders when they announce the bid merely foreshadow a requisition if the target company does not agree to call the meeting. The meeting will need to be held within 3 months and that should normally give sufficient time for an IER to be prepared and sent to shareholders with the notice of meeting.
The Takeovers Panel has said in Guidance Note 1 that using section 609(7) in an agreement to acquire a stake of more than 20% as a precursor to the announcement of a takeover bid will generally be considered to be unacceptable circumstances. The Panel was prompted to refer to this device in response to its use by Brookfield when it launched a bid to acquire Multiplex in 2007. Brookfield entered into put and call options with the Roberts family who held 26% of Multiplex. The options would fall away if the Roberts family accepted Brookfield's takeover bid. Brookfield also had the ability under the agreement to scale back the optioned shares to less than 20%. This arrangement had the effect of locking up the Roberts family's stake for 3 months, with the effect of discouraging possible alternative bidders.
The use of section 609(7) for a joint bid, particularly where the joint bidders are demonstrably serious about seeking item 7/611 approval or an ASIC exemption, does not present as a "cute" use of s.609(7) of the kind referenced by the Panel in GN1.
Last year's ConnectEast and Coal & Allied acquisitions indicate that it is feasible to make joint bids without a "match or accept" condition if the joint bid agreement is conditional on shareholder approval under item 7/611 (and the agreement has provisions meeting the other criteria in s.609(7)). This has the potential of making joint bids may more common, and hence could result in greater value realisation opportunities for shareholders.
1 In this note, references to "company" and "shares" are intended to refer also to listed managed investment schemes (eg trusts) and their securities (eg units). The distinction will be made where it makes a difference.
2 Johnson Winter & Slattery acted for CP2 and Horizon Roads.
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