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The significance of this deal
The Federal Court has approved one of the more novel schemes of arrangement in recent times, where the bidder (already a major shareholder), required that both the target’s Executive Chairman (also a major shareholder) and its Managing Director agree to accept shares in the bidder which would be subject to a two-year earnout arrangement – without joint bid relief from ASIC and the associated ‘match or accept’ condition of that relief.
The legal background
Where shareholders agree to pursue a consortium bid for a listed target (whether by way of scheme of arrangement or takeover), their holdings are aggregated for the purpose of the 20% takeovers threshold. If the aggregate exceeds 20%, they cannot join forces without an ASIC exemption – known as ‘joint bid relief’.
As a condition of the relief, ASIC usually requires that if a counterbidder makes a higher offer than the joint bid, the joint bidders must either match that offer, or accept their shares into the higher offer. The rationale is that the joint bidders’ aggregated shareholdings will be a blocking stake deterring potential counterbidders who might otherwise bid the price up to the benefit of minority shareholders. The ‘match or accept’ condition reduces the deterrent effect by encouraging an auction.
In theory, joint bidders could make their arrangements subject to the approval of a majority of independent shareholders received within three months after the joint bid agreement is entered into. However, ASIC has warned that where joint bidders do this to avoid the conditions of joint bid relief, ASIC will consider commencing proceedings in the Takeovers Panel.
Elements of the PVH scheme proposal
Gazal Corporation Limited (Gazal) was an ASX-listed company. The two largest shareholders were its Executive Chairman, Michael Gazal, with approximately 40%, and PVH Corp. (PVH) with approximately 22%. Gazal’s main business was a joint venture with PVH to distribute a number of PVH-owned brands in Australia, including CALVIN KLEIN and TOMMY HILFIGER.
PVH sought to acquire the 78% of Gazal that it did not already own via a scheme of arrangement. However, pending PVH establishing its own physical presence in Australia it would need to rely on Gazal senior management, including Michael Gazal and Managing Director Pat Robinson, to continue their successful management of the joint venture. PVH’s scheme proposal was therefore conditional on Michael Gazal, Pat Robinson and two other ‘key managers’ committing to continue their employment for approximately two years after the implementation of the scheme.
Also, to support the substantial premium that PVH proposed to offer, PVH required the four key managers to commit to an earnout arrangement – common in private equity acquisitions but unusual for public M&A transactions. The key managers would each be required to ‘roll over’ one quarter of their respective Gazal shareholdings into the newly-incorporated bid vehicle (Bidco) which would be majority owned by PVH. The key managers would then agree to sell their Bidco shares back to PVH in two tranches over the following two years. If the business underperformed, the sell-back price would be lower than the price received by other shareholders. If the business outperformed the sell-back price would be higher.
Had the key managers committed upfront to participate in this rollover, that would likely have made them associates of the Bidco and, by virtue of the often-overlooked section 608(3)(a) of the Corporations Act, PVH would have obtained a ‘relevant interest’ in the key managers’ shares in breach of the 20% rule. The transaction could not proceed without joint bid relief, exposing PVH and the key managers to a ‘match or accept’ condition.
Giving effect to the proposal without joint bid relief
JWS (acting for longstanding client Gazal) devised a number of features for the structure of the transaction arrangements to meet PVH’s requirements without the transaction, in substance, constituting a joint bid requiring ASIC relief. Taken together, these elements addressed ASIC’s underlying policy concerns about the deterrent effect of joint bids.
1 (Scheme conditional on key managers’ agreement) The Scheme Implementation Agreement (SIA) contained a condition precedent to implementation of the scheme that each of the key managers sign a form of ‘Subscription and Shareholders Deed’ (SSD) committing to the ‘roll over’ and earnout arrangements (including the terms of the two-tranche sell-back) as well as new employment agreements.
2 (No pre-commitment by key managers) The form of SSD and new employment agreements were in a ‘final’ form at the time the SIA was signed. However, the key managers were not asked to, and did not, commit to signing them. The key managers could let the scheme process play out to see whether a superior proposal emerged. The key managers only signed those documents after shareholders had voted in favour of the scheme – the latest time at which a counterbidder could reasonably be expected to emerge.
3 (No voting commitment) Further, the key managers were not asked to, and did not, commit to PVH to vote their shares in favour of the scheme, as this would likely have given PVH a ‘relevant interest’ in the key managers’ shares, again causing PVH to breach the 20% rule.
4 (Key managers’ truth in takeovers statements) Since the key managers had not committed to sign the SSD and new employment agreements or to vote in favour of the scheme, the conditions of the scheme might not be satisfied, potentially resulting in PVH terminating the scheme proposal. To address this uncertainty for other shareholders, Gazal sought statements from each of the key managers that they would sign the SSD and their employment agreements if the scheme was approved by shareholders, and that they themselves intended to vote in favour of the scheme in the absence of a superior proposal (as noted below, the key managers would vote in a separate class to other shareholders). These statements were cited in Gazal’s initial announcement of the scheme proposal as well as the scheme booklet. Under ASIC’s ‘truth in takeovers’ policy the key managers were effectively bound by these statements.
5 (Key managers free to divest shares) The key managers were not obliged to retain any of their Gazal shares at any point during the scheme process. Such an obligation would likely have given PVH a relevant interest in the key managers’ shares (control of disposal), again risking breach of the 20% rule. Reflecting this, the SSD would require the key managers to subscribe for the requisite number of Bidco shares either for a cash subscription price equal to the price per Gazal share under the scheme, or by ‘rolling over’ the requisite number of Gazal shares. If the key managers elected to subscribe for cash, they could source that cash from existing resources, by selling their Gazal shares on-market prior to the scheme record date, or by having their Gazal shares acquired under the scheme (for cash) and immediately reapplying that cash towards the subscription price.
6 (Two classes) Gazal volunteered that the key managers should vote as a separate class from other shareholders, so that the general body of shareholders had the opportunity to block the scheme if they were sufficiently concerned by the different arrangements for the key managers. This was readily accepted by ASIC and the Federal Court.
7 (Disclosure) The independent expert’s report in the scheme booklet included the expert’s assessment of the value of the Bidco shares offered to the key managers under the SSD. It transpired that the cash scheme consideration offered to other shareholders (and the key managers as to approximately 75% of their shares) was near the midpoint of the expert’s valuation range for Bidco shares. To the extent that the key manager arrangements were a benefit not offered to other shareholders, the value of the benefit was disclosed to all shareholders so they could make an informed decision.
When else can this structure be used?
The clearest application of the Gazal structure will be in cases of listed companies with major shareholders from whom a bidder is minded to seek agreement to an earnout – or whose ongoing affiliation is otherwise required for some reason.
Also, depending on the outcome of market consultation that ASIC is currently undertaking, the Gazal structure may provide a starting point for a broader range of ‘stub equity’ offerings.
ASIC is proposing to significantly tighten the regulation of schemes and takeover bids under which target shareholders are offered stub equity (a small minority interest) in the bidder. These transactions typically involve offers of the stub equity to target shareholders as a whole, with a custodian holding shares in a proprietary bidding company on behalf those target shareholders who elect to receive the stub equity. ASIC is concerned that such structures deprive shareholders of the numerous safeguards offered to shareholders of public companies.
Bidders may propose stub equity structures to gain the support of founding or institutional investors with substantial holdings who wish to remain invested in the target. In some cases, a bidder may be comfortable with limiting the offer of stub equity to major shareholders. The Gazal structure has the drawback that the offerees of stub equity will likely be required to vote as a separate class. But where that hurdle is considered acceptable, it may provide a starting point for structuring a solution where the holdings of founding or institutional investors, combined with the bidder, exceed 20%.
 Re Gazal Corporation Limited  FCA 701.
 If the higher offer is through a scheme of arrangement, the joint bidders cannot vote against it.
 Section 609(7) of the Corporations Act.
 ASIC Regulatory Guide 9: Takeover Bids at [9.649].
 See ASIC Regulatory Guide 25: Takeovers: False and misleading statements.
 See Re iSoft Group Limited  FCA 680.
 ASIC Consultation Paper 312: Stub equity in control transactions.
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