- Low gearing, strong earnings and good capital availability supported an ideal environment for mergers & acquisitions (M&A) in the first half of 2011. However, jittery markets and dropping confidence caused activity to slow in the third quarter.
- While deal values in the first nine months of 2011 are up 67% on the same period in 2010, macro economic issues and resource nationalism are making M&A decisions difficult. This is reflected in the fact that volume of deals is actually down on 2010.
- Synergistic, strategic and ‘one chance’ deals are being undertaken, and more speculative deals are being deferred. But with a number of large deals in the pipeline, and companies with access to cash in an environment where targets appear to be undervalued, we could see the year finish strongly.
Uncertainty is Having an Impact on Execution
The current level of political and economic volatility is making it harder to evaluate and execute M&A:
- There is a scarcity of new large scale, quality assets particularly in traditional resource geographies
- This is driving greater interest in frontier markets
- Resource nationalism is spreading globally making valuations more complex and deal execution more uncertain
- Meeting vendor price expectations whilst also delivering shareholder value is increasingly challenging, given increased risks for projects
- Volatile markets are making it more difficult for companies to price risk
Asia Pacific Regains its Position as Most Active Acquirer
North America has extended its lead as the preferred destination for mining and metals M&A targets, while Asia Pacific regained its title as the most acquisitive region. Australia and China dominated by activity.
Gold and fertilizer consolidation by Russian-based companies saw CIS step into third place as a target destination and acquiring region.
US Takes the Lead
The US has taken the lead ahead of both Australia and Canada as the most active acquirer, supported by intense domestic coal consolidation.
The US has also taken the lead as the preferred destination, although not all deals were for mining targets, e.g., BHP Billiton’s acquisition of Petrohawk Energy Corp ($11.8b) and Chesapeake Energy Corp’s Fayetteville Shale assets ($4.6b)1.
Inflated asset prices in Australia relative to other countries have led acquirers with greater risk appetites to look elsewhere. This has resulted in Australia dropping to fifth rank destination.
Coal Dominates M&A Activity
Coal continued to dominate the M&A landscape by a wide margin, accounting for over $30b of deal value. There are strong strategic drivers for coal :
- Majors buying assets to boost production capacity to meet increasing demand from China and India
- Power utilities, steel companies and governments integrating into raw materials
- Economies of scale to manage risk and regulatory compliance
There have been a large number of gold deals but at a relatively low average deal value.
M&A and Capital
The first six months saw the ‘first wave’ of M&A: bolt-on, ‘one chance’ and strategically important deals. But Q3 saw even these deals put on ice as economic turbulence found its way into commodity prices.
Companies are well positioned to undertake M&A, and targets appear undervalued, but the global economic backdrop is making M&A decisions more difficult than ever. If these factors stabilize, we may see a resurgence of M&A activity.
Volatility on equity markets will make life difficult for juniors once again, with the need to increase capital raising options and consider preservation of strategies.
Risk aversion may see a tightening of bank credit, an increase in the cost of borrowing, and a flight to ‘safe’ investments in the bond markets, leaving mid-tier and sub-investment grade companies potentially exposed.
Capital management is more important than ever in a rapidly changing and volatile funding environment.
To see the full report, click here.
CHINA/US/AUSTRAILIA Comparison – Comparing China’s NSR Process with the Process in Australia and the United States
Susan Ning’s last post explained China’s new National Security Review Process. This post makes the case that, despite foreign investors’ fear that the new process is yet another tedious regulatory and “protectionist” hurdle to doing deals in China, the process is in fact quite similar processes in the Western world, including the United States, Canada, Germany and Australia.
On 3 February 2011, released a notice which, for the first time, formalizes and sets out a national security review (“NSR”) process for foreign acquisitions of domestic companies in China. This notice is entitled “Notice by the General Office of the State Council in relation to the institution of the National Security Review system for mergers and acquisitions of domestic enterprises by Foreign Investors” (“Notice”). This Notice (and consequently, China’s NSR regime) came into force on March 5, 2011.
Since China’s State Council the release of the Notice, there has been a flurry of articles and commentaries in the press. Foreign businesses who wish to invest or continue investing in China are concerned that the NSR process is yet another tedious regulatory hurdle they have to pass (on top of the current corporate, industry-based and antitrust clearance processes) before they are free to close their deals. Cynics have criticized China’s NSR regime as just another “protectionist” measure by the Chinese government to control the economy. In fact, China is not alone in its institution of a formal NSR process governing foreign-domestic transactions; there are similar processes in the more “liberal” world, for instance in the United States, Canada, Germany and Australia.
This article compares China’s NSR regime against the regimes in the United States and Australia.
II Comparing China’s NSR Process with the Process in Australia and the United States
The table provides a “snapshot” of the key provisions within the NSR regimes of China, the United States, and Australia.
Annex – Snapshot of the key provisions within the national security regimes of China, the United States and Australia
|1.||What are the primary legislation and regulations which govern the national security review of foreign-domestic deals?||Notice by the General Office of the State Council in relation to the institution of the National Security Review system for mergers and acquisitions of domestic enterprises by Foreign Investors 2011 No. 6; and Interim Rules for Implementation||Section 721 of the Defense Production Act of 1950 (as amended by the Foreign Investment and National Security Act of 2007 (section 721); and as implemented by Executive Order 11858; Regulations Pertaining to Mergers, Acquisitions, Takeovers by Foreign Persons 2008.31 C.F.R. 800 et seq. (2010).||Foreign Acquisitions and Takeovers Act (Cth) 1975; Foreign Acquisitions and Takeovers Regulations (Cth) 1989;Australia’s Foreign Investment Policy|
|2.||What types of transactions are being caught by the NSR regimes (i.e. what are the “tests”)?||Foreign companies merging with or acquiring domestic businesses in China. The domestic businesses are either national defense or national economic businesses.||Parties should generally file a notice with the Committee on Foreign Investment in the United States when the transaction:
||It is mandatory to notify the Foreign Investment Review Board of the following types of transactions:
The Treasurer also expects that any “direct investment” (ie, 10% or more, or an investment with any elements of control) by a foreign government or its related entity (such as a state-owned enterprise), regardless of value, will be notified, although strictly speaking there is no statutory basis for this.
The Treasurer also has power to evaluate other transactions under the “national interest” regime, such as any acquisition of a business located in Australia valued at more than A$231 million (indexed annually, and higher for US and NZ investors in some circumstances) and certain offshore acquisitions where there is a sufficient connection to Australia. Notification of such transactions is not mandatory, but notification (and notice of no objection by the Treasurer) creates a safe harbor which ensures the Treasurer cannot unwind the transaction after completion.
|3.||Could both proposed and completed transactions be caught by the regime?||Yes.||Yes.||Yes.|
|4.||What is the maximum review period (and please give a brief breakdown of stages of review)?||General Review stage will span for a maximum of 30 working days. If the transaction warrants further investigation, Special Review stage will span for a maximum of another 60 working days.||The formalU.S.national security review process takes a maximum of 90 calendar days. Initial review is 30 calendar days. If the transaction warrants further investigation, the investigation must be completed by the end of another 45 calendar days. In addition, the President may announce a decision on whether to suspend or prohibit a transaction no later than 15 calendar days after an investigation is complete.||40 calendar day approval process (consisting of a 30 day approval period and a 10 day notification period) applies to most applications. This 40 day approval process can be extended:
Certain applications are not subject to any formal statutory time periods. Generally these are applications by foreign governments and their related entities (such as state-owned enterprises) which would not be notifiable except for the fact that the applicant is a government investor.
|5.||Who are the authorities in charge of the review process?||A Ministerial Joint Committee, led by the National Development Reform Commission and the Ministry of Commerce (and under the overarching leadership of the State Council). This Joint Committee will work with other relevant government agencies to carry out the review process.||The Committee on Foreign Investment in the United States is in charge of undertaking this review process. This Committee is made up of the following members: The Secretary of the Treasury (chair); the Attorney-General; and the Secretaries of Homeland Security, Commerce, Defense, State and Energy; the Secretary of Labor (non-voting); the Director of National Intelligence (non-voting). The Committee may include generally or on a case-by-case basis the heads of any other executive department, agency or office. The President has also designated the US Trade Representative and the Director of the Office of Science and Technology Policy as additional members of the Committee.||The Foreign Investment Review Board is a non-statutory advisory body which reviews all applications and makes a recommendation to the Treasurer. The Treasurer makes the final decision on all applications.|
|6.||What factors will be taken into consideration when the authority reviews the transaction?||Whether the transaction has a severe negative impact on national security. Specifically, the impact of transactions on:
|CFIUS’ policy is to limit its review to genuine national security concerns, not broader economic or other national interests.CFIUS is required by statute to consider the following factors:
||The Foreign Investment Review Board examples proposals to determine if they are contrary to the national interest. The term “national interest” may include without limitation:
|7.||Who may initiate a review?||Parties to the transaction or any other third parties (including other government departments, industry associations, and other businesses).||Any party or parties to the transaction. Filing is generally voluntary. However, the President or the Committee may initiate a review unilaterally.||The person proposing to make the investment is responsible for lodging the application and dealing with the Foreign Investment Review Board. The Treasurer can also independently initiate a review where no application is lodged. In addition, members of the public can report suspected breaches of the foreign investment regime to the Foreign Investment Review Board.|
|8.||What are the remedies in respect of a negative review?||The parties may be asked to terminate the transaction and may be asked to undertake conduct to mitigate any negative impact on national security (including divestiture).||The President may bar the parties from completing the transaction or force them to unwind a completed transaction if it threatens to impair the national security of theUnited States. Parties sometimes withdraw their applications for CFIUS approval, and abandon their transactions, if it becomes apparent that the transaction will not be approved by CFIUS.||The Treasurer may issue an order prohibiting the transaction, or if the transaction has already completed, issue an order requiring the parties to unwind the transaction.|
III Lessons Learnt from the United StatesandAustralia
In the coming months, it will be interesting to see the sorts of deals that fall under the purview of the NSR regime in China and whether the majority of these deals are approved (just like in the United States and Australia). It will also be interesting to see the kind of deals which are prohibited pursuant to the NSR regime or whether participants in deals which are likely to be prohibited by the NSR regime in China tend to abandon their deals, just like in the United States and Australia.
We note that in the United States, more than 85 percent of the transactions that the Committee on Foreign Investment in the United States(the “CFIUS”) reviewed between 2008 and 2010 were approved. The U.S. President has only once taken the formal step of blocking a transaction, but parties sometimes have decided to abandon their deals when it becomes clear that the CFIUS was prepared to make a negative recommendation to the President.
The recent attempt by leading Chinese telecommunications equipment provider Huawei to acquire staff and intellectual property from 3Leaf Systems, a server technology start-up in California, was a relatively rare instance where the parties did not abandon the deal until after CFIUS made a negative recommendation to the President. However, Huawei decided to unwind the 3Leaf transaction before President Obama made a formal decision.
Recent examples of deals where the parties have withdrawn their CFIUS application before CFIUS even made a negative recommendation to the President include the Firstgold deal in 2009 and the Emcore deal in 2010. Firstgold Corporation, a US mining company located in Nevada and Northwest Non-Ferrous International Company, a large Chinese mining and geological firm, were reportedly unable to address the national security issues associated with a Chinese company acquiring a gold mine in close proximity to a naval air station. As a result, the parties were forced to abandon their deal and Firstgold went out of business. Similarly, an attempt by Tangshan Caofeidian Investment Corporation to acquire the fiber optics business of Emcore Corporation, a New Mexico-based provider of semi-conductor components, reportedly fell apart because of U.S.national security concerns about Chinese control of sensitive U.S. technology.
We note that in Australia, business investment proposals are also seldom blocked under the broader “national interest” regime (managed by the Foreign Investment Review Board). On April 8, 2011, the Australian Treasurer rejected the proposed acquisition by the operator of the Singapore Exchange of the operator of the Australian Securities Exchange. Prior to this, the last formal rejection of a business investment proposal was in 2001, when Shell attempted to acquire 60 percent in Woodside Petroleum. However, in Australia (just like in the United States) it should be noted that the incidence of rejection might be higher, but for the fact that applicants often withdrew or modified their business investment proposals if it became clear that the Treasurer was likely to reject a proposal. In addition, rejection of real estate proposals (especially residential real estate proposals) is more common.
The manner in which China’s NSR regime is set out is comparable to the regimes in the United States and Australia. In China, the maximum time it would take for the Joint Committee to review an application is 90 working days; in the United States it is 90 calendar days and in Australia, it is generally 40 calendar days (although this can be extended by both formal and informal means, and no time limits apply to certain investment proposals). All three regimes are concerned with the negative impact in which foreign investment might have on the national economy, including where foreign investors purchase key assets of the state.
 See: http://www.gov.cn/zwgk/2011-02/12/content_1802467.htm
- The calls by the Youth League of the African National Congress for the nationalisation of mines has been much talked about but on balance is very unlikely to occur.
- Most of the recovery and growth in global steel production is attributable to China’s phenomenal growth with non-Chinese production not yet recovering to pre-crisis levels.
- The Minister of Mineral Resources has assured potential Chinese investors that South Africa offers a competitive mining sector open to foreign investors.
The principal legislation governing the mining industry in South Africa is the Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) which came into force on 1 May 2004 and replaced the Minerals Act, 1991. The MPRDA is not a “Mining Code” because it does not codify mining law in South Africa. As such, and although the MPRDA is the starting point, the common law remains applicable. In addition, other pieces of legislation are also pivotal.
2.1. The MPRDA changed the system of mineral regulation in South Africa from that of private ownership of mineral rights and licensing to one which is administratively driven and has replaced mineral rights with limited real rights in the form of prospecting and mining rights (for minerals) and exploration and production rights (for petroleum). The objects of the MPRDA include the empowerment of historically disadvantaged South Africans and security of tenure.
2.2. Transfer of prospecting and mining rights as well as the change in controlling interest of companies (that hold rights) requires consent of the Minister of Mineral Resources. Similarly, encumbrances of each right require Ministerial consent (save where the encumbrance is registered in favour of a bank or registered financial institution).
3. Law Applicable to Empowerment
3.1. On 11 October 2002, and as a result of a tripartite process (involving government, labour and the mining industry) the Broad Based Socio Economic Empowerment Charter for the Mining Industry (“the Original Mining Charter”) was signed by the representatives of the participants of the tripartite process. The Original Mining Charter was gazetted as the Charter contemplated in section 100 of the MPRDA on 13 August 2004. The Original Mining Charter became the instrument by which Government was to achieve its target of substantially and meaningfully introducing historically disadvantages South Africans into the mining industry. The Original Mining Charter imposed a 26% empowerment requirement on mining companies. After 5 years of its existence, it was reviewed and by way of the Broad-Based Socio-Economic Empowerment Charter for the South African Mining and Minerals Industry dated 20 September 2010 (“The Amended Mining Charter”) it was amended.
4. Mining Titles Registration
The primary legislation governing registration of mining titles is the Mining Titles Registration Act, 1967 (MTRA). Under this law, the Mineral and Petroleum Titles Registration Office (MPTRO) is established as a Mining Titles deeds registry. Mining Titles must be registered in the MPTRO. The role of the MPTRO is to register prospecting and mining rights that have been granted to holders.
5. Mine Health and Safety Act 29 of 1996
This Act provides for the protection of the health and safety of employees and other persons at mines and, for that purpose to promote a culture of health and safety; to provide for the enforcement of health and safety measures; to provide for appropriate systems of employee, employer and State participation in health and safety matters; to establish representative tripartite institutions to review legislation, promote health and enhance properly targeted research; to provide for effective monitoring systems and inspections, investigations and inquiries to improve health and safety; to promote training and human resources development; to regulate employers’ and employees’ duties to identify hazards and eliminate, control and minimise the risk to health and safety; to entrench the right to refuse to work in dangerous conditions; and to give effect to the public international law obligations of the Republic relating to mining health and safety; and to provide for matters connected therewith.
6. Precious Metals Act 37 of 2005
This Act provides for the acquisition, possession, smelting, refining, beneficiation, use and disposal of precious metals; and to provide for matters connected therewith. It is the legislation that is dedicated to the precious metals industry.
7. The Diamonds Act 56 of 1986
This Act provides for the establishment of the South African Diamond and Precious Metals Regulator and for the establishment of the State Diamond Trader; for control over the possession, the purchase and sale, the processing, the local beneficiation and the export of diamonds; and for matters connected therewith.
8. Size of the industry
8.1. The mining sector accounts for over seven per cent of the country’s gross domestic product (GDP), it provides employment to close to 500 000 workers and has mineral resources estimated at US$2.5-trillion, the largest in the world.
8.2. The South African mining industry’s total income in 2010 was R424-billion while expenditure was R441-billion. R228.4-billion was spent on purchases and operating costs such as timber, steel, explosives, electricity, transport and uniforms. R78.4-billion was paid on salaries and wages for mine employees, R49-billion on capex, R17.1-billion in tax, R16.2-billion in dividends, R38-billion on depreciation and impairments and R13-billion on interest to the banks. Estimates by the Chamber suggest that only about R34-billion or 8% of the total expenditure is moved offshore. That means that 92% of the value of local mining expenditures are effectively captured in South Africa resulting in the creation of thousands of jobs and significant multiplier effects into the rest of the economy.
9. Main resources (minerals)
9.1. The main minerals are gold, platinum group metals, silver, iron ore, manganese, nickel, coal, chrome and copper. In addition to these, there are mineral deposits of rare earths, andalusite, base minerals and metals.
9.2. South Africa is home to about 80 per cent of the world’s proven platinum and manganese reserves.
9.3. South Africa’s fluorspar (natural calcium fluoride) reserves exceed 30 million tons, it has the third largest reserves in the world and accounts for around 30 per cent of the western world’s and about 10 per cent of all known reserves; iron ore amount to 9 300 Mt, or nine per cent, the sixth largest in the world; 80 per cent of the world’s known manganese ore deposits are located in the Northern Cape and the North West province; 8,5 per cent of the world’s nickel reserves, are located in South Africa’s Bushveld Igneous Complex; with around 15 million tons of zinc reserves, contains about 3,5 per cent of global deposits of the metal; 14,3 Mt, 22,1 per cent of the world’s known zircon reserves are found in South Africa; South Africa’s Bushveld Igneous Complex contains more than 5 million tons of vanadium ore reserves, which represents about half of Western world reserves and one-third of the global total; vermiculite ore reserves at nearly 80 million tons, South Africa has the second largest reserves of the metal, representing about 40 per cent of the world total.
9.4. African production of uranium oxide, currently accounting for more than 20 per cent of world output. South African output is mainly produced as a by-product of gold and copper mining. The Richard’s Bay titanium reserves are the fourth largest in the world, Silver is an important constituent of gold and platinum ores in South Africa and occurs too in the ores of the base metals (zinc, lead, and copper).
10. Main players
The Chamber of Mines of South Africa (Chamber) is a prominent industry employers’ organization which exists to serve its members and promote their interests in the South African mining industry. The members of the Chamber include financial corporations, contractors, associations and mining companies (i.e. Anglo American, Anglogold Ashanti, BHP Billiton, Harmony, De Beers, Gold Fields, and Lonmin etc).
11. Investment climate
11.1. According to the Chamber, in the first half of 2011, steel production stood at an annualised 1.5 billion tons, 8.9% higher than the level recorded in 2010 and is likely to be a record production year.
11.2. Nearly 100% of South Africa’s cement and building aggregates are made locally and 80% of the country’s steel is made locally from locally mined iron ore, chrome, manganese and coking coal using furnaces that are 95% powered by electricity from coal fired power stations (the 20% imported steel is speciality steel products not made locally). Over 30% of the country’s liquid fuels are produced within the country from locally mined coal and 95% of electricity is generated in power plants that use locally mined coal.
11.3. Most domestic chemicals, fertilisers, waxes, polymers and plastics are fabricated using locally mined minerals and coal and 20% of the world’s platinum catalytic converters are made in South Africa. The Chamber estimates that another R200-billion in sales value and 150 000 jobs can be attributed to the local downstream beneficiation sectors. All South Africa’s gold and pgms are refined locally and more than 50% of diamonds by value are sold locally into the downstream diamond cutting and polishing industry.
12.1. The calls by the Youth League of the African National Congress for the nationalisation of mines were arguably the most talked about issue relating to the mining industry during the year. The ANC has directed a team to look into the merits of nationalisation, which is due to report its findings at the party’s policy conference in June 2012. Nationalisation is not government policy and the Chamber is opposed to it, which represents most of the players in the mining industry. The Chamber is committed to working towards finding the best alternatives. On the balance of evidence, nationalisation will not happen.
13. Exciting projects
Some of the recent and exciting projects include the following:
13.1. Gold One
Gold One’s flagship operation is the Modder East mine; the first new mine to be built in South Africa’s gold-rich East Rand region in 28 years. With a currently defined ore reserve of 1.53 million ounces at 4.0 grams per tonne and a 13-year life of mine, Modder East’s target reefs are located no deeper than 500 metres below surface. The mine’s shallow resources allow for trackless mine infrastructure where the underground orebody is accessed via a decline. Dedicated trucks transport rock out of the mine while a vertical shaft provides quick face access for personnel. Modder East’s first 240 ounce gold pour took place in July 2009. The mine’s first tonne of gold was poured in May 2010, only 10 months after its commissioning. At the end of the 2010 financial year, which marked only one year since Modder East had declared continuous and commercial production, the mine recorded a maiden profit of A$ 19.35 million before taxation. The mine’s low 2010 cash costs of US$ 484 per ounce were attributable to mechanised off-reef development and in-stope hydropower drilling. The use of hydropower also enables safer and more efficient working conditions as well as electricity savings. For 2011, Gold One anticipates increasing gold production by 80% and has forecast annual production of 120,000 ounces.
13.2. Kalagadi Manganese
Kalagadi Resources is in the process of establishing a manganese mine, coupled with a sinter plant, near Hotazel in the Northern Cape. The main shaft has holed through the lateral developments to the ventilation shaft at a depth of 281 metres, the production level of the R11-billion project, on which only equity funding has been spent so far. The project includes Kalagadi constructing a high-carbon ferromanganese smelter in Coega’s industrial development zone near Port Elizabeth, which will create the steel-making ingredient ready for consignment to foreign and local factories
The three-million-ton-a-year mine will provide the ore for the production of 2.4-million tons a year of sinter, 700 000 t of which will be sent to the ferromanganese smelter and 1.7-million tons a year of which will be marketed. The smelter will have a capacity to produce 320 000 t/y of high-carbon ferromanganese. Commissioning is scheduled for the third quarter of 2012, with the mine, sinter plant and smelter expected to employ 2 200 people. Mashile-Nkosi is targeting a 50% female employee complement. Kalagadi has secured both rail and port capacity from Transnet Freight Rail and power supply from Eskom. Kalagadi is currently generating its own power for the project from diesel-fuelled generator sets.
13.3. Coal of Africa
Coal of Africa is an emerging developer and producer of high-quality thermal and coking coal. Based in South Africa, it has two operating collieries and two projects in early operations and development, as well as a valuable suite of exploration projects, enabling them to grow well into the future. With good access to rail and port infrastructure, Coal of Africa can effectively service both domestic and international markets, providing a much-needed resource for economic growth and development for the country and the provinces in which we operate.
14. Chinese entrance
The Minister has assured potential Chinese investors that South Africa offers a competitive mining sector. “… my government is committed to creating a favourable and globally competitive mining sector in South Africa,” she told the 2011 Mining Ministers Forum in Tianjin, China”
According to the Chamber, in 2010, global diamond retail sales rose by 2.5% to US$60-billion, global jewellery sales rose by 7% to US$150-billion and polished diamond prices improved by about 6%. The strong price recovery was driven by re-stocking and a rebound in the global diamond market, particularly with the rise in polished demand from China and India.
Most of the recovery and growth in global steel production is attributable to China’s phenomenal growth with non-Chinese production not yet recovering to pre-crisis levels. China is currently producing 46.5% of global steel, driven by its own substantial industrialisation and urbanisation requirements.
DANISH UPDATE – Danish Disclosure Obligations Potentially Broader Than Other European Countries in M&A Context
- Under Section 27 of the Danish Securities Trading Act, inside information must be disclosed by an issuer at the earlier of (i) the coming into existence of the relevant circumstances or occurrence, albeit not yet formalised, (ii) the disclosure of the inside information to a third party, or (iii) a leakage of the inside information.
- This Danish implementation of Article 6(1) of Directive 2003/6/EC is broader than the interpretation of other European countries and could lead to more extensive and earlier disclosure.
1.1 This article presents the Danish regulations on the disclosure obligations of listed companies and the most recent amendment – the “Rule on Leakages.” The article presents the implications of the Danish regulations to how parties and advisors should structure cross border mergers and acquisitions involving a Danish issuer of shares listed on NASDAQ OMX Copenhagen A/S or another regulated market (an “Issuer”) and to the relating documentation.
2. Executive Summary
2.1 In any potential or ongoing transaction involving an Issuer, the involved parties should prepare publicity guidelines specifying the procedure for any disclosure of information and the responsible parties.
2.2 The foreign party should take extra care when dealing with the press both domestically and abroad. Particular care should be given to the wording of non-disclosure agreements and confidentiality clauses in order to address the disclosure obligations of the Issuer under the Danish Securities Trading Act (consolidated Act no. 883 of 09-08-2011, the “Act”), including the Rule on Leakages found in Section 27 (2)(3) of the Act.
2.3 The Issuer must have a procedure for immediately publicly disclosing the inside information and should in cases involving a high risk of leakage (mainly transactions) keep a draft company announcement ready.
3. Danish and EU provisions on disclosure and leakage
3.1 Under Section 27 (1) of the Act, any Issuer shall publicly disclose inside information immediately upon the coming into existence of the relevant circumstances or occurrence, albeit not yet formalised. This implements the Danish interpretation of Article 6 (1) of Directive 2003/6/EC on insider dealing and market manipulation (the “Market Abuse Directive”); that the Issuer as a starting point is obligated to disclose inside information only when the inside information has been realised. Other member states interpret the article to mean that all inside information must be published, regardless of whether the inside information relates to something which is a fact.
3.2 Inside information must be publicly disclosed simultaneously with the disclosure of the inside information to a third party, unless such third party is considered an insider and is subject to a duty of confidentiality, see Section 27 (2) of the Act, or immediately after the Issuer becomes aware or should have become aware of having disclosed the said inside information. The wording of Section 27 (2) is an implementation of Article 6 (3)(1),(2) in the Market Abuse Directive, which is likely implemented the same way in all the member states.
3.3 On 1 January 2011 the so-called “Rule on Leakages” was implemented as a new Section 27 (2)(3) of the Act. The amendment was implemented to ensure information parity in the market and to some extent to protect the market from being affected by rumours. The Rule on Leakages is not an implementation of any EU directive or regulation, but is implemented following a dispute regarding the interpretation of the Danish disclosure obligations (see below).
3.4 The Rule on Leakages stipulates that the Issuer must publicly disclose any inside information no longer held confidential (leakage of inside information), regardless of whether the source of the breach can be identified.
3.5 The Issuer’s disclosure obligations may be illustrated as follows:
4. Leakage case
4.1 In mid-July 2005, major Danish tele-, broadband and cable-TV supplier TDC A/S (“TDC”) was approached by a club of private equity funds (Apax, Blackstone, KKR, Permira and Providence) with the purpose of submitting a voluntary takeover bid for minimum 90 % of the outstanding share capital.
4.2 Negotiations continued during 2005 and very specific rumours concerning the transaction began to circulate in the media. On 17 August 2005, the transaction and the names of all the potential buyers were published on the front page of The Wall Street Journal, citing “sources close to the transaction” as the source. TDC published a company announcement confirming only that TDC “continually receives inquiries from interested buyers.” On 30 November 2005, TDC published a company announcement confirming that the five funds mentioned above were issuing a joint offer for TDC.
4.3 The Danish Securities Council ruled – on recommendation of the Danish Financial Services Authority (the “FSA”) – that TDC had failed to comply with its disclosure obligations under the Danish Securities Trading Act applicable at the time. According to the FSA’s interpretation of the Danish Securities Trading Act, the Issuer should publish any inside information as soon as the Issuer became aware of it, regardless of whether the inside information had become a fact. The ruling was never published because the high-profile case could not effectively be made anonymous.
4.4 On 19 April 2007, the FSA published a memo describing the above-mentioned interpretation of the Act. This interpretation was highly debated in Danish capital markets law and was eventually overturned by a ruling from the Danish Companies Appeals Board of 11 September 2008, incidentally in another case concerning TDC.
4.5 In accordance with the decision above, the interpretative notes of the Rule on Leakages reaffirm that the Danish Companies Appeals Board’s interpretation of Section 27 (1) of the Act, see clause 3.1 above, is in accordance with the Market Abuse Directive, and that the Danish rules are now supplemented with the obligation to disclose inside information in case of a leakage.
4.6 Today, the Rule on Leakages would imply that the issuer is forced to immediately disclose inside information confirming the leaked inside information. Such premature disclosure of course increases the risk of serious negative implications to the transaction and of the attraction of event driven hedge funds.
5. The Rule on Leakages and cross-border public M&A
5.1 The Danish disclosure obligations, including the new Rule on Leakages, are highly relevant to both cross-border and domestic mergers and –acquisitions.
5.2 In any transaction involving a Danish Issuer, the involved parties should carefully consider preparing publicity guidelines specifying the procedure for any disclosure of information and the responsible parties.
5.3 In a cross-border transaction, the foreign party should take extra care when dealing with the press both domestically and abroad to prevent that the Issuer is obligated to publicly disclose inside information about the potential transaction.
5.4 Under Section 27 (1) of the Act, the board of directors of the Issuer may be obligated to disclose a particularly firm indication by a potential offeror or merger partner of an upcoming public tender offer or merger proposal. Therefore, it is in the interest of a potential offeror that the Issuer is bound by a non-disclosure agreement as early as possible, and the initial contact with the Issuer should specify that the decision to put forward a public tender offer or merger proposal is not a certainty as well as what factors the decision will depend on, e.g. satisfactory due diligence.
5.5 Particular care should be given to the wording of non-disclosure agreements and confidentiality clauses in order to address the disclosure obligations of the Issuer under the Danish Securities Act (including the Rule on Leakages), which may differ from the disclosure obligations under the foreign party’s domestic regulations. In relation hereto, a foreign party in the EU should be aware of whether the foreign party’s home country employs the Danish interpretation of Article 6 (1) of the Market Abuse Directive, see clause 3.1 above.
5.6 These procedures and documents should be in place in order to (i) disclose inside information to as few people as possible, especially external persons, and on a need-to-know basis only and (ii) complete any confidential transactions as soon as possible, both in order to minimize the risk of a leakage of inside information.
5.7 Any leakage or true rumour in the market will obligate the relevant Issuer to disclose the leaked inside information, which could be very detrimental to a potential or ongoing transaction. Danish Issuers must have a procedure for immediately publicly disclosing inside information which is no longer held confidential and should in cases involving a high risk of leakage (mainly transactions) keep a draft company announcement ready.
AUSTRALIAN UPDATE – Deal Landscape, Deal Structures and Origin of Bidders in Australian Public M&A in 2011
- The market for Australian public mergers & acquisitions (M&A) has seen a strong resurgence in the two financial years since the GFC, both in terms of the number of deals being done but also in terms of their value.
- Success rates are also on the increase, with 70% of announced deals ultimately resulting a successful outcome.
- Deal protection is currently under intense scrutiny, with the UK Takeovers Panel taking a strict line and prohibiting deal protection mechanisms such as “no-shop / no-talk”, matching rights and break fees. It remains to be seen whether the Australian Panel has a similar view on the anti-competitive nature of many deal protection arrangements.
- Deals are still highly conditional – approximately 90% of transactions in FY2011 had conditions attached to them.
- There has been an increase in foreign M&A activity with 51% foreign bidders in FY2011, compared to 42% foreign bidders in FY2010. In particular, FY2011 saw strong activity from North American bidders.
The market for Australian public mergers & acquisitions (M&A) has seen a strong resurgence in the two financial years since the GFC, both in terms of the number of deals being done but also in terms of their value. The total consideration publicly committed to by bidders in FY2011 was $79m, up from $19m in FY2009 – additionally the number of deals with a market value over $500 million is on the increase. It remains to be seen whether this resurgence will continue in the face of current global economic uncertainty around. The early M&A figures for FY2012 do not look too alarming, but it may be too early for the effects to impact Australian public M&A, given most deals are often planned many months in advance.
Success rates are also on the increase, with 70% of announced deals ultimately resulting a successful outcome. This seems to be due to a number of factors, including an improved degree of success amongst hostile deals, an increase in the number of friendly deals and also a continued use of deal protection mechanisms, which have a strong correlation with success. Success rates have also been impacted by noticeably more bids originating from China and India being successfully completed.
Deal protection is currently under intense scrutiny, with the UK Takeovers Panel taking a strict line and prohibiting deal protection mechanisms such as “no-shop / no-talk”, matching rights and break fees. It remains to be seen whether the Australian Panel has a similar view on the anti-competitive nature of many deal protection arrangements, however they feature prominently in friendly deals in Australia and yet do not appear to have a negative effect on competition in M&A – both 2010 and 2011 saw a healthy number of competitive auction scenarios in public M&A.
Deals are still highly conditional – approximately 90% of transactions in FY2011 had conditions attached to them. Overall, the trend in takeovers seems to be towards having more conditions, which goes against the trend of last year. An indication that, despite the increased activity, bidders seem to be more cautious. In contrast, FY2011 also saw the continuation in the trend of more unconditional on-market bids.
Bidder caution continued in relation to the minimum acceptance thresholds, with an increase in 90% minimum acceptance thresholds and a decrease in 50% minimum acceptance thresholds in FY2011. In only three of the deals with 90% minimum acceptance thresholds was the condition waived or varied. Overall, only 11% of bidders waived their minimum acceptance condition.
42% of transactions had lock-up arrangements in FY2011. This is significantly higher than in both FY2009 and FY2010, when only around a quarter of deals had some form of lock-up. There is also a clear movement towards implementing a range of lock-ups. Directors stating that they will accept the offer in the absence of a superior offer still remains the most common lock-up, however we are seeing more pre-bid acceptances, option agreements and even voting agreements, all of which appear to be helping success rates.
ORIGIN OF BIDDERS
There has been an increase in foreign M&A activity with 51% foreign bidders in FY2011, compared to 42% foreign bidders in FY2010. In particular, FY2011 saw strong activity from North American bidders. Given the relative strength of the Australian dollar against theUSand Canadian dollars over the past year, it is perhaps surprising that of the 21 deals involving North American bidders, cash was the form of consideration in 13 of those deals.
Bidders in the deals with values over $1 billion were again predominantly offshore, spread across North America, Asia andEurope. Involvement by domestic bidders in ‘mega deals’ appears to have slowed after a resurgence in FY2010.