Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • CapitaLand Limited
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • Bank of America Merrill Lynch
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek Holdings
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • China Ocean Shipping Group Company (COSCO)
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • Royal Ahold (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • Nishimura & Asahi (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Mannheimer Swartling (Stockholm)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Australia

AUSTRALIAN UPDATE – deal landscape, origin of bidders and deal structures

Editors’ Note: This report was contributed by Philip Podzebenko, a member of XBMA’s legal roundtable. Mr Podzebenko is a partner at Herbert Smith Freehills in the Corporate Group. This paper was based on research conducted by other Herbert Smith Freehills staff, Paul Branston, Partner and Sophie Mony de Kerloy, Solicitor.

 

Highlights

  • The Australian public M&A market has seen steady activity levels, with modest growth in deal volumes (by value) in the 12 months to 30 June 2016 (FY16).
  • Success rates have remained steady, with 73% of deals announced in FY16 being completed.
  • The level of contested bid activity rebounded in FY16 with 6 targets attracting multiple bidders.
  • The industrials and utilities sectors dominated activity, with deals in those sectors comprising 70% of deal value.
  • Inbound public M&A remained steady, but with a significant increase in bid activity originating from North America.

Deal landscape

Levels of public M&A activity in FY16 remained steady, with 50 deals announced and $33 billion committed by bidders, compared with 55 deals announced and $28 billion committed in the previous 12 months. The proportion of deals exceeding $1 billion remained steady, with 6 deals announced in this category in FY16, including one contested bid (compared with 7 in FY15), and deals in this category accounting for 80% of all deal activity by value.

Success rates also remained steady in FY16 at 73% (FY15, 70%).

Overall, the proportion of bids launched in FY16 without support from the target board from the outset (45%) was consistent with previous years (FY15, 44%). Of the unsolicited bids, 61% were ultimately successful. All of the unsolicited bids which were successful were recommended by the target board (either in the board’s initial response, or following negotiations). None of the unsolicited bids which were resisted by the target board throughout the bid period were successful.

The number of contested bids rebounded in FY16, with 7 targets the subject of multiple bidders, up from 2 targets attracting competing bids in FY15. In each of the cases where a competing bid announced in FY16 has completed, the overbidder has been successful. Encouraging a competing bidder has been an effective strategy for target boards confronted by an unsatisfactory bid.

 

success-rates-in-hostile-and-friendly-deals

Merger and acquisition activity in the industrials and utilities sectors featured strongly in FY16, representing $23.3b (70%) of overall deal value. In contrast, challenging business conditions in the energy and resources sectors, which were characterised by low commodity prices in oil, iron ore and coal, slow growth and uncertainty, affected the level of deal activity, with these sectors contributing only $1.1b to total deal value.

Private equity participation remained steady in FY16, with 18% of deals involving private equity bidders (FY15, 18%), although target values were larger. Consistently with broader trends in the market, private equity acquirers bid across a range of industry sectors.

 

Origin of bidders

Foreign bidders accounted for 44% of all deals in FY16, by value. This represents a slight increase in funds committed by foreign bidders in FY16 relative to FY15. Unlike previous years, foreign bidder activity was not concentrated in energy and resources, with foreign bidders being active in the industrials and utilities sectors.

North American bidders were more prominent in FY16 than in previous years, with 27% of all bidders coming from North America (FY15, 15% ), representing 40% of all deals by value. North American bidders were particularly active in larger transactions, with 3 of the 6 deals exceeding $1bn involving North American bidders.

 

percentage-of-deals-by-origin-of-bidder

Deal structure

The preference for schemes of arrangement remained steady in FY16, with 44% of all deals involving schemes, compared with 45% in FY15. The use of schemes continued to dominate transactions exceeding $1 billion, with 86% of deals in this category implemented by scheme.

Cash consideration continued to feature prominently in FY16, and was the sole form of consideration in 62% of transactions (up from 58% in FY15). There was a strong preference for cash consideration in unsolicited deals, with 80% of all unsolicited bids being cash-only or having an all-cash alternative.

 

success-rates-by-consideration-offered-in-hostile-deals

Bids with cash-only consideration were more successful in FY16 than in the FY13-15 period, with cash-only bids (including both friendly and hostile bids) having an 80% success rate overall.

FY16 saw a further increase in deals involving an initial premium in the 20-40% range (46%), as well as an increase in bids offering an initial premium exceeding 40%.

Success rates in FY16 continued FY15’s trend, showing a positive correlation between size of premium and bid success, with bids involving an initial premium in the 20-40% range having a 70% success rate, and those with an initial premium exceeding 40% having a 92% success rate.

Consistently with previous practice, material adverse change conditions continued to be included in the majority of bids and conditional deals. However the continued increase in the use of carve outs from the material adverse change conditions for external factors such as changes in law or accounting policy,  general economic conditions, industry conditions and stock markets reflect that bidders are more willing to accept commercial risk when making a bid.

Deal protection mechanisms continued to feature in negotiated transactions, with an increase in toe-holds during FY16, compensating for a decrease in other forms of lock-up from target shareholders. ‘Truth in takeovers’ statements (being public statements of intent to accept or otherwise support a bid by target shareholders) remained the preferred form of lock-up, with 75% of lock-ups taking the form of truth in takeovers statements only, despite Takeovers Panel guidance raising concerns that such statements have been misused as lock-up structures.

Notification and matching rights continued to their popularity with notification and matching rights being found in 100% and 93% respectively of negotiated deals. Use of break fees and reverse break fees also increased, with 86% of negotiated deals having a break fee and 32% of deals also having a reverse break fee.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

AUSTRALIAN UPDATE: Changes to Australia’s Foreign Investment Regime

Editor’s Note: This report is contributed by Philip Podzebenko, a member of XBMA’s legal roundtable. Mr Podzebenko is a member of Herbert Smith Freehills’ Corporate Group. It is based on research conducted by other Herbert Smith Freehills employees, Tony Damian, Partner, Malika Chandrasegaran, Senior Associate, and Gila Segall, Vacation Clerk, Sydney.

Highlights

  • A new foreign investment regulatory regime applies from 1 December 2015.
  • The ‘substantial interest’ threshold above foreign investors must notify Australia’s Foreign Investment Review Board (FIRB), has increased from 15% to 20%.
  • Specific rules now apply to foreign investments in the agricultural sector, following the introduction of the concepts of ‘agribusiness’ and ‘agricultural land’.
  • The rules applicable to investments by foreign governments, and real estate investments, have been clarified.
  • Tougher criminal penalties and a new set of civil penalties have been introduced for contraventions of the regime.
  • Foreign investors are now required to pay fees in relation to any FIRB application they make.

Main article

From the 1 December 2015, a new foreign investment regime came into force, marking a significant reform of Australia’s foreign investment legislative framework.

The new regime comprises of the Foreign Acquisitions and Takeovers Act 1975 (Cth), a new set of regulations, and the Register of Foreign Ownership of Agricultural Land Act 2015 (Cth).

The changes seek to ensure Australia’s national interest is maintained while also strengthening foreign investment in Australia.

Substantial interest threshold

Foreign persons who intend on acquiring a ‘substantial interest’ in an Australian entity (generally above $252 million) must notify the Foreign Investment Review Board (FIRB) and obtain approval for the acquisition.

Under the new regime, the substantial interest threshold has increased from 15% to 20%. This means that certain acquisitions which previously attracted the notification requirement may no longer do so.

Agricultural land and business

Regulatory scrutiny of foreign investment in the agricultural sector has increased under the new regime.

‘Agribusiness’

Direct private investments in an agribusiness attract a $55 million threshold (indexed annually). A higher threshold ($1094 million) applies for investors from countries who have free trade agreements with Australia, which comprises of the US, New Zealand and Chile.

An agribusiness is defined to include Australian entities or businesses which carry on certain primary production and downstream manufacturing businesses contained in the Australian and New Zealand Standard Industrial Classification Codes. These include meat, poultry, seafood, dairy, fruit and vegetable processing and sugar, grain and oil and fat manufacturing. At least 25% of the business’ revenue or assets must come from the carrying on of the prescribed businesses in order to meet the statutory definition.

Agricultural land

Agricultural land is defined as any land in Australia that is used, or could reasonably be used, for a primary production business.

Agricultural land is subject to a $15 million notification threshold and is assessed on a cumulative basis. Certain exceptions apply: investors from countries in free trade agreements with Australia (US, NZ and Chile) attract the $1094 million threshold, and investors from Singapore and Thailand are subject to a $50 million threshold only in relation to land used wholly or exclusively for a primary production business.

The new regime also establishes an agricultural land register which contains all information about foreign interests held in Australian agricultural land. While the register will not be publicly accessible, certain information will be made available to the public on a regular basis. Foreign investors with interests in Australian land must notify the register of their interest or any changes within 30 days.

Commercial land

Regulation of foreign investments in commercial land depends on whether the land is vacant or developed, and whether it constitutes sensitive commercial land.

All private foreign acquisitions of vacant commercial land require notification, regardless of the value of the investment. Acquisitions of $252 million or more in developed commercial land require notification, unless the interest relates to certain sensitive land, in which case a $55 million notification threshold applies.

Sensitive land is defined broadly, and may include land leased to the Commonwealth, land used for military or security purposes and land on which public infrastructure is located, such as an airport, or electricity networks or telecommunications.

A threshold of $1094 million for agreement country investors applies in relation to developed land regardless of whether it constitutes sensitive land. The relevant country investors includes Chilean, Chinese, Japanese, New Zealand, South Korean and United States investors.

Foreign government investors

Consistent with the previous regime, approval must be sought for most direct interests acquired in Australian land or business by a foreign government investor.

Under the new regime, a foreign government investor includes a foreign or separate government entity, as well as private entities in which a foreign or separate government entity holds a substantial interest (20%).

The regime also provides that all foreign government investors from the same country will be considered as associates, and their interests aggregated.

Penalties

The new regime introduces tougher criminal penalties and new civil penalties for both individuals and companies. Now, criminal penalties for individuals have increased to $135 000 (or 3 years imprisonment). The new civil penalties include fines of up to $45 000 for individuals. For both criminal and civil contraventions the penalty for corporations is 5 times that for an individual.

Penalties are in addition to other powers, including divestiture orders.

Fees

The new regime imposes a set of fees onto foreign investors for all foreign investment applications. These fees are indexed and are determined by the value and type of investment. The fee must be paid before the Treasurer will take any action in regards to the application.

Some examples of common application fees include:

  • Vacant commercial land – $10,000,
  • Non-vacant commercial land – $25,000,
  • Private acquisition of an interest in a mining or production tenement – $25,000,
  • Foreign government investor to acquire an interest in a mining, production or exploration tenement, or a 10% interest in a mining, production or exploration entity – $10,000,
  • Acquiring an interest in an Australian entity, including an agribusiness, where the consideration does not exceed $1 billion – $25,000,

Acquiring an interest in an Australian entity or business, including an agribusiness, where the consideration exceeds $1 billion – $100,000.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Australian Update: Deal Landscape, Origin of Bidders and Deal Structures

Editor’s Note: This report was contributed by Philip Podzebenko, a member of XBMA’s legal roundtable. Mr Podzebenko is a partner at Herbert Smith Freehills in the Corporate Group. This paper was based on research conducted by other Herbert Smith Freehills employees, Paul Branston, Partner, Panashi Devchand, Solicitor, and Gila Segall, Vacation Clerk.

 

Highlights:

  • The Australian public M&A market has seen an overall decline in deal activity in the 12 months to 30 June 2015 (FY15).
  • Success rates have increased from FY14, with 70% of deals announced in FY15 being fully completed transactions.
  • FY15 has seen an increase in the number of bids implemented via schemes of arrangement, especially in deals exceeding $1 billion.
  • Foreign bidders accounted for 47% of deals in Australia, with Asian based bidders comprising 25% of deals overall.
  • The number of competitive bid scenarios declined in FY15, with only 2 targets the subject of multiple bidders, down from 8 targets attracting competitive bids in FY14.

Main Article:

Deal landscape

There was a decline in Australian public M&A activity in FY15, with 55 deals announced and $28 billion committed by bidders, down from 77 deals and $44 billion in the previous 12 months. Despite the overall decline in activity, success rates increased to 70%, from 60% in FY14.

The number of competitive bid scenarios declined in FY15, with only 2 targets the subject of multiple bidders, down from 8 targets attracting competitive bids in FY14. The main reason for failed bids in FY15 was a failure of conditions or the acquisition being successfully defended, rather than a bidder being overbid by a competitor.

Success rates in hostile and friendly deals

While the proportion of deals exceeding $1 billion experienced an overall decline, with only 7 deals announced in this category in FY15, the value of these deals was high, accounting for 80% of the deals by value in FY15.

The preference for schemes of arrangements surged in FY15 with 45% of all deals involving schemes, up from 36% in FY14. The use of schemes dominated transactions exceeding $1 billion, with 86% of deals in this category implemented this way. This is in contrast to deals exceeding $1 billion in FY14, of which the majority consisted of hostile takeover bids. The move towards schemes indicates bidders’ preference for certainty.

Energy and resources transactions continued to account for the majority of the number of deals (33 of the 55 deals). The value of these deals, however, only contributed $4.9 billion of the total $28 billion deal value (18%). In contrast, the 5 real estate transactions in FY15 contributed a value of $8.4 billion.

The proportion of M&A activity initiated by private equity has also increased in FY15, with 18% of all deals involving private equity bidders, up from 13% in FY14. Consistently with recent years, the majority of private equity M&A activity involved deals in the energy and resources sector.

Origin of bidders

Foreign bidders accounted for 47% of the value of deals in FY15, up from 39% in FY14, but the majority of deals were dominated by Australian and New Zealand bidders. Australian bidders also dominated transactions exceeding $1 billion, with 4 out of 7 bidders being Australian (the remaining 2 from Asia and 1 from the US), down from 69% of foreign bid offers made in the same category in FY14.

Asian-based bidders comprised the majority of foreign bidders in Australia, contributing to 25% of launched deals and 34% of deals by value.

Consistently with FY14, the majority of deals involving foreign bidders were in the energy and resources sector, with 18% of bidders from China or Hong Kong and 12% from North America.

Origin of bidders

Deal structure

Cash (or cash and scrip) consideration was offered in 73% of all transactions in FY15 which marks an increase from cash based consideration in FY13, when M&A activity was at a similar level (58%). Cash only consideration was more successful this year than in the FY12-14 period, with cash only bids successful 3 out of 4 times.

Despite this, deals exceeding $1 billion saw an increase in the use of scrip consideration, with 29% of deals in this category comprised of scrip only consideration. This is in contrast to the 5% average seen in the FY12-14 period. This trend may reflect a decline in bids by offshore acquirers, who usually offer cash, in this category of deals.

Success rates by consideration offered

The use of external debt funding was also more prominent in FY15 with 34% of cash consideration being primarily funded by private debt, down from 26% in FY14. This suggests that the availability of credit has increased.

FY15 saw an increase in deals involving initial premium offers in the 20-40% range (38%). This did not correlate with a greater success rate, however, with only 71% of deals successful in the 20-40% range, compared with a 90% success rate in the FY12-14 period. Deals involving premium greater than 40% had a success rate of 91%, up from a 55% rate in FY14.

Minimum acceptance conditions and material adverse change conditions continued to be included in the majority of bids and conditional deals. However, increasing use of carve outs for external factors such as changes in law or accounting policy, reflect that these conditions have become unreliable for bidders.

Deal protection mechanisms continued to feature in negotiated transactions, with an increase in lock-ups during FY15. ‘Truth in takeovers’ statements were the preferred form of lock-up, with 70% of lock-ups taking the form of truth in takeovers statements only. A recent Takeovers Panel guidance note on shareholder intention statements demonstrates the Panel’s concern that such statements have been misused as lock-up structures. Increased regulation of such statements could result in reluctance for individual shareholders to allow their intentions to be used in this way, possibly increasing the use of generic descriptions when describing aggregate shareholder responses.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

AUSTRALIAN UPDATE: Distressed M&A: Be Diligent

Editors’ Note: This article was contributed by Philip Podzebenko, a member of XBMA’s Legal Roundtable.  Mr. Podzebenko is a member of Herbert Smith Freehills’ Corporate Group, which is at the forefront of developments shaping Australia’s corporate landscape.  This article was written by Mr. Podzenbenko’s colleagues at Herbert Smith Freehills: Matthew FitzGerald, Partner, Mary Boittier, Executive Counsel and Peter A Smith, Partner, Brisbane.

In brief

The low oil price and limited capacity for oil and gas producers to further reduce operating costs is presenting challenges for producers of all shapes and sizes. In 2015 we expect that a number of producers will conduct strategic reviews which may lead to the sale of ‘non-core’ assets.

Traditional solutions of raising capital or debt may not be available on acceptable terms for many producers due to the uncertainty about the timing and extent of the oil price recovery. The option of warehousing a marginal project until economics improve may not be available either because such a project is now ‘non-core’ or because the producer must comply with minimum work obligations.

If strategic reviews trigger M&A activity in 2015 in the oil and gas sector, one challenge will be matching price expectations of producers with prospective investors. This is because of the inherent uncertainty around the recovery of the oil price. In this scenario, some junior producers may encounter difficulties and enter the M&A market as a distressed vendor.

This article considers some tensions between the positions of vendor and purchaser in an M&A transaction where the vendor is in financial distress.

Diligence is crucial in a distressed sale process

Effective due diligence typically provides the framework for the risk/pricing profile in an M&A transaction. In a distressed vendor environment, the purchaser’s ability to conduct effective due diligence may be impacted by a number of factors including:

  • shortened deal timeframes sought by vendors as a means of limiting the further deterioration of the asset and to obtain certainty, or
  • imperfect information being available due to the transaction being forced upon the vendor (rather than planned as part of an orderly sales process).

A risk to purchasers in these circumstances is ensuring that all key issues are considered and priced into the deal.

Prospective purchasers also need to be wary of the risk of using their bargaining position to obtain a deal which might later be challenged by a liquidator as an uncommercial transaction.

Warranties and indemnities

Where the vendor is in formal insolvency, the insolvency practitioner vendor administering the sale process will be concerned to limit personal liability and will usually resist giving any meaningful warranties or indemnities.

Where possible in a distressed vendor transaction, the purchaser should insist on warranties that provide comfort:

  • that the insolvency practitioner has been validly appointed and has the power and authority to enter into, and give effect to, the transaction,
  • that no consents or registrations are required to give effect to the transaction, other than as set out in the transaction documents, and
  • as to title to the assets and that the assets are unencumbered.

The practical value of any warranties and indemnities given by a distressed vendor or insolvency practitioner to a purchaser may be severely limited in any event. This is because a distressed vendor may not have the financial resources to honour a warranty or indemnity claim. Where such a claim is honoured, there is a risk that a liquidator appointed later may challenge the payments as ‘unfair preferences’. Any warranty or indemnity claims given by an insolvency practitioner as agent for a distressed or insolvent company will be unsecured debts of the company and may form part of the broader unsecured creditors’ pool in liquidation.

Possible options to enhance warranty and indemnity protection for the purchaser include:

  • obtaining security or a guarantee from a third party whose credit worthiness is not in doubt,
  • structuring the transaction so that there is a hold back as to part of the purchase price (provided that the purchaser does not have notice of, or suspicion, that the vendor was insolvent), or
  • obtaining buy-side warranty and indemnity insurance against insurable warranties.

Purchase price adjustments following completion

Post-completion purchase price adjustments may also be at risk where a distressed vendor does not have the financial resources to honour its obligation or, if it does, the amount paid may be later challenged as an ‘unfair preference’. The solutions listed above may be of assistance to protect the purchaser. It is also noted that a drafting solution may be to ensure that it is more likely that the purchaser will be required to pay the adjustment payment (e.g. in respect of a working capital adjustment, to make a conservative estimate of target working capital).

Conclusion

Negotiating a sale and purchase agreement where a vendor is distressed or in formal insolvency is unlikely to be an orderly process. For prospective purchasers, due diligence is critical before making an assessment of whether to proceed with a deal due to the limited legal protection typically on offer in these circumstances.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

AUSTRALIAN UPDATE – Shareholder Intention Statements: The Takeover Panel’s Proposed New Guidance

Editors’ Note:  Danny Gilbert, co-founder and Managing Partner of Gilbert + Tobin, non-executive director of National Australia Bank, and a member of XBMA’s Legal Roundtable contributed this article written by his colleagues Neil Pathak, head of the firm’s Mergers and Acquisitions team in Melbourne, Sarah Turner, a partner in the firm’s Corporate Advisory group and Nirangjan Nagarajah, a lawyer also in the firm’s Corporate Advisory group.

Highlights:

  • The Takeovers Panel recently issued a draft guidance note on when shareholder intention statements to accept a bid may be unacceptable.
  • Statements of intention from major shareholders to accept a takeover bid or vote in favour of a scheme should be qualified as being subject to no superior proposal emerging.
  • Shareholders should allow a reasonable period to elapse (the guidance suggests 2 or 3 weeks, dependent on circumstances) before accepting a takeover bid.
  • Details should be provided including name of shareholder and, where it is material, their shareholding.
  • The draft guidance does not give guidance on when an intention statement might give rise to relevant interests or associations in breach of the Corporations Act. It is hoped the final guidance note will do so.

MAIN ARTICLE

Public submissions recently closed on the Takeovers Panel’s consultation draft of a new guidance note on shareholder intention statements in the context of public company takeovers.  The proposed guidance follows recent Panel decisions concerning Ambassador Oil and Gas Limited and Bullabulling Limited.  In these cases statements either made by, or attributed to, target shareholders were found to either be misleading or to give rise to an association resulting in breach of the Corporations Act.  Anecdotally ASIC has also recently increased its scrutiny of such shareholder statements.  We expect that the Panel will have received a range of submissions from interested parties.  This article provides a summary of the key points, along with some of our submissions on the proposed guidance.

 

Shareholder intention statements – the context

In Australian public company takeovers it has become commonplace for major shareholders of a target company to publicly state whether or not they intend to accept a takeover bid or vote in favour of a scheme of arrangement proposal.  On the Takeovers Panel’s own statistics, 45% of takeover bids and 86% of schemes in 2014 were announced along with a statement attributed to a major shareholder concerning their intentions.  To date in 2015 they remain a common feature of public company transactions, with notable recent examples such as the proposed $1.4 billion acquisition by DUET Group of Energy Developments and Independence Group’s $1.8 billion acquisition of Sirius Resources featuring public statements of support from major shareholders holding over 20% of the target company.

Used appropriately, these statements are a legitimate and important part of public company takeovers.  They provide transparency for all shareholders and, at times, can give bidders the confidence to proceed with a transaction.

In the above context, the proposed guidance from the Takeovers Panel, which will give some more certainty to the validity of the use of shareholder intention statements, is very welcome.  It could be said that the draft guidance is light-on in some respects in relation to association and relevant interest matters (see further below).  To ensure the guidance is most helpful, it is hoped that the final guidance note fills in the gaps.

The legal framework:  the 20% rule and truth in takeovers

The Corporations Act restricts a bidder obtaining a relevant interest, or reaching any agreement, arrangement or understanding as to voting or disposal in respect of more than 20% of the target company prior to commencing a takeover or scheme transaction.  Therefore, to the extent a major shareholder is willing to sell into or accept an offer, the bidder can only reach an agreement for the shareholder to accept a bid or vote in favour of a scheme up to 19.9% of the target company.

However the ‘20% rule’ does not inhibit a shareholder (or shareholders collectively) holding more than 20% from publicly stating that it intends (or they intend) to accept a bid or vote in favour of a scheme.  ASIC’s Regulatory Guide 25 Takeovers:  False and Misleading Statements classifies these statements as a ‘last and final statement’ which then needs to be followed through.  The policy, often referred to as the ‘truth in takeovers’ policy, could be said to effectively bind shareholders to act consistently with public intention statements without the bidder necessarily having any agreement with the shareholder that it do so.

Accordingly, it is not unusual to see:

  • a bidder and major shareholder enter into pre-bid acceptance or voting agreements up to, in aggregate, 19.9%; and
  • major target shareholders publicly indicate their intention to accept or vote in favour of the transaction for their remaining holding beyond 19.9%, in the absence of a superior proposal.

The proposed draft guidance

The Takeovers Panel’s proposed draft guidance note sets out the Panel’s view on when a statement by a major shareholder may be misleading.  The key points include:

Is it misleading?

The draft guidance in effect provides that a shareholder statement could be misleading (or at least confusing) if:

  • expressed in unclear terms (eg a reference to a ‘present’ intention);
  • qualified in an ambiguous way (eg if an intention to accept is said to be within a certain period and the shareholder accepts early); or
  • published without sufficient details (eg the size of the shareholder’s holding in the target company, where material).

These are all sensible guidance points.  Shareholder intention statements are only effective if the market can clearly understand the effect and implications of the statement – it should be clear how many shares are affected, the timing by which acceptance will be made and the circumstances in which the shareholder does not need to accept.

When will an intention statement give rise to unacceptable circumstances?

The Panel’s draft guidance follows its key decision on these matters in MYOB Limited in 2008.  Statements should feature the following key components:

  1. Superior proposal qualification: Where a statement may take the bidder’s relevant interest in the target beyond 20%, the shareholder’s intention should be expressed to be in the absence of a superior proposal.  In MYOB, shareholders holding 34% of the target stated an intention to accept as soon as the offer opened without any such qualification, effectively binding themselves to accept regardless of whether a superior offer arose.  The Panel found this unacceptable.
  2. Time to accept: Following the MYOB decision, shareholder intention statements are typically qualified to allow 2 or 3 weeks for a competing proposal to emerge before acceptance.  Under the Panel’s draft guidance, if the shareholder does not wait for “a reasonable period” to elapse before accepting, unacceptable circumstances can arise.  The Panel appears to be considering whether 2 or 3 weeks after the offer opens is a reasonable period.  The Panel recently made a declaration of unacceptable circumstances in Ambassador Oil & Gas where a shareholder acted inconsistently with their statement by accepting early.

We agree that these two key components are important to ensure that a competitive market can continue.  One of the Panel’s consultation questions is whether the guidance should specify an appropriate waiting period before a shareholder can accept.  The Takeovers Panel has in the past indicated that 3 weeks is an appropriate period.  We generally agree that a 3 week period should give a serious potential counter bidder sufficient time to put together a proposal.  We also agree with the Panel where it flagged that the appropriate time period will depend on the circumstances.  In our view, circumstances where a shorter period may be appropriate include where the target has already tested the market via a sale process or where there is a significant period between announcement of an offer and dispatch of bidder’s statements (which commences the offer period in a takeover bid).

Association issues

As a separate matter, parties need to take care that any shareholder intention statement does not give rise to an unacceptable arrangement or understanding that could give the bidder a relevant interest in the shareholder’s shares, or render the bidder and the shareholder ‘associates’ in breach of the 20% or substantial holding rules in the Corporations Act.

The draft guidance touches very briefly on the need to avoid these issues and to circumstances where an association may arise.  ASIC provides some guidance on when a relevant interest and association might arise, but that guidance does not refer to shareholder intention statements in the context of a takeover bid or scheme.  Given its power to declare unacceptable circumstances, this is guidance the Takeovers Panel is best placed to give.

There is currently a range of views amongst advisers, market participants and regulators in respect of the circumstances in which a relevant interest or association may arise, and when a relevant interest or association may be found unacceptable.  We think the final form of the guidance note should make clear that the making of an intention statement from a shareholder, including after discussion with the bidder, will not, without more, be considered to give rise to an association or to the bidder having acquired a relevant interest in the relevant shareholder’s shares, provided certain safeguards are included.  In our view, where a statement of support for a transaction is made by a shareholder (including in circumstances where the shareholder and bidder’s aggregate voting power exceeds 20%) that:

  1. is made with the shareholder’s consent;
  2. is expressed to be subject to a superior proposal; and
  3. allows sufficient time for a superior proposal to arise,

such a statement should generally not give rise to an association or a relevant interest.  In our view, these circumstances do not lend themselves to inhibiting an efficient, competitive and informed market for the shares in the target company.

We think it would be very helpful for the Takeovers Panel to give clear guidance on these matters in the final guidance note.

Consent to be named

The draft guidance indicates that any shareholder intention statement should only be published by a bidder or target if the shareholder(s) has consented to the statement being made.  Other than where a shareholder is already on the public record as to its intentions, this seems a sensible approach to ensure that other target shareholders and the market generally are not misled by inaccurate/unverified statements.

It would be helpful if the final guidance note clarifies that obtaining consent alone does not give rise to an agreement or understanding between the bidder and the shareholder which constitutes an ‘association’.

Conclusion

Guidance on shareholder intention statements is certainly welcome:  the current market practice would be assisted by greater certainty in this area and, in our view, the draft guidance generally strikes the right balance between a competitive market and allowing shareholders to make their positions clear at the time a bid is announced (or shortly thereafter).  Having said that, we would welcome the Takeovers Panel’s final guidance note extending to clear guidance on the association and relevant interest issues.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Subscribe to Newsletter

Enter your Email

Preview Newsletter