Highlights:

• Recently, there has been a trend towards Australian listed companies disclosing to the market initial confidential approaches by bidders because of concerns that this was necessary to satisfy their continuous disclosure obligations under the Australian Stock Exchange’s listing rules.
• Changes to the Australian Stock Exchange’s listing rules and guidance taking effect from 1 May 2013 have sought to clarify the position. In the absence of a leak, a potential bidder and target should be able to conduct negotiations and due diligence without the target having to make disclosure to the market until execution of a binding implementation agreement.

Main Article:

It has become unusual for a formal takeover bid in Australia to be announced on a hostile basis without at least some prior engagement with the target board. Generally, bidders (and their financiers) are increasingly cautious, seeking to conduct due diligence before proceeding to minimise risk.

Therefore, it has become the frequent practice for an interested party to submit to the target board a confidential non-binding indicative offer expressing interest in acquiring the entity (usually by scheme of arrangement). The indicative offer is typically conditioned on satisfactory due diligence being carried out and the target board recommending that shareholders support the transaction.

Disclosure requirements

The receipt of such an indicative offer would put target directors in an invidious position due to their continuous disclosure obligations under the listing rules of the Australian Stock Exchange.

The general disclosure rule requires a listed entity to disclose immediately all information that a reasonable person would expect to have a material effect on the price or value of the entity’s securities.

There is a carve-out such that no disclosure is required if all of the following conditions are satisfied:

• the information concerns an incomplete proposal or negotiation;
• the information remains confidential; and
• a reasonable person would not expect it to be disclosed.

In recent years, boards increasingly felt obliged to disclose the receipt of an indicative offer. This was to avoid criticism from shareholders and the market for withholding information and also because frequently the existence of the indicative offer would leak and the entity would then be on the back foot and forced to disclose the letter to ensure an informed market. Many boards thought it easier to simply announce the indicative offer on receipt, even though that carried its own disadvantages, such as creating share price volatility and attracting hedge funds on to the register due to inevitable speculation that a bid would eventuate – all of which put the entity under additional pressure to engage with the bidder and agree a transaction.

The trend to disclose was so pronounced that concerns were raised that the disclosure carve-out would not apply, as it could not be said with certainty that, given the emerging practice, a reasonable person would not expect the approach to be disclosed.

This trend also resulted in potential bidders being put in a difficult position as they could not be certain that the target board would engage with them before announcing their approach and, effectively, putting the target in play.

New ASX Rule and Guidance

With effect from 1 May 2013, the ASX has brought into force a revised listing rule and accompanying guidance note which is intended to ease the pressure on listed entities to announce the receipt of an indicative offer.

The guidance note sets out the ASX’s attitude to disclosure at certain steps that may occur as a potential bidder engages with the target on a proposal. These are as follows:

Step 1       A potential bidder submits a confidential non-binding indicative offer to the listed entity proposing a merger by way of scheme of arrangement. The offer is expressed to be subject to a number of conditions, including the completion of due diligence and the target’s board unanimously recommending the transaction in the absence of a higher offer.

Step 2       The target’s board meets to consider the offer and resolves to reject it on the basis it undervalues the company and is opportunistic. The company’s advisers write a private and confidential letter to the potential bidder confirming the rejection.

Step 3       A week later a revised confidential non-binding indicative offer is proposed at a higher price, but otherwise on similar conditions.

Step 4       This time, the target’s board resolves to enter into negotiations about the possible transaction and writes to the bidder confirming the directors are prepared to recommend such a proposal in the absence of a higher offer, subject to final transaction terms being satisfactory.

Step 5       The parties sign a confidentiality agreement with a view to the bidder commencing due diligence.

Step 6       The potential bidder completes its due diligence and indicates that it is prepared to proceed with the transaction subject to the negotiation and signing of a legally binding implementation agreement

Step 7       The parties complete their negotiations and sign an implementation agreement.

The ASX’s view is that it is only at Step 7 that any disclosure is required under the listing rules.

This, of course, assumes that all of the steps remain confidential. If a leak occurs and confidentiality is lost, immediate disclosure, or a trading halt, is required to safeguard the market.

Implications

It is too early to reach any conclusions about whether the revised ASX rule is having the intended effect. However, the design of the rule and the guidance note should give target directors greater comfort to deal with an indicative offer on a proper basis without worrying that they will be criticised if they do not immediately announce they have received it.

Coupled with the absence of a put up or shut up rule in Australia, the revised rule should also encourage potential bidders to approach the target with greater certainty that their proposal will not be released prematurely by a target on the basis that disclosure was required by the listing rules.

For these reasons, we expect this revised approach of the ASX to be conducive to a more active market for corporate control.