Disclosure of indicative approaches – what is current market practice?

Summary

• The ASX listing rules were amended in 2013 to help boards decide not to disclose a preliminary, indicative and non-binding approach for a control transaction, unless the approach had ceased to be confidential.
• Recent market practice supports a conclusion that boards are feeling able to make that judgment.
• However, often strategic considerations will mean that disclosure is the better course of action.

Many if not most takeover bids and control transactions these days commence with a preliminary private approach from the bidder. They usually take the form of a short letter setting out an indicative offer price and important conditions, along with a request for due diligence.

One of the key issues for directors of companies which receive such an approach is whether or not to disclose it to the ASX.

The general rule is that all price sensitive information must be disclosed immediately, unless it is confidential, conditional and a reasonable person would not expect the information to be disclosed.

In response to uncertainty as to whether a listed entity which received a preliminary private approach had to disclose it immediately, the ASX said in 2013 that it did not expect companies to disclose indicative, non-binding preliminary approaches, provided they remained confidential.

At the time, however, concern remained that companies, faced with the possibility of allegations of breach of the listing rules and possible class action claims, would still opt to disclose.

What has been the recent practice?

The recent trend seems to be towards non-disclosure in the absence of a compelling reason to do so, even though institutional shareholders are still quoted in the media as though they consider they are entitled to this information.

It is, by definition, hard to identify situations where disclosure has not been made, but here are some examples of how boards have dealt with this issue.

Myer/David Jones (August 2013) – David Jones received an indicative approach for a nil premium merger of equals from Myer. It was expressed to be indicative, non-binding and confidential. Not disclosed at the time, nor was its rejection. Myer subsequently disclosed it in January 2014 after it appeared there had been a leak.

Saputo/WCB (September 2013) – WCB was under offer from Bega when it received an approach from Saputo of Canada. No announcement was made until a definitive agreement had been reached. This seems to us to be consistent with the usual course, despite the heightened disclosure obligations which arise when a target is already under offer, due to both the supplementary target’s statement requirements and to the expectation that more detailed disclosure is appropriate in this situation, particularly if shareholders are selling into – or on the basis of – an existing bid.

Envestra/APA (December 2013) – APA made an unsolicited approach to Envestra in July 2013. Both parties announced it immediately. Envestra rejected it in August 2013 unilaterally. A revised proposal was made in December 2013 and, once the parties had reached informal agreement, it was announced then by both on 17 December 2013. This shows a flexible attitude to disclosure, which we consider appropriate.

Woolworths/David Jones (April 2014) – Woolworths had approached David Jones at a time when there was on-going speculation about Myer’s proposed merger of equals with David Jones. Due diligence was conducted and no disclosure was made until a definitive agreement to implement a scheme of arrangement was executed in April 2014.

Wilmar/Goodman Fielder (April 2014) – on Monday 28 April 2014, Goodman Fielder announced that, over the previous weekend, it had received and rejected a non-binding, conditional proposal from Wilmar and First Pacific, which the board of Goodman Fielder determined materially undervalued Goodman Fielder. On 15 May, Goodman Fielder requested a trading halt and on 16 May announced that it had received an increased proposal from Wilmar and First Pacific that it was prepared to recommend.

GRAM/PanAust (May 2014) – GRAM, a 22% Chinese shareholder, made an approach expressed to be confidential and indicative on 10 April 2014. Following media speculation earlier in the day, the PanAust board disclosed it on 13 May 2014, at the same time as announcing that it was allowing GRAM to conduct due diligence (to provide an opportunity to GRAM to increase what the PanAust Board considered to be an inadequate indicative price).

KKR/Treasury Wine Estates (May 2014) – KKR made an approach on 16 April 2014 expressed to be confidential, indicative and non-binding. Late on 19 May 2014, TWE became aware that KKR has discussed the proposal with one or more TWE shareholders. Accordingly, as confidentiality was lost, TWE disclosed the approach, and that it had rejected it on value grounds, before trading commenced the next day. (Interestingly, this prompted KKR to make its own announcement saying that it was not bound by confidentiality.)

PEP/SAI (May 2014) – PEP submitted an indicative, confidential and non-binding proposal on 15 May 2014. SAI disclosed this on 26 May 2014 (at the same time as announcing the departure of its CEO), but said that it had not yet formed a view on the merits of the proposal. On 2 June 2014, SAI announced that it would run a formal process and invite other potential bidders to participate.

Stockland/Australand/Frasers (April/June 2014) – Stockland made an indicative approach on 22 April 2014, which was announced and rejected by Australand on 23 April 2014. A revised and ‘final’ approach was made on 28 April, which led to Australand allowing Stockland due diligence on 30 April 2014. On 3 June 2014, Frasers made its approach at a higher price, conditional on Australand executing a formal agreement that day allowing Frasers 4 weeks exclusive due diligence. This was accepted and announced. Therefore, disclosure in each case was prompt.

What should a board do?

The examples show that target boards feel comfortable to follow the ASX’s view that an indicative approach need not be disclosed, unless confidentiality is lost.

However, sometimes there may be a strategic reason to announce an indicative proposal, such as:

• there may be an expectation that the other party will make an announcement or leak the proposal, in which case it is generally better to be on the front foot,
• disclosure keeps the markets fully informed and will be well received by (some) institutional shareholders, which may be important if the board needs to keep them on side, and
• disclosing an approach may put pressure on the bidder to pay more and may attract other potential bidders.

On the other hand, non-disclosure may have advantages such as:

• it may generally make it easier to negotiate with a serious bidder, who might otherwise be deterred by being outed,
• disclosure will tend to put the company in play and may destabilise the company, its employees, customers and other stakeholders, and
• disclosure will dramatically increase share price volatility, especially if a transaction may not eventuate. Once passible deal is announced, hedge funds will acquire shares which may make it hard to resist a transaction.

Whether to disclose an approach is a difficult judgment call for directors in most instances. We expect boards to continue to judge this on a case by case basis.