Panel publishes updated position on frustrating action, takeover summaries and dividends

Summary

• The Panel has scaled back its proposed amendments to its Guidance Note on frustrating action (GN 12), but has nevertheless supplemented the list of matters which the Panel may take into account when considering whether a target has in fact engaged in unacceptable frustrating action.
• In relation to takeovers documents (GN 18), the Panel has adopted a less prescriptive approach to takeover summaries by removing its reference to ‘best practice guidance’ and making it clear that its guidance is by way of example only.
• The Panel had noted there are competing views on whether the value of franking credits should be deducted from bid consideration and the assessment of that value if the value was to be deducted. Accordingly, the Panel has decided not to publish a Guidance Note on dividends at this time.

Frustrating action

The Panel proposed amendments to its Guidance Note on frustrating action (GN 12) to address concerns that the policy had a potentially excessive effect on targets in some lengthy or contentious bids. The changes were intended to give target companies more flexibility where a bid condition has already been breached but the bidder has effectively given itself a free exit option by declining to confirm whether it will rely on the breach to allow its bid to lapse. In this situation, it is arguably unreasonable (depending on the circumstances) for the bidder to be entitled to constrain the target’s ongoing activities via the frustrating action policy.

This issue, and the Panel’s approach, was canvassed in our February 2014 newsletter.¹

Following a consultation process (in response to which Herbert Smith Freehills made submissions), the Panel has published the final version of its updated Guidance Note.

In summary, the Panel has scaled back its proposed amendments, but has nevertheless implemented the most substantive element of its proposed amendments – namely, it has supplemented the list of matters which the Panel may take into account when considering whether a target has in fact engaged in unacceptable frustrating action in situations where a bid condition has already been triggered and the bidder has not, within a ’reasonable time‘, disclosed whether it will rely on or waive that triggered condition.

The Panel has also noted that the determination of a ’reasonable time‘ will depend on the prevailing circumstances, including which condition has been triggered, whether the bidder has varied the terms of its bid since the triggering of the condition, and whether it is still acceptable to wait until the time for giving notice of the status of conditions.

Some further proposed qualifications on the policy which may have provided additional comfort to target companies (and their boards) when faced with this situation have not been included. The Panel also chose not to implement a further amendment, proposed by Herbert Smith Freehills, to confirm that taking action to address an urgent or commercially prudent need for refinancing be expressly identified as a situation unlikely to give rise to unacceptable frustrating action.

While a 'bright line' test has not been created by the Panel, the amendments to the Guidance Note should nevertheless provide some additional clarity for target boards and shareholders when considering the prospects of a bid and the options open to the target.

Summaries in takeovers documents

The Panel also proposed amendments to its Guidance Note on takeover documents (GN 18) to ‘encourage’ the inclusion, upfront in takeover documents, of a summary of the offer that is ‘accessible to retail shareholders’. Following a consultation period on the proposed amendments, the Panel has published the final version of the amended Guidance Note.

In its consultation paper, the Panel set out what it considered to be ‘best practice’ on the form of the summary, which consisted of quite prescriptive guidance (including as to location of the summary, font size, headings and content and length).

Herbert Smith Freehills and others made submissions to the Panel that the best practice guidance was too prescriptive and would be counter-productive. These submissions have been taken into account by the Panel in the final version of the amended Guidance Note.

In the final version of the amended Guidance Note:

• the reference to ‘best practice guidance’ has been removed – the Panel has made it clear that the guidance is ‘an example of what the Panel considers most likely to be of importance’ and that the contents of the summary will depend on the particular transaction,
• there is no specified page limit on the summary,
• it is noted that the summary would ‘most naturally’ follow the Chairman’s letter, and
• there is no longer a prescriptive requirement for the font size to be at least 10 point (although, the Guidance Note does note that the font size should be legible and that 10 point is an example of a legible font size).

Finally, in response to a submission that summaries may not be necessary for simple takeover bids, the Takeovers Panel confirmed that it considers that summaries are useful even for simple bids.

Deducting the value of franking credits from bid consideration

In its consultation paper, the Takeovers Panel indicated it was proposing that, if a bidder wishes to retain the right to reduce the bid consideration by the amount of franking credits, it must clearly state how the deduction for franking credits will occur, either by a formula or as a fixed amount. If this new policy was adopted, it would no longer have been acceptable for the bidder to state – as many bidders currently do – that it will be entitled to deduct an amount equal to the value of the franking credits ‘as reasonably assessed by it’.

In this regard, the Takeovers Panel had suggested, as an example of an acceptable valuation formulation, the following wording:

‘Bidder will value franking credits at 50% of their face value’.

The Panel received submissions from Herbert Smith Freehills and four other organisations.

The Panel noted, following consideration of the submissions, that there were competing views on, in particular, whether the value of franking credits should be deducted from bid consideration and the assessment of that value if the value was to be deducted. In view of the limited experience in the Australian market with these issues to date (essentially just the Alesco and Warrnambool Cheese and Butter matters), the Panel has said that it has decided to keep the area under review and revisit the possibility of publishing guidance in future should it be warranted. 

Endnotes

1. See article - New takeover policies on frustrating action, dividends and summaries in takeovers documents