Joint bids – ASIC’s new policy in practice

Summary

• Joint bids that result in the parties having initial combined voting power in the target company of more than 20% require ASIC relief. Alternatively, bidders may seek the approval of non-associated shareholders to enter the joint bidding arrangements.
• In June 2013, ASIC updated its regulatory guidance on joint bids, relaxing certain aspects of its joint bid relief. Other aspects of ASIC’s updated guidance suggest a potentially more restrictive approach to the shareholder approval path.

In a recent joint bid the bidders chose to seek ASIC relief, consistent with the guidance in ASIC’s updated policy. As more joint bid transactions proceed following the updated guidance, we expect the shareholder approval path will be relied upon in a more limited number of cases.

Joint bids

When joint bidding arrangements are entered between parties having combined voting power of more than 20% in the relevant target company, there are two options to ensure compliance with the “20% rule” in the takeovers provisions of the Corporations Act. One option is for the joint bidders to apply to ASIC for relief, which typically requires:

• either (1) in the case of a takeover bid, the offers are subject to a non-waiveable condition that acceptances are received for a minimum of 50.1% of all shares not held by the joint bidders or (2) in the case of a scheme of arrangement, the joint bidders and their associates must not vote in the same class as the other shareholders,
• a “match or accept” condition. That is, if the joint bidders are not prepared to match a higher rival bid (ie a takeover or scheme offering more than 105% of the value of the consideration offered by the joint bidders), the joint bidders must either (1) in the case of a higher rival takeover, accept an offer under that takeover or (2) in the case of a higher rival scheme, not vote against the scheme),
• the joint bidders use best endeavours to procure that the target obtain an independent expert’s report on the bid, and
• the joint bidders must immediately terminate their joint bidding arrangements if the bid lapses.

Section 609(7) of the Corporations Act provides an alternative to obtaining ASIC relief, based on target shareholder approval. Under section 609(7), where the joint bidding arrangements are conditional upon non-associated target shareholders approving them under section 611 item 7 within 3 months of the joint bid arrangements being entered, the joint bidders do not acquire a relevant interest in each other’s pre-bid stakes.

As both routes require some form of approval by non-associated target shareholders (by acceptance into the bid, or by voting) and an independent expert’s report (see RG74 for section 611 item 7 approvals), the key difference is that ASIC relief may require the match or accept condition referred to above.

Rationale for match or accept

In Regulatory Guide 9, ASIC states that its key concern regarding joint bids is that, depending on the joint bidders’ pre-existing shareholdings, the combination of their shareholdings may discourage rival bids and reduce the likelihood of any auction for control of the target. In ASIC’s view, this may reduce the likelihood of target shareholders obtaining a fair and reasonable price for their securities and may mean that the acquisition of control does not occur in an efficient and competitive market, contrary to the principles underpinning Australian takeovers law.

It is this deterrent effect that the match or accept condition is designed to offset, by encouraging rival bidders on the basis that if they are willing to offer the best price, the joint bidders will not be able to block their offer. The match or accept condition is effectively the quid pro quo for allowing two potential rival bidders to band together and divide the prize rather than competing for it.

That said, the match or accept condition is undesirable from a joint bidder’s perspective because it gives a rival bidder a clear path to an outcome if they are the highest bidder. It also removes the possibility of the joint bidders remaining shareholders if they are outbid.

The policy remains one of ASIC’s most controversial as it can also deter a shareholder from making a joint bid in case it is later forced to sell its pre-existing shareholding. Merely because a person will buy at one price does not mean they are prepared to sell at that price or even one a mere 5% higher. 

Updates to ASIC regulatory guidance on joint bids – June 2013

In addition to confirming it will apply its joint bid policy to schemes and bids, ASIC indicated that where the voting power in the target already held by one joint bidder is more than 50% or less than 3%, it may not impose the match or accept condition on its relief.

ASIC’s view is that where one bidder already has a 50% stake, the prospect of an auction for control is low and so the fact the bid is made jointly will not have a deterrent effect. Similarly, a less than 3% increase in a pre-bid stake as a result of joint bidding arrangements will also not likely materially deter rival bidders (consistent with the ‘creep’ exception).

Significantly, ASIC also indicated that it may take regulatory action (including seeking a declaration from the Takeovers Panel) if it appears that the parties to a joint bid have sought to avoid the protections provided for target shareholders under ASIC’s relief in purported reliance on section 609(7).

So does this mean that the section 609(7) exemption route is no longer a viable alternative to seeking ASIC relief for joint bidders where one bidder does not hold more than 50% or less than 3% (meaning the match or accept condition would be imposed if ASIC relief were sought)?

Robust Resources Limited – a recent joint takeover bid

At the time of the changes to ASIC’s regulatory guidance we noted that prior to the changes, most (but not all) section 609(7) transactions occurred in circumstances where the match or accept condition would not have been imposed.

While there have been a number of joint bid transactions following ASIC’s policy updates, in the majority of them, it was not necessary for the bidders to rely on ASIC relief or section 609(7), as their initial stakes did not exceed 20% in aggregate.

However, in the recently announced joint takeover bid for Robust Resources Limited (Robust Resources) by Droxford International Limited (Droxford) and Stanhill Capital Partners Holdings Limited (Stanhill), the joint bidders together held approximately 46% of Robust Resources.

Stanhill did not initially hold any shares in Robust Resources and announced a bid for Robust Resources (in which Droxford was a 26.7% shareholder) at $0.28 per share. Subsequently, Stanhill acquired a 19.9% stake from Robust Resource’s other major shareholder at $0.315 per share. Stanhill and Droxford then announced a joint bid for Robust at $0.49 per share.

The joint bidders for Robust Resources sought ASIC relief rather than opting to rely on section 609(7). Given their pre-bid stakes, their offer included a match or accept condition consistent with ASIC’s policy.

In bids such as Robust Resources where the joint bidders are by far the largest shareholders in the target (holding close to 50% in aggregate) and Stanhill’s initial bid had been on foot for approximately 2 months, the likelihood of a rival proposal would appear to be lower, reducing the potential for the match or accept condition to ever be enlivened and thus have an adverse impact on the joint bidder.

However, where there are other major shareholders or the joint bidders have a lower initial stake, imposition of the match or accept condition may be considered a greater risk from the joint bidders’ perspective.

Where to from here?

We expect ASIC’s bright line guidance will mean that the shareholder approval path will be followed in fewer joint bids, with reliance upon ASIC relief increasing. We expect that given ASIC has flagged the possibility of regulatory intervention otherwise, joint bidders may be inclined to only go down the target shareholder approval path where one joint bidder holds more than 50% or less than 3% and shareholder approval is considered more appropriate for the transaction structure.

However, there remains a possibility that, in certain cases and for various reasons, a joint bidder may prefer the shareholder approval route to ASIC relief notwithstanding that neither bidder holds more than 50% or less than 3% and therefore there is a possibility of regulatory intervention by ASIC.

It will be interesting to see ASIC’s approach to such a situation in practice if it arises. ASIC may consider making an application to the Takeovers Panel to require the match or accept condition to be imposed, in which case it will also be very interesting to see how the Panel will approach the use of what is a clear statutory exemption that has been used to facilitate joint bid transactions (and which does not require a match or accept condition).

Alternatively, ASIC may seek to ensure compliance with its guidance at other stages in the process when it is consulted - such as when joint bidders apply for an extension of the 3 month time period to seek shareholder approval, or during the target’s consultation on the notice of meeting seeking shareholder approval.