ASIC’s take on public M&A in the first half of 2017

We look at the public M&A data released by ASIC for the first half of 2017 and the areas that were a focus for ASIC’s regulatory activities during that period.

In brief

• ASIC has published observations on public M&A activity for the first half of 2017, including that schemes continue to be favoured in larger deals (although the split between takeovers and schemes is fairly even by number), that cash continues to be the favoured consideration offered by bidders, and that there was a substantial increase in the number of offers for targets valued at less than $50m compared to the previous 6 months.
• Disclosure issues continue to be a key focus for ASIC in its regulatory activities in the public M&A space. As an example, ASIC noted a bid in which it required the bidder to offer withdrawal rights to target shareholders following corrective disclosure by the target.
• Underwriting arrangements involving major shareholders are also a continuing focus for ASIC. ASIC expressed concerns about underwriting arrangements that involve a right for the underwriter to appoint a director as a pre-condition to, or a benefit obtained from, the arrangements, saying they see this sort of right as an indicator of an unacceptable control intention behind the underwriting.

Overview

In its half-yearly Corporate Finance Report released this month, ASIC reported 31 control transactions for the first 6 months of 2017 (1H17).¹ This was less than the previous 6 months (41 transactions), but an increase on the 22 transactions in the corresponding 6-month period last year.

Some of the noteworthy observations from ASIC on the transactions were that:

• Schemes still favoured in large deals – Although there were fairly even numbers of takeovers (18) and schemes (19), larger deals continued to favour schemes – schemes made up 76% of the deals by value (compared with 61% for the previous 6-month period). The sizeable Cheung Kong/DUET scheme, valued at $7.4b, would have made a major contribution to this bias. It’s worth noting, however, that the other ‘mega’ deal (ie >$1b) was done by takeover bid: the Downer EDI/Spotless Group transaction, valued at $1.3b.
• Cash continues to be the favoured consideration – 92.5% of control transactions by value offered cash consideration or an uncapped all-cash alternative (or 69.0% by number). This and the previous point seem to be a reflection of a continuing emphasis on certainty – a scheme offers certainty of outcome, and cash offers target shareholders certainty of value.
• Foreign bidders dominate by deal value – Although the split between domestic and foreign bidders was equal by number, 80% of the transactions by value were undertaken by foreign bidders (consistent with the previous period). Again, however, the sizeable DUET/Cheung Kong scheme would have had a major impact on this statistic.
• A flurry of smaller deals – There was a substantial increase in the number of offers for targets valued at less than $50m, moving from 41.4% for the previous 6-month period to 59.1% for 1H17.
• Shareholder-approved transactions continue to be popular – Transactions approved by shareholders under section 611 item 7 of the Corporations Act (another way to effect control transactions) remained the most common type of control transaction notified to ASIC.

What was in ASIC’s sights in 1H17?

ASIC’s regulatory focus in 1H17 seemed to be primarily disclosure issues.

It reported that the most common concerns it raised with bids or schemes were:

• inadequate disclosure of an expert’s underlying assumptions or the grounds for forward-looking statements in independent expert’s reports
• inadequate or misleading disclosure of bid premiums in scrip deals and/or the implied value of the scrip consideration offered, and
• public disclosures that should have been included in a supplementary disclosure document were not.

Some of the interesting specific examples reported by ASIC are set out below.

Withdrawal rights required where target forced to make corrective disclosure

ASIC reported that it intervened to require a bidder to offer withdrawal rights to target shareholders following corrective disclosure regarding the bid.

The interesting thing about this was that the corrective disclosure was made by the target – it was required to re-issue an independent expert’s report that was included in its target’s statement. The bidder had no involvement in the preparation of, or responsibility for, the disclosures.

However, ASIC considered withdrawal rights appropriate because the disclosures may have misled target shareholders into accepting. ASIC’s view is that unacceptable circumstances can arise regardless of who may be at fault.

Underwriting arrangements that give an underwriter a director appointment right

Underwriting arrangements continue to be a hot button issue for ASIC.

ASIC reported having raised concerns about underwriting or sub-underwriting by major shareholders where they believe there are indicators of control intentions – an area they have been active in over previous years.

The particular example reported was a right to nominate a director to the board of the issuer as a pre-condition to, or a benefit obtained from, the underwriting arrangements. ASIC did not appear to have a problem with this right per se, but they were concerned because the right was described as having been given ‘in exchange for’ the shareholder agreeing to underwrite.

ASIC saw this as a strong indicator that the underwriting arrangement may not be genuine but may have a control purpose, and expressly put the market on notice that it considers a right of this sort a significant factor in assessing whether there is a genuine underwriting in place.

Other

Multiple expert reports for the same transaction

Where more than one expert’s report is required for a transaction (such as where there is an acquisition by scheme and contemporaneous demerger by scheme), ASIC’s view is that the relevant disclosure documents for each scheme should consider both reports and contain clear disclosure of the differences in preparation and conclusion (if any). ASIC considers this necessary to ensure shareholders are adequately informed.

Communicating with members outside of the disclosure document

ASIC reported that one company sought to hold member information sessions to provide information and answer questions about a scheme booklet, ahead of a scheme meeting.

ASIC reminded market participants to ensure that any engagement with members ahead of a meeting should not disclose information other than what is set out in the scheme booklet (which is approved at the first court hearing). In addition, ASIC considers that the court should be advised at the first court hearing of the company’s intentions to engage with shareholders after dispatch of the booklet, and that companies should keep clear records of the engagements to allow audit by ASIC.

The same principles would apply to communications outside of a bidder’s statement / target’s statement, being the formal documents lodged with ASIC for review in a takeover bid.

Relevant interests arising from derivative arrangements

In commenting on the Downer EDI/Spotless Group Takeovers Panel proceedings, ASIC noted that it continues to be concerned with the disclosure of relevant interests arising from derivative arrangements – their expectation is that the full context and description of the party’s relevant interests (whether economic or derivative) will be disclosed to the market for it to assess in a control context.

Endnotes

1. ASIC’s data is based on disclosure documents lodged or publicly released during the relevant period: see page 24 of REPORT 539: ASIC regulation of corporate finance: January to June 2017 (August 2017).