The decline of broker handling fees in takeover bids

It has been just over two years since the Takeovers Panel updated its guidance on broker handling fees to connect broker handling fees to the conflicted remuneration provisions in the Future of Financial Advice reforms. Recent market practice suggests that bidders’ appetite for broker handling fees has dried up as a result. In this article, we examine the recent trends in broker handling fees and the likelihood that they might no longer be offered by bidders in future.

IN BRIEF

• Since the introduction of the Future of Financial Advice reforms, there has been a distinct drop off in offers including broker handling fees. From the authors’ survey of public takeover bids since 2015, only one bidder has offered broker handling fees as part of its takeover bid (and later qualified the offer with reference to the conflicted remuneration provisions), and one reserved its right to offer broker handling fees during the bid period (but did not end up doing so).
• Statements in ASIC’s Corporate Finance Reports indicate that broker handling fees are ‘likely’ to be considered by ASIC to be conflicted remuneration.
• The downturn in references to and the use of broker handling fees, coupled with these statements by ASIC, suggest that the end of broker handling fees could already be here.

Introduction

Broker handling fees have been used by bidders over the years to incentivise brokers to solicit acceptances of the takeover bid by the brokers’ clients. The Takeovers Panel issued Guidance Note 13 in 2003, following the Panel’s consideration of the broker handling fees offered by AngloGold in its bid for Normandy Mining and later by Placer Dome in its bid for AurionGold. In the Normandy Mining matter, the Panel decided that the broker handling fees were too high and the early expiry date for the availability of the fee had the possibility of inducing brokers to place undue influence, and possible coercive pressure, on their clients to accept the AngloGold offer.

Consistent with its decision in the Normandy Mining matter and the subsequent AurionGold decision that also took this approach, the Panel’s Guidance Note effectively capped the fee that bidders could pay per acceptance to the lesser of 0.75% of the consideration on offer or $750, with a minimum fee of $50 not considered to be unacceptable.

In 2012, the Federal Government introduced the Future of Financial Advice reforms. These included section 963E of the Corporations Act, which prohibits the payment or acceptance of 'conflicted remuneration'. The definition of 'conflicted remuneration' extends to any benefit given to a financial services licensee (such as a broker) who provides financial product advice to retail clients that, because of the nature of the benefit or the circumstances in which it is given, could reasonably be expected to influence the advice given.

Given the broad nature of the definition, and the lack of any specific exception for broker handling fees, we noted that there was a view that broker handling fees would be considered prohibited conflicted remuneration.¹ The broad scope of the financial services licensing provisions generally means that the prohibition arguably captures broker handling fees offered even where the consideration under the takeover bid is cash (and not securities in the bidder).

The question of whether broker handling fees actually constitute conflicted remuneration has not been directly tested by a Court.

TAKEOVERS PANEL

Following the Future of Financial Advice reforms, the Takeovers Panel updated Guidance Note 13 to include a statement that:

‘Broker handling fees appear to fall under the definition of ‘conflicted remuneration' and are prohibited under Chapter 7 unless an exception applies’ and that ‘market participants considering offering broker handling fees should seek professional advice on whether such fees would be allowed under Chapter 7’.

The Panel has not withdrawn Guidance Note 13, and at the time of the update indicated that it would monitor market practice and withdraw the guidance note if it was no longer market practice to offer broker handlings fees.

ASIC STATEMENTS

ASIC has indicated its position on the interaction between conflicted remuneration and broker handling fees in recent Corporate Finance Reports.

In Corporate Finance Report 469 (February 2016) and Corporate Finance Report 489 (August 2016), ASIC stated that broker handling fees are ‘likely to be conflicted remuneration and therefore prohibited under Div 4 of Pt 7.7A’. In addition, in Corporate Finance Report 512 (February 2017), ASIC indicated that discussions of broker handling fees had been removed from RG 9 given the likelihood that they may be considered conflicting remuneration.

MARKET APPROACH

In addition to the Panel’s and ASIC’s statements on broker handling fees, there has been a distinct downward trend in the offer of broker handling fees (and in bidders reserving the right to offer broker handling fees) as part of a takeover bid.

Looking back over previous takeover bids, broker handling fees were widely offered in the mid to late 2000s, hitting double-digit peaks in 2006, 2007 and 2009.

However, since 2012, there has been a distinct drop-off in takeovers containing broker handling fee arrangements.

Since 2015, only one bidder per year has mentioned broker handling fees in its bidder’s statement – two bidders stated that they would not be offering broker handling fees at all, one bidder chose to offer broker handling fees but followed up with a clarification that those fees would only be paid if the broker could demonstrate that payment of the fee was permitted under the ‘conflicted remuneration provision in the Corporations Act’, and the other retained the option to offer broker handling fees but did not end up doing so.

COMMENTARY

The significant drop in numbers referred to above indicates a clear decline in bidders’ appetite for the inclusion of broker handling fees. Given the correlation with the Future of Financial Advice reforms and the Panel and ASIC statements referred to above, there seems a high likelihood that the uncertainty over whether broker handling fees will be considered conflicted remuneration has played a factor in this change.

In addition, the question of whether broker handling fees constitute conflicted remuneration may never be definitively tested if, given the uncertainty, bidders cease offering them.

Given the apparent shift in market practice, unless there is any move to introduce a legislative exception to permit broker handling fees, it may be time for the Panel to revisit Guidance Note 13 to avoid inadvertently suggesting the ongoing viability of broker handling fee arrangements in takeover bids. However, until a definitive statement is made by ASIC or the Panel, we may still see the odd mention of broker handling fees in the years to come.

Endnotes

1. See the article by Rodd Levy and Kam Jamshidi, Herbert Smith Freehills, The End of Broker Handling Fees in Takeover Bids? (27 January 2016).