On-market acquisitions during a takeover bid – Australian Securities & Investments Commission's expectations

The latest ASIC Market Integrity Update addressed ASIC’s expectations regarding buy price disclosure in circumstances where a bidder intends to purchase target securities on-market at a price higher than the bid price.

IN BRIEF

• ASIC Market Integrity Update (Issue 143) provides that ASIC ‘expects’ bidders to make an announcement before commencing the intended on-market acquisition of target securities at a price higher than the offer price under the takeover bid.
• These conclusions differ from the approach taken by the Takeovers Panel in Virtus 03, as considered in our September 2022 update.
• ASIC intends to consult on a proposal to amend rule 5.13.1 to ensure that ASIC’s expectations for these announcements are clear to market participants.

MARKET INTEGRITY UPDATE

In its November update, ASIC outlined its expectations regarding rule 5.13.1 of the ASIC Market Integrity Rules (Securities Market) 2017 announcements. This rule imposes an obligation on market participants acting on a bidder’s behalf not to acquire cash market products when a takeover bid is on foot unless and until an announcement is made to the relevant stock exchange.

Although this quite technical (and somewhat unglamorous) rule has not received much attention previously, it received attention during the takeover battle for Virtus Health earlier this year.

ASIC identified two market practices that it considers to be compliant with rule 5.13.1. First, the bidder could announce the price at or below which it intends to purchase the target securities on-market. Alternatively, the bidder may vary the takeover bid and, if relevant, make the abovementioned announcement.

In the context of increased consideration, ASIC expressed an ‘expectation’ that when the participant acting on bidder’s behalf intends to purchase the target securities at a price higher than the bid price, the relevant announcement should state the actual price at which the bidder is offering to buy and be made before the intended on-market acquisition.

ASIC also noted that an announcement of a varied takeover bid would typically trigger a short trading suspension which would ‘allow time for the higher buy price information to disseminate and for the market to respond accordingly’. That would be consistent with Appendix 4013 of the ASX Operating Rules Procedures Appendices, which provides that once the relevant announcement is made by the market participant, ASX will immediately place the security into 60-minute Pre_NR session state.

COMMENTS

ASIC has taken a positive and timely step in response to the uncertainty identified by the Takeovers Panel.

The Takeovers Panel in Virtus 03 [2022] ATP 10 concluded that, to comply with rule 5.13.1 and the policy of Chapter 6, it is okay for the bidder to purchase the securities at a price which is higher than the offer price under the takeover bid and then immediately announce the varied bid price to the market. ASIC’s Market Integrity Update takes a different approach where the bidder would need to announce the higher price (triggering a trading suspension) prior to acquiring the securities at a higher price on-market.

We previously wrote that the approach taken by the Takeovers Panel is sufficient to create an efficient, competitive and informed market. We maintain this view.

ASIC intends to consult regarding the future amendment of rule 5.13.1 to ensure that the regulator’s expectations are clear to all market participants.

We plan to submit that the Takeovers Panel’s approach in Virtus 03 is fair and adequately balances the competing considerations of all stakeholders in a takeover. If the bidder announces that it reserves the right to purchase target securities at a price different to the bid price, the market knows it may buy shares at a higher price – therefore, sellers are on notice. They may choose to sell or to withhold their shares from the market until, for example, the bidder has declared its bid ‘final’. Requiring a premature announcement and trading suspension is not required and makes takeover bids unnecessarily difficult.