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1 Aug 2023
Insight
Australia
Takeover bids in Australia can be subject to a multitude of conditions. The legislation has few restrictions. As bids become subject to more and more conditions, they can impact how the market operates. This raises a question about whether and how the Takeovers Panel should respond.
In brief
- Takeover bids may be subject to a multitude of conditions. The law provides very few restrictions, as demonstrated by ACL’s bid for Healius.
- A lengthy set of conditions may make a bid unattractive, but ultimately the Takeovers Panel should be able to deal with any problems that causes to the market.
Takeover bid conditions – Can you have too many?
For a long time, we have seen that most takeover bids are subject to a long list of conditions.
The bid announced in March by Australian Clinical Labs for Healius may set a new high-water mark. The bid, which offered 0.74 ACL shares for every Healius share, is subject to the satisfaction or waiver of 25 conditions, including:
- 90% minimum acceptance;
- FIRB approval;
- ACCC clearance;
- Approval by ACL shareholders;
- Healius does not announce financial results worse than certain specified outcomes (including EBIT, profit, cash flows and net debt);
- No competing proposal;
- Equal access to due diligence information;
- No material adverse change;
- No fall in the ASX 200 by more than 10%;
- No acquisitions and disposals of any company, business or shares or other securities in any company, irrespective of materiality;
- No payment of a bonus or incentive payment or retention payment or increase in the remuneration of any employee that would result in the aggregate remuneration of that employee increasing by 7% or more;
- No action being taken in relation to billing practices;
- No breach of debt covenants;
- No litigation or regulatory action; and
- No prescribed occurrences or issues of convertible securities.
It is a very extensive list of conditions and covers 8½ pages of the bidder’s statement. It is one of the longest lists ever seen in the market. Anyone interested in company takeover practice should check out the offer document to see it for themselves.
When the bid was announced, ACL said it would not close until at least 29 September 2023, a period of over 6 months. Such a long period was necessary because ACL needs ACCC clearance, a process expected to take at least 6 months. That meant the conditions would be hanging over Healius’ head for a long time. (The bid was subsequently extended for a further 6 weeks after the ACCC issued its statement of issues in July.)
Shortly after the bid was announced, Healius challenged the bid in proceedings before the Takeovers Panel. The main aspect being challenged related to the ability for ACL to achieve synergies and how those synergies had been explained in the bidder’s statement.
Healius also took exception to the bid conditions. It said that the conditions of the bid were ‘unusually extensive, overreaching, an unnecessarily restrictive’, as they limit what Healius can do during a significant period of time to maintain its attractiveness as a standalone entity or as an acquisition target for other entities.
Tanarra Capital, which holds 8.5% of Healius, issued a statement about the conditions of ACL’s bid saying:
ACL’s offer conditions are also unreasonable, unattractive, and have the potential to inflict commercial damage on Healius as one of its main industry competitors irrespective of the outcome of the offer. There are 30 conditions alone relating to the company’s finances and operating performance, surely some sort of record in Australian takeovers. Many of these conditions leave little room for adverse developments. They have been imposed by ACL knowing that, by its offer, it has placed Healius in a position where it faces an extended period of business uncertainty due to ACL’s need to obtain ACCC approval, a process that will take many months. This means Healius shareholders have little idea of what the real value of the ACL offer may be ultimately, if it ever becomes capable of acceptance. Other conditions attempt to restrict the continued effective operation of Healius’ business during the (likely prolonged) offer period, such as restrictions on hiring and retaining staff. It is in Healius’ shareholders’ interests that it continues to operate its business in the normal course, including hiring and retaining key staff and fully competing with ACL during a time when important industry contracts will be up for grabs.
The Takeovers Panel proceedings led to ACL making additional disclosures about synergies and their achievability. In light of that, the Panel declined to commence formal proceedings. Therefore, the arguments about bid conditions were not the subject of the Panel’s eventual reasons.
What then are the relevant considerations in this respect? Can you have too many conditions in a takeover bid?
What does the legislation say?
The takeovers legislation contains few restrictions on the sorts of bid conditions that are permitted.
There is an important prohibition in s629 which outlaws conditions that depend on the bidder’s opinion. This is because those conditions effectively give the bidder an option whether to proceed with the bid, which creates uncertainty which is inimical to an efficient market for shares.
However, beyond that, the legislation does not really restrict the number or scope of the bid conditions.
Despite that, there are some practical limits.
Conditional bids unlikely to be attractive
A bid which is subject to conditions that may not be satisfied will be unattractive for shareholders. Therefore, the bid will struggle to gain any momentum until the bid conditions are waived.
Unlike voting on a conditional scheme of arrangement, the usual position is that, once a bid is accepted, the shareholder cannot withdraw their acceptance. That means they cannot sell their shares on market or accept a rival takeover offer.
There is an exception that arises if the bid period is extended for more than one month when the bid is still conditional, but that is sometimes remote, like in the ACL/Healius bid (given it is open for such a long period).
Conditions which are unlikely to be satisfied
Sometimes a bid may be subject to a condition which is unlikely to be ever satisfied. Examples could include:
- A condition that requires the target directors to disclose certain information, particularly if it is confidential or commercially sensitive and the bidder is a competitor. This style of condition was found in the Burns Philp bid for Goodman Fielder in 2001. The Takeovers Panel said the conditions were not unacceptable, but that did not mean that Goodman Fielder had to release the information to satisfy them.
- A condition that there are no change of control rights in the target’s material contracts or financing arrangements that may be triggered by the bid.
- A condition which leaves little room for mistake or adverse developments, such as a material adverse change of 3% or a condition that entitled the bidder to walk if the ASX index fell by 1%.
These hair-trigger conditions arguably conflict with the spirit of s629. This is because, once a breach occurs, the bidder effectively has an option whether or not to proceed with the bid.
What are the Panel’s views?
The Takeovers Panel has sometimes queried whether a hair-trigger condition or a vaguely drafted condition may create unacceptable circumstances in itself.
However, the Panel has not declared that unacceptable, but it has limited the impact of such conditions in a few ways.
First, the Panel has said that, while a bidder is free to choose the bid conditions, an action breaching a bid condition may not give rise to unacceptable circumstances: Guidance Note 12. The Panel says that it will place weight on whether the bidder has clearly stated its objectives and the relevant condition is therefore critical to the bid.
In other words, even if a condition is breached, the Panel may prevent the bidder relying on the breach, unless the condition is understood as critical.
An example is the NGM Resources matter in 2010. In that case, following the abduction of personnel employed at a mine site 150 kilometres away from the target’s tenements in Africa, the bidder purported to rely on a breach of a force majeure condition and a ‘no material adverse change’ condition to announce that its bid would lapse. The target objected and commenced Panel proceedings. The Panel read down the condition and said that the bid conditions had not been breached, because the event did not have material adverse implications for the target. It required the bidder to withdraw the announcement.
Second, the Panel’s policy against the target taking action that may frustrate the bid is unlikely to come into play if the conditions mean that the bid will not give shareholders a ‘genuine opportunity’ to dispose of their shares: Guidance Note 12 at [20].
The Panel gives as an example a bid ‘which has a condition incapable of satisfaction. For example, a condition which requires a third party to give an approval or consent and the third party has ruled out giving its approval or consent.’
In other words, a bid which is subject to a lot of conditions may not restrict the target from carrying on its business under the Panel’s frustrating actions policy, particularly if some of the conditions will inevitably be breached.
Third, if a condition is breached, the bidder will come under pressure to declare whether or not it will rely on the breach or waive it. In the Novus Petroleum matter in 2004, the Panel said that the bidder had until the last 7 days of the bid to make its mind up. There is a question whether a Panel these days would take the same approach. Surely a bidder with enough information who decides to say nothing about a breach creates unacceptable circumstances by not declaring its position?
Conclusion
We will continue to see lengthy bid conditions imposed by the bidder.
The ACL/Healius bid may be a high-water mark, but, in itself, a long list of conditions will not of itself create unacceptable circumstances.
The key questions are:
- whether the conditions will preclude the bidder getting the benefit of the Panel’s frustrating actions policy; and
- whether the conditions will do their intended job and protect the bidder’s interests if the Panel considers that they are unreasonable and prevents the bidder relying on them.
A bidder intending to place weight on a long list of conditions would be well advised to spell out why they are important.
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