How final is a ‘best and final’ takeover offer?

Amidst the highly regulated and prescriptive takeovers regime in Australia, it is not clear how long – if at all – a bidder must remain on the sidelines if it declares its bid ‘best and final’ but is not successful in taking over the target. This article considers the current state of affairs and urges corporate regulators to attend to the uncertainties in this area.

In Brief

• When a bidder declares its bid ‘best and final’, the truth-in-takeovers policy strictly prevents the bidder from improving or extending its bid. 
• Underpinning the truth-in-takeovers policy is the overall aim of market efficiency, seeking to establish certainty in, and reliability of, bidders’ statements. 
• The Takeovers Panel and ASIC are yet to clarify just when a bidder may launch a new bid when their ‘best and final’ bid has been unsuccessful, the result of which is a gaping hole in an otherwise highly regulated sphere. 
• The economic significance of takeovers and bidding activity warrants greater certainty, it is therefore time for corporate regulators to provide much needed legal guidance. 

The Issue

In Australia’s highly regulated and prescriptive takeover regime, it is strange that there is one important element where no-one actually knows what the rule is. In particular, it is not clear just how long – if at all – a bidder must remain on the sidelines if it declares its bid ‘best and final’ but is not successful in taking over the target. It’s time for the law to provide some clarity.

The Australian Landscape

The truth-in-takeovers policy

CIMIC (formerly Leighton Holdings) has been one of the most active participants in the Australian takeovers landscape in recent times, having made bids for each of Devine, Sedgman, UGL and – most recently – Macmahon.

CIMIC’s strategy of launching aggressive bids with minimal conditions and short end dates has received extensive coverage. One key part of its strategy has been to declare its bids 'best and final', and to publicly state that it will not voluntarily extend the offer period.

Under Australia’s truth-in-takeovers policy, bidders like CIMIC will be held to these statements and, if their plan succeeds,  target shareholders will be dissuaded from holding out for a better offer.

The truth-in-takeovers policy enhances market efficiency, as participants can make better informed decisions by knowing that they can rely on the bidder’s statement. Similarly, bidders have assurance that their statements will be taken seriously.

The relationship between the truth-in-takeovers policy and ‘best and final’ offers

While the truth-in-takeovers policy clearly establishes that bidders, like CIMIC, are prevented from improving or extending their bid, there is no clear legal position on whether they can come back shortly afterwards and launch a brand new bid, on either the same or better terms.

In form, this would be a new offer to which the 'best and final’ statement arguably might not apply. However, in substance, the rapid commencement of a new bid would be inconsistent with the bidder’s earlier statements and with the objectives of the truth-in-takeovers policy.

Where does this leave us?

Judging by the media, market commentators seem pretty sure that there is some sort of period when the bidder cannot return with a fresh offer, but there is no clear guidance on this. Even if there is such a no-fly zone, no-one is exactly sure how long it might last.

Every time a bidder makes a 'best and final' statement but does not receive the anticipated flood of acceptances, there is feverish speculation about how soon the bidder could return with a new offer.

In addition to CIMIC’s bid for Macmahon, we’ve seen related issues arise recently in relation to Dar Group’s statement that it had no present intention of initiating discussions with WorleyParsons in relation to a change of control transaction, and previously on high profile deals such as AMP’s bid for AXA and Airline Partners’ bid for Qantas, where bids were declared ‘final’.

If you crowd-sourced the answer from commentators and practitioners, you would probably conclude that the bidder’s mandatory time on the bench is between four and six months. But such an economically significant matter should have the benefit of a more formal legal framework.

In the UK, for example, there is a specific rule providing a 12-month no-fly zone before bidders can come back for another shot.

Whether 12 months is the right duration for the Australian market is not the point – rather, once any particular time period is clearly articulated as part of the law, the market (as well as bidders and targets) will digest this and factor it into decision-making.

Concluding Remark

In the Australian context, both the application of the truth-in-takeovers policy and market efficiency more broadly would be enhanced if the Takeovers Panel or ASIC were to provide clear guidance on just how long a 'best and final' bidder should be required to remain on the sidelines after their initial bid lapses.

This article was first published in www.investordaily.com.au