Shareholder intention statements - Foul play or play on?
Takeovers Panel rules on shareholder intention statements in Finders Resources Ltd 03R [2018] ATP 11
What you need to know
- In Finders Resources 03R [2018] ATP 11, the Review Panel of the Takeovers Panel has upheld a decision of unacceptable circumstances in relation to a shareholder who initially stated that it would not accept a takeover bid at the current offer price, but who subsequently accepted into the bid.
- However, orders from the Review Panel effectively permit the shareholder to sell into the takeover bid, despite submissions by the bidder that it would be adversely affected by the shareholder's acceptance. Notably, the Panel was not convinced that the bidder had acted in reliance upon the shareholder's intention statement in declaring its bid unconditional and declaring its offer price final.
What you need to do
- Bidders, targets, shareholders and all other parties interested in Australian public M&A need to remain cautious of the impact that ASIC's "truth in takeovers" policy may have on any shareholder intention statements.
- Bidders who are acting in reliance on a statement by a shareholder (or any other party) should consider making a clear and express public statement to that effect to improve their case for holding the shareholder to the statement in the future.
- Market participants should operate on the assumption that they could be held to any public statement, however they should also be mindful of the pragmatic approach that the Takeovers Panel takes to remedying departures from shareholder intention statements. Unfortunately, this commercial pragmatism could also be viewed by some as inconsistent application of a policy with a mixed history.
Overview
As the World Cup showed us, a review decision can be controversial.
In the recent Takeovers Panel proceedings in respect of Finders Resources, over the course of two legs (the initial Panel decision and the Review Panel decision), four members of the Panel decided to enforce "truth in takeovers" and hold a major shareholder to its statement that it would not accept a takeover bid.
However, two Panel members decided to effectively allow the major shareholder to depart from its statement, and required a reluctant bidder to acquire those shares. These two Panel members were a majority of the Review Panel and decided the outcome.
As a result, the major shareholder was able to help out in defence of the bid by making an unqualified 'no acceptance' statement and still benefit from that bid when the defence was unsuccessful.
Was this an opportunity missed by the Panel to give teeth to "truth in takeovers" or a further example of its commercial pragmatism?
It would be a brave shareholder who took the Review Panel's decision as a green light to make unqualified statements about its intentions and depart from them. Like the quest to remove diving/simulation from soccer/football, "truth in takeovers" will limp on as the unobtainable gold standard of good behaviour. Behave otherwise and you may get penalised or you may not.
What happened?
Finders Resources Limited (Finders), an ASX listed company, was subject to a takeover bid from Eastern Field Developments Limited (Eastern Field). The takeover bid offered 23 cents per share and was subject to various conditions, including a minimum acceptance condition of 50%.
On 5 December 2017 Finders issued a target's statement which disclosed that the independent directors recommended that Finders shareholders reject the takeover bid and that each independent director intended to reject the bid for any shares that they own or control. On 7 December, Finders released an ASX announcement with the consent of Taurus Funds Management Pty Ltd (Taurus), the manager of two vehicles that owned 11.31% of Finders shares, that Taurus does not intend to accept the offer at its current price.
Over the following week, Euroz Securities Limited (Euroz) obtained letters from other Finders shareholders who were not substantial shareholders consenting to Finders making an announcement which discloses that those shareholders also do not intend to accept the offer. By 15 December Finders made an announcement that (including the independent directors), shareholders with an aggregate 38.21% of Finders shares did not intend to accept the takeover bid at the current offer price.
Meanwhile, Eastern Field announced on 12 December that the bid was free from its minimum acceptance condition, on 14 February 2018 that the bid was unconditional, and finally on 12 March that it would not increase the consideration offered. By 16 March, Eastern Field's voting power in Finders had reached 48.40%.
On 19 March 2018, Taurus accepted into the takeover bid, increasing Eastern Field's interest to 60.22%. On the same day, Finders announced that although the independent directors continued to believe the bid undervalued their shares, given that Eastern Field had now acquired a controlling interest, they "urge shareholders to quickly consider ACCEPTING the Offer, to avoid the risks of being left as a minority shareholder in Finders when it is controlled by Eastern Field". Each of the independent directors subsequently accepted the takeover bid.
Review Panel orders
Both the original Panel and the Review Panel agreed that the actions of Taurus in accepting the takeover bid after Finders had (with the consent of Taurus) announced the Taurus rejection intention statement gave rise to unacceptable circumstances and that the effect of these circumstances was that the acquisition of control over Finders shares did not take place in an efficient, competitive and informed market. However, whereas the initial Panel ordered that Taurus be held to its promise and prevented from accepting an offer for 23 cents per share, the Review Panel effectively granted Eastern Field a call option, and Taurus a put option, over the Taurus shares at the offer price of 23 cents per share, subject to Taurus' put option not being exercisable until the later of 30 November 2018 and the close of the takeover bid.
Based on Eastern Field's submissions it would appear that a complete acquisition of Finders was not on its list of desired outcomes. Eastern Field submitted that it relied on Taurus' intention statement in making the bid unconditional and that it would be adversely affected in various ways by achieving voting power of 90% due to Taurus resiling from its intention statement and accepting the takeover bid, including: Eastern Fields' intention was now to maintain Finders' ASX listing due to Indonesian tax consequences of Indonesians holding more than 50% of an unlisted foreign company, the obligation to make compulsory buy-out offers, and the fact that it had fixed the amount of its banking facility on the assumption that Taurus would (or could) not accept.
However, the Panel was not satisfied that the consequences of Eastern Field obtaining voting power of 90% or more should be attributed to the unacceptable circumstances, rather than to Eastern Field's own decisions to make an offer for all ordinary shares on issue, declare its offer unconditional and extend the offer period. At the time of declaring the offer unconditional, Eastern Field noted that it held a 25% stake and made no mention of relying on Taurus' intention statement, nor did it mention its reliance on the intention statement in any of a series of subsequent announcements. Given the circumstances, the Panel expected that Eastern Field would have been willing to accept Taurus' shares into the bid if that was the only method of acquiring effective control of Finders.
The only alleged detriment to Eastern Field that the Panel considered ought to be remedied was the detriment relating to changes to its financing arrangements, which was remedied by the Panel by delaying the obligation to accept Taurus' offer through the orders delaying Taurus' put option so that it was not exercisable until 30 November 2018.
Further orders were also made to compensate shareholders who acquired shares on-market for more than 23 cents per Finders share between 7 December 2017 and 19 March 2018, on the grounds that Taurus' intention statement could have led some purchasers to expect an increased offer.
ASIC and Takeovers Panel policy on shareholder intention statements
In Takeovers Panel Guidance Note 23: Shareholder intention statements, the Takeovers Panel outlined its concern that shareholder intention statements should not inhibit:
(a) the acquisition of control over voting shares taking place in an efficient, competitive and informed market; and
(b) shareholders and directors being given enough information to enable them to assess the merits of a proposal.
A shareholder intention statement is any statement regarding the intention of a shareholder, which has been made or authorised by the shareholder, in the context of a bid, scheme or an item 7 vote. Typically, this will be an "acceptance" or "rejection" statement. The Takeovers Panel is concerned that a shareholder intention statement could preclude the opportunity for a competing proposal, and potentially either create a relevant interest in the shares on the part of the bidder, or support an inference of association. If so, the statement runs the risk of contravening the 20% rule in s 606 and/or undermining the policy of Chapter 6, giving rise to unacceptable circumstances.
Each statement will be reviewed individually on its terms and the context in which it is made, however key factors that the Guidance Note considers are likely to give rise to unacceptable circumstances are:
(a) if the shareholder states that it will not act before a given time, and subsequently acts before that time has passed;
(b) if the statement does not include the qualification that the shareholder will accept a superior proposal, and the combined shareholding of the bidder and any other shareholders who have made similar statements exceeds 20%;
(c) if the statement includes a qualification that the shareholder will accept a superior proposal, but the shareholder does not allow a reasonable time for another proposal to emerge; and
(d) if the statement is ambiguous or does not clearly identify the relevant shareholder(s) and details of their holding.
ASIC also considers shareholder intention statements in ASIC Regulatory Guide 25 at 25.29-25.34, outlining its concern that other shareholders may rely on a statement that a substantial shareholder will or will not accept a bid on the basis that if that shareholder does not accept, control of the target will not pass (or vice versa). ASIC's general position is that "market participants that make a last and final statement should be held to it, as with a promise."
How has the Panel previously dealt with departure from shareholder intention statements?
The Panel has previously considered departure from shareholder intention statements on a number of occasions. The decisions are split as to whether orders holding the shareholder to its statement were made. While the Panel has been willing to make a declaration of unacceptable circumstances where a shareholder acts inconsistently with a previous public statement, and will expect market participants to treat an intention statement as binding on the party who makes it, the Panel may only enforce this expectation through orders if it considers those orders are appropriate and tailored to the commercial circumstances of the case. For example, shareholders were held to their statements of intention to accept the offer in Ambassador Oil and Gas Limited 01 [2014] ATP 14 but in Summit Resources Limited [2007] ATP 09 the Panel concluded that despite the existence of unacceptable circumstances, "there were no orders which could be made which would be appropriate to remedy the effect of the unacceptable circumstances".
Read more
You can read the original Panel decision here and the review decision here.
Authors: Nick Terry; Partner, Jonathan Bisset; Lawyer.
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