Truth in Takeovers
It is a somewhat unique feature of Australian takeovers law that statements of intention by market participants are taken to be binding on their terms unless expressly and clearly qualified. The policy is known informally as the “Truth in Takeovers Policy” The policy states, in short, that market participants should be entitled to rely on statements made by stakeholders in a public company takeover or scheme. If a person makes a statement as to its intention and does not clearly and expressly qualify that statement, then that person must act in accordance with that statement. ASIC will take action to enforce the policy.
In its Corporate Finance Report January 2018 to June 2018 ASIC has announced a review of its policy on truth in takeovers.
The policy was originally formulated in connection with statements by bidders as to their “last and final” statements – a statement by a bidder that it does not intend to increase its offer price or extend its offer period in a takeover. But the policy applies to all statements and to all participants, not just bidders or target companies.
Because an unequivocal statement by a participant is taken to be binding and subject to enforcement by ASIC, such statements have come to be used by major shareholders to telegraph their intention to accept or reject an offer or scheme proposal. ASIC has expressly discouraged the use of shareholder intention statements because, in ASIC’s view:
shareholder intention statements made in the usual form in relation to acceptance or rejection of a takeover bid are difficult to distinguish from a standard formal pre-bid acceptance agreement;
this provides bidders with a mechanism to circumvent the limits on pre-bid agreements by locking in a pre-bid stake beyond 20%; and
shareholders are often asked to provide a statement of intention before having access to the disclosure documents and may not be fully informed when making that commitment.
It is clear that care needs to be taken by market participants around the circumstances in which a statement of intention is made. However, provided that the statement does not “lock in” shares into a bid or scheme, it seems there is no policy reason to discourage such statements per se. Indeed, prohibiting statements of intention in these circumstances could have the effect of discouraging bids from being made or an increase in bid prices from being negotiated, which would otherwise be in the interests of all shareholders.
Legal and policy background
Takeovers regulation is premised on ensuring that the acquisition of control of a company takes place in an efficient, competitive and informed market, the shareholders know the identity of the bidder and the shareholders have a reasonable time to consider the proposal and have an equal opportunity to participate in any benefits accruing to shareholders.
The availability of information concerning the intentions of significant shareholders is beneficial to market participants. Indeed, ASIC’s RG25 is premised on the market’s ability to rely on this information. Information as to the likely behaviour of significant shareholders encourages bids and can encourage price increases. Canvassing shareholders for this information has always been permitted by takeover regulations and ASIC policy, and the more this information is made public, the more informed the market for corporate control. A public statement of intention only has a negative impact on the market for corporate control where it has the effect of preventing or inhibiting competing bids for the target.
The Takeovers Panel has made it clear that intention statements “can give rise to concerns ... particularly where the interests the subject of the statement, when aggregated with the bidder’s interest, exceed 20%”, but the Panel has declined to expressly discourage intention statements by shareholders.
Panel decisions and ASIC activity
In formulating its policy position, ASIC refers to the Panel decisions in Ambassador Oil & Gas Ltd and Bullabulling Gold to demonstrate why certain emerging market practices justify its policy position. It is worth setting out some facts in one of these Panel decisions because the issues that arise in the interaction of pre-bid discussions and statements of intention are often fact specific.
For example, Ambassador Oil involved a competing bid for Ambassador Oil (the target company) by Drillsearch and Magnum Hunter Resources Corporation. Over an extended period prior to the announcement of a bid by Drillsearch, there were discussions between representatives of Ambassador Oil and representatives of Drillsearch. Drillsearch and Ambassador Oil made a joint announcement on 28 May 2014 that Drillsearch intended to make an off-market conditional takeover bid and that the parties had entered into a bid implementation agreement. The bid implementation agreement contained a matching right that required Ambassador Oil to give Drillsearch 5 days to match any competing offer made for Ambassador Oil. That announcement also disclosed that Drillsearch had acquired 19.9% of Ambassador Oil before the announcement and that certain key shareholders had expressed an intention to accept the Drillsearch offer, in the absence of a superior bid. The same day Ambassador Oil separately announced that each member of its Board intended to accept the Drillsearch offer within 14 days of the offer opening, in the absence of a superior bid. On 10 June, Magnum announced its intention to make a takeover bid.
On 16 June Drillsearch increased its offer by 5 cents per share and declared its offer unconditional. The Ambassador Oil board announced that it considered that Drillsearch offer to be superior to the Magnum bid. The shareholders that had stated that they intended to accept the Drillsearch offer in the absence of a superior proposal accepted the Drillsearch offer on the same day. The next day Magnum increased its offer price and also declared its offer unconditional.
The Panel found the circumstances to be unacceptable and inferred from the circumstances that there had been an arrangement or understanding between Drillsearch and the accepting shareholders which gave rise to a breach of the Corporations Act. The Panel drew that inference because there was no commercial reason for those shareholders to accept the revised Drillsearch offer the day it was made, other than that they had made an arrangement to do so. That is, it was clear from the interactions between Drillsearch and representatives of Ambassador Oil that the increase in offer price was made on the understanding that the accepting shareholders would accept immediately. The Panel found that the immediate acceptance was inconsistent with the statement of intention that they would accept, in the absence of a superior proposal. There was a counterbid on foot and the accepting shareholders had not given Magnum an opportunity to respond to the increased Drillsearch offer. The Panel considered that this behaviour was not commercially rational in the absence of an arrangement to accept immediately. The Panel concluded that accepting shareholders in these circumstances should wait for a reasonable period for a competing bid or revised bid to emerge before accepting, or shareholders would risk a similar adverse inference being drawn.
The evil that was sought to be addressed in this Panel decision was that the interactions between Drillsearch, Ambassador Oil representatives and certain shareholders of Ambassador Oil were directed at locking up acceptances so that Magnum could not compete for Ambassador Oil in an open and efficient market.
But the actions of the participants in Ambassador Oil that were inferred by the Panel gave rise to the unacceptable arrangements to lock up Ambassador Oil, not the statements of intention. Indeed, the Panel found that the early acceptance was inconsistent with the statements of intention. It was not the statements of intention that locked up the shareholdings in Ambassador Oil; it was the arrangements reached between participants.
The MYOB Panel decision is another example of the activities that concern ASIC in the lead up to the making of statements of intention. In that decision, the Panel inferred that in the process of canvassing and securing statements of intention from large shareholders, an understanding arose between the bidder and the shareholders as to the shareholders’ acceptance of the bid when made. The Panel did not decide that the statement of intention was unacceptable. The Panel decided that the statements of intention were evidence of the underlying acceptance arrangement and led to a breach of the Corporations Act.
The distinction is important. The concern expressed by ASIC in MYOB and Ambassador Oil and the reason for the regulatory focus is on the nature of the discussions between the bidder and key shareholders and not on the fact of the statement of intention.
If a market participant acts in accordance with its intention statement, it is doing so because of the effect of the policy and the likelihood of ASIC enforcement action. The compulsion arises by virtue of the policy and the participants’ knowledge of ASIC’s active approach to enforcement. The implication of this is that the Truth in Takeovers policy gives a bidder practical comfort that a shareholder will act in accordance with their statement due to the existence of the policy and the likelihood of ASIC enforcement and not because of any arrangement or understanding between the bidder and the shareholder. The compulsion on the part of the shareholder making the statement of intention arises from the policy and not from any “control” exercisable by the bidder.
Indeed, consideration should be given to whether, instead of seeking to discourage shareholder intention statements as to acceptance or voting, such intention statements should not be taken to be binding unless it is clear that the statement is intended to be binding. That way, unless it is clear it is intended, there is no compulsion on the shareholder to accept the bid as a result of the policy. The statements of intention would then provide the market with information as to the general attitude of the major shareholders to the bid, without the adverse consequences for locking up the target prematurely.
The practice of obtaining an unequivocal statement of intention as to acceptance or voting has become common market practice. Indeed, it is a feature of most control transactions that a bid or scheme proposal would be conditional on directors making a public statement of support for the bid or scheme, subject to a superior proposal emerging. The making of public statements of intention encourages bids to be made, enhancing the efficient and competitive market for corporate control.
ASIC has said that shareholder intention statements should be actively discouraged, and it has since taken an active policy stance to do so. But making shareholder intention statements public creates a more informed market for corporate control, so in the absence of an adverse effect on market participants, shareholder intention statements should not be discouraged per se. Bidders feel more comfortable in making bids, raising prices and dropping conditions if they understand what the reaction of significant shareholders is likely to be. There has never been an objection to canvassing shareholders’ intentions. Shareholder intention statements make the information that arises from that canvassing publicly available, which better informs the market.
The policy issue to be addressed is to prevent a statement of intention, in the context of the operation of the “truth in takeovers” policy, locking up acceptances or voting and precluding other bids. The policy objective is satisfied if a statement of intention does not chill competition in the market for corporate control. For example, if the shareholder intention statement is qualified in a way that permits the shareholder to accept a superior offer and it leaves time for a superior offer to emerge. That policy objective would also be achieved if the statements of acceptance behaviour were not to be treated as binding unless expressed to be so.
Regardless of the policy position on statements of intention, it is clear that ASIC will continue to closely monitor statements of intention in takeovers and schemes and the behaviours of the participants in the lead up to such statements being made. Market participants will need to take care to ensure that pre-bid discussions do not give rise to any arrangement or understanding between the participants that may be in breach of takeovers law.
About the Author
Hal Lloyd is a partner at Hamilton Locke with more than 20 years' experience in mergers and acquisitions, private equity, capital raising and distressed transactions across a number of industry sectors.
Hal has been recognised for his expertise in a broad range of areas, including AFR Best Lawyer and Legal 500 Asia Pacific for Restructuring and Distressed Investing and Legal 500 Asia Pacific for Mergers & Acquisitions.
 Regulatory Guide 25 (RG25) “Takeovers: False and misleading statements”.
 For example, it did so in a recent Panel decision in Finders Resources Limited O3R  ATP 11 in which orders were made to unwind an acceptance by a major shareholder inconsistent with its statement of intention
 REPORT 589: ASIC regulation of corporate finance: January to June 2018, 16
 Corporations Act 2001 (Cth) s 602, reflecting the Eggleston Principles.
 Takeovers Panel, Guidance Note 23 – “Shareholder intention statements”, .
 Ambassador Oil & Gas Ltd 01  ATP 14
 Bullabulling Gold Ltd  ATP 8.
 Panel Guidance Note GN23 indicates at least 21 days from an initial bid, although perhaps less for a revised offer
 MYOB Limited  ATP 27
 Annexure A of the Takeovers Panel response to consultation on Guidance Note 23 GN 23 Shareholder intention statements—Public consultation response statement
 An argument has been made by the author that ASIC need not take such a prescriptive approach to the regulation of statements of intention to further the stated policy objective (Hal Lloyd, “Statements of Intention in Takeovers – ASIC Reconsidering the Policy Settings” (2017) 35 C&SLJ 395) but that is the current landscape on which takeovers activity currently occurs.