Takeovers Panel Issues Final Guidance Note on Frustrating Action in Takeovers: Directors Must Obtain Shareholder Approval for Triggering Actions
The Takeovers Panel has recently released its final Guidance Note on frustrating action in takeovers. The final version is very similar to the draft circulated for public comment in May last year. The effect of the Guidance Note is that, subject to the exceptions outlined below, directors of a company that is subject to an offer, or genuine potential offer, must not take any action or enter into any transaction that would trigger a defeating condition in the offer, such that the bidder may allow its offer to lapse (or, in the case of a potential offer, not make the offer), without first obtaining target shareholder approval to the action or transaction.
If directors of a target take frustrating action, the Panel may make a declaration of unacceptable circumstances and orders either preventing the action proceeding or requiring the target to seek shareholder approval for the action. This principle, which was developed out of the Panel decisions in Pinnacle Nos. 5 and 8 and in Bigshop No. 2, operates in addition to the normal directors' duties in a bid situation.
There are a few points to note in relation to the frustrating action principle:
- Not every triggering action will give rise to a declaration of unacceptable circumstances. There are four main exceptions to the principle, as follows:
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where the triggering action is part of the ordinary course of the target's business or is undertaken pursuant to agreements entered into or announced before the target became aware of the bid;
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where the triggering action is required in order to comply with a legal requirement or there is some commercial or legal imperative to take the action (eg in order to avoid some materially adverse financial effect or legal consequence);
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where the action, although it triggers a bid condition, does not materially affect the financial or business position of the target (eg buying back a small number of shares in the face of a bid condition that there be no share buy-backs); and
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where the bid condition is overly extensive or restrictive (eg it is not unacceptable for a target to decline to cooperate with the bidder by facilitating due diligence or entering into a transaction outside the ordinary course of the target's business).
- If the target proposes to put a triggering action to shareholders for approval, it must do so expeditiously. The Guidance Note is silent as to the requirements for such shareholder approval, but the decision of the Panel in Pinnacle No. 8 provides the following guidance:
- The approval should be a disinterested, properly informed majority vote. Shareholders who are interested in a transaction under consideration at the meeting, and their associates, should be disqualified from voting. There will be additional requirements where the action is being taken by directors for an improper purpose in breach of directors' duties (eg for the purpose of defeating the bid) and the directors are seeking ratification of that action. There, the fact that action or transaction may be voidable for improper purpose needs to be set out in the notice of meeting, and the directors and their associates will be precluded from voting.
Pinnacle No. 8 does not of itself mandate that an independent expert's report be obtained, but if one is required by ASX Listing Rules or the Corporations Act, or is otherwise sought by target directors, it should compare the benefits accruing to shareholders if the triggering action or transaction proceeds against the benefits accruing to shareholders under the bid.
If a triggering action or transaction is put by target directors to shareholders, that action or transaction needs to be structured so that it terminates with no consequential liability on the part of the target (ie shareholders cannot be coerced by potential liability for damages or a break fee into approving the transaction).
The Panel will likely seek undertakings from the bidder to keep its bid open until after the shareholders meeting so that shareholders are effectively choosing at the meeting between the bid and the triggering action.
The target board cannot act to defeat or delay a takeover by simply entering into transactions of dubious benefit and making them subject to shareholder approval. In such circumstances, the Panel may still declare unacceptable circumstances, even though the target had offered to put the transaction to shareholders.
- The Guidance Note expressly states that it is not intended to cover 'poison pills' (ie pre-emptive action that the target directors take in the absence of an offer, but which is designed to protect against a possible future change of control). However, following the Panel decisions in AMP Shopping Centre Trust Nos. 1 and 2, we hope that a draft guidance note on 'poison pills' will not be far away.
The underlying policy of the frustrating action principle, namely, that decisions about control and ownership of the company are properly made by fully informed shareholders, is equally applicable to 'poison pills'.
- One area in which the operation of the frustrating action principle remains a little unclear is where a potential offer has been made to the target, but has not been announced. The Guidance Note makes it clear that the principle applies only where there is a genuine potential offer, and the prospective bidder must have made it clear to the target what conditions would apply if an offer were to be announced. However, if, as will often be the case, the approach has been made by the prospective bidder to the target on condition that the transaction would only proceed on an agreed basis, is it frustrating action for the target to decline to agree and decide to enter into a competing transaction? We think not (and the prospective bidder taking the target to the Panel is unlikely to enhance the bidder's chances of obtaining that agreement in any event).
There are some interesting times ahead as the Panel further defines the boundaries of the frustrating actions principle, particularly some of the exceptions (such as ordinary course of business and overly extensive bid conditions).
