Unacceptable frustration? The difficulties in defending a hostile takeover under the Takeovers Panel’s frustrating action policy

For the board of an ASX-listed company, receiving a hostile takeover bid for the company is a game-changer.

Once a takeover bid is received or announced the target company enters the restrictive world of the Takeovers Panel’s ‘Frustrating Action’ policy and the board’s freedom to pursue strategic transactions is curtailed.

What is a frustrating action? And when is this unacceptable?

A frustrating action is any action by a takeover target that could cause a takeover bid to be withdrawn or not to proceed. Typically, this occurs where the target company takes an action that breaches one of the conditions to the takeover bid (enabling the bidder to walk away unless it waives the breach).

Whether or not the frustrating action is unacceptable will depend on whether it interferes with the target’s shareholders having a reasonable and equal opportunity to participate in any benefits of the bid or means that there isn’t an efficient, competitive and informed market for the target company’s shares.

The Panel’s policy is aimed at ensuring that the target’s shareholders, and not its board, determine whether or not a genuine bid for the company proceeds. For that reason, the policy acknowledges that frustrating actions which are subject to shareholder approval are generally not unacceptable.

What is changing?

The current policy doesn’t clearly state which frustrating actions will be unacceptable.  There’s also been a recent trend of bidders including long, complex and restrictive bid conditions, including conditions that restrict the target’s business and require it to take actions to assist the bidder (all of which make it harder to avoid frustrating actions).

In response to these concerns, the Panel is proposing to update its policy to give greater guidance as to the circumstances in which frustrating actions will be unacceptable by:

  • clarifying that the frustrating action policy will generally only apply to a bid proposal which provides a genuine opportunity for shareholders to dispose of their shares (that is, the target board should be able to ignore the policy if the bid is unfunded or clearly won’t be proceeding); and
  • identifying considerations which make a frustrating action unlikely to give rise to unacceptable circumstances because such a conclusion would be unreasonable.

Does this mean it’s now easier to defend a hostile bid?

The updated policy more clearly clarifies the types of frustrating actions that will, and won’t, be considered acceptable. This will give target boards greater certainty when responding to a hostile bid, and will allow a more strategic and informed response.

However, while the policy provides greater clarity, target boards will still need to operate within its restrictions and carefully consider whether implementing a material transaction after the receipt or announcement of a takeover bid will be acceptable.

So how can you defend a hostile bid?

Of the various strategies available to ASX listed companies to deter an unwanted takeover bid the most important are the ones which either:

  • remove obstacles that may be preventing the company’s share price from reflecting the company’s true value (as this is the primary protection from being acquired at less than a full price); or
  • ensure that the company is as prepared as reasonably possible for a bid, enabling the board to act quickly and decisively in assessing a bid and pursuing any alternative for delivering shareholder value.

Preparation is key, and the best preparation is to put together a bid response manual. This will ensure that you are taking the right steps now to prepare for a bid, and are in the best possible position to respond when a bid arrives. If your ASX-listed company or client doesn’t have a bid response manual in place, we would be happy to prepare one for you.

_______________

 

On 8 November 2016, Kain Lawyers will be hosting its inaugural ASX-Listed Companies Breakfast at the Adelaide Convention Centre. With 600 people attending, a keynote address from the Premier of South Australia and presentations from Elders, SeaLink, Ellex and Codan, this important corporate networking breakfast is expected to become a much-anticipated annual event on the South Australian business calendar.