ASIC’s latest corporate finance report comments on recent M&A activity, novel relief applications and areas of concern for ASIC.
Observations on ASIC’s latest corporate finance update
Earlier this month, ASIC released a report about what it is seeing in M&A markets and explaining some novel M&A relief applications it has considered. It is interesting to review these as they reveal some of the key issues in the regulation of M&A practice in Australia.
ASIC reported that the COVID-19 pandemic has severely affected M&A activity:
- In the 6 months to 30 June 2020, there were 15 independent control transactions.
- This is fewer transactions than the 40 transactions in the 6 months to 31 December 2019.
ASIC comments that, whilst the volumes were lower in the 6 months to 30 June, the value of transactions were greater ($14.43 billion compared to $9.02 billion), but this was largely because of the TPG Telecom transaction (which had a value of $8.2 billion) was counted in the period to 30 June.
ASIC also reports that most transactions during the period were takeover bids, as opposed to schemes of arrangement. This is a departure from the recent trend towards schemes. ASIC does not believe this is a long term trend, but merely an aberration influenced by the low number of transactions.
Finally, ASIC says that, as uncertainty around the COVID-19 pandemic eases, it expects M&A activities to increase. They encourage parties to talk to ASIC early in the planning phase of any deal which may incorporate novel structures and terms to deal with the risks of the pandemic.
Electronic dispatch of target’s statement
ASIC granted relief to allow a company subject to a hostile takeover bid to dispatch its target’s statement electronically to shareholders.
Generally speaking, the legislation requires bidder’s statements and target’s statements to be sent by post or by courier. However, ASIC felt that the dispatch by email was appropriate because:
- the COVID-19 pandemic could mean significant delays in dispatch and also potential transmission of COVID-19 through physical delivery of documents (it would be interesting to see the epidemiology of that aspect!); and
- shareholders who had elected to receive company documents electronically were to be sent an email with a link to the target’s statement. Other shareholders were to be sent a postcard with the target’s statement URL.
This particular relief expands relief granted earlier by ASIC, most notably in the Healthscope transaction in 2019.
Given that email is the standard method of business communication in Australia, it is encouraging that ASIC is using its powers to enable companies to use email to dispatch documents. The next frontier is allowing a bidder to dispatch its documents electronically. If only the target can do this, that detracts from a level playing field, which may be significant where the takeover is hostile.
The solution that was adopted in the Healthscope transaction was for the bidder to give its documents to the target company who would then send them to those shareholders for whom it held email addresses. This did not, accordingly, require the target company to hand over the email addresses to the bidder (which would arguably create privacy concerns).
Our view is that it would be a relatively easy matter for the Corporations Act to be changed (either by amending legislation or by ASIC class order) to establish email dispatch, with the appropriate privacy safeguards mentioned, as a permanent feature of the regulation of takeovers.
No reduction in market bid price allowed
ASIC reported that there was an on-market takeover where the target company announced and completed an issue of bonus shares in the bid class during the offer period. As this would have reduced the value of the shares, the bidder (perhaps not surprisingly) sought relief to allow a proportionate reduction of the offer price.
ASIC refused to give the relief. ASIC said that it considered that the bidders assume the risk of certain events occurring and that they may be unable to vary their bid. Furthermore, the situation did not unfairly prejudice shareholders who had already disposed of their shares because, ASIC said, the legislation already contemplates shareholders potentially receiving different consideration in market bids (for example, where the offer price is increased during the bid, it is not passed on to those who accept early).
It is difficult to know what to make of this decision without knowing the full background. However, it seems harsh on the bidder where there has been an event that has diminished the value of shares in the company. It would have been open for the bidder to withdraw its bid relying on section 652C, which permits an on-market bidder to withdraw a bid where there is a new issue of shares in the target company. It is hard to know if that would have been a better outcome than seeking ASIC relief to continue the bid at a lower price.
ASIC intervention in transactions
ASIC reports that its regulatory interventions during the period have centred on schemes of arrangement. It gives several examples.
Case study 1
The acquirer in a proposed scheme of arrangement purchased shares in an off-market special crossing above the price proposed under the scheme itself. ASIC raised concerns that all shareholders would not be treated equally unless the scheme consideration was increased. Ultimately, the scheme was terminated due to a competing transaction.
This is a reminder that, where an acquirer purchases shares above the scheme price, it will be inviting potential opposition from ASIC whose policy since the 1990s has been to oppose those sorts of acquisitions.
Case study 2
ASIC acted to ensure that the views of the independent board committee on a transaction had enough prominence in comparison to the recommendation of conflicted directors.
ASIC has said that it would generally expect conflicted directors to refrain from making a recommendation. It also reminded parties that this should be considered when the scheme implementation agreement is being negotiated and conditions about director recommendations should be crafted appropriately.
Case study 3
ASIC took action after there was a material delay to a scheme because a third party regulatory approval was not received for several months after shareholders voted on the scheme. This was remedied by the target company reissuing disclosure to shareholders and agreeing to hold a “ratification” meeting of shareholders.
If there is a material delay between the shareholder vote and the final court approval, there is a risk that the scheme may not be approved by the court on the basis that, due to material changes after the shareholders’ meeting, the vote has gone ‘stale’. For this reason, generally speaking, companies endeavour to hold the shareholder vote as close as possible to the second court hearing and will delay the holding of the vote if regulatory approvals are outstanding.
ASIC advises that, where possible, practitioners should consider obtaining approvals to conditions precedent dependent upon third party approvals before commencing the scheme process.
ASIC latest report is a useful source of information about technical aspects of M&A practice. Well done to ASIC for issuing these reports at regular intervals. The more information that is available in the market, the better the market operates. My only suggestion is that ASIC should seek to consult more with practitioners on issues, especially on contentious issues.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2020