Reverse takeovers - ASX reveals its hand

The ASX has now released its response to its November 2015 consultation paper on reverse takeovers. Consistent with the consultation option in that paper, the ASX has decided to require bidders to seek shareholder approval where the issue of new securities by a bidder in a takeover bid or scheme of arrangement would exceed 100% of the bidder’s share capital.

IN BRIEF

• The reverse takeover debate, on the back of deals such as the merger proposals of Roc Oil / Horizon Oil and Gloucester Coal / Whitehaven Coal, saw the ASX release a consultation paper in 2015.
• After extensive consultation, the ASX has decided to require bidders to seek shareholder approval where the issue of new securities by a bidder in a takeover bid or scheme of arrangement would equal or exceed 100% of the bidder’s share capital.
• In doing so, the ASX resisted calls from proxy advisers to impose a much lower share issuance level at which the requirement for bidder shareholder approval would apply.

THE REVERSE TAKEOVER DEBATE

Reverse takeovers have provided a rich source of colourful debate in recent years.

On one side of that debate stand proxy advisers and activist investors seeking to limit the ability of boards to execute scrip transactions without shareholder approval.

On the other, boards and companies have argued that the case has not been made for the costs imposed by the increased regulatory burden.

The events of the proposed mergers of Gloucester Coal and Whitehaven Coal (2009) and Roc Oil and Horizon Oil (2014) were at the centre of the debate. In the latter case, Allan Gray requisitioned a meeting of the bidder’s shareholders to change the bidder’s constitution to prevent it from issuing the relevant shares without shareholder approval.

The debate ultimately led to calls for increased regulation, and in response, the ASX undertook a consultation process. The ASX’s 2015 consultation option was that bidders should seek shareholder approval where the issue of new securities by a bidder in a takeover bid or scheme of arrangement would exceed 100% of the bidder’s share capital.

A brief history of the debate is contained in our article on the ASX’s initial consultation paper:

SUBMISSIONS TO ASX

The submissions to ASX in response to its consultation paper unsurprisingly mirrored the previous positions adopted by the players in the debate. In particular, those who wished to see tighter restrictions on scrip takeovers wanted the bidder shareholder approval test to apply at much lower thresholds of bidder share capital.

One proxy adviser argued in its submission:

The current regime makes a mockery of the notion of shareholder primacy in takeovers by allowing boards and their advisers to subvert this principle in the interests of ensuring a deal closes regardless of the wishes of shareholders of the notional ‘bidder’.

The same proxy adviser argued that a bidder issuing more than 20% of its share capital ought to be subject to shareholder approval.

The balance of board and shareholder powers in Australian takeovers is much more complex than suggesting that shareholder primacy is the guiding principle. In many cases, boards rightly have wide discretions in control situations. Even if one accepted there was some notion of shareholder primacy in takeovers, it is difficult to suggest that a shareholder approval requirement set at such a low level has anything to do with takeovers or matters relating to control.

The competing view was illustrated by the Herbert Smith Freehills submission to ASX, which provided:

"In circumstances where there are competing policy considerations, regulators should exercise caution in giving individual shareholders an increased ability to block deals. Shareholder activists and proxy advisers by definition may wish to do exactly that. But a balance must be struck and responsible boards must be given sufficient scope to execute deals that benefit the majority of shareholders without costly and unnecessary hurdles being placed in the way".

THE ASX TAKES THE MIDDLE ROAD

The consultation option (largely) retained

The ASX decided to impose a requirement that bidders will require shareholder approval where they issue share capital in excess of or equal to their existing securities on issue.

In weighing up the competing arguments, the ASX concluded:

ASX’s market analysis indicated that requiring shareholder approval at a lower threshold of 25-50% of existing capital would affect 40-70% of scrip bids (and 30-50% of all bids) by Australian listed bidders for Australian listed companies. Given the significant number of transactions likely to be affected, ASX considers that adoption of a lower threshold would represent a fundamental change in the regulation of control transactions in Australia. ASX considers that the regulatory benefits of such a significant amendment must clearly outweigh the potential costs.

While the approach taken by ASX is certainly better than some of the more extreme suggestions that had been advocated, it is still a significant moment for the Australian M&A market. According to the ASX’s own analysis, this requirement would have applied to 20% of scrip takeovers in the period from 1 January 2012 to 31 August 2016.

The detail

The ASX has released a good deal of detail around the proposals, including the proposed amendments to the Listing Rules.

Some of the key points of detail include:

• Requirements will also apply to raisings for cash – the rules will also apply to securities issued to fund the cash consideration under a takeover or scheme.
• No independent expert’s report required – ASX will not require bidders to obtain independent expert’s reports where shareholder approval is required. Detail around the particular disclosure requirements has been provided.
• Voting exclusions – the ASX does not propose to exclude common shareholders of both bidder and target from voting, unless the common shareholder has a controlling interest in the target. There are also detailed rules around some other voting exclusions concerning associates and also benefits unrelated to shareholdings.

NEXT STEPS

The ASX has asked for comments on the Exposure Draft Listing Rule Amendments by Friday 26 May 2017. The ASX has indicated that it is seeking to introduce these amendments with effect from 1 October 2017.