The Takeovers Panel has released the reasons for its decision in Finders Resources Ltd 02, in which the Panel ordered that an 11% shareholder be held to its unqualified public statement that it did not intend to accept the bidder’s offer at $0.23 per share. The reasons elaborate on the Panel’s views of ASIC’s truth in takeovers policy, particularly as it applies to both substantial holders and non-substantial holders, including directors in their capacity as shareholders.
- The Takeovers Panel ordered the reversal of an acceptance by an 11.31% shareholder who had stated publicly that it would not accept the bid at $0.23 but had not qualified the statement.
- The Panel drew a distinction between the binding nature of non-acceptance statements of the 11.31% shareholder, two directors holding around 1.7% and other smaller shareholders holding around 25% in aggregate, principally on the basis of the substantial holder (5%) concept.
- The Panel’s decision confirmed that in its view the truth in takeovers policy does not apply to non-acceptance statements by non-substantial holders and that a public statement by a substantial holder in a takeover scenario must be appropriately qualified if the maker is to reserve the ability to act contrary to those statements.
On 20 November 2017, Eastern Field Developments Limited made a takeover bid for Finders Resources Limited, subject to a 50.1% minimum acceptance condition and certain other conditions. The bid valued Finders, the operator of the Wetar Copper Project in Indonesia, at approximately $177 million.
In mid-December 2017, Finders issued a series of statements to the effect that a number of shareholders (totalling between 33% and 38% in the different announcements) stated that they would not accept the offer. Finders disclosed the names of the holders and the numbers of shares they spoke for, but most of the shareholders had not been warned that they may be bound by the statements.
The exceptions were two directors (who owned about 1.7% of the Finders shares between them) and an 11.31% shareholder, Taurus Funds Management Pty Ltd. Taurus advised the company that it did not intend to accept, but that it would advise Finders if it changed its mind. However, it later approved a public non-acceptance statement attributed to it, which omitted that qualification.
On 14 February 2018, Eastern declared the bid unconditional, and that acceptances stood at 5% (it had started with a 19.8% stake). On 12 March 2018 it declared the price final, and on 16 March 2018, it announced that its relevant interests were at 48.4%. On 19 March 2018, Taurus accepted the Eastern offer, the Finders board reversed its recommendation not to accept, and the two Finders directors stated that, given control had passed, they would now accept the bid, though they still thought it underpriced, and that shareholders then had ten days to accept the bid.
ASIC applied to the Panel, with Eastern’s support, to have the directors’ and Taurus’ acceptances set aside. ASIC succeeded as regards Taurus, but not the directors. Without Taurus’ 11%, Eastern would have approximately 83% of Finders, and would not be obliged to issue buy-out notices to the minority shareholders.
The decision remains subject to a review application to the Review Panel by Taurus. At the time of writing, the outcome of that application was unclear.
THE PANEL’S REASONS
The Panel reached its decision by applying to Taurus, but not to the directors or the other shareholders, a statement in ASIC’s truth in takeovers policy (ASIC Regulatory Guide 25 Takeovers: false and misleading statements) (RG25) that certain market participants who:
“make a last and final statement should be held to it, as with a promise”.
It needs to be remembered that this truth in takeovers policy was originally applied to substantial holders (that is, persons who have voting power in the target in excess of 5%) because in one instance a holder of a blocking stake had stated that it would not accept a bid down to the last minute, when it changed its mind and accepted, too late for many small shareholders to follow it in accepting. The policy does not concern the breach of a solemn oath, but disappointing the reasonable reliance by others on your stated position.
The Panel sought to explain the different treatment of Taurus on the one hand and the two directors on the other hand by saying that Taurus was a substantial holder which had made a considered and informed decision to authorise a non-acceptance statement without reserving the right to change its position. The same is true of the directors, of course, except that they were not substantial holders.
ASIC submitted that by making their non-acceptance statements, the directors had precluded themselves from accepting the bid, and their acceptances should be reversed. The Panel did not accept this submission, saying that:
“in most circumstances statements by directors in a target’s statement that they do not intend to accept a bid in relation to their shares should not attract the operation of RG 25 unless a director is a substantial holder. The market is likely to interpret any statements made by such directors to move with the board recommendation.”
This recognises what is generally accepted as market practice. It is both usual and proper for directors who think a bid is underpriced to recommend rejection and state that they do not intend to accept, but to reverse their recommendation in good time if the bid nonetheless succeeds. In doing so, they are in good company: according to legend, when accused of inconsistency, JM Keynes replied:
“When the facts change, I change my mind. What do you do?”
The Panel also did not hold the remaining non-substantial holders (holding around 25% in aggregate) to their unqualified intention statements. Besides, none of those shareholders being substantial holders on an individual basis, it appears the Panel took into account the fact that the financial adviser who had gathered the statements from shareholders for Finders did not advise those shareholders that RG25 may apply to their statements.
In drawing the distinction between the treatment, for truth in takeovers purposes, of statements by substantial holders and statements by non-substantial holders, the Panel appeared to rely primarily on the fact that RG25 is expressed to apply only to substantial holders. The Panel added that it considered that the market would have expected Taurus, which as an 11.31% holder had the capacity to block compulsory acquisition, would be bound by its statement and therefore the market would have relied on its statement. Therefore, departure from the statement resulted in the acquisition of control of Finders not taking place in an efficient, competitive and informed market.
The Panel did not accept that Taurus had the same right as non-substantial holders making the same non-acceptance statement to change its position in light of the progress (however unwelcome) of the bid - the offer becoming unconditional, control having passed, the board changing its recommendation and the offer being due to close. The Panel commented that those matters were foreseeable and that if Taurus wanted to change that statement it should have reserved the right to do so.
Whilst we agree that the market would certainly have been better served if Taurus had meaningfully qualified its public statement from the outset, the Panel did not specifically identify any adverse effects of Taurus’ conduct constituting unacceptable circumstances (i.e. prejudice to any shareholders who had relied on Taurus’ non-acceptance statement resulting from its change of position).
In fact, it might be contended that, once Eastern held nearly 50% of the shares, it would have been irrational for any shareholder to rely on any action or inaction on Taurus’ part to prevent Eastern from taking control of Finders (particularly in circumstances where Eastern’s bid was not subject to a 90% minimum acceptance condition). When the Finders board recommended acceptance of the bid, remaining shareholders had ten days to accept. Ten days is consistent with statutory benchmarks, and in any event the bid is still open, more than 10 weeks later. The Finders board did not refer to Taurus’ change of position. There was no need to: on one view, Taurus’ position had become irrelevant, as well as untenable, once Eastern reached 50%. On this view, the impact of Taurus acting inconsistently with its original statement on an efficient, competitive and informed market for Finders is less clear.
There are certainly some lessons from the Finders decision for major shareholders. Taurus could clearly have managed things better: it should have insisted that its reservation be retained in the non-acceptance statement publicly attributed to it or (more usefully) given advance notice that it would accept the bid when and if other acceptances gave Eastern control of Finders (and then have waited until Eastern had a relevant interest over 50% before accepting).
But the question needs to be asked whether, through the strict application of the broad truth in takeovers policy in the Finders decision, we have seen the policy harden into a black and white rule which applies to any unqualified intention statement by a substantial holder irrespective of any subsequent change of circumstances, and which is applied without attending to the basis of the policy? This question is particularly relevant considering where the only clear prejudice resulting from these events is to Taurus’ investors and to the 6% minority shareholders in Finders who will not receive buy-out notices from Eastern.