There are many instances where a Chapter 6 takeover bid commences on a 'hostile' basis but ultimately becomes 'friendly', with the bidder securing the support of the target's board - typically only once the bidder improves the price and/or conditionality of its bid to a level that is acceptable to the target's board. In these situations, the bidder will usually maintain its initial Chapter 6 bid structure, with the target's board issuing a Target's Statement recommending that shareholders 'Accept' the improved offer.
But what if, after the initial hostilities cease and the target's board agrees to recommend the bidder's improved offer, the bidder wants to abandon its Chapter 6 bid structure and proceed with a scheme instead? Can this be done? The short answer is 'Yes, subject to ASIC relief'.
This situation is demonstrated by the current SAB Miller/Foster's scheme. SAB Miller initially sought to engage with the Foster's board by submitting an indicative, non-binding proposal at $4.90 per share. This preliminary approach was publicly disclosed and rejected by the Foster's Board on 21 June 2011. On 17 August 2011, SAB Miller announced its intention to make a hostile takeover bid at the same price of $4.90 per share, less any dividend or distribution paid or declared by Foster's. Approximately one month later, SAB Miller succeeded in securing the support and recommendation of the Foster's Board after:
- increasing the offer price to $5.10
- allowing Foster's shareholders to retain a final dividend of 13.25 cents per share that had been declared, and
- agreeing to allow Foster's to make a capital return of 30 cents per share.
The improved offer was structured as a scheme between Foster's and its shareholders. In other words, SAB Miller abandoned its initial Chapter 6 bid in favour of a scheme. From a bidder's perspective, one important point to appreciate when shifting from a publicly announced Chapter 6 takeover to a scheme of arrangement is that a bidder must apply to ASIC for relief from its statutory obligation to proceed with the takeover offer within 2 months after the takeover bid was publicly announced.
The relief granted by ASIC to SAB Miller is conditional on SAB Miller fulfilling its statutory obligation to proceed with its earlier announced takeover offer if the scheme of arrangement fails. So, if the scheme is not approved by shareholders on 1 December 2011 or if the scheme otherwise fails, SAB Miller will be required to follow through with its original bid as announced on 17 August 2011 (ie. $4.90 per share less the final dividend of 13.25 cents and subject to the announced defeating conditions).
From a purist's viewpoint, the condition attached to ASIC's relief is appropriate – after all, SAB Miller's desire to change to a scheme should not deprive Foster's shareholders of the offer for their shares that the takeover provisions of the Corporations Act promise. However, from a practical perspective, the conditional nature of ASIC's relief arguably makes less sense. The hostile bid first announced was at $4.90 less any dividend or distribution and was subject to a 90% minimum acceptance condition. The scheme proposed is at $5.10 plus the 13.25 cent final dividend plus a 30 cent capital return. Therefore, the scheme offers Foster's shareholders substantially more funds in their hands than the originally announced takeover bid. Viewed in this light, it is difficult to conceive of a situation where, if the scheme fails to achieve 75% approval, SAB Miller (which would then be compelled by ASIC to follow through with its initial hostile bid at the lower price and on the announced terms) would secure sufficient acceptances to fulfil the 90% minimum acceptance condition. Similarly, if the Foster's scheme is approved by shareholders but fails because of a 'material adverse change' or other non-fulfilled condition before the second court hearing, it is likely that the same circumstances would enliven one or more of the conditions attached to SAB Miller's originally announced bid. Therefore, requiring SAB Miller to follow through with its original takeover bid is unlikely to provide much protection for Foster's shareholders if the scheme fails: any acceptances of offers received under SAB Miller's 'enforced' original bid would only create a conditional contract between SAB Miller and each accepting shareholder. SAB Miller could maintain the condition(s) and wait for the offer period to end, at which point the conditional contracts would lapse.
Conclusion
The legislative requirement that a party who announces an intention to make a takeover bid must proceed to make offers within two months on the same or substantially no less favourable terms than those announced serves an important public policy purpose. Similarly, ASIC has a legitimate point in ensuring that target shareholders are not disadvantaged if a bidder wishes to change from a bid structure to a scheme structure, However, with due respect to these two considerations, our view is that it is time for ASIC to concede that if an announced takeover does not have any prospect of success due to a supervening event or other subsequent development, it is appropriate to free bidders unconditionally from the barren obligation to make offers within two months of the announcement.
This article is from our November 2011 edition of Mergers & Acquisitions newsletter.