Introduction

A shareholder intention statement is any public statement regarding the intention of a shareholder which has been made or authorised by the shareholder in the context of a takeover bid or scheme of arrangement.

Examples of 'direct' shareholder intention statements are ones that are publicly made by a shareholder itself, such as:

• "I, the holder of 15% of the shares in [target], intend to accept the takeover offer announced by [bidder], in the absence of a superior proposal";
• "I, the holder of 15% of the shares in [target], intend to vote in favour of the scheme resolution under which [bidder] will acquire 100% of [target], in the absence of a superior proposal."; or
• "I, the holder of 15% of the shares in [target], do not presently intend to accept the takeover offer made by [bidder]."

Often the shareholder intention statement is publicly made by the bidder or target and attributed to the shareholder. For example, a bidder or target may come out publicly and state: 'Party A, the holder of 15% of the shares in [target], has advised [bidder / target] that it intends to accept the takeover offer announced by [bidder], in the absence of a superior proposal'.

Why are shareholder intention statements important?

Shareholder intention statements are an established but complex feature of public M&A transactions. They play an important role in both 'friendly' and 'hostile' takeovers bids by providing a public indication of the level of shareholder support for an announced control transaction. For different reasons, this may be important to both the bidder and target.

For a bidder, a positive intention statement from one or more key shareholders can provide important public support and momentum for a takeover bid to succeed. It may also have a 'chilling' or 'deterrent' effect on potential rival bidders (although this potential effect is largely attenuated if a shareholder intention statement is appropriately qualified as applying 'in the absence of a superior proposal').

For a target, a positive intention statement from one or more key shareholders may provide a valuable insight into as to whether or not a 'friendly' control proposal will succeed, especially in the context of a scheme of arrangement where the target will bear the majority of the costs in proposing and implementing the scheme.

For a target in a hostile bid context, a negative intention statement from one or more key shareholders sends a powerful signal to remaining shareholders that they too should reject the offer.

What has happened recently?

In December 2015, the Takeovers Panel issued Guidance Note 23 – Shareholder Intention Statements. This was prompted by the proliferation of these statements in takeovers, often with deficiencies that detracted from a competitive, efficient and informed market for the control of the particular target company's shares. The Panel identified a need to provide market guidance on the permissible use of shareholder intention statements. As part of its recent guidance note, the Panel has taken the opportunity to synthesise guiding principles from three of its key decisions in this area, being MYOB in 2008, Bullabuling in 2014 and Ambassador Oil in 2014. A brief summary of those three Panel decisions is provided in the annexure to this client alert, together with a fourth Panel decision, Gulf Alumina, that was delivered after Guidance Note 23 was released.

The release of Guidance Note 23 is timely. A number of principles are now clear and can be stated with certainty. Other important points, however, remain unclear and are creating uncertainty for bidders and targets, as well as substantial shareholders who may be approached to provide a shareholder intention statement. A summary of what is now clear and what remains unclear is provided below, together with some practical guidelines for bidders, targets and substantial shareholders respectively.

Why all the fuss about shareholder intention statements?

Shareholder intention statements are not unacceptable per se. However two key issues need to be kept firmly in mind whenever shareholder intention statements are being considered as a possible feature of a publicly announced takeover.

First, market integrity issues may arise if the intention statement is ambiguous or misleading or if the maker of the statement does not act in accordance with it.

Secondly, the circumstances surrounding how a shareholder intention statement is procured may give rise to a risk that either:

a) a relevant agreement arises between the bidder and the maker of the shareholder intention statement, or

b) an inference of association arises between the bidder and the maker of the shareholder intention statement.

Either of these two circumstances could result in the bidder obtaining a relevant interest in the shares of the target held by the maker of the shareholder intention statement. This in turn may result in the bidder breaching its substantial holder disclosure obligation or even worse, breaching the 20% prohibition under section 606(1) and, in the case of certain 'foreign' bidders, potentially also the 20% threshold in the Foreign Acquisitions and Takeovers Act. These risks are heightened if the bidder already has a pre-existing interest in the target's shares.

What is now clear?

Time before acceptance

If a shareholder statement is qualified by a reference to time (e.g. 'I intend to accept the takeover offer 21 days after the offer period opens') you cannot accept before that date.

Similarly, a statement along the lines, 'I intend to accept the takeover within 21 days after the offer period opens, in the absence of a superior proposal' requires that you do not accept the offer within, say, the first 7 to 10 days after the offer opens. Although that would be 'within' your stated 21 day timeframe, commercially rational and objective behaviour requires that you defer your acceptance to as late as possible within your stated timeframe. That provides maximum time for a superior proposal to emerge. So in this example, you should defer your acceptance until day 20 or 21.

Aggregation with bidder's shareholding

A shareholder intention statement must always be qualified as applying 'in the absence of a superior proposal'. If it is not qualified in this manner, a finding of unacceptable circumstances is likely. That is especially the case if the shareholding of the person making that unqualified statement, when aggregated with the bidder's pre-existing shareholding (if any), increases the bidder's shareholding to above 20%. By way of example, see the summary of the MYOB Panel decision in the annexure to this alert.

Superior proposal

If a shareholder intention statement is qualified by reference to no superior proposal emerging, you must allow a reasonable period of time to pass for a superior proposal to emerge before acting on your stated intention (e.g. before accepting the offer or lodging a proxy vote in favour of the scheme). What is a reasonable amount of time? The Panel says 21 days after the offer has opened (or presumably in the case of a scheme 21 days after the scheme booklet and proxy form are received). For further context, see the summary of the Ambassador Oil Panel decision in the annexure to this alert.

A related issue is this: what if a shareholder intention statement is qualified by no superior proposal emerging and a competing proposal does in fact emerge - who determines whether the competing proposal qualifies as a superior proposal? The Panel says that, 'Whether a competing proposal is superior is primarily for the shareholder to determine, but it may give rise to unacceptable circumstances if a shareholder acts contrary to a demonstrably superior competing proposal without good reason.' This implies that the Panel may apply an element of objectivity to assessing whether a competing proposal qualifies as a 'superior proposal'.

Assessing whether a competing proposal is a superior proposal is not always a straight forward exercise. This requires assessing and comparing factors such as price, conditionality and timing for receipt of payment. Further complexities arise if, as is often the case, either the first proposal and/or the competing proposal is or includes scrip. In that case, it is not a simple exercise of comparing one cash offer against another cash offer (leaving to one side a comparison of conditionality and timing).

For further context, see the summary of the Gulf Alumina Limited Panel decision in the annexure to this alert where the Panel criticised the vagueness of a statement from a shareholder that it would not accept the offer unless it was 'a substantially improved offer'.

Consent and other details

If a bidder or target makes a public reference to any shareholder intention statement, the prior consent of the shareholder is required. You also need to clearly specify the identity of the shareholder(s) and the details of their holding (in number and percentage).

If you are aggregating holdings of multiple shareholders whose intention statements you are publicly referencing, each of those shareholders must first consent to your public disclosure and their individual holdings must be separately identified in your public statement.

For further context, see the summary of the Bullabuling Gold Limited and the Gulf Alumina Limited Panel decisions in the annexure to this alert.

What is still unclear?

Despite the release of Guidance Note 23 and the principles it synthesises from previous Panel decisions, several important aspects remain unclear. These were raised in submissions made by various parties, including ASIC, during the consultation process for the guidance note. Unfortunately these aspects are not adequately addressed by the Panel in the final form of the guidance note.

Will a shareholder intention statement by itself give rise to any 'association' or 'relevant agreement' issues?

Potentially. This is an important area that needs further guidance. Bidders seeking shareholder intention statements remain unsure as to the legal implications of procuring such statements – this may invite an allegation that the bidder and the shareholder who provides the requested statement are 'associates', which in turn carries a risk of breaching the substantial holder notification regime and/or the 20% prohibition.

Our view is that a 'positive' shareholder intention statement that is qualified as applying in the absence of a superior proposal should not, by itself and without more, give rise to unacceptable circumstances. It is hard to see how an appropriately qualified shareholder intention statement would undermine any policy objectives of the takeovers regime, even though an association or relevant agreement may technically arise through the circumstances in which the statement is procured.

Unfortunately, despite almost all of the responses received during the consultation process calling for more guidance on this point, all that the Panel says in the final Guidance Note is that a shareholder intention statement can give rise to concerns, depending on how it has been obtained and how it is used, particularly where the interests the subject of the statement, when aggregated with the bidder’s interest, exceed 20%.

What is ASIC's view?

In its submission during the Panel consultation process, ASIC stated that shareholder intention statements should be discouraged. ASIC also agreed that further guidance is required on how the 'association' and 'relevant interest' concepts intersect with shareholder intention statements.

ASIC's view is that the broad definitions of 'associate' and 'relevant agreement' create a 'significant risk' that the process of obtaining and then publicly disclosing these shareholder intention statements will either give rise to a relevant agreement or the inference of an association. This view was reiterated by ASIC in the recent Gulf Alumina Limited Panel decision, a brief summary of which is set out in the annexure to this alert.

In February 2016, ASIC released its half yearly report on regulation of corporate finance. Unsurprisingly, one of ASIC's observations on M&A transactions was the need for caution with shareholder intention statements and the interplay with ASIC's truth in takeovers policy.

What is the interplay between shareholder intention statements and ASIC's truth in takeovers policy?

If a bidder enters into a binding contractual agreement with a substantial holder regarding the control over the disposal or the voting rights attached to shares held by the substantial holder, the bidder will acquire a relevant interest in that substantial holder's shares. That in turn potentially attracts substantial holder notification obligations for the bidder and a breach of the 20% prohibition by the bidder, especially if the bidder has a pre-existing interest in the target's shares. These same outcomes potentially arise if the bidder or target makes a public statement of intention that is attributed to one or more shareholders.

However, a bidder could potentially achieve the same outcome it is seeking through a different path. Rather than entering into a formal contractual agreement with a substantial shareholder or seeking that shareholder's consent to the bidder making a public intention statement that is attributed to the shareholder, it remains open for the bidder to invite the substantial shareholder to come out publicly and make its own statement that it intends to accept the bidder's offer or vote in favour of the scheme (as the case may be), in the absence of a superior proposal. This type of direct public statement of intention from a key shareholder would attract ASIC's 'Truth in Takeovers' policy. ASIC will hold the shareholder to that statement.

Is this an anomaly? Does this present an alternative avenue for bidders to achieve the same binding outcome, without the attendant 'association' and 'relevant agreement' risks we have referred to earlier? Probably not. Unless a substantial holder unilaterally decides, without any prompting or encouragement from a bidder, to come out with its own public statement of intention in support of a bidder's offer, our view is that ASIC is likely to take the same approach of saying that the preceding circumstances and context that gave rise to the shareholder making its own shareholder intention statement carry a 'significant risk' that there is a 'relevant agreement' or 'association'.

How will shareholder intention statements impact a scheme of arrangement?

The risk that shareholder intention statements can give a bidder a relevant interest in the shares of the maker of the intention statement becomes more acute in a friendly takeover structured as a scheme of arrangement.

This is because if the bidder is found to have a relevant interest in the shares the subject of the intention statement, that parcel of shares may need to be excluded for the purpose of voting on the scheme resolution or voted as a separate class. If that happens, this reduces the overall pool of shares available to vote as a single class on the scheme. That in turn works against the bidder by making it harder to satisfy the 75% voting threshold.

This is precisely the same risk that arises if the bidder in a scheme has a significant pre bid stake in the target. This is why large pre bid stakes in schemes can be problematic and counterproductive for bidders.

Is it safe to announce a shareholder intention statement at the same time as the takeover is first announced?

Another concern, and one that applies equally to friendly takeovers structured as either a conventional takeover bid or scheme, is the timing of the shareholder intention statement. Can this statement be released at the same time as the friendly takeover is first publicly announced?

Ideally, a shareholder's intention to accept a takeover bid or to vote in favour of the scheme (as the case may be) should only be publicly announced after the recommended offer is first announced, not at the same time. This avoids the strong inference that the shareholder knew about the recommended offer before all other shareholders and the broader market and that this shareholder played a key part in developing the recommended offer or was otherwise involved in its promulgation. Commercially rational and objective behaviour suggests that 'unassociated' shareholders would first learn of a control proposal at the same time as the broader market, and that they would then take the time to assess for themselves the overall terms and commercial merits of that publicly announced proposal before publicly indicating their support for it. This in turn suggests that there should be a reasonable period of time between the public announcement of a recommended takeover and the shareholder intention statement in support of it.

ASIC has also indicated that it is concerned with shareholders being invited to make what is in effect a binding decision in relation to a control proposal:

• prior to receiving the regulated disclosure documentation that is designed to ensure that all shareholders are fully informed of the expected advantages, potential disadvantages and risks of a control proposal e.g. in the case of a bid, the bidder's statement and target's statement (with the latter statement possibly including an independent expert's report), and in the case of a scheme, a scheme booklet (which typically includes an independent expert's report); and
• without the benefit of the statutory time periods for shareholders to consider this extensive documentation.

ASIC's view is that a bidder's desire to frontload or offline decision making by one or more key shareholders may undermine many of the fundamental shareholder protections in Chapter 6.

Guiding principles

Given the current uncertain state of play, what are some practical guiding principles when it comes to shareholder intention statements?

Exercise caution!

1. Shareholder intention statements are clearly a hot topic for ASIC and the Takeovers Panel. The need for caution is heightened in a friendly takeover by scheme of arrangement where ASIC has a statutory mandate to review the draft scheme booklet before it is released. Expect significant scrutiny from ASIC if your draft scheme booklet incorporates any reference to a shareholder intention statement.
2. Even in a conventional takeover bid where ASIC does not review the draft bidder's statement and target's statement before they are publicly released, ASIC will not hesitate to intervene after the offer is publicly announced or after the bidder's statement or target's statement are released if it considers that a shareholder intention statement is problematic.

Guidelines for bidders

1. How commercially fundamental is the shareholder intention statement to the overall success of the offer? If a bidder is confident of the merits of its offer, they should carefully consider whether it is worth the potential regulatory delay and distraction of procuring a shareholder intention statement, with all of its inherent legal risks and complications.
2. Any shareholder intention statement should be made independently by the shareholder, without any prior inducement or procurement by the bidder. Ideally, the bidder should avoid initiating contact or having discussions with key target shareholders regarding any intention statements from them.
3. Situations which give rise to an inference that the bidder has induced, procured or otherwise orchestrated a shareholder intention statement or a particular course of action by a target shareholder (e.g. submitting an offer acceptance form or lodging a proxy vote in favour of the scheme) should also be avoided. The deliberate absence of any correspondence or communication between the bidder and a key shareholder or deliberate brevity in such correspondence or communication can look contrived and has recently led the Panel to infer that there is some element of orchestration leading to a finding of an association.
4. Any shareholder intention statement in support of a recommended takeover offer should have a temporal gap between the initial announcement of the offer and the making of the statement.
5. Any shareholder intention statement should include the written consent of the party making the statement, permitting the bidder to publicly release or reference that statement. The public statement must clearly identify the shareholder(s) and the details of their holding (in number and percentage).
6. The bidder should never say or infer that it would only proceed with its proposal if the shareholder intention statements are provided.
7. Instead of obtaining a written statement of intention from the substantial holder addressed to the bidder, consider whether the substantial shareholder might be independently minded to make its own public statement of intention in support of the offer. In that case, ASIC will hold the shareholder to its public statement under ASIC's Truth in Takeovers Policy. Again, there should be no prior inducement or procurement activity by the bidder – the decision to make the shareholder intention statement should be arrived at independently by the shareholder.

Guidelines for targets

1. Target boards should resist pressure from a prospective bidder to procure shareholder intention statements as a condition of the bidder working up an indicative, non-binding takeover proposal. The target's board should always be conscious of its overriding duty to achieve the best outcome for its shareholders in the context of a potential change of control transaction. The discharge of that duty requires target directors to create or at least facilitate competitive tension. This includes not agreeing to unreasonable 'lock up' mechanisms and not being a party to any other conduct that might discourage the possibility of competing proposals emerging.
2. As a corollary of this first point, a target board that is working with a bidder on a non-binding, indicative takeover proposal should carefully assess whether procuring a shareholder intention statement is in the best interest of the target's shareholders? Does such a statement have the potential to 'lock in' a transaction for a potential bidder? If so, will this discourage potential competing bidders?
3. Be conscious of the risk that the target may be deemed to be an agent of the bidder if the target agrees to solicit shareholder intention statements on behalf of the bidder.
4. A target board that is negotiating a potential friendly takeover proposal may have a legitimate interest in receiving an early insight from its key shareholders as to whether they are supportive of the proposal, particularly as a failed proposal will result in considerable expense and will have reputational implications for the target directors. In these circumstances, target directors (and equally bidders) are better advised to rely on informal shareholder canvassing (i.e. non binding and non public indications), rather than seeking shareholder intention statements that would then be publicly released. ASIC has confirmed that the board of a target is free to canvass a target shareholder on its likely reaction to a potential bid. Shareholder canvassing is permitted provided it does not require the shareholder in any way to commit to either accept, reject or vote in a particular way or consent to their intention statement being publicly announced by the bidder or the target. Provided that no consensus or arrangement between the parties in fact results, shareholder canvassing is unlikely to give rise to any agreement, arrangement or understanding.
5. In the context of defending a hostile takeover, target boards need to be careful with actively soliciting and procuring statements from key shareholders that they intend to reject the offer. Ideally, a target board defending a hostile bid should critique the offer on its own merits and let key shareholders come out independently with their own public statements that they do not currently intend to accept the offer. Having said that, if a target shareholder, acting on its own initiative, writes to the board privately and says that it does not presently intend to accept the unsolicited offer on its current terms and is supportive of the target board and its strategy, it is probably permissible for the board to respond to that shareholder and ask whether they would be prepared to consent to that private communication being reformulated into an 'intention statement' that would then be made public as part of the takeover defence.
6. If, despite these guidelines, a target board wishes to actively procure a shareholder intention statement in support of or against a publicly announced offer, the prior consent of the shareholder is required. You also need to clearly specify the identity of the shareholder(s) and the details of their holding (in number and percentage).

Guidelines for substantial shareholders

1. If you are approached by a bidder or target to provide a public shareholder intention statement (in support of or against an offer), it is important to understand the potential legal implications of this, including that you may be considered to be an 'associate' of the bidder or target and that, in the case of a bidder, they may acquire a relevant interest in your shares.
2. Even if you consider that a potential offer a bidder confidentially approaches you with is a compelling one, you should resist the natural urge to assist the bidder in providing 'public support' and 'momentum' for their offer. In your enthusiasm to assist, you may unintentionally create regulatory complications that then need to be fixed, causing unwanted delay and distraction.
3. It might be that the best approach is to maintain an arm's length distance with a bidder, by not providing the requested shareholder intention statement but instead replying privately that if an offer was publicly announced on the terms communicated, your current intention would be to accept it, in the absence of a superior proposal, but that you reserve your position, including based on your review of the formal offer documentation once it is released. That type of private response may be sufficient for a bidder.
4. If, despite the preceding guidelines, you are comfortable making a shareholder intention statement, ensure that it complies with the Panel's guidance note – always qualify your intention statement appropriately, including noting that it is subject to no superior proposal emerging; always provide for reasonable time periods to allow a superior proposal to emerge; and always allow those time periods to almost expire before acting on your stated intention.
5. If you are minded to do so, consider coming out publicly shortly after the offer is announced and making your own shareholder intention statement in support of (or against) the announced offer. Recognise that you will be bound by your public statement under ASIC's Truth in Takeovers policy, so it is imperative that your statement is carefully drafted and appropriately qualified.

Annexure

MYOB Limited [2008] ATP 27

In October 2008, Archer Capital and HarbourVest Partners LLC made a takeover bid for MYOB Limited (MYOB). Shareholders holding approximately 34% of the issued shares in MYOB indicated to the bidders that they would accept the offer as soon as the offer opened for all their MYOB shares. These statements were not qualified by reference to no superior offer emerging.

The Panel was satisfied that there was a relevant agreement between these shareholders and the bidder which gave the bidder a relevant interest in 34% of MYOB, therefore breaching the 20% prohibition.

The Panel also found it unusual that the acceptances were to occur at the beginning of the offer period. This is contrary to commercially rational behaviour and common market practice of deferring acceptance of an offer until late in the bid period, to allow time for any superior offer to emerge.

Ambassador Oil and Gas Limited 01 [2014] ATP 14

In May 2014, Drillsearch Energy Limited (Drillsearch) and Ambassador Oil and Gas Limited (Ambassador) jointly announced Drillsearch's intention to make a recommended conditional off-market bid for Ambassador, offering 1 Drillsearch share for every 5.4 Ambassador shares. Drillsearch also announced that it had obtained a pre bid stake of 19.99% in Ambassador. In addition, Drillsearch announced that it had obtained shareholder intention statements from two other shareholders collectively holding 17.6% advising that they intended to accept the offer within 14 days of the offer opening, in the absence of a superior proposal. In June 2014, Magnum Hunter Resources Corporation (Magnum) announced its intention to make a competing off-market bid for Ambassador.

Magnum applied to the Takeover Panel alleging that unacceptable circumstances arose from various aspects of Drillsearch's recommended offer for Ambassador. One of the issues before the Panel was whether Drillsearch had obtained a relevant interest in the 17.6% parcel the subject of the two shareholder intention statements. If that was the case, then that 17.6% parcel, when aggregated with Drillsearch's 19.99% pre bid stake, meant that Drillsearch had a relevant interest in 37.6%, in breach of the 20% threshold.

The two shareholders who provided the intention statement accepted the offer on the 4th day after it opened. They argued that this was consistent with their statement that they would accept within 14 days. The Panel found that although this may be literally correct, it is was inconsistent with their statement that they would only accept in the absence of a superior proposal. The Panel said that commercially rational behaviour would be for these two shareholders to wait for as late as possible within their stated 14 day timeframe before accepting to see if a superior proposal emerged in that time. They should have waited up to the very last day of the 14 day period before acting on their intention statement and accepting Drillsearch's offer.

Bullabuling Gold Limited [2014] ATP 8

In April 2014, Norton Gold Fields announced a hostile off-market takeover bid for all of the shares in Bullabuling Gold Limited (Bullabuling) at 7 cents per share. As part of the defence of the hostile takeover, Bullabuling said that it had received strong messages of support from its shareholders, including from those collectively holding 41.8% of the target indicating that they did not intent to accept the offer. These rejection statements were compiled by Bullabuling using varied verbal and written statements from 101 shareholders. The written statements were not solicited by Bullabuling directly. Rather, the statements were received from, or on behalf, of 88 shareholders in response to a Bullabuling shareholder who used the internet stock discussion site HotCopper to solicit these intention statements. The Panel found that the rejection statements were misleading and that they lacked uniformity and appropriate qualifications. The Panel noted that only approximate figures were used and none of the shareholders consented to their rejection statements being publicly referenced by Bullabuling. A declaration of unacceptable circumstances was not made following an undertaking by Bullabuling to issue a supplementary target's statement retracting these rejection statements.

Gulf Alumina Limited [2016] ATP 6

In December 2015, Metro Mining Limited (Metro) announced a hostile off-market scrip takeover offer for all of the shares in Gulf Alumina Limited (Gulf), with Metro offering Gulf shareholders 3.3 Metro shares for every 1 Gulf share held. In January 2016, Gulf issued its target's statement which disclosed a shareholder intention statement that fifteen of Gulf shareholders holding in aggregate 70.6% of Gulf's stating that their current intention was not to accept the Metro offer. This was expressed as a non binding statement of current intentions. In its application to the Takeovers Panel, Metro submitted that this statement had failed to disclose the number of shares and percentage holding of each of the shareholders and was therefore contrary to Guidance Note 23. This prompted corrective disclosure by Gulf. The other key takeaways from the Panel proceedings include the following:

• it may be possible to express shareholder intention statements as being statements of present intention so long as these statements are not meant to be binding;
• statements from a shareholder that it will not accept the offer unless it is 'a substantially improved offer' may be vague and unclear and should be avoided; and
• if the target's directors appear to have been significantly involved in procuring the shareholder intention statements, ASIC may form the view that this has resulted in the target obtaining a relevant interest in those shareholders' shares or that an association arises between the target and those shareholders.