How a takeover bid works - off-market

10 minute read Michael Scarf, Alberto Colla

This article explains how an off-market takeover bid can be used to acquire control of a listed Australian company.

What is an off-market takeover bid

Takeover bids are the most common way in which control of Australian listed companies and managed investment schemes is acquired.

There are two types of takeover bids: off-market and on-market, with off-market takeover bids being far more common than on-market takeover bids.

An off-market takeover bid is a procedure under Chapter 6 of the Corporations Act under which a bidder makes individual offers directly to all target securityholders to acquire their securities.

Target securityholders are free to decide whether or not to accept the bidder's offer – if they accept then the bidder acquires their target securities.

If the target board recommends that target securityholders accept the bidder's offer from the outset, the off-market takeover bid is considered 'friendly'. As an off-market takeover bid is driven by the bidder and does not require target consent or co-operation, it can also be used for a 'hostile' acquisition of a target.

Interestingly, hostile off-market takeover bids are more common than friendly off-market takeover bids, and in most cases an off-market takeover bid that starts as a hostile bid is only successful if it is ultimately recommended by the target board.

Overview of an off-market takeover bid

An off-market takeover bid consists of sending offers contained in a bidder's statement to target securityholders, a response by the target in its own target's statement, and target securityholders lodging acceptance forms and receiving cash or scrip (or a combination thereof) as consideration from the bidder in exchange for their target securities.

The key phases and steps for a friendly off-market takeover bid are shown below. For a hostile off-market takeover bid, Phases 1 to 3 are more limited.

Key steps in an off-market takeover bid

Initial approach

The first key step in a friendly off-market takeover bid will typically involve the bidder approaching the target with an indicative offer to acquire 100% of target pursuant to an off-market takeover bid.

Due Diligence

If the target is amendable to the bidder's offer, the target will typically grant the bidder an exclusive or non-exclusive period of due diligence so that the bidder can confirm its interest in the target and the offer price.

If the offer price includes bidder scrip, the target may undertake some due diligence on the bidder so that it may confirm the value of the bidder scrip.

In a hostile off-market takeover bid, the bidder will not have access to target's confidential information, but will base its offer price and terms on the bidder's understanding of target gained form publically available information such as target's continuous disclosure announcements and periodic financial reporting. This is commonly known as 'desktop' due diligence.

Pre-bid stake

In a hostile off-market takeover bid, the bidder will typically approach one or more major target securityholders on a confidential basis to seek to purchase target shares up to the 19.9% limit. A pre-bid stake is important for a hostile off-market takeover bid as it gives the bidder momentum and reduces the possibility that a third party will make a rival offer for control of target.

In a friendly off-market takeover bid, the need for a pre-bid stake is not as acute as the bidder will have the benefit of the target board's recommendation that target shareholders accept the bidder's offer. Nevertheless, a pre-bid stake is still very helpful in reducing the possibility that a third party will make a rival offer. 

Bid implementation agreement

In a friendly off-market takeover bid, before the takeover bid is publicly announced, the bidder and the target will typically enter into a 'bid implementation agreement' which:

  • sets out the terms of the offer to be made by the bidder and commits the bidder and the target to the takeover bid transaction;
  • obliges the target to support the takeover bid, and to ensure that the target directors recommend that target shareholders accept the offer; and
  • sets out how the bidder and target will work together throughout the takeover bid process.

The bid implementation agreement will typically contain 'deal protection mechanisms' such as:

  • 'no shop', 'no talk' and 'no due diligence' obligations on the target to seek to prevent the target from proactively generating rival bidders;
  • a notification and matching right for the bidder to be notified of and have the opportunity to match any third party offer for control of target before target directors may recommend that third party offer; and
  • a break fee (generally not exceeding 1% of the equity value of the target) payable by target to bidder if a third party is successful in obtaining control of target or if the target directors change their recommendation to vote in favour of the scheme in certain circumstances.

The off-market takeover bid is typically publicly announced for the first time when the bid implementation agreement is executed. That announcement commonly attaches a full copy of the bid implementation agreement.

The offer process

The bidder's offers are contained in a document that is mailed to target securityholders called a 'bidder's statement'.

The bidder's statement generally contains all information known to the bidder that is material to a target securityholder's decision whether to accept the offer, as

well as specified information including

information about the bidder (a greater amount of which is required when the bid includes scrip consideration);

  • how the bidder will fund any cash consideration;
  • details of the bidder's intentions regarding the target's business, assets and employees; and
  • details of any acquisitions of target securities by the bidder or its associates in the previous four months.
  • A copy of the bidder's statement is typically given to the target, ASIC and released to ASX electronically when the bidder first announces its offer.

The offer can only open for acceptance once the bidder's statement is mailed to all target securityholders. But, unless the target consents otherwise, the bidder is not permitted to send its bidder's statement to target securityholders until 14 days after the bidder's statement is given to target. The 14 day waiting period gives the target company time to respond to the bidder's offer.

It is common in a friendly off-market takeover bid for the target to consent to dispensing with the 14 waiting period, but in a hostile off-market takeover bid the target is unlikely to consent and will typically use that time to plan its defence strategy and to potentially take action against the bidder in the Takeovers Panel, one aim of which is to try to increase the time period before bidder can send its bidder's statement to target securityholders and open its offer.

The target must respond to the bidder's statement in a document that is mailed to target securityholders called a 'target's statement'. The target's statement must be sent to target shareholders no later than 15 days after the bidder's statement is despatched. The target's statement contains the target directors' recommendation on whether to accept the offer, and usually an independent expert report valuing the target securities.

The bidder's offers will typically set an offer period of one month, but it is common for several extensions to the offer period to be made by the bidder during the course of the off-market takeover bid to allow target securityholders more time to accept the offer. The maximum offer period, including extensions, is 12 months.

The bidder's offers are also typically conditional on one or more events occurring or not occurring, such as the Bidder reaching a minimum level of acceptances (often 50% or 90%) or obtaining regulatory approvals such as FIRB or ACCC. In order for the off-market takeover bid to be successful, all conditions will need to be satisfied or waived by the bidder, which means that the bidder will need to make strategic decisions about when to waive conditions to encourage target securityholders to accept the offer.

The bidder must pay the offer price to target shareholders who have accepted the offer within the earlier of one month after the offer becomes unconditional, or 21 days after the offer period closes.

The bidder can increase the offer price at any time before the offer period closes, regardless of wither the offer is still conditional. However, if the bidder increases the offer price during the last seven days of the offer period, the offer period is extended for 14 days. Regardless of when the offer price is increased, target securityholders who have already accepted the offer are entitled to be paid the increased offer price.

Once the bidder reaches ownership of 90% of all target securities, the bidder may commence the process of compulsory acquisition of all remaining target securities not held by the bidder in return for payment of consideration equal to the offer price. The compulsory acquisition process involves the bidder sending notices to all remaining target shareholders and a period of time during which any remaining target shareholders may object to the Court.

Delisting of target from ASX will usually take place soon after completion of compulsory acquisition.

Indicative timetable for an off-market takeover bid

The timetable for an off-market takeover bid is largely prescribed by law, as described above. But the timing is uncertain as the offer period is typically initially set at one month, but is extended several times, and is followed by four to six weeks of compulsory acquisition.

As a result, a friendly off-market takeover bid followed by compulsory acquisition usually take about four months to complete, but can be up to six months or longer if significant due diligence is conducted before the takeover bid is announced or substantial regulatory approvals are required such as FIRB and ACCC.

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https://www.minterellison.com/articles/how-an-off-market-takeover-bid-works

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