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Australia – Acceptance Statements: When Will They Lead To Association?

25 November, 2014

 


What You Need To Know

 

  • A bidder was found to be associated with certain target shareholders who made “truth in takeovers” statements. 
  • The Panel indicated that acceptance statements are legitimate, provided they are not used to “achieve an end” or “lock in” acceptances.
  • In addition, when setting a specified time period for acceptance in an acceptance statement, shareholders should ensure it affords a meaningful opportunity for competing bids to materialise.

 
Background

 
In Ambassador Oil and Gas 01 the Takeovers Panel considered pre-bid arrangements and target shareholder acceptance statements relating to a scrip takeover bid by ASX-listed Drillsearch Energy Limited for Ambassador Oil and Gas Limited. The Panel application was made by a competing bidder, NYSE-listed Magnum Hunter Resources Corporation.

 
On 28 May 2014, in addition to announcing its recommended takeover offer for Ambassador, Drillsearch announced that:

 

  • it had entered into pre-bid agreements with 32 shareholders to acquire a total of 19.9% of Ambassador shares; and
  • two major shareholders and the Ambassador directors had indicated to Ambassador that they intended to “accept … within 14 days of the opening of the Offer Period, in the absence of a superior proposal” (acceptance statements). One of the major shareholders was the wife of Ambassador’s corporate adviser, Mr Hatziladas.

 
The pre-bid agreements and acceptance statements were all arranged by Mr Hatziladas.

 
Magnum Hunter announced its competing offer 13 days later. Following this, Drillsearch met with Mr Hatziladas, who indicated that certain Ambassador shareholders would likely accept a higher offer from Drillsearch. Drillsearch provided Mr Hatziladas with personalised acceptance forms for these shareholders.

 

Six days after Magnum Hunter had announced its offer, Drillsearch announced an increase in its offer and declared it unconditional. The offer was then accepted by the two shareholders and two of the directors who had made acceptance statements (together holding 24% of Ambassador) the same day.

 
In response, Magnum Hunter increased its offer, declared its offer unconditional and made an application to the Panel. (In Ambassador Oil and Gas 02 the Panel declined to conduct proceedings on an application by Drillsearch concerning Magnum Hunter’s US scrip bid after Magnum Hunter made extensive supplementary disclosure as required by ASIC and the Panel. Ultimately, Magnum Hunter declined to increase its offer further and Drillsearch successfully acquired 90% of Ambassador and commenced compulsory acquisition.)

 
Acceptance Statements And Association

 
The Panel found that Drillsearch had an association with Mr and Mrs Hatziladas, and the Ambassador directors, as there was an agreement, arrangement or understanding for the purposes of controlling or influencing the conduct of Ambassador’s affairs, or, in the alternative, the Panel considered they were acting in concert.
The Panel pointed to several facts in its findings, including:

 

  • the timing of Drillsearch’s increased offer; 
  • the fact that the shareholders who made acceptance statements accepted the offer exceptionally early and virtually all at the same time (which precluded counterbids and was considered by the Panel to be uncommercial, given that larger shareholders don’t tend to accept offers in the first few days of an offer period); 
  • the manner in which the Ambassador directors “acquiesced” in the role played by Mr Hatziladas (described as the “directing mind” of Ambassador); and
  • Mr Hatziladas’ “high level of orchestration” in arranging groups of shareholders to give the pre-bid agreements and acceptance statements where there were board, family and employment links between Mr Hatziladas and those shareholders.

 
The Panel considered that Drillsearch had taken steps to “lock in” various shareholdings through Mr Hatziladas.

 
The Panel’s finding of association meant that Drillsearch had contravened the 20% prohibition in Chapter 6 of the Corporations Act. The acceptance statements gave Drillsearch voting power in 19.55% of Ambassador, which coupled with Drillsearch’s 19.9% pre-bid stake took its voting power in Ambassador to well over 20%.

 
The Panel made a declaration and a number of orders, including unwinding the acceptances of shareholders who made the acceptance statements, providing a reversal right to shareholders who sold their shares to Drillsearch as part of the 19.9% pre-bid stake and providing a withdrawal right to all other shareholders who accepted the Drillsearch offer on or prior to the Panel’s decision.

 
We do not consider that the Panel was expressing more general concern with common practices in relation to pre-bids or acceptance statements in this decision. Bidders and target shareholders who support an offer only because they consider it attractive have not been treated as associates either by the courts or the Panel in the past. The Panel acknowledged that the use of acceptance / “truth in takeover” statements is legitimate for shareholders who wish to make a supporting statement indicating their intention. However, this case highlights that such statements can heighten the risk that the Panel will infer that some agreement, arrangement or understanding has been reached, or that parties are acting in concert, to “achieve an end” (ie to deliver control of a target company to a particular bidder).

 
Although the facts of the Ambassador Oil and Gas Limited 01 case are reasonably particular to that case, it may be necessary for bidders to take greater care when dealing with a target shareholder who claims to be able to speak for, or facilitate agreements with, other shareholders.

 

Acceptance Statements And Truth In Takeovers

 
The Panel also applied ASIC’s “truth in takeovers” policy in relation to the acceptance statements. The shareholders accepted Drillsearch’s offer four days (and merely two trading days) after it had opened, having initially indicated in their statements that they would accept the offer “within 14 days…in the absence of asuperior proposal”. The Panel interpreted this statement as implying that the shareholders would “wait in the hope that a superior proposal emerges” for 14 days before accepting Drillsearch’s offer. Based on its experience, the Panel considered that a reasonable market participant would come to the same conclusion.

 
In accepting the offer after four days, the Panel found that the shareholders had acted contrary to their acceptance statements. As the statements were “truth in takeovers” statements to which ASIC’s Regulatory Guide 25 applied, the Panel held the shareholders to their statements, and unwound their acceptances. If a shareholder wishes to have the flexibility to accept in a shorter period of time, an option would be for such statements to indicate that the shareholder will accept “no earlier than [time and date] and no later than [time and date]”.

 
With respect to the length of the period following which a shareholder proposes to accept an offer in accordance with an its acceptance statement, the Panel’s reasons suggest that a 21 day period from the opening of the offer would be preferable (in light of the statutory minimum bid period of one month). However, the Panel conceded that it was open to shareholders to specify a shorter period, provided it affords a meaningful opportunity for competing bids to materialise.

 
Comment

 
The decision in Ambassador Oil and Gas 01 may be best understood as a warning to bidders not to overstep by “locking in” acceptances to which ASIC’s truth in takeovers policy applies. In such circumstances, the bidder may be found to be an associate of the relevant shareholders, which will potentially be problematic depending on the bidder’s existing voting power.

 
In addition, where a shareholder specifies a maximum period for acceptance in its acceptance statement, but accepts well before that period has expired, the Panel may consider that the shareholder has acted inconsistently with its acceptance statement. When setting a specified time period for acceptance, shareholders should ensure it affords a meaningful opportunity for competing bids to materialise.

 

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For further information, please contact:

 

Roger Davies, Partner, Ashurst
roger.davies@ashurst.com

 
Olivia Blakiston, Ashurst
olivia.blakiston@ashurst.com

 

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