Jurisdiction - Australia
Reports and Analysis
Australia – Take Care With Hair Trigger!

 3 October, 2012

 

In brief

 

In Austock, the Panel:

 

  • confirmed that its frustrating action policy may not apply to a bid which it does not regard as "genuine", eg an unfunded bid;
  • indicated that a break fee of 1.5% may not be excessive in a small bid;
  • applied its break fee policy to an asset sale which was mutually exclusive with a takeover bid; and
  • suggested that a hair trigger defeating condition, or reliance on it, could be inappropriate.

 

In Austock Group Limited, the Takeovers Panel made some interesting observations on several aspects of takeovers practice. The Panel also took the unusual step of making a declaration of unacceptable circumstances and costs order against the applicant, Mariner Corporation.

 

Mariner had announced a cash takeover bid for Austock. Austock subsequently announced that it had entered into an agreement to sell its property funds management business to Folkestone, conditional on shareholder approval. The sale of the business would breach a "no disposals" condition of Mariner's bid. The Folkestone agreement also required Austock to pay a break fee to Folkestone if Austock shareholders did not approve the Folkestone transaction. Mariner applied to the Panel to complain of the Folkestone transaction as well as the break fee.

 

Hair trigger conditions

 

The Panel noted the existence of possible inappropriate "hair trigger" conditions. Mariner's bid was conditional on, among other things, Austock not acquiring or disposing of any assets or business (without any materiality qualifier) and also on the net tangible assets per share of either Mariner or Austock not rising or falling by more than 10%.

 

ASIC was concerned that the no asset sale condition (without an express materiality qualification) gave Mariner too much discretion over whether to abandon its bid. The Panel noted that, as drafted, it could be an "inappropriate 'hair trigger' condition". The Panel also noted that it would "not seem appropriate" for Mariner to seek to rely on a breach of the condition that Austock's NTA per share not increase. The Panel made the general observation that it is less likely that a breach of such a condition would constitute frustrating action, giving rise to unacceptable circumstances, if it is triggered by an event that is not material to the bid. However, the Panel did not address whether a bidder could walk away from a bid if a hair trigger condition were breached.

 

Discussion

 

In general a bidder is free to choose its bid conditions, subject to those conditions not contravening the Corporations Act (eg subjective conditions). However, if a condition is impossible to satisfy (eg "the sun will rise in the West tomorrow") the Panel is highly likely to find that unacceptable circumstances exist and make orders rendering the condition ineffective. The position is less clear where the condition is very likely, but not certain, to be breached (eg the S&P/ASX 200 index will not fall on any day during the offer period) or a customary condition is breached in a trivial respect.

 

In NGM Resources Limited, the Panel read a materiality qualification into a force majeure condition to prevent the bidder relying on it. In Bigshop.com.au Limited 02, the Panel noted that the bidder may be entitled to rely on breach of a "no share issue" condition to lapse a bid if an employee option is exercised "although the reasonableness of doing so would depend on all the circumstances".

 

By way of contrast the UK Takeover Code prevents a bidder relying on a breach, unless it is of material significance to the bidder in the context of the bid. However, UK takeover practice is different from Australia. In Australia, bid conditions are relatively limited and generally comprise "prescribed occurrences" and some fairly tailored commercial conditions, to avoid the target rejecting the bid on the grounds of its "highly conditional nature". Offer periods, and the bidder's exposure, are significantly longer in Australia and bidders and the market expect a bidder to be able to rely on a breach of a condition to lapse a bid. Indeed, breach of a bid condition is sometimes used as a takeover tool to set up a virtual condition in an Australian bid. It should only be a rare case in Australia that a bidder is prevented from relying on a breach to walk away from a bid. However, it may be helpful to market participants if the Panel gave some further guidance about its views on this subject, given its comments in Austock and other cases.

 

Other issues

 

Frustrating action

 

ASIC submitted, and the Panel agreed, that the Folkestone transaction could not frustrate the Mariner bid, because Mariner's proposed bid was not capable of being implemented due to not being properly funded. The Panel's frustrating action policy (Guidance Note 12) applies to a "genuine potential bid". There was no evidence that Mariner had any definite or binding agreements to provide finance for the bid and Mariner acknowledged that it had announced the bid before settling financing arrangements. At a minimum, the Panel would expect a detailed term sheet or commitment letter to be in place before offers were posted. As a general proposition, the Panel considers that announcing or making an unfunded bid is a serious matter. In Austock, the Panel said that Mariner's omission to arrange financing was unacceptable, and made a declaration and costs order against Mariner.

 

Break fee

 

The Panel considered whether Austock's obligation to pay a break fee to Folkestone if Austock shareholders failed to approve the sale of the funds management business to Folkestone was an unacceptable fetter on Austock's shareholders choice between the Folkestone transaction and allowing the Mariner bid to proceed. At its highest, the break fee would have been 3.3% of Austock's market capitalisation, although Folkestone gave an undertaking to the Panel to limit the fee to approximately 1.5% of Austock's market capitalisation. The fee was intended to compensate Folkestone for external and internal costs incurred and the Panel noted that in small transactions it is not unusual for such costs to exceed its 1% guideline for break fees. Accordingly, the Panel did not consider the break fee to be excessive.

 

It should be noted that the fee was payable to a proposed purchaser of assets if the asset sale did not occur, as distinct from being payable to a bidder if its takeover bid did not succeed. Although the Panel's guidance on lock-up devices in Guidance Note 7 is primarily directed at a break fee payable to an unsuccessful bidder, the Panel applied the principles underlying Guidance Note 7 to the Folkestone transaction since it was an alternative to the Mariner takeover bid.

 

 

For further information, please contact:

 

Marie McDonald, Partner, Ashurst

marie.mcdonald@ashurst.com

 

Ashurst Corporate/M&A Practice Profile in Australia

 

Homegrown Corporate/M&A Law Firms in Australia

 

 

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