Key Considerations and Disclosure Challenges in Contested Scrip Takeovers

In M&A transactions, scrip deals are often used by bidders as they allow the target shareholders to retain part or full exposure to the underlying business and can be helpful in bridging the gap in value expectations, while reducing upfront cash paid by the bidder.

As part of disclosure to target shareholders, it is customary to disclose an implied value of the scrip consideration where the scrip being offered is listed securities with a readily ascertainable value. That is, the equivalent cash value that the scrip would be worth based on market price. However, with daily market fluctuations, the value of the shares could be at a premium to the target’s current share price, making it an attractive proposition, and be at a discount the very next day.

We explore some of the key issues to consider for bidders and targets in contested takeovers with respect to implied scrip value disclosures.

Background – Fixed and Floating Ratios

Broadly, there are two types of scrip consideration ratios – either a fixed ratio or a floating ratio.

A fixed ratio is where the offer includes a specific number of bidder shares to be exchanged for each target share, whereas a floating ratio involves the bidder agreeing to pay each target shareholder a fixed dollar value and scrip consideration is given equivalent to this value.

The majority of scrip deals in Australia are undertaken using a fixed exchange ratio. If the scrip involves an offer of listed securities, the use of a fixed exchange ratio then raises the question, at what point is the implied value (that is, the implied cash value of the scrip consideration) of the scrip to be determined, and how often does that calculation needs to be updated.

Disclosure

In the context of an unsolicited takeover bid, the implied value disclosure presents an opportunity for the bidder and target to strategically ‘cherry pick’ dates for calculating the implied value of the scrip consideration. While it is entirely within each party’s interests to present information in a favourable light (in the case of the bidder, selecting a time during the bid to disclose the price where the scrip consideration is at a premium to the target’s shares, and vice versa), this needs to be done within the bounds of the Corporations Act and Takeovers Panel guidance.

Key points for consideration by bidders and targets:

1. Impact: Generally, after an off-market takeover bid is made (or even expected) the target’s share price will increase. This premium represents the market’s anticipation of the takeover, as well as a ‘re-rate’ of the target, due to increases in analyst coverage. This artificial increase in the target’s price can often result in the implied value of the offer being at a reduced premium (or even at a discount) against the current market price, but at a material premium against the “undisturbed” price (being the price without the takeover premium before the bid was announced). The bidder’s statement can discuss the offer metrics in terms of the “undisturbed” trading price (i.e., by removing the ‘takeover premium’). However, it becomes important to balance this requirement with the need for full disclosure, as well as not providing information that is misleading or deceptive, or likely to mislead or deceive (including by omission).
2. Price disclosure: The Takeovers Panel has suggested that price disclosure in scrip offers must be presented in a fair and balanced way.¹ The Panel has found that unacceptable circumstances may arise if, amongst other things, the price at the ‘last practicable date’ is not included. This applies to both bidder’s statements / target’s statements and any other market disclosures.
3. Legal Requirement: The legal requirement to include this information is found under section 636 (for bidders) and section 638 (for targets) of the Corporations Act. These provisions state that all information that holders of the bid class securities and their professional advisers would reasonably require to make an informed decision regarding the offer must be included. The implied price, calculated as the ‘last practicable date’ in addition to the ‘undisturbed price’ certainly falls into this category.
4. Regulatory consequences: ASIC Regulatory Guide 25 – Takeovers: False and Misleading Statements, also provides that statements that are literally true, but placed out of context or inadequately explained, can be misleading and deceptive (by omission) for the purposes of section 643(1)(a) of the Corporations Act. If a bidder is to disclose a closing price on a specific ‘cherry-picked’ date, which makes the bid look more attractive, but neglects to include the ‘last practicable date’, this could be misleading or deceptive. In such circumstances, ASIC may compel supplementary disclosure. This not only results in the ‘last practicable date’ being drawn to the attention of target shareholders, but can cast the bidder in an unfavourable light.
5. Updating price disclosures: There is no requirement to continue providing updated price disclosures during the course of the offer period. Of course, the bidder or target may deem it desirable, from a strategy perspective, to disclose changes in their opponent’s share prices that impact the bid. For example, such disclosures may be appropriate in circumstances where there is a significant change to share prices arising from a material announcement during the bid period. Of course, to the extent applicable, the takeover parties must also continue to comply with their continuous disclosure requirements.

Are you prepared for a hostile takeover?

In the evolving landscape of hostile takeovers, both bidders and target companies must navigate the complexities of Chapter 6 of the Corporations Act. Legal and financial advisers should ensure that all regulatory requirements are met promptly and accurately to avoid penalties and delays. Our experienced team can assist in ensuring compliance and developing a robust strategy that addresses both the legal and tactical aspects of the process.

For more information, please contact Brett Heading, Benny Sham or Peter Williams.

¹ Consolidated Mineral Ltd 01 [2007] ATP 20; Normandy Mining Ltd 01 [2001] ATP 26; General Property Trust [2004] ATP 30; Programmed Maintenance Services Ltd 02 [2008] ATP 7 and InterMet Resources Ltd [2008] ATP 17.