You don’t need it until you need it – the role of the Board in takeover defence readiness

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Key points

  • Managing a response to a takeover bid deflects the Target’s Board and senior management from the day-to-day running of the business. Being as prepared as possible for a takeover bid will enable the Board to act in shareholders’ interests both in the response to the bid and in continuing to oversee “business as usual”.
  • Defending a takeover bid does not mean simply rejecting it – an effective defence means a timely and professional response so that control does not pass without the bidder paying an adequate premium.
  • Boards need to understand how the Takeovers Panel may be a forum in which their defence tactics are called into question, as well as how it may be used to highlight unacceptable behaviour of the bidder.

As the business landscape continues to be affected by the uncertainties of COVID-19, directors of ASX-listed companies have plenty to consider. An approach by a potential bidder may be a welcome opportunity for shareholders to liquidate their holding but the prevailing financial uncertainty may allow the bidder to obtain a bargain in the process. By being prepared, a board can respond to a bid with due care and skill, so as to support the best interests of shareholders.

Why prepare?

A company may receive a takeover offer at any time. The bidder will have invested time in undertaking due diligence (to the extent it can from public sources) and mapping out its game plan prior to making an offer, while the target Board will be playing “catch up”.

If the bid has not been solicited by the target Board, the bidder may make a confidential approach first, which may lead to a negotiated outcome in which the target supports the bid, or may lead to a rejection, at which point the bidder may still proceed, and announce the bid to the market. Alternatively, the bidder may not telegraph anything to the target until announcing the bid. Whether the bidder approaches the target first, or goes public from the outset, there is limited time for the target Board to respond, and their options are constrained by takeover regulation and by their continuous disclosure obligations.

Managing a response to a takeover bid deflects the Board and senior management from the day-to-day running of the business. Being as prepared as possible for a takeover bid will reduce the distraction. A target company’s shareholders’ interests will be best protected by a board that carefully considers and efficiently responds to an offer.

By being well prepared before the event, the Board will be best positioned to:

  • Demonstrate professionalism and organisation which will, in turn, instil confidence among shareholders.
  • Show the Board’s determination to achieve the best possible result for shareholders.

How can boards be prepared?

In April, we issued a short update on the key elements of a “takeover response plan”: https://www.dentons.com/en/insights/articles/2020/april/27/takeover-response-planning---australia.

In addition to maintaining an up-to-date “takeover response plan”, boards can be prepared for unsolicited bids through:

  • Being familiar with the general indicators of their company’s valuation (so that they have a foundation from which to judge whether the bid valuation is “in the right ballpark” )
  • Monitoring changes to the identity and holdings of substantial shareholders (which may indicate that someone is building a stake from which to launch a bid)
  • Regularly identifying likely bidders, and considering what value proposition they would offer as acquirers
  • Good document management so that key information can easily be accessed for the purpose of allowing a bidder to undertake due diligence (in the case of a “friendly” takeover) and/or for briefing an independent expert if a formal valuation is required
  • Knowing the extent of their directors and officers liability (D&O) coverage
  • Undertaking periodic refresher training on the takeover response plan

How might a board respond to an unsolicited bid?

Where a party makes an unsolicited approach to gain control, the target Board may, after considering the proposal, decide:

  • That in principle they would recommend the bid to shareholders, in which case they would engage with the bidder to refine the terms of the transaction. If the parties reach consensus, the basic elements may be set out in an implementation agreement, and the parties will then proceed with an off-market bid or scheme of arrangement
  • They would not recommend the bid to shareholders, because it undervalues the target or because there are further growth opportunities for the target that might be lost if a change in control occurs. Once this decision is communicated to the bidder:
    • There may be further negotiations which result in an improved bid that the target Board supports
    • The bidder may decide to proceed without the target Board support (a hostile takeover)

Defending a takeover bid does not mean simply rejecting it – an effective defence means a timely and professional response so that control does not pass without the bidder paying an adequate premium.

When might the Takeovers Panel become involved?

The bidder, target, Australian Securities Investment Corporation (ASIC) or any other person whose interests are affected can apply to the Takeovers Panel for a declaration of unacceptable circumstances. For example:

  • A target (or potential target) may approach the Panel where they believe that shareholders are acting in concert without disclosing that fact, or if they believe that a bidder’s offer document is misleading.
  • A bidder may approach the Panel where a target engages in “frustrating actions” that may prevent an actual or potential bid from proceeding without giving target shareholders opportunity to choose between alternative strategies for the company.

The Panel must consider, amongst other things:

  • Whether the circumstances appear to have an unacceptable effect.
  • The core principles in section 602 of the Corporations Act, such as the principle of an efficient, competitive and informed market, the requirement for transparency about the identity of a bidder and the importance of equal treatment of target shareholders.
  • Whether there has been a breach of specific requirements of the Corporations Act for the conduct of takeovers.

The Panel may find “unacceptable circumstances” even if there is no breach of the law.

“What’s in it for me?”

A takeover can be a highly stressful process at “the best of times”. In the current environment, Boards are already navigating more uncertainty than usual, and directors’ emotional and intellectual reserves may be deleted.

Taking some time to gather resources and “war game” a hypothetical unsolicited bid will put the Board in a better position to respond logically and skilfully even in a highly volatile business landscape. The side benefit of gaining a better understanding of the company’s inherent value and market context may also enable the board to take proactive action and implement a strategic transaction of their own.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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