The Takeovers Code is scheduled for policy review in 2005. Commentary following the Dorchester Pacific determination suggests that pre-bid agreements and the minimum acceptance condition will be on the agenda.
Pre-bid agreements are mechanism under the Take-overs Code which, until recently, have escaped the spotlight in the world of takeovers. However the Dorchester Pacific determination by the New Zealand Takeovers Panel in September 2004 has resulted in significant discussion about the permissibility of pre-bid agreements.
Another mechanism which has had similarly low profile, but may be contentious, is the minimum acceptance condition.
PRE-BID AGREEMENTS
Pre-bid agreements (also known as lock-up agreements) can take two forms, pre-bid agreement or an intra-bid agreement. To date, pre-bid agreements have been more common and used, for example, in the takeovers of New Zealand Dairy Foods, Enza, UnitedNetworks, Sky TV and more recently DB.
A pre-bid is an agreement between shareholder and bidder to the effect that if bidder makes takeover offer for company on agreed terms, then the shareholder will accept the bid. Earlier this year, the panel stated clearly that lock-up agreements are permitted – if certain criteria apply: the potential bidder must not become the holder or controller of voting rights attaching to the shares under the pre-bid.
For example, pre-bid agreement which has form of general proxy incorporated would contravene the code as the bidder would effectively have control of voting rights attaching to the shares that are the subject of the pre-bid agreement (assuming the bidder already controlled in excess of, or crossed as consequence of the pre-bid agreement, the 20 percent threshold under the code).
Intra-bid agreements are also permitted by the code, subject to the same constraints. Under such an agreement shareholder agrees that it will accept an offer as soon as the offer price has been varied to an agreed figure.
Bridgecorp’s acquisition of beachhead stake of 19.9 percent in the listed Dorchester Pacific made in conjunction with pre-bid agreement was the subject of non-compliance ruling by the Takeovers Panel in September – and may yet be the subject of High Court hearing. (For information on the Takeover Code and the Dorchester Pacific decision visit www.takeover.govt.nz)
The decision possibly does not alter the panel’s view that pre-bid agreements are permissible – its determination focused on the nexus between entering into the pre-bid agreement, the terms of which the panel considered wider than the commercial standard lock-up agreement, and the fact of the acquisition by Bridgecorp of its beachhead stake.
The panel determined that the totality of these arrangements comprised business relationship and consequently that Bridgecorp and Brent King (whose Dorchester Pacific shares formed substantial part of the pre-bid agreement with Bridgecorp) were associates for the purpose of the code. (The panel may in fact have changed its views on the lawfulness of pre-bid agreements. There are strong indications that only certain pre-bid agreements are lawful – the panel’s decision in this respect is difficult to understand and, in our opinion, quite possibly wrong.)
However, the panel’s position that lock-up arrangements are permissible is tempered by the view expressed in the determination that such arrangements will “generally constitute the parties as associates”. This raises issues as to the future use of pre-bid agreements.
Assuming for the moment the panel’s view is applied, finding of “associate” status will have implications for the structuring of takeover offers. For example, it may now be difficult to acquire beachhead stake in code company in conjunction with pre-bid agreement without contravening the code.
International jurisdictions have varying views on pre-bid agreements. The UK permits them but Australia does not. The debate on pre-bid agreements has lain dormant in Australia for some years, following the senate knocking back legislation which would have effectively permitted pre-bid agreements (provided they were immediately followed by full takeover bid). But the debate may be about to be rekindled.
An Australian financial commentator recently suggested that the Securities Institute of Australia will shortly issue paper relating to the review of the Australian takeover regime. It seems that the Institute will advocate regulatory regime under which party would be able to lock up more than 20 percent of company in advance of making full takeover offer – effectively mandatory bid system.
In the UK, pre-bid agreements (called “irrevocable undertakings”) feature in nearly every takeover bid. Such agreements are usually entered into by the directors of the target company and by large (usually institutional) shareholders. In some cases non-binding letters of support are given instead.
It is common in the UK to see takeover offers launched with commitments having been received for well over 30 percent of the target’s share capital.
Whilst directors’ commitments are usually unconditional, it is relatively common for institutional commitments to “fall away” in the event competing offer is received which exceeds the original bidder’s offer price by specified amount. The extent to which bidder has obtained irrevocable undertakings and the circumstances where they fall away must be disclosed in both the announcement of the offer and the offer document itself.
Opponents of pre-bid agreements in New Zealand argue that they prevent or hinder competitive auction in take-over. They point to the contested takeover for Montana in support of their argument for competition in takeover.
In response, the Takeovers Panel states that fundamental objective of the code is equal treatment for all shareholders and that this objective is always satisfied in the case of pre-bid agreement because other shareholders must be offered the same price (under the “equal treatment rule”). The panel also argues that the flexibility of the code (absent under the Australian code) allows major shareholders to undertake competitive sale process to achieve the best price for the shareholder.
The panel cites the sale by the controlling shareholder Aquila of its stake in UnitedNetworks to Vector in support of its position. In that case, Aquila and UnitedNetworks undertook competitive sale process to maximise the sale price of Aquila’s controlling stake.
The panel stated this was possible because under the code the preferred bidder had the certainty through pre-bid agreement with the major shareholder that when the formal bid was ultimately made to all shareholders the controlling shareholder would sell to that bidder.
The panel also suggested that many in the commercial world argue that the ability to undertake commercial auction in this manner is efficient and also achieves the best outcome. Interestingly though, one commentator has suggested that maximising price is not always the sole objective of selling shareholder and surmised that strategic reasons may have influenced shareholder to enter into one of the pre-bid agreements mentioned above.
MINIMUM ACCEPTANCE CONDITION
The minimum acceptance condition is mechanism not replicated in Australia but is requirement in the UK. Where bidder does not already hold or control more than 50 percent of the voting rights in code company, the code requires that the offer be conditional on the bidder receiving acceptances that will result in the bidder controlling more than 50 percent of the voting rights in the target company. The only qualification to this rule is in the case of partial offer where the offer is for less than 50 percent and the requirement for shareholder approval of that lesser percentage has been fulfilled.
As stated by the panel, the code is concerned with regulating changes in control of code companies. The minimum acceptance condition therefore appears to assume,
