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Chapter 1 - Introduction
Background
1.1
The Corporate Law Economic Reform Program Act
1999 re-wrote the takeover provisions of the Corporations Law, with the new
provisions coming into force on 13 March 2000.
1.2
The Explanatory Memorandum for the CLERP Bill
advised of the objectives of the proposed takeover reforms:
The Takeover reforms contained in the Bill are designed to
improve the efficiency of the market for corporate control while encouraging
better management and enhancing investor protection. Takeovers, or the
prospect of takeovers, provide benefits for shareholders, the corporate sector
and the economy since they provide incentives for improved corporate efficiency
and enhanced management discipline, leading ultimately to greater wealth
creation. The reforms are aimed at ensuring that these incentives operate
effectively.[1]
1.3
The CLERP Bill included provisions for a
Mandatory Bid Rule (MBR), under which a prospective purchaser would be
permitted to exceed the statutory takeover threshold of 20 per cent of the
total voting rights in a company before being required to make a full takeover
bid. The Explanatory Memorandum noted that prospective purchasers would be
able to chose the type of takeover procedure most suited to achieving their
objectives and that all shareholders of the target company would have an equal
opportunity to exit the company at a fair price.[2]
The new rule would require the acquirer to offer the same bid price to all
shareholders, regardless of whether they held controlling interests or not.
1.4
Other jurisdictions have adopted a MBR. For
instance, France, Germany and Ireland have enacted a MBR, although with
different threshold limits, following an EC Commission directive proposing the
adoption of the MBR.[3]
As noted in the Explanatory Memorandum, the archetype for the MBR is the UK City
Code on Takeovers and Mergers, which is a self-regulatory code. In the UK,
the MBR has operated since the introduction of the City Code in 1968.
The adoption of a MBR has also been analysed in the literature and policy
documents.[4]
1.5
The rationale behind the MBR is the need for
protection of minority shareholders who might be compromised in takeovers.
According to Mr Peter Lee, Deputy Director-General of the UK Panel on Takeovers
and Mergers, the MBR present in the City Code is derived from the
principle that “shareholders should be given the chance to sell out of the
company as they may have a low opinion of the new controller’s business ability
or methods, or they might not wish to remain in a company which had, say
manufactured cars and was now to produce armaments” and the view that “the
passing of control usually involves the payment of a premium over the market
price. It is thought that all shareholders, not just the controller, should
share the premium.”[5]
Mandatory Bid Rule as proposed in the CLERP Bill
1.6
Under the CLERP provisions, the acquisition of
shares beyond the holding of 20 per cent of the total voting rights in a
company would be permitted so long as the acquisition is immediately followed
by the announcement of a full takeover bid.[6]
The provisions also imposed certain conditions for the protection of minority
investors even where, at the time the mandatory bid is made, the prospective
purchaser has gained a controlling position.
1.7
The following conditions would apply to a
mandatory bid, including a number of general conditions that apply to takeover
bids:
- the bidder must start from below the 20 per cent threshold with
only one acquisition being allowed before the mandatory bid is triggered
(section 611 item 5(d));
- the bidder should not acquire a relevant interest in any other
securities of the target company at the same time as the acquisition triggering
the mandatory bid (section 611 item 5 (c));
- the bidder must disclose to the vendor that the mandatory bid
will be triggered by an agreement to sell (section 611 item (f));
- the takeover bid must include a cash offer for the securities. It
may also include an offer either of securities, or cash and securities, as an
alternative (section 621(2));
- the bid price must be for an amount at least equivalent to the
highest price paid by the prospective purchaser in cash or non-cash
transactions in the last four months (section 621(4);
- the takeover bid must be unconditional (section 611 item 5(e));[7]
-
target shareholders must be provided with an independent expert’s
report by the target (section 640(1)(d));
- the bidder must not exercise control of the target until the
offer period starts for the mandatory bid (section 614(1)(b);
- no securities will be able to be issued in the target, or
dividends declared or distributions made, from the time of the pre-bid
acquisition until the end of the bid period without shareholder approval by a
general meeting (section 614(1) (c) and (d));
- the bidder must demonstrate in its statement to target
shareholders that the bid is adequately funded (section 636(1)).[8]
1.8
On 10 December 1998 the Senate referred the
provisions of the CLERP Bill to the Parliamentary Joint Statutory Committee on
Corporations and Securities (PJSC) for inquiry and report.[9]
1.9
On 12 May 1999 the PJSC tabled its report on the
Corporate Law Economic Reform Program Bill 1998.[10] The PJSC supported the
introduction of the MBR, without amendment, on the basis that it would lead to
greater takeover activity and would ensure that target shareholders would have
the opportunity to sell their shares on the same terms as the single, pre-bid
acquisition.
1.10
The PJSC also considered whether the MBR should
be extended to conditional mandatory bids as suggested by the Australian
Institute of Company Directors (AICD). The AICD contended that the ability to
make a conditional mandatory bid was fundamental to a takeover bid. However,
the PJSC did not agree:
The Committee has not been persuaded that the Bill should be
amended in this regard. One of the objectives of the mandatory bid rule is to
ensure that where control of a company has passed to a bidder all of the
remaining shareholders should be given an opportunity to sell their shares on
the same terms...The objectives of the rule could be circumvented by a bidder
attaching conditions to a bid which would make it highly unlikely that the bid
could proceed. Given that the mandatory bid rule is opening a new avenue for
takeover bids in addition to those already existing under the current
legislation the Committee does not consider that the restriction on conditional
bids will unreasonably restrict takeover bids.[11]
1.11
The PJSC, however, noted that the CLERP Bill
provided for the Government to review the operation of the new rule two years
after its commencement. It concluded that this would be an appropriate time to
review the requirement that mandatory bids be unconditional.
1.12
During parliamentary debate on the CLERP Bill in
October 1999, the Senate removed the provisions in the Bill introducing the
MBR.[12]
The Committee’s inquiry
1.13
On 7 December 1999, the Minister for Financial
Services and Regulation, the Hon. Joe Hockey MP, requested the PJSC to inquire
into whether it was appropriate to amend the Corporations Law to include a
mandatory bid rule, similar in terms to that proposed in the Bill. As a result
of that request the PJSC agreed to re-examine the proposed introduction of the
MBR.
1.14
The PJSC advertised its inquiry on 7-8 January
2000 and called for submissions by 4 February 2000. The PJSC received 12
written submissions, which in general supported the introduction of the MBR. A
list of organisations and individuals who made submissions is included at
Appendix 1 to this Report. The PJSC also held two public hearings and a list of
witnesses who appeared before the PJSC is included at Appendix 2.
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