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Chapter 2 - The mandatory bid rule
The MBR as a policy instrument
2.1
The proposal for the introduction of the MBR was
developed within the framework of the Government’s Corporate Law Economic
Reform Program (CLERP) which brought an economic focus to the Corporations
Law. As stated by Treasury the fundamental objectives of the Law are to
facilitate investment, employment and wealth creation.[1] A key area of the Law
identified for review and reform was the regulation of takeovers. According to
the Treasury paper on Takeovers, the basic objective of takeover regulation is
to improve market efficiency. “All regulation involves some costs,” the paper
added, “and it is essential to ensure that the benefits from regulation
outweigh consequential costs.”[2]
The takeover threshold and Treasury
arguments in support of the MBR
2.2
Corporate control regulation is contained in
Chapter 6 of the Corporations Law, which regulates the procedures for takeover
bids, the conduct of bidders and targets, and more recently the process for resolving
takeover disputes. Section 606 of the Law prohibits the acquisition of shares
beyond a holding of 20 per cent of the total voting shares in a company,
subject to a number of exceptions. The principal exception is the acquisition
of shares made under a takeover offer which complies with a takeover scheme
(‘Part A’ bid) or takeover announcement (‘Part C’ bid). As a result, corporate
control is acquired after a takeover offer is made. The prohibition has the
effect of making unlawful any attempt to acquire control prior to the making of
a takeover offer.
2.3
The Treasury paper set out the proposal for the
adoption of the MBR. It noted that an auction facilitates price competition in
the market for corporate control but imposes transactional costs and adds
significantly to the costs of a bid and takeover premium. “An auction
potentially leads to an increased takeover premium,” the paper added, thereby
discouraging “prospective bidders of other targets who will expect higher bid
prices.” Efficiency problems can also result from defensive tactics by target
directors who may encourage an auction or bidding war in order to frustrate
the bid. Defensive behaviour in the face of a pending takeover “can be
considered to be a market inefficiency through the inefficient use of corporate
resources and may deprive target shareholders of a takeover premium if the bid
is frustrated.”[3]
2.4
The Treasury paper advanced four arguments in
support of the MBR, as practised in jurisdictions such as the UK. According to the paper, the
introduction of the MBR would lead to increased certainty as to the outcome of
a bid, lower bid costs, smooth the bid process and discourage rival bidders
from ‘free-riding’ on the initial bidder’s efforts.[4] Although the MBR would
preclude rival bids and the opportunity for auctions, it would not decrease
price competitiveness in the market for corporate control because it was “in
the interests of the seller to get the best price possible for the control
parcel.”[5]
In practice, it was likely that a controlling interest would attract bids from
more than one prospective bidder and that these would include a premium for
control, which under the new rule would be offered to all other shareholders.
2.5
The paper also set out the conditions that would
apply to the MBR. The conditions would need to take account of the fact that
control would already have passed at the time of the pre-bid acquisition. The
implication of the change in control is that shareholders in the target company
should be given the opportunity to exit the company completely and on the same
terms as the control transaction. This would require the bidder to make an
unconditional bid for all shares of the target company immediately following
the control transaction. It would also require the bidder to offer the same
bid price to all shareholders. The paper noted that the risk of allowing
conditional mandatory bids is that, if the conditions are not met, the bidder
would have acquired control but minority target shareholders would have lost
the opportunity to exit the company.
Basic premise questioned by ASIC
2.6
In its submission to the PJSC, the Australian
Securities and Investments Commision (ASIC) responded to the Treasury
proposal. ASIC questioned the value of the MBR as a mechanism for the
efficient allocation of resources. The submission stated that “if takeovers
are to serve as a tool for the efficient allocation of resources then it would
seem best that any bidder should be prepared to test the relative efficiency of
its proposed allocation of the target’s resources against the allocations
proposed by any rival bidders.”[6]
ASIC also argued that an auction best promotes the economic benefits that are
meant to flow from a takeover. Further, ASIC analysed the arguments advanced
in favour of the MBR and concluded that they were neither germane nor
compelling.
2.7
ASIC questioned the argument that prospective
bidders are discouraged by the current prohibition in the Law and are reluctant
to make bids because of the risk of being involved in a bidding war or being an
unsuccessful bidder. ASIC suggested that the evidence adduced to support this
proposition was largely anecdotal; in fact it appeared that bidders and foreign
bidders in particular are active in the takeovers market. The ASIC submission
advised that:
In particular, it should not be assumed that there is any
necessary nexus between the current level of takeover activity in Australia and
the absence of a mandatory bid. It is asserted that certain bidders,
particularly foreign bidders, are reticent about making bids where they cannot
have some previous assurance of success. That assertion may not sit well with:
(a) the significant numbers of unsuccessful bids which are made; and (b) the
prominent involvement of foreign bidders in the Australian takeovers market.
(Footnote: Data available to ASIC suggests that almost half of all takeover
offers for Australian targets are made by foreign bidders or subsidiaries of
foreign bidders.)[7]
ASIC analysis of the MBR - mooted
advantages overstated by Treasury
2.8
ASIC submitted that, apart from attracting more
bids because prospective bidders will have a greater degree of certainty, the
other three advantages which the Treasury paper suggested would flow from the
MBR are a consequence of the absence of rival bidders offering higher prices
once control has passed to the new controller.[8]
To the extent that the MBR will lower bid costs, as suggested by the Treasury
paper, it will do so by allowing the prospective bidder to pay less than a
market price because, if there is no auction for control, rival bidders will
not incur such costs. ASIC also commented that a smoother bid process is the
result of a friendly bid and the MBR will “often just be another way for
bidders and targets to organise a friendly bid.” It was no advantage therefore
to advise, as the Treasury paper did, that the MBR will deter defensive tactics
employed to frustrate a takeover bid when those tactics will not be used in any
event. The Treasury paper also suggested that the MBR is advantageous because
it will discourage subsequent bidders from ‘free-riding’ on the efforts of the
initial bidder. However, ASIC advised that before committing resources to a
large scale acquisition, a well-advised rival bidder will undertake its own research
and due diligence. The competitive advantages of ‘free-riding’ were not as
great as suggested in the Treasury paper as “all bidders will incur their own
search costs and if an auction occurs each bidder (including the initial
bidder) will take advantage of information disclosed by its rivals.”[9]
Lower bid prices
2.9
Another doubt raised by ASIC concerned the
assumption that the MBR would lead to higher bid prices as a result of the
increased price competition in the market. The Treasury paper advised that in
practice a significant parcel of shares in a company would attract bids from
more than one buyer, which would include a premium for control. However, ASIC
contended that if more bids are made for the controlling interest, “it should
also mean that average bid prices will be lower.”[10]
Comparison with the UK City Code
2.10
The Introduction to the City Code states
that the Code operates principally to ensure fair and equal treatment of all
shareholders and that it is not concerned with the merits or commercial advantages
or disadvantages of a particular takeover. Rather, the Code represents the
collective opinion of professionals in the field on what are good business
practices and how equality of treatment for all shareholders is achieved.[11] In expressing support for the
MBR, submissions referred to the mandatory bid provisions that have operated in
the UK since 1968. Although the MBR is a small percentage of overall takeover
bids (between 5 and 15 per cent), the certainty of outcome associated with the
mandatory bid will encourage bidders to “bargain up the price to gain a
premium, thereby heightening price tension in the market.”[12]
An unconditional bid
2.11
There are several important differences between
the UK model and the MBR as proposed in the Bill. First, under the City
Code, a mandatory bid is triggered if a bidder acquires 30 per cent or more
of the voting rights of a company. The bid is, however, subject to a minimum
acceptance condition (50 per cent of the share capital). Mr Lee described the
essential elements of the MBR:
Mr Lee—A mandatory bid should have no
conditions attached to it except that it must be conditional on the bidder
achieving acceptances to take him to over 50 per cent. Until the offer document
is posted, we place certain restrictions on the exercise of control by the
offerer. He cannot appoint anybody to the board nor can he exercise the votes
attaching to the shares that he has bought. If a party holds between 30 per
cent and 50 per cent, any shares that that party buys will automatically
trigger a mandatory bid. Once a party holds over 50 per cent, there is no
restriction on any further purchasing. [13]
2.12
Mr Peter Lee also advised that the 30 per cent
figure is a control threshold reflecting effective control of a UK company:
Mr Lee—I think, philosophically, as I
said earlier, the key thing is control as opposed to influence. I think we felt
that 30 per cent, in a general sense, is where you are likely to get control of
a UK company. The acid test, I suppose, is whether somebody with less than 30
per cent is likely to be able to push through a resolution to change the whole
boardroom and get themselves and their colleagues onto the board. Anecdotally,
I suppose there have been one or two attempts over the years by people with
less than 30 per cent to do that and they have tended not to achieve it. So I
think it is control that we are focusing on and that is why I think 30 per cent
is about right in the UK.[14]
2.13
As proposed in the Bill, the threshold required
to trigger the mandatory bid is 20 per cent. In the Australian context, the
statutory threshold is “a number that is of significant influence and pressure
but is not control.”[15]
The 30 per cent control threshold implies that a bidder who acquires an
interest of at least 30 to 50 per cent must extend its offer to all
shareholders at the same price at which it acquired control. Submissions
therefore expressed doubt that the amount received by a majority shareholder
for its interest would be a control premium since effective control had not
passed to the bidder. In the UK, as Mr Lee advised, there is no evidence to
suggest that the price at which the controlling shareholder sells its shares is
done at other than a full price:
Mr Lee—From our experience—and that is
all it can be—over the last 30 years and more there really does not seem to be
any evidence that the best price is not achieved by the people selling the
controlling block. There has never been any sort of muttering or comment that I
am aware of to that effect. So I think the lack of a public auction does not
actually militate against the ordinary shareholder. I think the best price is
obtained by the system that we have at the moment. I think very often it is
arguable that perhaps the buyer of that block is prepared to pay a very, very
full price to get control of the company.[16]
Consideration to be offered
2.14
The second difference relates to the bid
itself. As proposed in the CLERP Bill, the bid must include a cash offer,
which is at least equivalent to the highest price paid by the bidder in the
previous four months. This gives target shareholders the option of exiting the
company should they wish. Alternatively, the bidder may offer scrip-for-scrip,
or a combination of cash and scrip. In evidence to the PJSC, Mr Ted Rofe,
Chairman of the Australian Shareholders’ Association Ltd, emphasised the
significance of a scrip-for-scrip offer in making the bid more attractive for
target shareholders:
Mr Rofe—I noted that under the UK rule
the bid can only be a cash bid. Mr Lee outlined the two main reasons for
that. I do not think it is necessary provided that there is a cash
alternative. Of course, from a shareholder’s point of view, particularly with
the presence of capital gains tax rollover relief, in many cases a scrip bid
will be more attractive than a cash bid, so it may be in the interests of both
the bidder and the target company shareholders to have a scrip alternative
available.[17]
2.15
A substantially different philosophy underpins
the bid provisions which operate in the UK. There the bidder must in effect
offer cash.[18]
According to Farrar’s Company Law, the right of withdrawal is a fundamental
element of the rule since “shareholders who are already minority shareholders
under one controlling shareholder should not be compelled to continue under a
different controlling shareholder.”[19]
Mr Lee—I suppose the philosophy in the
UK is that if somebody gets control of your company then you should be given
the chance to get out of the total group—that is, get cash as opposed to being
offered shares in the bidding company, which means that you are going to remain
a shareholder of that enlarged group. The philosophy that underlies it is that
shareholders should be able to get out, completely, for cash. In the UK, we
also have capital gains tax rollover provisions which only apply in the case of
a scrip offer. But, certainly, there has never been any sort of wish that the
mandatory bid should be other than cash. That has been the position for many,
many years.[20]
EC Commission Directive on takeovers and position in
France and Germany
2.16
As part of its attempt to create a ‘level
playing field’ for takeovers, the European Community (EC) Commission has
proposed a Directive on takeover bids which lays down certain basic principles
and minimum requirements for the conduct of takeovers, particularly as regards
the transparency of the takeover process.[21]
The rationale for the harmonisation of takeover regulation, as stated by the
Commission, is the removal of takeover barriers between member states which may
act to hinder corporate restructuring:
Opportunities for acquiring companies in different Member States
are still uneven. Takeover barriers are mainly due to either the different
level of capitalisation of national markets, or to company law provisions which
may ensure that the control of a company remains in the hands of ‘friendly’
shareholders even beyond the context of a takeover bid (if, for example,
certain categories of shares enjoy disproportionate voting rights). There is
thus no ‘level playing field’ for takeovers throughout the Union which means
that in practice takeover activity is concentrated in a few Member States. The
Commission is aware that these obstacles may hamper the restructuring of
Community companies.[22]
2.17
The proposed framework Directive includes the
enactment of the MBR by member states. Article 4 of the Directive would
require any person acquiring control to make a full takeover bid for all
remaining shares. Thereby all shareholders, not merely the controlling
shareholder, would have the opportunity to exit the company. The Directive
also requires member states to enact more detailed rules in accordance with
their own regulatory structures and practices. The objective of the Takeovers
Directive is to provide an equivalent protection throughout the Union for
minority shareholders when control has passed:
In the case of the acquisition or change of control of a listed
company, the proposed Directive would require Member States to adopt specific
national rules to guarantee that minority shareholders were protected. The
full mandatory bid method (the UK method) is seen as the only means of
protecting the minority shareholders of a listed company.[23]
2.18
However, a threshold acquisition is not
specified in the Directive nor is ‘control’ defined.[24] While the EU Internal Market
Council has yet to ratify the directive, the MBR has been adopted by France and
Germany.
2.19
The objective of French regulation, of which the
MBR is the cornerstone, is the protection of minority shareholders and the
maintenance of the equal treatment for all shareholders.[25] The substance is to require a
bidder that exceeds a threshold of 33 per cent of voting shares to make a full
bid for the remaining shares, except in the case of block acquisitions where
the threshold is 50 per cent. Until 1998, the mandatory bid threshold was 50
per cent of voting shares and the bidder was exempt from this rule if it could
demonstrate effective control of the target over several years prior to the
request for exemption.[26]
2.20
Similarly, the German Takeover Code is directed
towards the protection of target shareholders.[27]
A full bid for all remaining shares must be made immediately the bidder
acquires control. As in the French regulations, the Code precludes partial
bids for control under the MBR. The Code also specifies certain minimum price
requirements. The mandatory bid threshold is not defined in percentage of
voting share terms, although until 1997 the threshold was 50 per cent. A
bidder has gained control when any of the following four triggering events
occurs:
- a shareholder holds a majority of the voting rights;
- a shareholder holds majority voting rights based on an agreement
with the other shareholders;
- a shareholder has the right to appoint or remove the majority of
the members of the administrative, managing or supervisory board of the target
company; or
- a shareholder obtains a percentage of voting rights, which, for
the first resolution passed at each of the three preceding shareholders
meetings of the target company, would have constituted a percentage of voting
rights equal to at least three quarters of the share capital present and
entitled to vote.[28]
Transparency of control transaction
2.21
Some submissions expressed doubts about the
level of disclosure of the control transaction triggering the mandatory bid and
the equal treatment of shareholders, because the parties may have agreed on
side payments not disclosed to shareholders. ASIC indicated its concern that
the MBR may create “more opportunity for the acquirer and the vendor to enter
into undisclosed ‘side deals’ of a kind that violate the equal opportunity
principle.”[29]
ASIC advised that, if the bidder and vendor have entered into an undisclosed
side deal, not all shareholders would receive the same benefit, although the
amount received by all shareholders under the offer would be the same. From a
regulatory point of view, the burden of investigation and proof in seeking to
uphold the equal opportunity principle would be increased:
Mr Cameron—If the commission had grounds
for concern that there was some side deal that was an unlawful deal, the
benefits of which were not going to be shared with all other shareholders, then
the commission could commence an investigation. But it would have to be
satisfied that there were grounds to suspect a breach of the law before its
formal powers of compelling people to answer questions and produce documents
and so on would be triggered. So, in a sense, it is the risk or the possibility
of a completely unknown side deal, or a side deal that is more along the lines
of, ‘Well, we will remember that you did this for us in the future.’ It is that
sort of nod and a wink type arrangement that it is not possible to legislate
against.[30]
2.22
Similarly, Mr Rodd Levy, a Partner at Freehill
Hollingdale and Page, cautioned that “The possibility of private auctions and
secret deals under the guise of the mandatory bid rule flies in the face of
this objective.”[31]
In addition, the lack of market transparency could lead to a loss of investor
confidence. The submission from the International Banks and Securities
Association of Australia noted that:
...the rule could prevent shareholders of a target company from
having access to important advice from the company’s directors before control
has passed to the bidder. Small shareholders could be particularly
disadvantaged, as they are more likely to be presented with a fait accompli
under the rule.[32]
2.23
Another concern raised by ASIC was the likely
adverse effect of the MBR on foreign participation in Australia’s equity
market. Rather than encouraging foreign participation, the MBR would make
Australia capital market less attractive. If control passes in circumstances
where the market is not informed and is not confident about the equal treatment
for all shareholders, that may have “adverse implications for the
attractiveness and liquidity of the Australian equity market.”[33]
Distressed vendor situation
2.24
Macquarie Bank Ltd and others submitted that the
certainty which the MBR provides to a prospective purchaser would increase the
number of bids for control, with the result that the controlling shareholder
would seek to maximise the bid price. However, several submissions advised
that vendors of control parcels may have particular reasons to sell their
shares at a less than fair price and may accept a bid price which is below
market value.[34]
For example, Mr Levy raised the ‘distressed seller’ problem where a vendor is
anxious to sell its shares rather than to negotiate the best possible price.
Mr Levy stated that:
I have been involved in transactions where the majority
shareholder was prepared to sell at a price which was less than that achievable
if an auction developed. This is particularly the case where the seller is in
financial distress or is controlled by a liquidator, receiver or administrator.[35]
2.25
On the other hand, Mr Alistair Lucas, Executive
Director of Macquarie Bank Ltd, disputed the inability of the vendor to
negotiate a fair price:
Mr Lucas—In a distress situation, there
are creditors involved, almost by definition. Those creditors are looking to
have their debts associated to the maximum possible extent. It would seem to be
a significantly value destroying move, were those creditors to say to the
distressed sellers, ‘Look, we do not care what price you get. You have got to
sell it within two days.’ It is much more likely that creditors in those
situations would say, ‘You have got to sell that asset to pay the debts. You
are distressed, the debts have got to be paid. We want to see a process by
which we get the maximum possible price.’ Of course, a corporate auction can be
run quickly in terms of the time it takes for distressed assets to be worked
out.
In the case of a liquidator, my experience is that liquidators
are very, very assiduous in seeking out the highest possible price, and of course
they have a statutory obligation so to do. My experience has been that it does
not really matter whether a vendor is financially sound or distressed; it is a
pretty general rule that vendors want the highest price and seek to get such.[36]
Alternative proposals
Irrevocable undertakings
2.26
To solve the problems posed by takeovers, a
number of submissions suggested an alternative change of control process. The
alternative proposals would achieve the same objectives of the MBR and leave
open the possibility of price competition. The proposals were supported by
ASIC and Mr Rodd Levy, who referred to the practice in the UK of accepting
irrevocable undertakings. Under the City Code, a bidder can accept
“irrevocable commitments” (as they are called) from shareholders that, in the
absence of a higher bid emerging, they would accept the bidder’s takeover
offer. This alternative would allow prospective bidders to obtain a commitment
from the vendor of the control parcel, while at the same time allowing for the
possibility of an auction before control had passed. The alternative would
also leave a role for directors of the target company to participate in the
takeover process and “give some prospects for the minority shareholders of
eventually a higher price emerging.”[37]
Mr Levy stated that:
Irrevocable undertakings have long been a feature of the UK
takeovers practice, and it is my understanding, that they have worked well to
ensure a smooth takeover process and benefits for all shareholders. Similar
arrangements have also been a feature of Australian takeovers practice in the
last few years (though only in respect of shares up to 20% of the target
company). This practice has emerged to overcome the strictness of the rule in
section 698 (as evidenced in the Aberfoyle Ltd v Western Metals Ltd
decision). These arrangements have taken the form of conditional sales or
options which have been conditional on no higher bid emerging. Examples are
found in Savage Ltd v Pasminco Investments Pty Ltd and in Cultus v
OMV.[38]
2.27
However, Mr Bruce Dyer, a Partner at Blake
Dawson Waldron, submitted that irrevocable commitments permitted under the City
Code are not required to be conditional in the manner described and only
indicate in what circumstances the commitment will cease to be binding:
That is apparent from Note 3 to Rule 2.5 of the City Code which
indicates that, when an announcement gives details of such irrevocable
commitments (as required by Rule 2.5) it “must specify in what circumstances, if
any, they will cease to be binding, for example, if a higher bid is made”
(emphasis added). It is our understanding that bidders in the UK commonly
obtain irrevocable undertakings from target shareholders which do not permit
the shareholder to accept a competing bid (although the shareholder would be
entitled to receive any increased consideration offered by the bidder holding
the undertaking).[39]
2.28
Mr Dyer also noted that the possibility of
obtaining irrevocable commitments from target shareholders to accept an offer
is available in voluntary bids as well. The City Code permits a bidder
to seek assurance as to the success of the bid before it is made:
The possibility of obtaining of “irrevocable commitments” from
target shareholders to accept an offer makes that assurance available in “voluntary
bids” as well. As we understand the requirements of the City Code, a bidder
can obtain irrevocable commitments which will assure success of the bid without
needing to make a mandatory bid (which would be subject to greater constraints
than a voluntary bid) regardless of the percentage of shares to which the
undertakings relate. Indeed, the availability of such irrevocable commitments
may well determine whether a voluntary bid proceeds.[40]
Share tender system
2.29
In evidence to the PJSC, Mr Alan Cameron AM,
Chairman of ASIC, advised that to some extent a rule equivalent to the MBR
already exists in the form of ASIC Policy Statement 102, Tender Offers by
Vendor Shareholders.[41]
Under that policy a bidder can acquire major parcels of shares prior to a
public announcement and takeover offer. Although ASIC had received few
requests to do so, Mr Cameron indicated that ASIC would be prepared to adapt
the policy provided minority shareholders were not compromised. However,
according to Deutsche Bank, the reasons for this were due to the unwillingness
of potential vendors to offer publicly their holdings for tender:
The ASC tender system is a lengthy process, and assumes a
shareholder is willing to hold out to the world that it is a definite seller,
even before a minimum price is set. This is a position that few asset owners
ever wish to adopt: the limited number of share tenders ever undertaken bears
this out. The existence of ASC PS 102 does not remove the need for a mandatory
bid rule.[42]
Postponement of the introduction of
the MBR
2.30
The CLERP Act substantially reformed the
takeover provisions in Chapter 6 of the Law. The procedures for bidders and
targets were simplified and streamlined. In addition, the role of the
Corporations and Securities Panel (the Panel) in resolving takeover disputes
was considerably strengthened and enhanced. According to ASIC, “The new Panel
provisions have the capacity to cause a major shift in the whole climate in
which mergers and acquisitions are conducted. When changes in capital gains
tax rollover relief are also taken into account, it will be seen that the whole
scheme of regulation applying to takeovers is about to be substantially
transformed.”[43]
In light of these reforms ASIC suggested that it would be useful to observe the
new takeover regime in operation for a period of 12 months, before any decision
was made regarding the introduction of the MBR. ASIC added that if the reforms
have their intended affect “it may be found that that a mandatory bid rule is
unnecessary.”[44]
Potential harm to bidders in the absence of the MBR
2.31
Mr John Green, NSW President and National
Councillor of the Securities Institute of Australia, advised that every auction
for control involves the risk of a bidding war between rival bidders, with
consequent harm to a bidder’s reputation and its assets if it is unsuccessful.
Such harm may result from an unsuccessful bid, litigation, market revaluation
of the bidder’s asset quality, or the defensive tactics by the target in a
hostile takeover. This risk is borne by all bidders in an auction. Mr Green
described the nature of the harm:
Mr Green—There have been a number of
transactions in which I have been involved where parties have expressed
significant interest in acquiring companies where there might even be a bid in
place, a hostile bid. Those parties have said, ‘We don’t want to play in that
game but, if you’re able to deflect that bid, come and talk to us later. We
won’t do that. We don’t make hostile takeover bids. We won’t play in that
arena. Even if we get a board recommendation, we don’t want to play because the
other party may challenge us, may litigate us, may do all sorts of things to
damage us, and our reputation is worth more to us than this particular
transaction.’[45]
2.32
Macquarie Bank Ltd advised that potential
bidders who undertake a risk/reward assessment therefore may chose not to make
a public takeover bid and face the risks involved:
If the only way that a corporation can participate in an auction
for corporate control is to make a public takeover offer (with the requisite
cost that this involves – organisation of funding, time to manage a public
process, flagging public strategy), it usually will not wish to join such a
public process.[46]
Improved corporate performance and price maximisation
Corporate performance
2.33
Macquarie Bank Ltd submitted that, as well as
encouraging increased takeover activity, the MBR will improve corporate
management. The greater threat of takeover arising from the MBR should deliver
worthwhile benefits to shareholders in higher management performance and
increased price tension in the market for corporate control.[47] The Australian Shareholders’
Association Ltd (ASA) supported the introduction of the MBR as proposed in the
Bill because it would lead to improved corporate performance and better
communication with shareholders:
Mr Rofe—One argument that has come up in
some of these submissions is that a more competitive takeover environment might
encourage companies to take the defensive action before the bid rather than
after; that it is not really in shareholders’ or anyone’s interest for
directors to wait until they receive a bid or suspect that they are about to
receive a bid, to say ‘Look, we’ve got great plans; we’re going to be
profitable next year; we’ve got all these strategies in place,’ which, at that
stage, often sounds a bit unconvincing. Rather, if there were this environment
of increased takeover activity, those boards of directors would be saying to
themselves all the time, ‘We want to develop the right strategies; we want to
let our shareholders know that we are developing the right strategies.’ I would
suggest that, if that is the case, if they can convince shareholders and the
market that they are doing the right thing, the share price will reflect the
potential and they will be less susceptible to takeover activities.[48]
Price maximisation
2.34
Several submissions argued that target
shareholders would be disadvantaged because the use of the MBR to acquire a
controlling interest would defeat an auction for control. These submissions
advised that the MBR would result in less price tension. The lack of price
tension meant that the controlling shareholder would not get the best possible
price for its control parcel. However, Mr David Quigg, a Partner at Kensington
Swan, advised that minority shareholders may prefer a negotiated sale rather
than the uncertainty of a public auction:
The controlling shareholder has a choice. It is not required to
accept any offer from the prospective purchaser. Presumably it will only
accept the offer if it believes that it is unlikely an auction would achieve a
greater price. It is therefore the controlling shareholder’s choice to go
auction. I believe that the controlling shareholder would prefer to have its
flexibility enhanced by the Mandatory Bid Rule (either commit or go to
auction). I believe on balance that the Mandatory Bid Rule would also be
favoured by the minority shareholders. Allowing the simple mandatory auction
regime to proceed anticipates that the principles of the auction theory always
apply in practice. That is, that there are competing offerors and due to their
competing offers the maximum price is achieved. Often in fact there is a lack
of multiple purchasers even in the best run tender or auction situation.
Resort is made to “phantom” purchasers. Such arrangements cannot be used in
the present compulsory auction regime applicable in either New Zealand or
Australia. One clearly knows from market information whether or not there are
any competing offers. Taking this into account, there may well be a better
result for the minority shareholders in a negotiated sale rather than a public
auction. The flexibility given by the Mandatory Bid Rule gives the possibility
for a private treaty sale to be negotiated with the controlling interest. The
subsequent mandatory bid requirement means that minority shareholders share in
the same premium achieved by the controlling shareholder.[49]
2.35
Similarly, Mr Alistair Lucas, Executive Director
of Macquarie Bank, advised that the MBR would not lead to reduced price tension
for corporate control and a less effective takeover process:
Mr Lucas—In my experience, getting an
auction going—there have been a number of public auctions—in a public company
situation is very difficult. Quite often when a takeover is being made, the
offeror companies are making very major corporate change decisions. They are
increasing their size, maybe 20 or 50 per cent, or even doubling their size by
making a takeover offer. When a corporation makes a takeover offer it wants to
be certain that success will occur, otherwise it has flagged to the whole
market a major change in strategy and has then failed if it does not succeed.
That can be a significant issue in relation to the confidence that investors
have in that company. That company, by indicating that it wishes to make a
takeover, may have made it clear that it is weak in a particular market. It may
have made it clear that it believes its current level of operations is not
sufficiently diversified. A whole range of strategic issues can be and are
pretty clearly read by analysts into corporations by the process of making
takeover offers. Companies do not make takeover offers lightly. It is much
harder in my experience for a corporation to make a decision to make a takeover
offer in a situation where they know someone has already made an offer and so
it is already contested. I have heard countless times, ‘We are not interested
in bidding in a contested situation.’ That is a common statement made by
boards. It is an unattractive situation to be in a public auction process. The
process that the mandatory bid rule would allow is a private auction. A private
auction is a much more acceptable way for corporations to conduct an auction
because they do not have to make their position public. They do not have to
make their pricing public. They do not have to line up the finance in advance.
It is a much easier process for the corporations to deal with.[50]
Theoretical analysis of the MBR
2.36
The Centre for Corporate Law and Securities Regulation,
University of Melbourne, submitted a 1997 paper which examines the MBR from an
economic perspective.[51]
The paper analyses the effect of the MBR on the outcome of a control contest
between two rival management teams in a firm where no controlling position
exists. The theoretical model used is that of a firm which is privately owned
by a founder/entrepreneur. The paper also adapts the Grossman and Hart
framework of security and private benefits that accrue to the two rival teams.
The security benefits are the net present value of the firm’s projects that
accrues to all shareholders of the firm. Private benefits are defined as net
of any costs making a bid and may measure the attendant psychic value generated
by control over the firm.
2.37
The MBR requires that when control shifts all
shareholders should have the opportunity to exit the company and the chance to
sell their shares at the price of the control premium. Giving all shareholders
such an option would seem fair and equitable. However, by changing the
conditions of the control contest between the rival teams, the MBR triggers
several counteracting effects on shareholder wealth. The different effects on
shareholder wealth are brought about by the relative value of the security and
private benefits to each management team. The model yields several general and
specific outcomes which indicate when the MBR is in the interests of target
shareholders:
In the general case with two-sided private benefits, the MBR is
aligned with the shareholder’s interests only over a comparatively small set of
values in the parameter space. Hence the implementation of the MBR does not
generally benefit the target shareowners. Specifically, if the private
benefits of the two contestants are about the equal size, its effect on the
shareholder’s wealth is uniformly nonpositive. In fact, unless the difference
in private benefits is large, the target shareowners encounter a loss from the
implementation of a MBR.[52]
2.38
On the other hand, these results contrast with
that obtained when the private benefits are one-sided. If either the incumbent
management or the rival team enjoy private benefits which are larger than its
rival, then the adoption of the MBR is likely to increase shareholders’ wealth:
With one-sided private benefits, the difference in willingness
to pay over private benefits between the two contestants is maximised.
Consequently, since their willingness to pay is relatively more similar over
security benefits, the target shareholders exploit this fact by allowing nonpartial
bids.[53]
Hence the special case with one-sided private benefits provides the strongest
case for the MBR because it is perfectly aligned with the shareholders’
interests.[54]
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