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Chapter 3 - Conclusions and recommendation
Rationale for the final MBR proposals – the protection of
minority shareholders
3.1
The questions before the PJSC during this
inquiry were very similar to the questions that were faced by Treasury when it
proposed the introduction of the MBR as part of its review of Chapter 6 of the
Law. The CLERP paper addressed two basic issues: Is the MBR necessary to solve
the efficiency problems involved in an auction for corporate control, and if
so, are the conditions attached to the MBR sufficient? The difficulty with the
CLERP proposal, however, was that it attached too much importance to achieving
efficiency and transactional certainty in the takeover process. In identifying
the efficiency problems involved in an auction, which could lead to higher bid
costs and increased premiums, the paper presented the MBR as a costless option
for acquiring and relinquishing corporate control. The removal of an auction
could result in “smaller control premiums being paid in some instances”, but it
was more likely that the initial bid would succeed. It could be expected
therefore that more bids would be made as a result of the greater certainty of
outcome, although the CLERP paper acknowledged there would be “some reduction
of market transparency.”[1]
3.2
Subsequently, a package of benefits or rights of
minority shareholders was included in the provisions of the CLERP Bill
consistent with the recommendations by ASIC to Treasury. A number of
prescribed conditions would apply to the MBR. The bidder must disclose to the
controlling interest that its agreement to sell will trigger the mandatory bid,
and it must not exercise control of the target until the first offer under the
bid is made. Several conditions that apply to takeover bids would also apply
to a mandatory bid. Target shareholders would have the benefit of an
independent assessment of the fairness and reasonableness of the bid and the
bidder’s statement would contain information about the financing for the bid.[2] The policy underlying the
modified MBR was stated in the Explanatory Memorandum to the Bill:
...all target shareholders will have the opportunity to sell their
shares at a fair price and to benefit from the premium a bidder for control
places on the securities...minority investors will be protected from being
offered insufficient consideration for their holdings, since the procedure will
encourage controlling and institutional investors to make an informed
assessment about the appropriate premium for control, which will be required by
the mandatory bid provisions of the law to be offered to small investors.
Subject to the conditions applying to the mandatory bid procedure, the general
procedure for undertaking a mandatory bid will be the same as for other
takeover bids.[3]
3.3
The PJSC concludes that the final MBR proposals
as contained in the CLERP Bill provide strong protection and safeguards for
minority shareholders.
Comparisons with the UK and EC models
3.4
The MBR has long been a feature of the UK takeovers practice. As stated by Mr Lee the rule has worked well over the past 30 years and is a completely
accepted feature of corporate and commercial life. Although the number of
mandatory bids is relatively low, there is no evidence that the price at which
the controlling shareholder sells its interest “is done at other than a very
full price.” However, direct comparisons with the rule in the UK should not be
taken too far. This is also the case for comparisons with the MBR in other EC
countries which have adopted a more restrictive form of the MBR. The PJSC
believes, however, that the MBR as proposed in the Bill, taken with the new
compulsory acquisition powers and the recent changes to capital gains tax
rollover relief, would operate in a significantly different, but no less
beneficial, manner.
Distressed vendor situation
3.5
The PJSC found it difficult to assess the
magnitude of the ‘distressed vendor’ problem and whether or not this would only
occur in a minority of situations, or if at all. However, the PJSC noted that
the concerns raised in submissions about a ‘fire sale’ situation where a
distressed vendor is anxious to sell its control parcel and forego a higher
offer are largely addressed by the conditions to which the mandatory bid is
subject. In the PJSC’s view the package of rights or benefits attached to the
use of the MBR acts to protect minority shareholders. In practice, it is
likely that target shareholders who chose to sell will do so only after the
board has advised them about the bid following the expert’s valuation. If a ‘fire
sale’ has been agreed to, the bidder will face a high degree of risk as its bid
may not be accepted by all shareholders. If shareholders deny approval of the
bid, the bidder is kept from gaining 100 per cent control unless the bidder
increases the offer price above the amount received by the distressed seller:
It should be recognised that if an anxious seller disposes of
its shares at something less than the best possible price, other shareholders
in the target company would not be compelled to dispose of their shares to the
offeror if they felt that the price offered under the mandatory bid was
inadequate. In those circumstances, in order to achieve the necessary
threshold to be able to compulsorily acquire all the shares held by the
minority shareholders, the offeror might be compelled to offer a higher price
under the mandatory bid or to increase the price offered under the mandatory
bid above the price that may have been paid to the anxious seller.[4]
Alternative proposals
3.6
The PJSC concluded that there is a fundamental
problem with the proposal for irrevocable undertakings, in that the initial
bidder has no certainty that its bid will succeed. It is also unclear how
irrevocable undertakings would work in practice. The conditions attached to
the undertakings would need to be restrictive so as to leave open the
possibility of an auction and the prospect of higher bids emerging from the
auction. By organising a friendly bid between the bidder and target company,
such undertakings could be used as a defence against a potential takeover.
They may serve therefore to check rather than stimulate competition. The
proposal also assumes a lengthy takeover period if the conditions that apply to
the initial bid are to apply to the higher bid and successive higher bids.
3.7
ASIC Policy Statement 102, Tender Offers by
Vendor Shareholders, which permits sales by tender of control parcels, has
the effect of requiring a mandatory bid and allowing control to pass prior to
the bid. To date, however, there has been little use of that policy. The
tender system assumes that a shareholder is “willing to hold out to the world
that it is a definite seller, even before a minimum price is set”.[5] While ASIC is prepared to
adapt the policy so long as investors are not compromised, the policy is not a
workable alternative to the MBR. The PJSC believes that the MBR is
particularly significant because it will alter the risk/reward balance for
potential bidders. A reform to takeovers as significant as the MBR requires a
legislative basis rather than the modification of an ASIC policy.
Theoretical analysis of the MBR and its implications
3.8
The paper submitted by the Centre for Corporate
Law and Securities Regulation analysed how the application of the MBR affects
shareholder wealth in a takeover contest. The paper derived a general design
principle that characterised when the MBR was in the interests of target
shareholders and when it was not. It also evaluated the MBR as a policy
instrument in the context of the EC Commission’s Directive on takeovers. The
analysis expressed doubts about the value of the MBR within the EC on several
grounds, including the rule’s prohibition on partial bids:
By demonstrating that it is only quite restrictive conditions
that he target shareowners actually gain ex post from implementation of the
rule, the analysis exposes the unclear and insufficient motivation behind the
MBR. In particular, the right to sell feature is not a free option and needs
serious motivation from regulators. The relative similarity of willingness to
pay rule provides the answer to when the enactment of the MBR is really in the
interests of the shareholders.[6]
3.9
The MBR proposed by the CLERP Bill is not
subject to the same restrictive rules which apply to the MBR under the EC
Commission’s Directive, just as the essential elements of the MBR are not
similar to the principles underlying the UK City Code. The PJSC noted
the diversity of rules and conditions applying to the MBR, although the basic
principles that govern the protection of minority shareholders are common to
all jurisdictions. The first is the equal opportunity principle and the
second, that all shareholders have a right of withdrawal. The PJSC noted that
the same principles underlie the package of benefits or rights of minority
shareholders contained in the CLERP Bill. However, the theoretical analysis is
a useful tool in understanding how shareholders’ wealth is maximised in a
takeover contest where there is no controlling position. In expressing doubts
about the implementation of the MBR within the EC, the authors of the paper
were advocating a less restrictive regime, which delivered a more efficient
management and maximised shareholder wealth.
Mandatory bid threshold and control premium
3.10
A feature unique to the MBR as proposed in the
Bill is the 20 per cent threshold, compared to the higher control thresholds in
other countries (between 30 and 50 per cent). The reasons for the choice of
the 20 per cent threshold were alluded to in evidence to the PJSC and they have
to do with the environment of corporate takeovers in the 1960s. It was felt
then that the figure should be below the threshold required for effective
control but should reflect significant influence and pressure.[7] Theoretically the premium for
control offered by a bidder belongs to the shareholder which can deliver
control to the bidder, be it at 30, 40 or 50 per cent. If control has not
changed, it does not follow that the amount received is a control premium even
though it may exceed the sharemarket price. The PJSC accepts that effective
control can be demonstrated in some instances where the control parcel is below
20 per cent, because of the spread of shareholders in the particular company or
the size of the company. However, in most cases effective control would not
have changed with the agreement to sell. The MBR therefore is more liberal
than other forms of the MBR because it allows a bidder to gain full control
without first having acquired a controlling interest (between 30 and 40 per
cent). The PJSC believes that, in practice, the rule will lead to an
incremental offer or offers by the bidder to gain a minimum 90 per cent
acceptance by target shareholders. At 90 per cent the bidder would be able to
compulsorily acquire the remaining 10 per cent of shares. Therefore it is in
the interests of the majority shareholder to seek offers from other potential
bidders with an interest in acquiring its holding in order to maximise the
price at which control eventually occurs. As Mr Alan Cameron noted, mandatory
bids will carry the risk that the bidder will achieve only partial control and
not 100 per cent ownership, unless it offers a full price or is prepared to
raise the offer price:
Mr Cameron—...one of the things that will
tend to drive the price up in the first purchase will be the fact that the
bidder will then be at risk of being stuck with that holding themselves because
the bid must be fully unconditional. If that rule is preserved, if that
condition is maintained as part of the parliament’s approach, then it will be a
very brave bidder who does not bid at reasonably full price or who is not
prepared to raise the price, because they will not be sure of control in that
situation...But you can read it either way. You can say either that it means
there will be fewer bids, of that it means the bids will have to be at a price
than the lack of an auction might have otherwise suggested...The other factor I
would add in is the necessity to ensure that you get to control, because our
experience in this country is that few bidders are really content with a
situation where they will not get control.[8]
Corporate performance, price tension and better
communication
3.11
The PJSC concluded that the primary argument
against the MBR is that an auction for corporate control ensures that the
maximum takeover premium over and above the sharemarket price is achieved. The
relationship between price competition and the takeover premium was at the
centre of this debate. However, the argument assumes that all bidders with an
interest in acquiring control will participate in a public auction and that the
risk/reward balance outweighs the potential harm to their asset quality if the
bid is unsuccessful. It also assumes that greater value is created through an
open auction for control. The PJSC, however, does not accept these
propositions.
3.12
The PJSC concludes that the MBR will stimulate
new competitive pressures in the takeovers market. The question of how these
competitive pressures will be stimulated involves two dimensions: corporate
efficiency and price tension in the market. The former concerns how the
performance of incumbent management is affected by the increased threat of
takeover and whether better communication with shareholders will result. The
latter concerns the price tension which arises in the course of a private
auction and, consequently, how large a premium the majority shareholder is able
to negotiate for its interest. These pressures are factors that affect the
pre-takeover value of the company rather than the price level at which the
takeover occurs. The PJSC believes that a strong and active market for
corporate control promotes higher corporate efficiency. All shareholders,
regardless of whether they hold controlling interests or not, will benefit from
improved performance by company management, better communication and increased
price tension.
Recommendation
3.13
The PJSC recommends that the MBR as proposed in
the CLERP Bill should be enacted.
3.14
The PJSC also recommends a review of the
operation of the MBR two years after its commencement, as foreshadowed by the
Government at the time the CLERP Bill was introduced into Parliament.
Senator Grant Chapman
Chairman
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