House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

7 Takeovers

7.1 This Chapter sets out the key changes introduced by the takeover provisions in the Bill.

Mandatory bid rule

7.2 To facilitate a more competitive market for corporate control, a mandatory bid rule will be introduced. Under the rule, a bidder will be able to exceed the takeover threshold (more than 20 per cent of the total voting rights in a company) before being required to make a general takeover offer (proposed section 611, item 5).

7.3 Under the current law, bidders wishing to launch takeovers must do so when their holding in the target company is below 20 per cent (current section 615). This means that they face considerable uncertainty over the likelihood of the success of their bid, as it is relatively easy for other parties to launch takeover bids in response to an initial bid. In addition, the directors of the target have a greater opportunity to take defensive action, even where that may not necessarily be in the best interests of the target shareholders. Hence, potential bidders may decide not to proceed with their bids, due to the risk of spending considerable time and resources being involved in a bidding war or an unsuccessful bid.

7.4 There are two significant advantages of the mandatory bid rule. First, by giving potential bidders the choice of which takeover method to employ, they are more likely to proceed with their bids, resulting in an increased likelihood of assets being used in their most productive manner. Secondly, the mandatory bid rule will ensure that all target company shareholders will have the opportunity to sell their interest at a fair price and to benefit from the premium a bidder for control places on the securities.

7.5 At the same time, 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.

7.6 The mandatory bid procedure is broadly based upon a similar rule in the United Kingdom. The majority of takeover bids made in the United Kingdom are voluntary rather than mandatory, indicating that the mandatory bid rule is considered as an alternative rather than the standard means of gaining corporate control.

7.7 As a result of the proposed changes, bidders will be able to choose the type of takeover procedure most conducive to allowing them to achieve their objectives. Subject to the conditions applying to the mandatory bid procedure below, the general procedure for undertaking a mandatory bid will be the same as for other takeover bids.

7.8 Associates of the person who made the acquisition triggering the mandatory bid, such as parent companies, subsidiaries or other vehicles established specifically for the purpose, will be able to undertake the mandatory bid on behalf of the person (proposed section 611, item 5(e)). This recognises that companies may employ a variety of different ownership structures in order to meet their corporate objectives.

7.9 Under its general power to modify the application of the takeover law in particular cases, ASIC will be able to relieve persons from the obligation to proceed with a mandatory bid, or to allow mandatory bids to be conditional (proposed section 655A).

7.10 The Government will review the operation of the mandatory bid rule two years after its commencement, to ensure that the Governments policy goals with the introduction of the mandatory bid are being achieved.

Conditions applying to the mandatory bid rule

7.11 The conditions that generally apply to takeover bids will usually apply to mandatory bids. However, certain other conditions will also apply to mandatory bids to provide protection for minority shareholders.

7.12 For example, the conditions are designed to ensure that the mandatory bid complies with the equal opportunity principle that target shareholders be given a fair opportunity to exit the company completely at a fair price. The conditions also recognise that at the time the mandatory bid is made, control may already have passed to the bidder.

7.13 The mandatory bid conditions include:

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the bidder must start from below the 20 per cent threshold with only one acquisition being allowed before the mandatory bid requirement is triggered, which must be immediately followed by the announcement of the mandatory bid (proposed section 611 items 5(d) and (e));

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the bidder should not acquire a relevant interest in any other securities of the body at the same time as the acquisition triggering the mandatory bid occurs (proposed section 611 item 5(c));

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the bidder must disclose to the selling shareholder that the mandatory bid requirement will be triggered by an agreement to sell (proposed section 611 item 5(f), Schedule 3 Part 9 item 363, section 1002LA);

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the bid must include an offer of a cash sum for the securities, thereby giving target shareholders the option of exiting from the company completely. Alternative consideration, such as securities or a combination of cash and securities, may also be offered (proposed subsection 621(2));

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the bid must be for an amount at least equivalent to the highest price paid by the bidder in cash or non-cash transactions in the last four months (proposed subsection 621(4));

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the bid must be unconditional (proposed section 611 item 5(e));

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target shareholders must be provided with an independent experts report by the target (proposed paragraph 640(1)(d));

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the bidder must not exercise control of the target until the offer period starts for the mandatory bid (proposed paragraph 614(1)(b)) that is, until the first offer under the bid is made. Until then, the bidder will only be able to influence the affairs of the target through voting shares already held in the target before the pre-bid acquisition that triggered the mandatory bid procedure; and

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no securities will be able to be issued in the target, nor 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 (proposed paragraphs 614(1)(c) and (d)). However, this prohibition does not apply in certain circumstances, including where the issuing of securities is announced before the mandatory bid is announced (proposed subsection 614(2)).

Dispute resolution

7.1 Takeover disputes are currently principally determined by the courts, with the jurisdiction of the Corporations and Securities Panel (Panel) depending upon referrals from ASIC. There have been only three matters brought before the Panel since it was established in 1991.

7.2 Target companies often resort to litigation in hostile takeover bids, sometimes for tactical reasons. This can result in bids being delayed and, where a final hearing cannot be held within the bid period, the courts having to decide between disrupting the bid by granting an injunction without the benefit of full evidence and allowing the bid to proceed even though it may later be found to be defective.

7.3 To meet these concerns, a reconstituted Panel will take the place of the courts as the principal forum for resolving takeover disputes under the Corporations Law, with the exception of civil claims after a takeover has occurred and criminal prosecutions. This will allow takeover disputes to be resolved as quickly and efficiently as possible by a specialist body largely comprised of takeover experts, so that the outcome of the bid can be resolved by the target shareholders on the basis of its commercial merits. Other benefits of an effective panel for dispute resolution include the minimisation of tactical litigation and the freeing up of court resources to attend to other priorities.

Panels role

7.4 The Panel will be the main forum for resolving takeover matters until after the end of the bid period for a takeover bid. Once a takeover bid has been proposed, only ASIC or another public authority of the Commonwealth or a State will be able to apply to the court to stop or affect a takeover bid (proposed section 659B).

7.5 In place of the courts, the Panel will have the power to:

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review on its merits a decision of ASIC to exempt or modify the takeover rules in Chapter 6, replacing the current Administrative Appeals Tribunal (AAT) jurisdiction (proposed section 656A); and

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declare circumstances to be unacceptable and make a wide range of orders, including stopping a takeover bid (proposed sections 657A - 657F).

7.6 This approach retains the benefit of ASICs experience in making exemptions and modifications under the Law generally and complements its day-to-day enforcement role.

7.7 Any interested person, including the bidder, target and ASIC, will be able to apply to the Panel for a declaration of unacceptable circumstances, interim order and/or final order based upon those circumstances (proposed section 657C). Similarly, any interested person will be able to apply for review of an ASIC takeover decision (proposed subsection 656A(2)). The Panel will be able to decline to hear a matter or prevent further applications being brought by a person making a frivolous or vexatious application (proposed section 658A).

7.8 To minimise tactical litigation by seeking review of ASIC decisions, a party would not be able to seek review of the following decisions:

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an ASIC application to the Panel under section 657C for a declaration of unacceptable circumstances or an order relating to those circumstances;

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an ASIC application to the court under section 657G for enforcement of a Panel order;

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an ASIC application for the court to make an order before the end of the bid period under section 659B; and

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an ASIC application to the court for an order enforcing the takeover rules under sections 1325A, 1325B and 1325C (proposed Schedule 3 Part 9 item 370, paragraph 1317C(gc)).

7.9 The Panels jurisdiction to make a declaration of unacceptable circumstances will not depend upon the existence of a general offer to shareholders under a takeover bid. Instead, its discretion will extend to circumstances involving an acquisition of a substantial interest in, or control of, a company (proposed paragraph 657A(2)(a)). In making a declaration of unacceptable circumstances, the Panel must have regard to the spirit of the takeover rules in section 602 in deciding whether the circumstances are unreasonable and whether it is in the public interest to make the declaration (proposed subsection 657A(2)).

7.10 The Panel will have the power to make a wide range of orders, either on an interim basis, following an application for a declaration of unacceptable circumstances, or as a final order once the declaration is made (proposed sections 657D and 657E). For example, the Panel will be able to prevent a person from acquiring securities, direct a person to dispose of securities and award costs (proposed Schedule 3 Part 9 item 295, remedial order).

7.11 Findings of fact by the Panel will be able to be used in subsequent proceedings, unless contrary evidence is put forward (proposed section 658B). On the other hand, the Panel will be able to apply to the court to obtain a ruling on a question of law (proposed section 659A).

7.12 A full-time President will be appointed, initially sitting on all matters to provide consistency in decision making. A full-time independent executive will also be established to service the Panel and deal with market participants on a day-to-day basis.

7.13 In light of its expanded role, the Panel will need additional resources. It is intended to apply full cost-recovery to the Panels operation. This will be achieved by accompanying the introduction of the new takeover arrangements with revised fees payable by the parties.

Courts role

7.14 Court proceedings in relation to a takeover bid or proposed takeover bid will not be able to be commenced until after the end of the bid period, except on the application of ASIC or another public authority of the Commonwealth or a State (proposed section 659B, Schedule 3 Part 9 item 292). The courts will instead decide after the bid any damages claims, criminal prosecutions or applications to be relieved from liability arising from contraventions of the Law or procedural irregularities.

7.15 The restriction on court proceedings in relation to a takeover bid or proposed takeover bid until after the end of the bid period will include:

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any proceedings for review of Panel decisions (proposed section 659B); and

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proceedings under Commonwealth and State laws and the general law (proposed subsection 659B(4)).

7.16 If the Panel has refused to make a declaration of unacceptable circumstances during the bid period, but the Court finds that there has been a contravention of the Law, the orders that the Court will be able to make will be limited to (proposed section 659C):

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imposing a penalty if the person is found guilty of an offence or ordering the person to pay money to another person if there is a contravention of the Law; and

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making an order relieving a person from liability arising from a contravention of the Law or procedural irregularity.

Compulsory acquisitions

7.1 The Bill will extend the current legislative mechanisms for the compulsory acquisition of securities. These are intended to balance the interests of facilitating changes in corporate ownership with the need to protect the rights of minority shareholders.

7.2 Extending the power to compulsorily acquire securities will:

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allow better management of company groups;

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reduce the administrative and reporting requirements of associated companies by:

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helping parent companies distribute funds between subsidiaries;

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protecting the confidentiality of commercial information and avoiding conflicts of interest in dealings between associated companies; and

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discourage minority shareholders from demanding a price for their securities that is above a fair value (often referred to as greenmailing).

7.3 The new provisions will:

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allow all securities (rather than just shares) to be compulsorily acquired;

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revise the 75 per cent rule for post-bid compulsory acquisitions;

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facilitate the acquisition of the outstanding securities in a class by any person who already holds 90 per cent of the class; and

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allow an overwhelming interest holder of a company to acquire all the outstanding securities in the company (securities in all classes) in situations where the holder can demonstrate an overwhelming interest in the company.

Post-bid compulsory acquisitions

7.1 A bidder making a takeover bid will be permitted to compulsorily acquire securities in the bid class if:

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the bidder and its associates have a relevant interest in at least 90 per cent of those securities; and

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the bidder has acquired at least 75 per cent, by number, of the outstanding securities, of those securities bid for under the bid.

7.2 The current law only provides for compulsory acquisitions in respect of shares. The draft provisions will allow compulsory acquisitions in respect of all securities and convertible securities, including options over yet to be issued securities, outstanding voting and non-voting equity securities, securities that are convertible into voting or non-voting equity securities, options, convertible notes and converting preference shares (proposed sections 661A and 664A). The Bill applies the same definition of securities as in the fundraising provisions (proposed Schedule 3 Part 1 item 34, subsection 92(3)).

7.3 Under the current law, a post-bid compulsory acquisition can be defeated if 75 per cent by number of the outstanding shareholders (regardless of how many shares they hold between them) object to the compulsory acquisition (current section 701). This provision has been used in the past to defeat takeover bids by splitting down a small number of shares among a large number of shareholders. The Bill will remedy this by enabling a majority securities holder to compulsorily acquire shares if 75 per cent of the outstanding securities, by number of securities, accept the bid (proposed section 661A).

7.4 A court may order that a compulsory acquisition not proceed where the consideration is not fair value for the securities (proposed section 661E).

Compulsory acquisitions of all securities in a class

7.5 The draft provisions introduce a new compulsory acquisition power to enable a person, who has a full beneficial interest (that is, either direct ownership or ownership through a nominee) in at least 90 per cent of any class of securities in a company, to compulsorily acquire the remaining securities in that class (proposed subsection 664A(1)). This new power will be in addition to the post-bid compulsory acquisition power and will allow compulsory acquisitions to take place at any time, not just following a takeover bid.

7.6 Because the compulsory acquisition procedure may not immediately follow a takeover bid:

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the threshold test for this power (full beneficial interest in 90 per cent) will be set higher than under a post-bid compulsory acquisition (relevant interest in 90 per cent); and

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the majority securities holder will be required to provide an independent experts report to the minority securities holders setting out:

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whether, in the experts opinion, the terms of the compulsory acquisition give a fair value for the securities; and

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the reasons for the opinion.

7.7 If 10 per cent of holders of securities in a class object, the acquisition of that class will not be able to proceed without court approval (proposed subsection 664E(4)).

Compulsory acquisitions of all securities in the company

7.8 The power to compulsorily acquire shares should enable the overwhelming owner of a company to obtain the often substantial benefits of complete ownership. These benefits can only be obtained where a securities holder has 100 per cent beneficial ownership of all securities in the company. Compulsory acquisition of each class of securities can be difficult where there are a large number of different classes or a small number of securities holders in one or more classes, or where there are restrictions on transferring some securities (for example, securities issued under employee share schemes).

7.9 Proposed subsection 664A(2) facilitates the acquisition of 100 per cent of all the securities of a company by any person provided that the person holds:

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full beneficial ownership of securities valued at 90 per cent of the total market value of the company; and

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full beneficial entitlement to 90 per cent of the voting rights to approve a general resolution in a general meeting.

7.10 As the new power will enable a controlling shareholder to acquire complete control of the company and not just the ability to compulsorily acquire securities of a particular class, an overwhelming economic and control interest in the company will be required. This will be based upon the market value of the securities and the voting rights in a general meeting.

7.11 To protect minority shareholders and keep markets informed, the person acquiring the securities will be required to provide a notice of acquisition. The notice will set out the offer price for the securities to be acquired and be accompanied by an independent experts report valuing the company as a whole, the interests of the person seeking to acquire the remaining securities and the interests of the securities holder being sent the notice. The notice will also disclose any offers made by the acquirer, or an associate, for securities in the class within the 12 months prior to the compulsory acquisition (proposed section 664C).

7.12 The independent experts report must state whether, in the experts opinion, the offer price is fair. If at least 10 per cent of the securities holders of any one class object to the acquisition, based upon either the valuation of the company as a whole or the offer price for their securities, then court approval of both the valuation and the offer must be obtained. The courts role will be to determine if the offer gives a fair price for the securities (proposed section 664F).

7.13 The issue of valuing companies for the purposes of compulsory acquisition is a difficult one and the draft provisions provides guidance to experts as to how they should go about valuing a company (proposed section 667C). It is proposed that experts would not account for premiums on account of the special value of the outstanding securities to the acquirer, or discounts on account of the lack of a market for particular securities.

Managed investment schemes

Applying takeover rules to listed managed investment schemes

7.1 Currently, the takeover provisions do not apply to managed investment schemes, which are typically unit trusts. The draft provisions will apply the takeover rules to listed managed investment schemes (proposed section 604).

7.2 The takeover provisions will only apply to listed managed investment schemes because the redemption facility of a listed scheme is suspended and units trade at a price set by the market. This provides an opportunity and incentive for a bidder to pay a premium over the market price for control parcels of undervalued units.

7.3 For most unlisted schemes this is not the case, as the manager provides investors with a withdrawal facility at a price reflecting the net asset backing of the units. This would be a strong disincentive for a bidder who must pay a premium for the units above the value for which they can be redeemed.

7.4 Other operating features of many unlisted schemes make the application of company takeover rules impractical. In particular, in the case of open-ended schemes, new interests are issued on a continuous basis as investments are made. While the potential effect of this could be overcome by the imposition of freezes on the issue of new interests when a takeover bid is launched, this would appear to amount to an unwarranted interference in the ordinary operation of the scheme.

7.5 To apply the company takeover provisions to managed investment schemes, the provisions equate features of a company to features of a managed investment scheme (proposed subsection 604(1)).

7.6 Applying the draft provisions in this way avoids repeating the provisions specifically for listed managed investment schemes. However, in some instances the application of the provisions to listed managed investment schemes is specifically dealt with. For example, a bidders statement must disclose the bidders intentions regarding the future of the target. The provisions clarify that this requirement applies differently to targets that are companies and to targets that are schemes (proposed paragraphs 636(1)(c) and (d)).

7.7 In addition, the regulations may modify the application of the takeover provisions to managed investment schemes (proposed subsection 604(2)).

7.8 As the current provisions do not apply to managed investment schemes, most listed schemes include in their trust deed takeover provisions based upon those currently in the Corporations Law. The application of the takeover provisions to managed investment schemes will automatically override any inconsistent takeover rules contained in existing trust deeds without the need for further legislative amendment.

Replacing the scheme manager

7.9 One issue that arises from the application of the takeover provisions to managed investment schemes is the appropriate statutory rule for the replacement of the scheme manager. The current statutory rule requires a vote by 50 per cent by value of unit holders to remove the manager (current regulation 7.12.15(10)(g)). In contrast, ASX Listing Rule 13.3 requires a listed schemes trust deed to allow removal of the schemes manager by an ordinary resolution of unit holders. Unlike the statutory rules, the listing rule approach is consistent with the rule for the removal of company directors.

7.10 Another problem with the current statutory voting rules is that they enable the bidder and its associates to vote on the removal of the manager, while the existing manager and its associates are excluded from voting (current regulations 7.12.15(6)(f) and (9)(b)(i)). This disenfranchises those investors who have already indicated a preference in favour of the existing manager by purchasing units in the scheme. Where the manager and its associates hold a large percentage of the units, the manager could be removed by a vote of just half of the value of the minority unit holders.

7.11 The draft provisions will resolve these issues by making it clear that the manager of a listed managed investment scheme can be replaced by a simple majority of unit holders who vote at a duly convened meeting (whether in person or by proxy), without any restrictions on who can vote (proposed Schedule 3 Part 9 item 341 subsection 601FM(1) and items 322 - 325, sections 252L, 252M(1) and 253E). This is consistent with the voting requirements for the removal of company directors.

Compulsory acquisitions

7.12 The compulsory acquisition provisions in Chapter 6A will extend to listed managed investment schemes (proposed section 660B). This will enable a bidder or 90 per cent holder to move to 100 per cent control of a listed managed investment scheme in the same way that a bidder or 90 per cent holder can move to 100 per cent control of a company. Similarly, extending these provisions to schemes will ensure that minority unit holders will have access to the same compulsory buy-out protections as minority shareholders.

Substantial holdings and tracing

7.13 To ensure that changes of control of managed investment schemes take place in an informed market, the proposed provisions on substantial holdings and tracing beneficial interests in Chapter 6C will apply to listed schemes.

7.14 A person will be required to provide the responsible entity and the ASX with particulars of their identity, their interest in the scheme and any associates, where:

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they gain or cease to have a substantial holding in a listed managed investment scheme;

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they have an existing substantial holding that increases or decreases by 1 per cent; or

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they make a takeover bid for securities of the scheme (proposed subsection 671B(1)).

7.15 ASIC or a listed managed investment scheme will be able to trace the beneficial ownership of interests. A member of a scheme will be able to request ASIC to exercise its tracing powers on behalf of the member (proposed section 672A).

Rewriting the takeover provisions

7.16 The Bill also rewrites the takeover provisions to streamline the rules and remove anomalies and unnecessary requirements, in order to reduce transaction costs and lighten the regulatory burden on business. This takes into account the recommendations of the Legal Committee of the Companies and Securities Advisory Committee (CASAC Legal Committee) in its reports Anomalies in the Takeover Provisions of the Corporations Law (March 1994) and Compulsory Acquisitions (January 1996).

Takeover prohibition and exceptions

7.17 The more significant changes to the takeover prohibition and exceptions include:

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applying the takeover provisions to acquisition of shares in listed companies and unlisted companies with more than 50 members (proposed paragraph 606(1)(a)). In contrast, the existing takeover provisions apply to companies with more than 15 members (current subsection 619(1)). It is considered difficult to justify the imposition of takeover regulation to closely held companies in light of the costs involved;

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liberalising the current exemption for downstream acquisitions that occur as a result of an acquisition of shares in an Australian listed company (the upstream acquisition), by allowing the upstream acquisition to fall under any of the exemptions from the 20 per cent threshold and extending the exemption to foreign bodies approved by ASIC (proposed section 611 item 14);

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exempting a relevant interest that arises from:

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an agreement conditional on shareholder approval under item 7 in section 611; or

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an agreement conditional on ASIC relief, until fulfilment of the condition

provided that the agreement does not confer control over voting and does not restrict disposal for more than 3 months (proposed subsection 609(7)). This removes the difficulty that a person would be deemed to have a relevant interest in anticipation of the agreement under proposed subsection 608(8);

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measuring voting control of a company by the number of votes attached to shares a person controls, rather than the number of voting shares (more accurately reflecting a persons voting power);

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replacing the concept of entitlement with voting power (proposed section 610). Voting power will be calculated by identifying any share that either the person or an associate has a relevant interest in and determining how many votes are attached to those shares as a proportion of the total number of votes. Given the possibility that the number of votes attached to a share may vary, the number of votes to be counted is:

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the number that may be cast on the election of a director, or

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if no votes are cast for the election of a director the number that may be cast on the amendment of the constitution (proposed subsection 610(2))

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ensuring that a director will not have a relevant interest in shares in which a body corporate has a relevant interest merely because they are a director of the body (proposed subsection 609(9)). This exception means that a director will only have a relevant interest in securities over which they in fact have control (for example, as a result of personal shareholding);

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providing that a member of a company will no longer have a relevant interest in the shares held by other members merely because of pre-emptive rights under the companys constitution (proposed subsection 609(8)). A right of pre-emption occurs where the members of the company are able to purchase the shares of any other member who proposes to sell their parcel, before any outsider can purchase them; and

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providing that a person will only acquire a relevant interest in a security under an exchange traded option or futures contract when the option is exercised or they are obliged to take delivery (proposed subsection 609(6)).

Takeover procedure

7.1 The draft provisions largely replicate the existing law in relation to the processes that must be followed by parties to a takeover bid, with some minor changes (proposed sections 631 - 635).

7.2 Diagrams have been included that show the documentation that a bidder and target must provide to each other, ASIC, the ASX and the holders of securities that are subject to the bid, for off-market and market bids respectively (proposed sections 632 and 634). These diagrams are non-operative that is, they are only a summary of the substantive requirements in the other provisions (for example, proposed section 633 for off-market bids and section 635 for market bids).

7.3 Changes to the current procedure include:

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bringing the procedural rules relating to off-market and market bids into line where appropriate, including:

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merging off-market and market statements into a bidders statement (replacing Part A and Part C statements) and a targets statement (replacing Part B and Part D statements);

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allowing market bids to be made without the consent of ASIC where the bidder controls more than 30 per cent of the target company, instead applying the off-market bid requirement for an experts report to accompany the targets statement (proposed paragraph 640(1)(a), current subsection 674(2)); and

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leaving the mechanical details of making market bids to the ASX Listing Rules

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allowing the bidder to send a copy of the bidders statement to the target on the same day as lodging the statement with ASIC, rather than requiring lodgment to be no later than the day before the statement is sent to the target (proposed section 633 item 4). This removes an unnecessary delay caused by the current law;

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the target will be able to send its statement to the bidder on the same day it receives the bidders statement (proposed section 633 item 11); and

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no longer requiring the bidder to send out the targets statement with its own documents to target shareholders, in the event that it has received the targets statement in time (current subsection 639(2)). In the case of a hostile bid, it would be in the interests of the target company to use the maximum time available to prepare its response and commission an experts report. The bidder may, however, still choose to send the targets statement where the bidder and target agree to this.

7.4 The general rules on takeover procedure in Division 5 of Part 6.5 will facilitate a bidder sending documents to target holders at the addresses that may be obtained from the target (proposed sections 648B and 641). Proposed section 648C modifies the current provisions on sending takeover documents to allow documents to be sent overseas by courier (current section 607 and regulation 6.1.01). The Bill also retains the current takeover approval provisions, in light of concerns that their removal may reduce investor protection (proposed sections 648D - 648H, current Part 6.3 Division 8).

Offers

7.5 A bidder will be able to determine the period that the offer will remain open, subject to a minimum of one month and a maximum of 12 months (proposed subsection 624(1)). This allows a greater degree of flexibility for a bidder. Currently, an offer must remain open for a minimum of one month and can be extended for a further month, but it cannot remain open for more than 6 months (current subsections 638(3) and 681(3)).

7.6 The current provisions limit a bidder to making a takeover bid for the shares in the bid class that is, not including securities convertible into the bid class. The draft provisions will allow the bidder in an off-market bid to specify in the offer document that the takeover applies to securities that exist or will exist as at the date set by the bidder (proposed section 617).

7.7 This change was introduced to better facilitate the acquisition of securities under a takeover bid. While the provision does not remove the possibility of defensive tactics through the target issuing convertible securities during the bid period, the target company directors will be subject to directors duties. In addition, draft paragraph 652C(1)(d) allows the bidder in certain circumstances to withdraw the bid for unaccepted shares if such convertible securities are issued.

7.8 Under a market bid, the offer must extend to all convertible securities that will or could be converted to shares of the bid class within the offer period (proposed section 617).

7.9 In determining the highest price paid in the last four months for the purposes of cash consideration, the draft provisions takes into account non-cash consideration, as well as cash consideration as at present (proposed subsection 621(4)).

7.10 The current prohibition against escalator agreements will be modified to provide an exemption for an agreement triggering a mandatory bid (proposed subsection 622(2)). This will allow the agreement to provide that the price paid will be increased to reflect any higher amount payable under the mandatory bid.

7.11 The prohibition relating to the giving of collateral benefits has been modified to focus on inducements offered to a vendor of securities or any associate. It will prohibit a bidder giving a benefit to a person or an associate if that benefit is likely to induce them to accept the takeover bid or dispose of their securities, and the benefit is not given to all holders of the securities in the class (proposed section 623).

7.12 The draft also allows a bidder to make simultaneous takeover bids for different classes of securities in the target (proposed subsection 623(5)). Under the current law, section 698 prevents such simultaneous offers because it amounts to a collateral benefit.

Conditional bids

7.13 Division 4 of Part 6.4 of the draft provisions brings together the rules in relation to conditional offers in one place. The rules have been redrafted to make them easier to read.

7.14 Consistent with the current law, the basic rule is that only off-market bids may be made subject to conditions, and that in an off-market bid, certain types of conditions are prohibited (maximum acceptance conditions, discriminatory conditions, conditions requiring payments to officers of the target and conditions that turn on the opinion of the bidder).

7.15 The Bill retains the prohibitions on certain conditions that exist in the current law that might otherwise frustrate the principles underlying the takeovers rules by restricting the ability of all securities holders to participate equally after an offer has been made (proposed sections 626 - 629). The current requirement to publish certain notices about defeating conditions in a newspaper has been deleted.

Variation of bids

7.16 Provisions dealing with variation of takeover bids in Divisions 4 and 5 of Part 6.3 of the current Law will be recast in Parts 6.6 and 6.7 of the draft provisions. The rules have been revised to give greater protection to investors during the course of a takeover bid. The provisions in the new Bill:

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allow bidders to offer to buy shares to which a dividend is attached and for the dividend to be paid to or retained, in whole or part, by the target holder (proposed paragraph 650B(1)(g));

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better apply the principles that securities holders be given a reasonable period in which to consider a bid, and equal access to benefits arising out of a bid (proposed Part 6.6); and

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improve the operation of the rules governing declarations that offers are free from conditions (proposed section 650F).

7.17 Variations of off-market and market bids will continue to be restricted to improving the consideration and extending the period of the offer (proposed sections 649A and 650A).

7.18 Current section 655 sets out the various ways a bidder may vary consideration in respect of an offer. Section 655 will be replaced by proposed section 650B, which will allow offers to purchase shares cum dividend to be varied so as to enable target holders to retain all or part of the dividend.

7.19 The current law contains mechanisms to ensure that increases in consideration, late in the bid period, do not disadvantage target holders who have already accepted the offer (current sections 655 and 664 - 668). However the current rules do not allow sufficient time for consideration of increased bids, late in the period, by target holders who have not previously accepted the lower offer. This is inconsistent with the principles that shareholders of a target have reasonably sufficient time to consider offers in a takeover bid and equal access to benefits flowing from a bid (proposed section 602).

7.20 In order to give sufficient time for target holders to consider increases in bid offers that occur late in the bid period, off-market bid periods will be extended automatically by 14 days if the consideration in an off-market bid is improved in the last 7 days (proposed subsection 624(2)). Offers will not be able to be increased in the last 5 trading days of a market bid (proposed section 649B, current subsection 677(3)).

7.21 Proposed section 624 will also provide for the automatic extension of a bid period for 14 days if, during the last week of the bid period, the interests of the bidder rise above 50 per cent. This will assist target holders who might have declined the offer on the basis that they wished to remain with the existing management, but would accept if the bidder obtains a majority holding in the target.

Disclosure requirements

7.22 The present disclosure regime for bidders and targets statements has an extensive list of specific disclosure requirements as well as a catch-all general disclosure requirement (current section 750). In addition, a bidders statement for a bid offering securities as consideration must contain information required for a prospectus offering those securities. The large list of specific disclosure requirements in the current law results in some information being included in the bidders and targets statements that may have limited relevance to target shareholders. The presentation of bidders and targets statements also tend to follow the checklist. As a result, the statements may be less readable and may obscure significant information.

7.23 The provisions will introduce new disclosure rules that are consistent with the fundraising disclosure rules and have regard to the extent to which reliable information is available and the usefulness of disclosure. Regard is also had to the desirability of avoiding the inclusion of information that would provide a basis for engaging in litigation with a view to frustrating a bid.

7.24 Where a bidder is offering cash as consideration, the bidders statement will be required to contain:

•

more limited specific information identifying the bidder and the bidders intentions for the target (proposed paragraphs 636(1)(a), (c) and (d));

•

details of the cash amounts held by the bidder as well as the identity and arrangements the bidder has made with any other person who is to provide cash consideration (proposed paragraph 636(1)(f)); and

•

any other information known to the bidder that is material to a decision by a holder of securities of the target whether or not to accept the offer and that has not been previously disclosed to them (proposed paragraph 636(1)(j)).

7.25 Where cash is offered as consideration, the disclosure of these specified matters together with any other material information known to the bidder, is all that is required from the bidder. The appropriate source of information regarding the target is the target itself.

7.26 Where a bidder is offering securities as consideration, the bidders statement will also be required to contain information that would be required to be contained in a prospectus (if any) for the offer of those securities (proposed paragraph 636(1)(h)). Thus where new securities are to be issued, the bidders statement would have to contain the information required under the general prospectus disclosure test and where the securities are in an existing quoted class, the information required for prospectuses for such securities (see proposed sections 710, 711 and 713).

7.27 Where existing securities are offered by a controller of the entity that issued the securities, the statement will also need to include prospectus information (proposed paragraph 636(1)(h)). Consistent with the removal of the existing disclosure requirements for secondary sales by the proposed fundraising provisions (current section 1043D), offers of existing securities as consideration by a person who is not a controller will not need to include prospectus-like information.

7.28 Where the bid is a mandatory bid, the bidders statement will also be required to include details of the acquisition that led to the making of the bid (proposed paragraph 636(1)(i)).

7.29 The targets statement will be required to contain:

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all the information that holders of bid class securities and their professional advisers would reasonably require, and reasonably expect to find in the statement, to make an informed assessment of whether to accept the offer under the bid (proposed subsection 638(1)), and

•

the recommendations of the targets directors on whether the offer should be accepted, giving reasons for the particular recommendation or, where no recommendation is made, a statement giving reasons why a recommendation is not made (proposed subsection 638(3)).

7.30 The general disclosure rule for the target is based upon the general disclosure rule in the proposed fundraising provisions. This type of disclosure rule is considered appropriate as it will require the target to focus on what information is required by holders of the targets securities to make an informed decision.

7.31 The general disclosure rule will only require information to be included in the targets statement if the target actually knows or ought reasonably to have obtained the information by making enquiries (proposed paragraph 638(1)(b)). In addition, given the different circumstances in which takeovers occur, in determining what information it is reasonable for a target to include, regard may be had to the time period in which the targets statement must be prepared (proposed paragraph 638(2)(d)).

Supplementary takeover documents

7.32 There is currently no express requirement in the Law to update a bidders or targets statement with additional or alternative information. However, a number of provisions of the current law effectively require the bidder or target to provide supplementary information including:

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the requirement that variations of an offer set out particulars of the modification of the bidders statement that are necessary because of the modification (current subsection 657(1));

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the requirement for an off-market bidders statement to be updated where the offer remains open for longer than 6 months (current subsection 657(2));

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the defences against liability for defective takeover documents that require targets and bidders to establish that they had reasonable grounds for believing that the statements were not defective at the time a person acted on them (current section 704);

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the misleading or deceptive conduct prohibitions and in particular the risk that the failure to update renders a continuing representation misleading or deceptive (current section 995); and

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the insider trading provisions that prohibit persons with price sensitive information that is not generally available from dealing in securities (current Division 2A of Part 7.11).

7.33 The provisions will clarify when a supplementary bidders or targets statement is required. The provisions are consistent with the supplementary disclosure document rules in the proposed fundraising provisions and will ensure that holders of bid class securities are able to make an informed decision on whether or not to accept a takeover offer.

7.34 Bidders and targets will be required to issue a supplementary bidders or targets statement when they become aware that their statement contains a misleading or deceptive statement or an omission or when they become aware of a new circumstance that would have been required to be included in their statement under the disclosure rules. The misleading or deceptive statement, omission or new circumstance must be one that is material from the point of view of a holder of securities in their assessment of the bid (proposed sections 643 and 644).

7.35 If the target is listed, the supplementary statement will only be required to be lodged with ASIC, given to the securities exchange which lists the targets securities and given to the target. In other cases, the supplementary statement will also be sent to holders of bid class securities who have not accepted an offer under the bid (proposed section 647).

7.36 In light of the new supplementary statement rules, the requirement for an off-market bidders statement to be updated after 6 months will be removed (current subsection 657(2)).

Liability regime

7.37 The draft provisions will ensure that the liability regime for takeover activity is generally consistent with the liability regime adopted for fundraising.

Prohibitions

7.38 Chapter 6B will bring together the liability provisions for conduct arising under Chapter 6 (takeover activity) and Chapter 6A (compulsory acquisitions).

7.39 The liability provisions will apply to bidders and targets statements, takeover offer documents and notices of variation, compulsory acquisition and buy-out notices, and experts reports. A person will be prohibited from giving a takeover or compulsory acquisition document that contains a misleading or deceptive statement (proposed paragraph 670A(1)(h)). A person must not give a bidders or targets statement that omits material or fails to disclose a new circumstance (proposed paragraphs 670A(1)(i) and (j)). This reflects the positive disclosure obligations and the supplementary statement regime applying to bidders and targets statements.

7.40 Consistent with the approach taken in the fundraising provisions, liability for defective takeover or compulsory acquisition documents will be dealt with under a specific liability regime to the exclusion of the general prohibition on misleading or deceptive conduct (current section 995). Removing the application of section 995 from conduct arising in relation to takeover and compulsory acquisition documents will make it clear that the positive disclosure obligations in relation to these statements are reinforced by a specific liability and defence regime.

7.41 Similarly, the misleading and deceptive conduct provisions in the Trade Practices Act (and the equivalent provisions in the State and Territory Fair Trading Acts) will no longer apply to securities dealings. These reforms have been implemented in the fundraising provisions.

7.42 Consistent with the approach under section 52 of the Trade Practices Act, it will no longer be necessary in civil actions under the Law to establish that the misleading or deceptive statement, omission or new matter was material (proposed subsection 670A(1)). Recovery of damages will depend on establishing that loss has been suffered (proposed subsection 670B(1)), and an injunction will remain a discretionary remedy available under current sections 1324 and 1325. It will only be an offence to give a takeover or compulsory acquisition document containing a misleading or deceptive statement, omitting required material or without a new circumstance if it is materially adverse from the point of view of the holder of the securities (proposed subsection 670A(3)).

Persons liable

7.43 The draft provisions clarify the people who could be held liable for the takeover or compulsory acquisition document and the extent of their liability (proposed subsection 670B(1)).

7.44 The person that issues a takeover or compulsory acquisition document, and their directors, will be liable in relation to the document as a whole. For example, the target will be liable for the whole of the targets statement. Directors of the target will also be liable for the whole of the document unless they were not present when the board resolved to adopt the statement or voted against the resolution.

7.45 While the draft provisions preserve the existing civil liability of the bidder, the target and their directors, other persons will only be liable for statements in a takeover or compulsory acquisition document that they have made or which are based upon their statements. A person will need to have consented to being named in the document in relation to a statement before any liability may arise (proposed subsection 670B(1), item 10).

7.46 Clarifying the statutory liability of these persons will strengthen investor protection. The holder of securities may give considerable authority to a proposition or forecast in a takeover or compulsory acquisition document because it is made by or supported by a person who is held out as independent and having a particular expertise. Where these persons consent to being named in the document, consistent with the approach taken in the proposed fundraising provisions, it is appropriate for them to assume liability for their statements.

7.47 Other persons involved in a contravention of the takeover provisions could also be liable to compensate for any loss suffered (proposed subsection 670B(1), item 11).

7.48 Since the liability provisions and the offence provisions operate independently, it will not matter whether or not the person against whom compensation is being sought has been convicted for an offence in respect of the contravention.

7.49 A person who may be liable on a takeover or compulsory acquisition document must inform the person offering the securities in writing as soon as practicable after they become aware of a material misleading or deceptive statement, omission or new circumstance (proposed section 670C).

7.50 The draft provisions will retain the current liability and defence provisions for proposing a takeover bid or announcing a market takeover bid and not carrying through with it (proposed sections 670E and 670F).

Defences

7.51 Under the existing Law, a defence is available where a person can show that they believed on reasonable grounds that a takeover document was not misleading or deceptive in the manner alleged (current section 704). The draft provisions will retain this defence for takeover and compulsory acquisition documents.

7.52 To successfully establish a defence under the new provisions, a person will be required to show either:

•

they did not know, that the document was misleading or deceptive, or omitted required information (proposed subsections 670D(1) and (2)); or

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reasonable reliance on another person (proposed subsection 670D(3)).

7.53 The reasonable reliance defence will not be available in respect of information provided by an employee or agent or, if the person is a body, its directors (proposed subsection 670D(3)). This will prevent someone relying on what is effectively their own information. A person will be able to rely on someone who performs a particular advisory or professional function provided they are not an agent for some other reason (proposed subsection 670D(4)).

7.54 Where a person has comments attributed to them in a takeover document, a defence will be available to the person if the person can show that they publicly withdrew their consent to being named in the document (proposed subsection 670D(5)).

Liability for other takeover conduct

7.1 Consistent with the approach taken in relation to the fundraising provisions, conduct in relation to takeover activity and compulsory acquisitions other than the content of the takeover and compulsory acquisition documents will be subject to section 995 of the Law.

Compulsory acquisitions

7.2 The provisions on compulsory acquisitions have been streamlined and extended to make them more consistent and easier to use. The proposed new compulsory acquisition powers will operate consistently with the underlying takeover principles in proposed section 602, as well as the new compulsory acquisition powers proposed by CLERP. In particular:

•

the powers of minority shareholders to force majority shareholders to buy them out have been strengthened consistently with the new compulsory acquisition powers; and

•

the new provisions are generally consistent with the recommendations in the CASAC Legal Committees report Compulsory Acquisitions (January 1996).

7.3 The new provisions will apply to all companies and listed managed investment schemes and bodies subject to Chapter 6, regardless of any contrary provision in their constitution, although individual shareholders are not prevented from entering into agreements with other shareholders concerning the exercise of the new provisions (proposed sections 660A and 660B).

Treatment of later issued securities

7.4 The CASAC Legal Committee report recommended that a bidder should have an option to compulsorily acquire securities issued after the date of the offers, but before the date the compulsory acquisition notices are sent, provided the threshold is met when these later issued securities are taken into account.

7.5 The Bill gives effect to the recommendations of the Committee by allowing bidders in a post-bid compulsory acquisition to choose to purchase later issued securities for a short period after the end of the bid. Consistent with the CASAC recommendations, the new provisions will give the bidder the choice to acquire:

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bid class securities;

•

bid class securities issued before the bidder sends out compulsory acquisition notices; and

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securities of which the bidder is aware and that convert to bid class securities within 6 weeks after the end of the bid (proposed subsection 661A(4)).

7.6 A bidder will still be required to meet the compulsory acquisition thresholds when the later issued securities are taken into account. The bidder will also be permitted to acquire securities in which it, or an associate, has a relevant interest (proposed paragraphs 661B(4)(b) and (c)).

7.7 The Bill also gives effect to the recommendations of the Committee by allowing a bidder to:

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elect to extend a compulsory acquisition to securities that are issued after the end of the offer period (proposed paragraph 661A(4)(b));

•

commence compulsory acquisition procedures immediately where the compulsory acquisition threshold is reached during the course of the bid period (proposed subsection 661A(1)); and

•

acquire securities that it might already be able to vote, or holds through associates or nominees (proposed paragraph 661A(4)(d)).

Treatment of convertible securities holders

7.1 While a bidder under a post-bid compulsory acquisition will be required to offer to buy out all holders of convertible securities, this rule will not apply to bidders who choose to avail themselves of the new 90 per cent beneficial interest compulsory acquisition power until the bid is successful. That is, the 90 per cent beneficial interest holder will not be required to offer to buy out the convertible securities holders until the holder is the 100 per cent holder of the bid class securities (proposed section 664A).

7.2 This difference in the treatment of convertible securities holders is proposed:

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so as not to denigrate the existing rights of holders of convertible securities in a post-bid acquisition;

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to avoid a bidder with a 90 per cent beneficial interest having to acquire convertible securities despite the acquisition of the bid class having failed; and

•

consistently with the recommendations of the CASAC Legal Committee.

Discretion to reduce 90 per cent threshold

7.1 The acquisition thresholds proposed by the Bill may be satisfied at the end of a bid period or during the course of the bid. Consistent with the CASAC Legal Committee recommendations, both ASIC and the courts will be able to reduce the threshold in appropriate cases.

7.2 A majority shareholder will be able to apply to the Court to commence a compulsory acquisition where the compulsory acquisition threshold has not been satisfied (proposed subsection 661A(3)). The power has been added to the Bill to give additional flexibility to the compulsory acquisition procedure and to remove some of the arbitrariness of the 90 per cent threshold, particularly at the margin. The power is not confined merely to cases where shareholders cannot be traced, but might also be applied to other situations, for example:

•

where a target dilutes the interests of a majority securities holder during a takeover bid by issuing additional shares; and

•

where a bidders interest is marginally below the threshold.

7.3 It is not the intention of the Bill, however, that the flexibility of the provisions could be used to allow a successful bidder to move, from, say, 80 per cent to 90 per cent where the bidder reached 90 per cent during the bid but was diluted by a genuine placement before the bid closed. Even more so, if a takeover offer was made for the placed shares and rejected.

Role of the Court in compulsory acquisition disputes

7.4 The role of the Court will be to determine a fair price for the securities. It is envisaged that in the context of determining whether to disallow an acquisition, the Court would:

•

assess the value of the company as a whole and determine the value of each class of issued security (taking into account its relative financial risk and its distribution rights); and

•

then proportion that value to the remaining securities without any premium or discount (proposed section 667C).

7.5 In order to discourage minority shareholders from improperly using the objection process to obstruct a bidder, the Bill limits the number of applications that may be made to the court by holders in a bid to stop a compulsory acquisition. Regardless of how many securities holders apply to the court to stop an acquisition, once the court makes a decision in relation to one of them, that decision applies to all future or pending applications before the court on the particular compulsory acquisition (proposed subsection 661E(3)).

Substantial shareholdings

7.6 Chapter 6C of the Bill largely replicates the existing law in respect of substantial holding information and the tracing of shares (proposed sections 671A - 672F). Minor amendments to the existing law include:

•

in providing information on substantial holdings and changes, additional information is required on a persons associates, such as the nature of the association (proposed paragraph 671B(3)(d)); and

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the definition of relevant interest in which the holding of securities is to be disclosed has been expanded to include exchange traded options and conditional agreements (proposed subsection 671B(7)).