M&A Highlights From ASIC's Latest Corporate Finance Update
The Situation: The Australian Securities and Investments Commission ("ASIC") recently released its update on corporate finance regulatory activities for the third quarter of 2022.
The Result: Reflective of the range of macro headwinds experienced during the first half of 2022, ASIC's update shows a significant reduction in the number and value of public M&A transactions in the most recent six-month period. Similar to its last quarterly update, ASIC appears to be identifying more issues with schemes of arrangement than takeover bids. Interestingly, a number of the points raised, including unacceptable fetters on 'fiduciary outs' in schemes, extensions to matching periods in control transactions and imprecise 'material adverse change' ("MAC") conditions, arguably indicates a willingness of certain bidders to 'push the boundaries' in terms of what's generally acceptable.
Looking Ahead: As always, ASIC's observations provide a useful insight into what ASIC is seeing in the market, as well as providing timely reminders and practical guidance for those executing public M&A deals.
Observations on Public M&A Activity Based on ASIC's Reported Deal Statistics
ASIC's public M&A deal statistics highlighted the following:
- There was a significant decrease in the number of M&A transactions in the six months ended 30 June 2022. Specifically, ASIC reported 36 independent control transactions, comprising 14 takeover bids and 22 schemes, which was a 21.7% reduction from the previous six-month period, which had 46 independent control transactions (comprising 17 takeover bids and 29 schemes).
- There was a material decrease in deal value—with ASIC reporting an aggregate estimated M&A deal value of AU$29.95 billion for the period January to June 2022, which was a 53.4% reduction on the prior six-month period of AU$64.28 billion.
- ASIC's observation was that the figures reflect a 'return to normal' after a significantly high number of transactions in the previous period as well as the prevailing economic conditions.
ASIC's Key Concerns and Areas of Focus in Public M&A
Unacceptable fetters on 'fiduciary outs' in schemes of arrangement. In a change of control context, a 'fiduciary out' clause enables a target board to engage with a competing bidder where required to do so in accordance with that board's fiduciary or statutory obligations. The drafting of a 'fiduciary out' usually follows a standard formulation, and ASIC notes that parties should be careful not to impose unacceptable hurdles within the clause that the target board is required to clear.
In this context, ASIC raised concerns with a recent fetter on a 'fiduciary out' in the implementation deed for a scheme of arrangement. The clause required the directors of the target to 'act reasonably' in making the determinations required to rely on the fiduciary out. The issue was resolved by the parties deleting the 'reasonableness' requirement from the provision.
Interestingly, ASIC commented that fiduciary out clauses, which would require a target board to identify what its fiduciary and statutory requirements are and whether failing to comply with those additional requirements would constitute a breach of those duties, may also be unacceptable.
We are aware of ASIC having raised this issue on previous occasions, so it may be the case that some bidders are pushing the limits of acceptable exclusivity provisions. Needless to say, ASIC warned that it will continue to monitor fetters on fiduciary out clauses in schemes.
MAC conditions. ASIC reported a recent trend in the formulation of MAC conditions in control transactions, where a 'material adverse change' is circularly defined as a 'material adverse change'.
ASIC warned that such a condition poses a material risk that the condition may contravene sections 602 of the Corporations Act 2001 (Cth) (the acquisition of control to take place in an 'informed market') and 629 (conditions turning on bidder's opinion not allowed) due to the inability to disclose the risks associated with such condition and the subjective or unclear threshold of the condition.
ASIC suggests that parties to control transactions should ensure they follow established 'market practice' of including objective and quantifiable standards by which the parties to a transaction, and their securityholders, can determine whether a MAC has occurred.
Matching periods in control transactions. In what can be seen as another example of some bidders pushing the limits of exclusivity provisions, ASIC took issue with a matching right in a transaction implementation agreement, which extended a five-business-day matching period by a further three business days to provide the bidder with a second opportunity to put forward an equivalent or superior proposal.
From ASIC's perspective, the additional three business days to allow the bidder a second opportunity to put forward an equivalent or superior proposal was likely to be an unacceptable lock-up device.
ASIC referred to the often-cited Takeovers Panel decision of Ross Human Directors Ltd  ATP 8, in which the Takeovers Panel considered that any material extension to the five-business-day matching period in implementation agreements is likely to be unacceptable because of the effect such a provision has on the willingness of a third party to put forward a competing proposal. Additionally, the anticompetitive effect of any matching period may be exacerbated where the bidder has an existing or substantial stake in the target—which was the case in ASIC's example.
ASIC reminded target directors that they should be satisfied of the commercial and competitive benefits to shareholders before entering into any agreement for a control transaction.
Regulatory carve-out in takeover bid conditions. In the context of a takeover bid, ASIC issued a reminder noting that prospective bidders must include a carve-out for regulatory action taken by ASIC and the Takeovers Panel in the conditions of a takeover bid. If such a carve-out is not included, parties may have to apply for relief to amend the offer terms to include one.
More specifically, ASIC's concern is that whilst takeover bids typically include a 'no regulatory action' condition—which requires there to be no regulatory action taken by a public authority in connection with the offer, ASIC considers it standard market practice that actions taken by ASIC and the Takeovers Panel should be carved out of such a condition. The effect of doing so is that the condition is not triggered by any regulatory action taken by ASIC or the Takeovers Panel.
Independent expert reports … again. As it reported in its June corporate finance update, ASIC has again observed a transaction where a draft independent expert's report was provided to the acquirer for comment and the expert's value range was relied on during a renegotiation of the offer consideration.
In this example, whilst ASIC was concerned about the appearance of undermining the expert's independence, ASIC was ultimately satisfied that the draft report was largely complete, and the comments did not impact on the expert's analysis of the transaction or their conclusion.
ASIC's view, as espoused in its Regulatory Guide 112, is that experts should only provide a full draft copy of the report to the commissioning party for fact-checking when the expert is reasonably assured that the conclusions in the report are unlikely to change.
Independent expert reports have been for some time, and continue to be, a hot button issue for ASIC.
Four Key Takeaways
- Some bidders appear to be pushing the boundaries of what is acceptable in terms of exclusivity provisions. ASIC is watching for unacceptable 'fetters' on 'fiduciary outs' in schemes, as well as extended matching periods in control transactions.
- ASIC's position is that MAC conditions should contain objective and quantifiable standards by which the parties to a transaction (and their shareholders) can determine whether a MAC has occurred. Failure to draft such conditions in this way could run afoul of the Corporations Act.
- ASIC's view is that it is standard market practice to carve out regulatory actions taken by ASIC and the Takeovers Panel from the commonly utilised 'no regulatory action' condition precedent in takeover bids.
- Independent expert reports remain on ASIC's radar. Upmost care should be taken in sharing a draft of the expert's report between the parties to a transaction.
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