The ASX (Australian Stock Exchange) has proposed changes to its listing rules to require bidders to obtain shareholder approval for reverse takeovers. These would be takeover bids or schemes of arrangement where the bidder issues more than 100% of existing capital in a bid. The change will probably begin on October 1 but would not apply to transactions announced before the implementation date.

Motivations for the change

The ASX believes that the proposal offers a balance between additional investor protection without creating a significant impact on the market for corporate control. The proposed threshold of 100% represents about 20% of all scrip bids by Australian listed bidders. ASX’s market analysis indicates that a lower threshold of 25% to 50% of existing capital would affect 40% to70% of scrip bids by Australian listed bidders for Australian listed companies. In comparison, Hong Kong requires shareholder approval for scrip issues at a threshold of 25%, Singapore 100%, UK 25% and US 20%. This comparison does not take into account other accompanying legislation related to reverse takeovers.

Investor and corporate groups, such as the Australian Shareholders Association, have been lobbying for the proposed change in reverse takeovers because of the lack of bidder shareholder approval in reverse takeovers. The ASX launched a consultation in November 2015 before coming up with the draft changes in April 2017.

High-profile deals in the energy and natural resources industry, have triggered public interest on the issue. The proposed merger between Roc Oil and Horizon Oil was proposed as a scheme of arrangement in which Roc Oil would acquire Horizon Oil. Institutional investor Allan Gray, a major shareholder in Roc Oil, launched a campaign to try to have a shareholder vote but didn’t get enough shareholder support to change Roc Oil’s constitution to require a vote on an all-scrip merger. In the end, Fosun won the bid for Roc Oil, and the original deal between Roc Oil and Horizon Oil fell through.

Another proposed merger saw Gloucester Coal bid to take over its bigger rival Whitehaven Coal. Noble Group announced a competing bid for Gloucester to avoid seeing its stake in the company reduced from 21% to 7%. Noble Group argued that the proposed Gloucester-Whitehaven bid would involve a change in the control of Gloucester and should be subject to approval by shareholders. Gloucester and Whitehaven sought a review of the merger from the Takeovers Panel of its order for a shareholders’ vote and the panel revoked its own decision after considering that neither the potential for two shareholdings above 20% in Gloucester Coal nor the dilution of Noble Group in the company gave rise to unacceptable circumstances.

Less incentive for scrip bids

Australian M&A lawyers believe a change in the rules on this issue would put listed companies at a competitive disadvantage because of the extra time needed for scrip bids and the uncertainty created, but as the trigger threshold for a shareholder vote is quite high, there would not be a huge impact in the market. “For listed companies and larger companies, there is little benefit for scrip bids since they are harder to do, and there is a competitive disadvantage compared to private companies,” says Guy Alexander, partner at Allens.

“The change will potentially increase uncertainty and transaction time; the costs and detriments of the change are likely to outweigh any benefits,” says Sarah Turner, partner at Gilbert + Tobin. “A bid is often a dynamic, competitive process.  The change potentially dampens the market, giving the bidder an ability to walk away from an announced deal, and overlaying the requirement that shareholders must have 28 days’ notice prior to a shareholders meeting.  It’s also not clear what subsequent events will render shareholder approval stale.”

“The ASX is delving into a world that should be regulated by the Australian Securities and Investments Commission (ASIC) and Takeovers Panel and it’s standing on a slippery slope trying to regulate M&A activities,” says Andrew Lumsden, partner at Corrs Chambers Westgarth.

In her organisation’s submission to the ASX’s consultation, Diana D’Ambra, chairman of the Australian Shareholders’ Association, notes that while the “bidder shareholder approval requirement may lead to some additional costs, including the cost of preparing and holding shareholder meetings, as well as additional fees to legal advisers, deal protection measures and break fees are a common feature of transactions and that the 1% cap on break fees provides a suitable upward limit on such costs”.

Before the October 1 implementation date, the ASX is waiting for final comments on the practical operation of the proposed amendments. “More detail would be needed on supplemental disclosure where there is materially new or different information after a notice of meeting,” says Lumsden. “With a strong REIT market using trust schemes, it would be useful to see how the change in the listing rule would apply to trust schemes.”

A requirement for shareholder approval for reverse takeovers would increase shareholder protection in Australia, but shareholder groups maintain the threshold of 100% is high, compared with those imposed by other stock exchanges triggering shareholder vote in scrip bids. Whether the new requirement delays bids and causes uncertainty remains to be seen.