In short
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: Reflecting the range of macroeconomic headwinds encountered in the first half of 2022, the ASIC update shows a significant reduction in the number and value of public M&A deals over the past six months. Similar to its last quarterly update, ASIC appears to identify more issues with arrangement patterns than takeover bids. Interestingly, a number of points raised, including unacceptable impediments to “fiduciary outflows” in systems, extensions of matching periods in control transactions, and unclear “material adverse change” conditions (“MAC”), no doubt indicate a desire by some bidders to “push the boundaries in terms of what is generally acceptable.
Look forward: As always, ASIC’s observations provide useful insight into what ASIC sees in the market, as well as timely reminders and practical advice for those executing public M&A deals.
Observations on Public M&A Activity Based on ASIC Reported Deal Statistics
ASIC’s public statistics on mergers and acquisitions highlighted the following:
- There was a significant decrease in the number of M&A transactions during the six months ended June 30, 2022. Specifically, ASIC reported 36 independent review transactions, including 14 takeover bids and 22 schemes, representing a reduction of 21.7% compared to the previous half-year. , which recorded 46 independent review transactions (including 17 takeover bids and 29 schemes).
- There has been a significant decrease in deal value, with ASIC reporting an estimated aggregate M&A deal value of A$29.95 billion for the period January to June 2022, a reduction by 53.4% over the previous six-month period of A$64.28 billion.
- ASIC’s observation was that the numbers reflect a “return to normal” after a significantly high number of trades in the prior period as well as prevailing economic conditions.
ASIC’s Top Concerns and Areas of Interest in Public M&A
Unacceptable chaining on “fiduciary outputs” in arrangement diagrams. In a change of control context, a “fiduciary withdrawal” clause allows a target board to engage with a competing bidder when required to do so pursuant to that board’s fiduciary or statutory obligations. The drafting of a “fiduciary release” generally follows standard wording, and ASIC notes that parties should be careful not to impose unacceptable hurdles in the clause that the target board is required to eliminate.
In this context, ASIC raised concerns about a recent impediment to a “fiduciary exit” in the act of implementing a scheme of arrangement. The clause required the directors of the target to “act reasonably” in making decisions necessary to rely on the trustee. The issue was resolved by the parties removing the “reasonableness” requirement from the provision.
Interestingly, ASIC noted that fiduciary clauses, which would require a target board to identify what its fiduciary and statutory requirements are and whether failure to meet these additional requirements would constitute a breach of those obligations, may also be unacceptable.
We are aware that ASIC has raised this issue on several occasions, so some bidders may be pushing the boundaries of acceptable exclusivity provisions. Needless to say, ASIC has warned that it will continue to monitor fiduciary clause fetters in plans.
Mac Terms. ASIC pointed to a recent trend in the wording of MAC conditions in control trades, where a “material adverse change” is circularly defined as a “material adverse change.”
ASIC has warned that such a condition poses a significant risk that the condition could violate Sections 602 of the Companies Act 2001 (Cth) (acquisition of control must occur in an “informed market”) and 629 (conditions dependent on bidder’s opinion not permitted) due to failure to disclose risks associated with this condition and the condition’s subjective or unclear threshold.
ASIC suggests that parties monitoring transactions should ensure that they follow established “market practices” of including objective and quantifiable standards by which parties to a transaction and their security holders can determine whether a MAC happened.
Corresponding periods in control transactions. In what can be seen as another example of some bidders pushing the boundaries of exclusivity provisions, ASIC challenged a counterparty right in a deal implementation agreement, which extended a three-business-day five business day consideration period to provide the Bidder with a second opportunity to submit an equivalent or superior proposal.
From ASIC’s perspective, the additional three working days to give the bidder a second opportunity to submit an equivalent or superior proposal was likely to be an unacceptable blocking mechanism.
ASIC referred to the oft-cited decision of the Takeover Board of Ross Human Directors Ltd. [2010] ATP 8, in which the OPA Committee considered that any substantial extension of the five business day matching deadline in implementing agreements is likely to be unacceptable due to the effect such a provision has on the willingness of a third party to propose a competing proposal. Further, the anti-competitive 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 the ASIC example.
ASIC reminded the target directors that they must be satisfied with the commercial and competitive benefits for shareholders before entering into any agreement for a control transaction.
Regulatory carve-out under the terms of the public tender offer. As part of a takeover bid, ASIC has issued a reminder that potential bidders should include an exception for regulatory actions taken by ASIC and the Takeovers Panel in the terms of a takeover bid. ‘purchase. If such an exclusion is not included, the parties may need to seek a waiver to amend the terms of the offer to include one.
Specifically, ASIC’s concern is that while takeover bids typically include a “no regulatory action” condition – which requires that no regulatory action be taken by any public authority in relation to the offer, ASIC considers it common market practice that actions taken by ASIC and the tender offer committee should be excluded from such a condition. This has the effect that the condition is not triggered by any regulatory action taken by ASIC or the Takeovers Panel.
Independent expert reports…again. As reported in its June Corporate Funding Update, ASIC again observed a trade where a Disorganized the independent appraiser’s report was provided to the purchaser for comment and the appraiser’s value range was retained during a renegotiation of the offer price.
In this example, while ASIC was concerned about the appearance of undermining the independence of the expert, ASIC was ultimately satisfied that the draft report was substantially complete and that the comments had no no impact on the expert’s analysis of the transaction or its conclusion.
ASIC’s view, as set out in its Regulatory Guide 112, is that experts should only provide a complete copy of the draft report to the commissioning party for fact-checking when the expert is reasonably assured that the conclusions of the report are not likely to change.
Independent expert reports have been and continue to be a hot issue for ASIC for some time.
Four takeaway meals
- Some bidders seem to be pushing the boundaries of what is acceptable in terms of exclusivity clauses. ASIC monitors for unacceptable “hinders” on “fiat outflows” 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 parties to a transaction (and their shareholders) can determine whether a MAC has occurred. Failure to draft such terms in this manner could violate the Corporations Act.
- ASIC’s view is that it is common market practice to exclude regulatory actions taken by ASIC and the take-over bid committee from the “no regulatory action” precondition commonly used in takeover bids.
- Independent expert reports remain on ASIC’s radar. The greatest care must be taken in sharing a draft expert report between the parties to a transaction.
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