One of the principles underlying Australian takeover laws is that all shareholders of a target company are to be treated equally. To achieve this, section 621 of the Corporations Act provides that the price offered by a bidder must “equal or exceed” the price paid by the bidder in the past four months.

While this is all well and good, the progressing Wesfarmers and Coles deal is proving that section 621 isn’t worth the paper it’s printed on.

Back on April 3 this year, Wesfarmers agreed to pay Premier $16.47 per share for its 5.9 per cent stake to secure a foothold in the retailer. The stake gave Wesfarmers a significant tactical advantage, possibly allowing it to block a rival scheme, or if a rival offer was clearly superior to Wesfarmers, it could sell its stake and cash in for a quick profit. There is nothing to restrict Wesfarmers from such a strategy (up to 19.9 per cent of the target company) – in fact, it is strongly advisable.

At the time Wesfarmers’ made its offer to Coles shareholders, its shares were trading at $45.73, meaning that the consideration being received by Coles shareholders was $17.25 (ostensibly greater than the price being received by Premier). However, that price is for all intensive purposes – irrelevant, as the value of Wesfarmers shares has slumped to around $39 (valuing the offer at around $14 after the WES dividend is paid).

Coles shareholders might have been thinking that section 621 would compel Wesfarmers to offer all shareholders at least the $16.47 that it agreed to pay Premier – wrong.

For a start, Wesfarmers didn’t launch a takeover bid for Coles, rather, it has proposed to merge by scheme of arrangement. For whatever reason, the ‘minimum bid rule’ applies only to takeovers and not schemes.

As noted by ASIC, the rationale for the ‘minimum bid rule’ is to ensure that “all holders must have a reasonable and equal opportunity to participate in any benefits accruing to the holders through any proposal under which a person would acquire a substantial interest.” While a noble intention, Wesfarmers has been able to sidestep the provision with ease.

However, even if Wesfarmers had launched a takeover bid for Coles (rather than a scheme), they would probably still be able to avoid the operation of the minimum bid principle and pay Premier a premium for its holding. That is because the ‘minimum bid rule’ only applies for four months from the time of the agreement. It has almost been four months since the Premier deal and there is no sign of the scheme documentation yet.

Clearly, the four month time limit is too short. In complex deals requiring due diligence and an independent expert’s report the four month period can easily be circumvented by the acquirer holding back on sending documents to the target shareholders for a few weeks to avoid the ‘minimum bid’ requirement.

The ‘minimum bid rule’ is a good rule. The only problem for Coles shareholders is that it doesn’t work.