ASIC chairman Greg Medcraft is stirring up the takeover world with two proposals for changing the rules. He wants to extend the creep provisions so it takes longer for someone to get control without bidding, and he wants to introduce a UK-style “put up or shut up” rule.
People should always put up or shut up when it comes to the sharemarket; it’s too easy to manipulate flighty institutional capital by hinting you’re going to do something and then selling into the spike or waiting for big shareholders to pressure the board into capitulating.
The first of those things may have happened with David Jones two weeks ago, subject to an ASIC investigation, although for it to work the protagonist needs more substance than a wee storefront in the north of England. If the man behind the bid that wasn’t, John Edgar, or someone else, had been planning to cash in when DJs stock price spiked, they had to be very quick indeed before the price fell back down. There’s no evidence yet that that’s what happened, by the way.
The main problem, in my view, is with private equity firms that need a directors’ recommendation and a scheme of arrangement to get bank funding. A scheme allows a bid to achieve 100% with a 75% vote instead of the usual 90%t acceptance threshold, and banks usually want to know that a bidder using a lot of debt can get hold of the target’s cash, so the lower threshold is preferred.
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Private equity usually approaches a board with the idea of a takeover that would only happen if they gave it the nod and agreed to a scheme. It’s therefore non-binding and conditional. Do we call that a disclosable approach or not? Should a “put up or shut up” rule apply?
In Australia S.631 of the Corporations Act, which says that a takeover proposal must be turned into a firm bid within two months, does not apply to schemes of arrangement.
In the UK the mere announcement of an approach triggers the start of a 28-day period in which the bidder must either make a bid or go away. The key decision is whether the target announces or not; the wording is that it must be disclosed if the target is “the subject of rumour and speculation or there is an untoward movement in its share price”. The target is obliged to seek guidance from the Takeovers Panel about this.
The clincher is that all this can happen even if there is no actual approach to the board, but merely if the target and the panel believe there is enough rumour and speculation, or an “untoward” movement in the share price, because there is a bidder in the wings. That announcement still starts the 28-day clock ticking for any bidder.
In Australia the lack of an effective “put up or shut up” rule allows bear hugs to happen, where a bidder, usually private equity, makes a low-ball, conditional, non-binding offer which must be disclosed to the market under continuous disclosure rules, and then sits back and waits for institutional shareholders hungry for an exit to pressure the board into accepting.
That usually takes more than a month; a board can just put off a meeting for longer than that if it wants to. Spotless was put in a bear hug by Pacific Equity Partners last year and it took six months for the board to agree to a Scheme of Arrangement.
Put up or shut up wouldn’t stop the David Jones situation, but it might make bear hugs less effective.
What ASIC would be doing, in reality, is protecting small shareholders from institutions that sell too readily because they are on quarterly performance benchmarks.
As for the creep provisions, I’m not sure there’s a problem to be solved here.
The only person with the patience to use the existing creep of 3% every six months (beyond 20%) is Kerry Stokes, who did it twice — once with Seven Network in the mid-90s and West Australian Newspapers in 2009. Shareholders who were trapped have done very badly: the share price has fallen from $8 in January 2010 to $1.60 because Stokes loaded the business with debt.
James Packer and Gina Rinehart have threatened to do it to Echo Entertainment and Fairfax Media, but so far there is no sign of it actually happening. Packer managed to get rid of Echo’s chairman, John Story, with 10% of the stock, and Rinehart has crept down, not up.
Very few creeps, it seems, have the patience for a long campaign. Kerry Stokes is an exception, not a harbinger.
*This article was originally published at Business Spectator