Everyone knows that, under ASIC's 'truth in takeovers' policy, market participants are expected to abide by statements of intention made regarding a takeover or scheme of arrangement. That's been the rule for over 30 years. The Takeovers Panel has described the rule as a 'fundamental tenet of the Australian takeovers regime'. A recent decision, however, raises a question about the seriousness of those statements.
Here is a simple test to consider.
If I announce to the ASX that I hold 31% of a company and will vote the shares in favour of a scheme of arrangement, can I sell some or all of the shares before the shareholders meeting?
What about if I say that I will hold certain shares through to the close of the transaction and vote in favour? Does that stop me from selling?
I would have thought that, if the 'truth in takeovers' principle means anything, I have twice ruled out my ability to sell any shares. The first statement carries the clear implication that I intend to hold my shares to vote them at the scheme meeting. The second statement speaks for itself. I should have qualified each statement if I wanted to reserve the right to sell.
Furthermore, as both statements were made with the clear intention that the market would rely upon them, it should follow that, if I did sell shares, I may need to buy them back to remedy the position or face other serious consequences.
This scenario is based on the recent $415 million Dropsuite/NinjaOne transaction where, after making each statement, the shareholder sold large numbers of shares, reducing its 31% holding first to 19.7% and then down to 10.5%. Very different from a 31% holding. Compounding the situation, each time the shareholder was several weeks late in filing a revised substantial holder notice.
The matter came before the Takeovers Panel after an application by another shareholder, Harvest Lane.
The Panel shied away from deciding that the first statement, by implication, restricted a sale of shares. It merely said that the statement was 'ambiguous' as to whether the relevant shareholder could sell shares (despite not reserving any right to do so). However, failing to lodge a substantial holder notice on time meant there were unacceptable circumstances.
In relation to the share sales after the second statement, the Panel said those sales were 'clearly contrary' to the shareholder's statement.
So what did the Panel order? Was the shareholder required to buy back to its original 31% stake or even to the interim 19.7% stake?
No. The Panel decided that, even though there were 'unacceptable circumstances', it merely ordered that the shareholder could not sell more shares and had to vote the remaining shares in favour of the scheme (adding a qualification that the shareholder was released if there was a superior proposal or change in the expert's opinion).
The Panel said that forcing the shareholder to buy back shares could have unintended consequences for the trading price of Dropsuite shares (such as inflating the price) and may 'unfairly prejudice' the shareholder's own investors.
Not much of a consequence, in my opinion.
To me, it undermines the truth in takeovers principle. The statements were made voluntarily with the intention of influencing the market. Even if the first statement was 'ambiguous', the ambiguity should have been construed against the maker of the statement.
The prime objective of the legislation is that control transactions take place in an 'efficient, competitive and informed market'. Adopting a strong stance on truth in takeovers is essential. In the long run, the market suffers where exceptions to the truth in takeovers principle are devised or no consequences follow, even if in a particular case it may seem harsh to an individual participant (in this case, the shareholder). Making a tough decision should lead to future statements being made with greater care.
And there is another curious part of this. It was up to a shareholder, Harvest Lane, to bring the application to the Panel. It is unclear why ASIC was not the applicant in such a clear-cut case in a large transaction, especially with the late filing of the substantial holder notices.
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