Killing a bid with a few words – strange [non-prescribed] occurrences
This post is mainly for busy takeovers advisers (in Australia), so I’ll start with the key points:
a mis-drafted prescribed occurrence condition (PO) can ruin a successful takeover bid (but not a scheme)
mis-drafted POs are disturbingly common (at least 9 in the last 12 months).
If you’re still reading, you probably know POs as standard conditions in Australian takeovers that are usually satisfied or waived. Consequently, a PO is often seen as the condition least likely to cause problems. But a mistake in a PO may be a time bomb.
POs in bids
In the context of a takeover bid, a PO is usually triggered only by certain potentially serious events relating to the capital structure, financial standing and solvency of the target and its subsidiaries. These events are specified in s652C(1) or (2) of the Corporations Act. Before 2000, similar events were listed in a defined term “prescribed occurrence”. The name has stuck as shorthand for s652C(1) or (2) events but strictly it is no longer a technical term.
POs have long received special treatment in the regulation of takeover bids, provided they are confined to the triggers in s652C(1) or (2) (true PO). Unlike other conditions, a true PO:
does not stop a bidder relying on exceptions that permit buying on-market during a bid (items 2 and 3 of s611), and
does not need to be waived before the final week of the offer – rather the bidder can retain the protection of a true PO until the bid closes and have a further 3 business days to waive any breach (s650F). (NOTE: Section 650F and many of the provisions referred to below have been significantly modified by ASIC, as shown in this markup.)
Also, in the case of market bids (which must be unconditional), true PO events can allow withdrawal of unaccepted offers (s652C).
POs in schemes
POs are also often used in schemes, but usually include other triggers along with s652C events. That is of no consequence in a scheme since there is no special treatment of POs.
The dangers of Non POs in bids illustrated – WAM Active’s bid for Keybridge
The special treatment of true POs in bids gives rise to risks where a condition looks like a true PO but goes beyond s652C(1) or (2) (Non PO). A bidder with a Non PO could find that its last-minute attempts to waive that condition, and then extend the bid, are invalid (due to s650F(1)(b) and s650C(2), respectively). If the bid then closes with an unfulfilled condition, all acceptances under the bid will be void (s650G).
This has recently been considered by both the Takeovers Panel and the NSW Supreme Court in relation to WAM Active’s first bid in 2020 for Keybridge. The bid had many twists and turns, but I will only discuss the treatment of WAM Active’s PO. Each of the Initial Panel, the Review Panel and the Court treated WAM Active’s “No Prescribed Occurrences” condition as a Non PO because the event described in its first paragraph (conversion of shares into a larger/smaller number) referred not just to the target (as per s652C(1)(a)) but also to “any of the Controlled Entities of [the target]”.
Both Initial and Review Panels accepted that WAM Active’s attempt to waive the Non PO the day before its offer was due to close was unsuccessful (because of s650F(1)(b)), with the result that WAM Active’s purported further extension of the offer also failed (because the bid was still conditional and none of the exceptions in s650C(2) applied to allow extension of a conditional bid after giving a notice of status of conditions under s630(3)). The Court agreed, to the extent that it needed to address these issues.
Both Initial and Review Panels also found that, because the PO had not been effectively waived, and the target had issued shares in breach of the PO’s fourth paragraph, the bid had closed subject to a condition that had not been either waived or fulfilled, resulting in all acceptances under the bid being void under s650G. The Court reached a different conclusion, accepting an argument (apparently not put to either the Initial or Review Panel) that treated the various paragraphs of the PO as separate conditions (as the offer terms required) in applying s650G. The Court concluded that the breached fourth paragraph was a true PO event and accordingly could be waived within 3 business days after the end of the offer, whilst the first (Non PO) paragraph did not need to be waived (since there was no event triggering a breach) and was fulfilled when the offer ended. It followed that all conditions had either been waived or fulfilled and s650G did not apply.
Why does this matter and what is the risk?
Clearly this matters a great deal if it invalidates waiver of a condition or an extension or makes all acceptances void. Many bidders avoid any risk of these consequences by waiving all conditions before giving their notice under s630(3), so that the bid is not subject to conditional bid closing phase requirements (ss624(2), 650C, 650F, 650G). In some cases, however, there may be reasons not to do that. For example:
the bidder may consider that it needs to retain the protection of a PO until the bid closes
the bidder may wish to use “closing phase tactics” and retain a condition in the last week to force shareholders to choose between losing the bid or accepting to take the bidder above 50% and force an automatic extension (s624(2)).
Even where all conditions are waived before giving a s630(3) notice, mistaking a Non PO for a true PO could still have adverse effects:
a bidder buying on-market in reliance on items 2 or 3 of s611 where the bid has a Non PO may contravene the 20% takeovers prohibition (s606)
the bidder’s statement and offer are likely to be misleading or wrong in discussing conditions, waiver of conditions and extensions of the bid
it may be necessary to obtain ASIC relief to correct the condition or otherwise waive it entirely and forgo its protection
in a contested situation, a Non PO may provide a hostile target or competing bidder with grounds to apply to the Panel, should it wish to do so.
Common Non POs
Non POs have become surprisingly common in bidder’s statements in recent years.
WAM Active’s Non PO – where the events or entities covered go beyond those in s652(1) and (2) – is one type. My quick (and not comprehensive) review of bids announced in the last 12 months found another 3 examples of that. In all those, the mistake affected only the first paragraph, and the reason is obvious. All except the first of the 13 paragraphs in s652(1) and (2) refer to the target or a subsidiary, whereas s652C(1)(a) refers only to the target. Someone reviewing the condition quickly could easily assume the omission of “subsidiary” in the first paragraph is a typo. But there is good reason for the omission. Section 652C(1)(a) deals with the combination of shares into a larger or smaller amount, which is a very serious event in the case of the target (since the bid price is expressed per share) but not for a subsidiary (since it does not change the proportion of shares held by the target in its subsidiary and should not significantly affect the value of that holding).
Similar errors could arise from an adviser comparing a bidder’s statement PO with one in a scheme implementation agreement. As noted above, POs in schemes can be true POs but most extend to other events or entities.
Another error, even more common, is where the condition period for the PO extends for 3 business days after the end of the offer period. Section 650F gives the bidder 3 business days after the end of the offer period to waive a true PO. But, as explained by the Panel in Atlas Iron Limited  ATP 14 at , that does not mean the bidder can rely on breaches of the condition after the end of the offer to allow the bid to lapse. The 3 business days are not part of the condition period – they merely give time to assess any breach prior to that period ending at the close of the offer.
Atlas Iron suggests ASIC and the Panel consider that a true PO cannot have a condition period extending beyond the offer close. It is clear, in any case, that such a condition would need to be waived to prevent all acceptances being void under s 650G. The condition could never satisfy s650G(c) since (as a negative condition) it cannot be fulfilled until the condition period ends (after the offer close), making waiver in accordance with s650G(b) essential. If the condition is a Non PO, it must be waived before the s630(3) notice is given, regardless of whether any PO events occurred.
Disturbingly, my quick search found 6 examples of this type of Non PO in the last 12 months.
In many POs the condition period starts, before the bid period, at the date of announcement of the bid. That gives rise to an argument that the condition is not a true PO because it extends to the happening of events before rather than “during the bid period”, as required in the introductory words of each of s652C(1) and s652C(2). To ignore those introductory words entirely arguably implies the insertion of “each paragraph of” before “subsection 652C(1) or (2)” in s650F. (This was not an issue for WAM Active’s Non PO, even though the condition period started on the announcement date, because that was also the start of the bid period.)
Is this risk yet another reason to prefer schemes?
Most large takeovers occur by scheme due to the many advantages of schemes (such as their greater structuring flexibility, all or nothing outcome and lower threshold (usually) to obtain 100%). Is the risk of technical errors like this in bids yet another reason to prefer schemes? If so, I would argue that it is of little significance, except perhaps for advisers.
Success rates and causes of failure of bids and schemes are hard to compare on an equivalent basis. I doubt there is much difference for equivalent levels of target board and substantial shareholder support. But one difference may well be that technical arguments loom larger in the failure of a bid than a scheme and may be more likely to lead to client dissatisfaction with its advisers. When bids fail, technical faults may well be alleged and made public in a Panel application, causing irritation even where they do not really make a difference. When schemes face opposition, technical arguments may be raised at the first court hearing but are almost invariably either addressed in changes to the scheme booklet or dismissed, in the light of shareholder support, when the court approves the scheme. If a scheme fails, it is usually obviously due to opposition or a superior proposal, for which advisers are less likely to be blamed.
For that reason, the more technical and prescriptive regulation of bids is probably more of a concern for advisers than their clients. Also, the dominance of schemes in large deals for over a decade means most advisers will now be more familiar and more comfortable with schemes than bids. Nevertheless, bids sometimes have advantages, as I have discussed previously.
Should the requirements regarding conditions and the close of the offer be simplified?
Ideally, yes – their complexity outweighs their usefulness. However, personally, I would not support Parliament attempting a rewrite. To work well, complex prescriptive legislation of this kind needs to be regularly reviewed, improved, and adapted, after proper consultation with those affected. Parliament does not have the time, resources, or interest to do that well.
My evidence for that is the last rewrite, in the Corporate Law Economic Reform Program Act 1999. The rewrite itself was done exceptionally well, in my view. Significant resources were devoted to it and there was extensive and meaningful consultation. Despite that, and not surprisingly for such complex legislation, some things didn’t work, including some of the provisions regarding conditions and the closing phase of the offer period. Fortunately, ASIC consulted with practitioners and fixed them using its modification powers. ASIC’s first (and most essential) modification fixes were made more than 20 years ago. We are still relying on ASIC’s modifications for takeovers law to work (albeit ASIC had to remake them all, 19 years ago, when the re-enacted Corporations Act 2001 failed to adopt any of the fixes, and has had to remake them again since due to sunsetting). The modifications are significant, as you can see from this markup.
The fact that Parliament has not found time in the last two decades to fix those problems is a realistic measure of Parliament’s capacity to provide the maintenance and updating necessary for highly complex and prescriptive legislative schemes to work.
A better option, I suggest, would be for ASIC to be given slightly broader modification powers and the resources necessary to consult with stakeholders and then simplify and improve these provisions. Understandably, that will not be ASIC’s highest priority at present. But it would be a great shame if the parts of the Act that have worked best, thanks to ASIC’s good work in the past, fall into disrepair through lack of funding and attention.