Australia – Early Disclosure – A Risk Worth Taking?

iSelect (ISU)

$1.79 (08/02)

 

On 13 October 2015, iSelect announced that it had received a confidential, indicative, non-binding and conditional proposal "from a well credentialled international private equity firm" to acquire all its shares via a scheme of arrangement. The announcement noted that there was no certainty that the proposal would result in a binding offer or that it would be recommended by iSelect's Board. Following media speculation, iSelect confirmed on 14 October 2015 that the proposal was received from Providence Equity Partners.

 

Ultimately, iSelect determined that discussions with Providence Equity Partners should cease and made an announcement to that effect on 7 December 2015. 

 

Bradken (BKN)

$1.08 (07/12)

 

On 5 December 2014, Bradken announced the receipt of a non-binding indicative proposal from funds advised by Pacific Equity Partners Pty Limited and Bain Capital Asia, LLC (PEP/Bain Consortium). The proposal was conditional upon a number of matters, including completion of confirmatory due diligence and a Board recommendation. The announcement also detailed that the PEP/Bain Consortium had made a confidential, non-binding indicative proposal in August (which had not previously been disclosed), pursuant to which detailed due diligence was granted, but from which no firm offer eventuated.

 

On 11 December 2014, Bradken announced that it had received additional inbound enquiries since its 5 December announcement but that there were no assurances that any of these discussions, including the proposal from PEP/Bain Consortium, would result in a transaction.

 

While confirmatory due diligence was undertaken to the satisfaction of the PEP/Bain Consortium, Bradken announced on 28 January 2015 that all discussions in relation to the proposal had ceased.

 

Bradken went into trading halt on 2 April 2015 and, in response to media speculation, confirmed it had received an unsolicited non-binding proposal from Koch Industries and Pacific Equity Partners (Koch/PEP) to acquire Bradken for cash by way of a scheme of arrangement. The offer was subject to a number of conditions including financial due diligence. There were no other ASX announcements regarding this proposal.

 

On 26 June 2015, Bradken announced that a consortium of Sigdo Koppers and CHAMP Private Equity (SK/CHAMP Consortium) had approached Bradken regarding a possible merger between Bradken and Sigdo Koppers’ wholly- owned subsidiary, the Magotteaux Group. Bradken agreed to work with the SK/CHAMP Consortium during a 60 day exclusivity period to review the strategic and financial merits of the proposed merger.

 

On 31 August 2015, Bradken indicated that the SK/CHAMP Consortium remained committed to the project but was not in a position to provide Bradken with a proposal. Bradken chose not to extend the exclusivity period as requested by the SK/CHAMP Consortium.

 

On 7 September 2015 Bradken announced that it had received written notice from the SK/CHAMP Consortium formally terminating merger discussions. 

 

Continuous disclosure

 

Unless an exception applies, Listing Rule 3.1 requires an entity to disclose information to the market that a reasonable person would expect to have a material effect on the price or value of an entity's securities. The announcement of a non-binding approach would ordinarily be expected to have a material effect on an entity's share price.

 

However, Listing Rule 3.1A provides an exception for information that relates to an incomplete proposal or negotiation where it remains confidential (and ASX does not consider otherwise) and a reasonable person would not expect disclosure.

ASX Guidance Note 8, which provides comprehensive guidance on continuous disclosure, makes it clear that a negotiation will be complete only when the parties enter into an agreement to proceed or have otherwise committed themselves to proceeding.

 

Pre-merger discussions entered into by entities, such as those in the above examples, clearly fall within the carve out in Listing Rule 3.1A and will not require disclosure provided the confidentiality requirements (see below) and the reasonable person test (also see below) are met.

 

Confidentiality

 

Information relating to an approach or discussions will only be considered confidential if it is "secret", that is, it is known to a limited number of people who understand (and abide by the understanding) that the information is to be treated in confidence and used only for permitted purposes.

 

If the information ceases to be confidential, or ASX forms the view that it has ceased to be confidential, it must be disclosed immediately.

 

Guidance Note 8 indicates that ASX may form the view that information is no longer confidential where there are media reports or rumours in the market that are reasonably specific and accurate. ASX has regard to the degree of specificity in determining the extent to which confidentiality is lost. For example, if a report only refers to an entity "considering" a particular transaction without any specific details, ASX may only require the entity to disclose the fact that negotiations are on foot. However, where the report/rumour includes more specific details, ASX is likely to expect the entity to confirm those details.

 

Reasonable person test

 

Discussions which meet the confidentiality requirements will generally also satisfy the reasonable person test. This reflects a value judgment on the part of ASX that a reasonable person would not expect an incomplete proposal or negotiation to be disclosed whilst it remains confidential. Helpfully, ASX has specifically outlined its view that a reasonable person would not expect disclosure of confidential information that an entity has received an offer from another entity to enter into a control transaction. Disclosure will only be required where there is something in the surrounding circumstances sufficient to displace the general rule (for example, where the information needs to be disclosed in order to ensure that another announcement is not misleading or deceptive). 

 

Some pros and cons

 

It is tempting, with the benefit of perfect hindsight, to assume that the three cases above involve voluntary pre- announcement to facilitate a deal being reached and that this tactic failed. However, even assuming that the announcement was in fact voluntary, it is not possible to say with certainty that the "target" would have been better off keeping silent. If approaches go undisclosed, they can also be made public later by spurned suitors and that may, in some cases, produce a strong negative reaction from shareholders. The choice is a fraught one. It requires careful balancing of pros, cons and probabilities, and whatever decision is made, one can never be certain what "might have been".

 

Where disclosure of an approach or discussions is not required because the carve out in Listing Rule 3.1A applies, Directors may nevertheless determine that disclosure is the right thing to do in the relevant circumstances. (Note, however, that if the company has entered into a confidentiality agreement, disclosure where the carve out applies may be a breach of that agreement, depending on how it is drafted.) In some instances, premature disclosure, although not required by the Listing Rules, may be the better course of action because:

 

• it may encourage an "auction" (as noted in the Bradken example, disclosure of the PEP/Bain Consortium's non- binding offer subsequently resulted in enquires from a number of other potential suitors);
• front foot disclosure may avoid the need for a hurried response, and possibly greater detail, in the event of a reasonably specific leak;
• it keeps investors better informed (disclosure of a non-binding proposal is likely to have a positive effect on the company's share price upon announcement, but an opposite and "more than equal" reaction may occur if a transaction does not eventuate); and
• the disclosing entity will more likely avoid scrutiny by regulators.

 

On the other hand, disclosure may not always be advantageous. For example, disclosure may:

 

• cause the entity to lose negotiating leverage otherwise available;
• expose the entity to unwelcome publicity, making it more difficult to finalise a deal;
• create an irreversible perception an entity is "for sale"; and
• require the entity to keep the market updated.

 

Further, where an entity chooses to disclose a proposal, care will need to be taken to ensure the announcement is not misleading. For example, any public statement must make clear that the proposal is incomplete and ensure that investors are not misled as to the level of certainty attached to the potential transaction.