25 April, 2016
On 25 February 2016, the Monetary Authority of Singapore issued a revised Code on Take-overs and Mergers (the “ Code”) which came into force on 25 March 2016. Most of the amendments to the Code address the issues faced in the takeover of Fraser and Neave, Limited between 2012 and 2013. The Code also incorporates feedback received on the consultation paper released by the Securities Industry Council (“SIC”) on 6 July 2015 (the “Consultation Paper”).
The objectives of the Code may be classified under four broad categories, namely, providing certainty in cases of competing offers, encouraging pro-active offeree boards, providing more timely disclosure, as well as codifying and streamlining existing practices.
This article examines the amendments as follows:
1. an offeree board’s consideration of the feasibility of soliciting a competing offer or running a sale process does not amount to a frustration of an existing offer or imminent offer;
2. an offeree board may consider sharing available management projections and forecasts with the independent financial adviser; and
3. prompt disclosure is required of any material changes to information previously published or material new information
which would have been required to be disclosed in any previous document or announcement.
As always, in cases of doubt, the SIC should be consulted.
SOLICITING A COMPETING OFFER ETC.
Rule 5 of the Code provides, amongst others, that in the course of an offer, or even before the date of the offer announcement 1, if the board of an offeree company has reason to believe that a bona fide offer is imminent, the board must not, except pursuant to a contract entered into earlier, take any action without the approval of shareholders at a general meeting, on the affairs of the offeree company that could effectively result in any bona fide offer being frustrated or the shareholders being denied an opportunity to decide on its merits.
SIC explained that the rationale of Rule 5 is to prevent offeree directors from unilaterally affecting the state of affairs of the offeree company (for example, by reducing the value of the offeree company through a disposal of material assets) so as to provide grounds for the withdrawal of the offer by the offeror. The rule against the frustration of offers by an offeree board is intended to ensure that the shareholders of the offeree company should have the opportunity to consider the merits of an offer.
Under the amendments, a new Note 8 is introduced to Rule 5 to clarify that the board of an offeree company may, but is not under an obligation to, consider the feasibility of soliciting a competing offer or running a sale process. Such actions will not amount to a frustration of the initial offer because they neither hinder the progress of, nor result in shareholders being denied the opportunity to decide on the merits of the initial offer, and are hence not inconsistent with the intent of Rule
5. A better or alternative offer is generally in the interest of the offeree company’s shareholders.
AVAILABILITY OF MANAGEMENT PROJECTIONS AND FORECASTS
Rule 7.1 of the Code provides that the board of the offeree company must obtain competent independent advice on any offer, and the substance of such advice must be made known to its shareholders. In the Consultation Paper, the SIC noted that there was currently a lack of forward-looking information provided by the management of offeree companies to their independent financial advisers. The SIC elaborated that such information enables independent financial advisers to provide a better estimate of the value of the offeree company in the future, instead of relying on peer comparisons of companies in similar sectors.
Under the amendments, a new Note 5 is introduced to Rule 7.1 to set out that the board of an offeree company may, but is not under an obligation to, share available management projections and forecasts with the independent financial adviser for the purpose of obtaining the latter’s advice on the offer.
Directors should note that if management projections and forecasts are used in the independent financial adviser’s published advice, Rule 25 of the Code relating to profit forecasts has to be adhered to. Rule 25 places the responsibility of compiling such projections and forecasts on the directors. Directors must do so with scrupulous care and objectivity.
The financial adviser appointed to advise on the offer must discuss the assumptions with the board and be satisfied that the forecasts have been made with due care and consideration. In other words, directors bear the ultimate responsibility for any profit forecast despite having appointed the independent financial adviser to give a report on the valuation of the offeree company.
MATERIAL CHANGES IN INFORMATION
Rule 8.1 relates to the responsibility for and standard of care required of information provided to shareholders in relation to an offer. The intent of Rule 8.1 is to ensure that shareholders are given all facts necessary to make an informed judgment on the merits of an offer. Hence, an accurate and fair representation of such facts must be given to the shareholders in a timely manner so as to enable them to make a decision in good time.
Under Note 1 on Rule 8.1, any document issued to shareholders must include information about any material change in any information previously published by or on behalf of the relevant company during the offer period. If there had been no such changes, this should be stated.
Under the amendments, Note 1 on Rule 8.1 enhances the obligation for offerors and offeree boards (as the case may be) to promptly disclose material information at any time following the publication of the initial offer document or offeree board circular until the end of the offer period. The relevant company must promptly announce:
(a) any changes in information disclosed in any document or announcement published by it in connection with the offer which
are material in the context of that document or announcement; and
(b) any material new information which would have been required to have been disclosed in any previous document or announcement published during the offer period, had it been known at the time.
In appropriate circumstances, a paid press notice may be needed to ensure prompt and wide dissemination of the material change in information. The SIC may further require a document setting out the relevant information to
be sent to the shareholders in the offeree company.
Where such information is material to the offeree company shareholders’ consideration in deciding whether to accept an offer, it will also be incumbent on the offeree board and the independent financial adviser to take such information into consideration and, where appropriate, revise their recommendation and/or advice.
CONCLUSION
The proposed amendments to the Code discussed above provide clarity and set out the parameters of what the directors of an offeree company can do when faced with an offer, thereby encouraging directors of offeree companies to be more proactive.
Offerors may indirectly feel compelled to provide a more attractive offer which enables shareholders of offeree companies to obtain a higher or a better offer. The enhanced disclosure obligations also serve to promote more transparency and information symmetry in the market. These amendments may potentially lead to more competing or attractive offers in takeover transactions, and contribute to more dynamic M&A activities in Singapore.
One amendment to the Code clarifies that the term “date of the offer”, under Rule 5, refers to the date of the offer announcement.
For further information, please contact:
Li-Ling Ch’ng, Partner, RHTLaw Taylor Wessing
