Cross border transactions:

Transcription

1 Cross border transactions: Hanson and Pioneer Global consolidation in the building industry has given rise to a number of recent cross border acquisitions. Last year, Hanson PLC (Hanson) of the UK made a recommended takeover offer for Pioneer International Limited (Pioneer) of Australia valued at A$4 billion (US$2.09 billion). This article looks at some of the issues which are common to a cross border acquisition of an Australian company and which were considered in the context of the Hanson offer, including: Method of acquisition (scheme of arrangement or public takeover bid). Disclosure of information on due diligence. Documentary disclosure requirements. Capital Gains Tax issues. Dealing with options. Listing bidder shares on the ASX (see Glossary ). Regulation of foreign investment. Scheme or bid The Hanson offer for Pioneer proceeded by way of a recommended takeover offer. However, where an acquisition is on a recommended basis, there are two principal methods by which an Australian listed company can be acquired: A traditional takeover bid under the Corporations Law. By way of a scheme of arrangement. Until the early 1990s there was strong regulatory resistance to the use of a scheme of arrangement for a transaction which could be achieved by way of a takeover. Now a scheme of arrangement is quite often used as a method of acquiring control of a company in Australia under an agreed merger. It involves the target putting forward a proposal to its shareholders for the transfer or cancellation of their shares in exchange for some form of consideration from the bidder. A scheme must be approved by: A special majority of shareholders, being 75% by vote and 50% by number of those voting in person or by proxy at a special court convened meeting of the target. The court. Once approved, the scheme binds all shareholders. There are various advantages and disadvantages of proceeding by way of a scheme or a takeover (see box Choosing 100 GLOBAL COUNSEL M&A HANDBOOK

2 Peter Cameron, Colin Smith and Jeremy Low Allens Arthur Robinson the right method of acquisition ). One of the principal determinants is the bargaining strength of the parties. A scheme puts the target in control of the process as it is the target that puts forward the proposal to its shareholders, drafts the documentation and drives the timetable in accordance with the scheme process. In the case of a takeover bid, the bidder controls and initiates the process, although once the bid document is lodged with ASIC, the timetable is largely prescribed by statute (see national chapter Australia and also Merging Vivendi, Seagram and Canal Plus ). Disclosure of information on due diligence A recommended acquisition brings into sharp focus the level of due diligence to be afforded to the bidder. The provision of due diligence information to a bidder raises insider trading issues if non-public price sensitive information is to be provided. The Corporations Law prohibits the provision of non-public price sensitive information to somebody who may make use of it for the purposes of dealing in listed securities to which the information relates (the tipping prohibition). There is no exception where the information is provided only on the basis that no dealing in securities occurs until the information has been disseminated to the market. This results in a somewhat uncommercial circumstance in which, technically at least, the target would have to release such information to the market at the same time it is provided to the prospective bidder. There are instances in practice when the technical interpretation is ignored. Indeed, some Judges have declined to prevent the provision of information by a target to prospective competing bidders when the company is seeking to defend a bid which it perceives to be inadequate. In the case of a takeover, the issue is sensitive because the foreign company will have to disclose in its bid documents both: Any materially price sensitive information which it may have obtained. Any information which is material to the making of a decision by the target shareholders and has not previously been disclosed to shareholders (as distinct from to the market generally). The disclosure of such information may invite debate as to whether it was in fact price sensitive (and, therefore, as to whether a breach of the tipping prohibition has occurred) or whether the information has lost the necessary character of confidentiality and should have been disclosed to the ASX under continuous disclosure obligations. GLOBAL COUNSEL M&A HANDBOOK

3 Glossary ASIC. The Australian Securities and Investments Commission which is the public authority that regulates companies and securities in Australia. ASX. The Australian Stock Exchange Limited. London Listing Rules. The Listing Rules of the London Stock Exchange Limited (now administered by the United Kingdom Listing Authority). The issue is less sensitive in the context of a scheme of arrangement because the explanatory statement sent to shareholders describing the scheme is a document issued by the Australian target. There is no sale by uninformed parties if the transaction is structured as a scheme involving: The cancellation of existing shares in the Australian company held by existing shareholders (in other words, there is no sale of those shares and there is no purchase of them by the bidder). An issue of shares by the Australian company to the bidder. The issue of new shares in the bidder to the former shareholders in the Australian company. Such an arrangement constitutes a subscription and issue of securities between parties who are both possessed of the relevant information at the relevant time (assuming the public scheme document discloses all relevant information). Documentation requirements In a cross border acquisition where shares are offered as consideration, the bidder will need to consider the documentary disclosure requirements that may arise in various jurisdictions other than Australia. These may relate to listing obligations of the country in which the bidder proposes to list the scrip consideration and relevant provisions relating to offering of securities. In this regard, it is important to consider the shareholder base of the target and the jurisdictions in which they are resident. There is often a mismatch in the requirements of each jurisdiction. The rule then tends to be that shareholder documentation should comply with the greatest disclosure requirement applicable, subject to relevance. This ensures that all shareholders who may be required to consider a proposal have equality of information on which to base their decision. This issue arose in the case of the Hanson offer. The consideration offered was A$35.75 (US$18.75) in cash and one Hanson share for every 10 Pioneer shares. The acquisition was sufficiently large so as to require approval by Hanson shareholders under the London Listing Rules. In addition, Pioneer had a US shareholder base in excess of 10%. As a result, Hanson s documentation had to comply with the following: Information requirements for a bid document under the Australian Corporations Law. Prospectus level requirements for offering securities in Australia. Disclosure requirements for offering securities in the US. London Listing Rule requirements in relation to approval of major transactions. London Listing Rule requirements in relation to the listing particulars required for the new Hanson shares to be issued. The mis-match of requirements was highlighted by the financial information required to be disclosed in the various regimes. The application of the US disclosure requirements meant that the financial information (both historic and pro-forma) which was otherwise stated in Australian and UK GAAP had to be restated in US GAAP. This was even though the number of Pioneer US shareholders was relatively small. It is therefore important to identify any such requirements at an early stage and build them into the transaction timetable. A recommended scrip offer and application of differing disclosure requirements can also give rise to information requirements that a target would not otherwise have to comply with. In preparing its listing particulars, Hanson was required to disclose quite detailed information about its probable and proven reserves. It was also required to disclose the same information in relation to Pioneer. Pioneer had not previously disclosed this information in such detail. It was therefore faced with having to provide much more detailed disclosure for the purposes of Hanson s UK documentation than it was accustomed to doing under Australian provisions. If the offer had not been recommended, Pioneer could have refused to provide the information. This is a difficult stance to take in the case of an agreed recommended offer. The offer of foreign scrip may also give rise to an issue in relation to liabilities for target directors who are to become directors of the bidder. Under the London Listing Rules, a prospective director who is named in the listing particulars must take responsibility for all the information in the document, including in relation to the bidder. It will be a matter of negotiation as to whether appropriate indemnities (subject to the laws of the place of incorporation of the bidder) can be given by the bidder to those target directors who are to become directors of the bidder, as were provided by Hanson. Roll-over relief The disposal of shares by a shareholder in exchange for other shares as part of a scrip for scrip takeover offer would ordinarily give rise to a taxable capital gain under Australia s capital gains tax (CGT) rules where, either: The shareholder is a resident of Australia for tax purposes. The shares are shares in an Australian resident private company. The shares are in an Australian resident public company and the shareholder owned at least 10% by value of the shares of the company (on an associate inclusive basis) at any time during the previous five years. Until recently, there have been very few foreign scrip bids in Australia due to the lack of roll-over relief for CGT purposes. However, from 10th December, 1999, relief has been available to shareholders accepting a scrip for scrip offer which enables them to defer the taxable capital gain on the disposal of their shares, provided certain conditions are met (see box CGT roll-over relief ). 102 GLOBAL COUNSEL M&A HANDBOOK

4 Choosing the right method of acquisition Choosing the right method of acquisition Takeover bid Scheme of arrangement Flexible Terms and conditions can be varied (although there are limitations on extending offer period during last 7 days of offer period) Offer period must be minimum of one month and up to 12 months Information Insider information issue is acute - constrains due diligence by the bidder The bidder is required to issue a Bidder's Statement. The target responds with a Target's Statement High level of disclosure: all information known to the bidder (and not previously disclosed to shareholders) which is material to shareholders decision Process control and timetable Bidder controls and initiates Once Bidder's Statement lodged with ASIC, timetable largely prescribed by statute (but need to factor in compulsory acquisition process) No court involvement. Any challenges to bid must be brought before the Takeover Panel, not court (unless initiated by ASIC) Timing of acquisition and focus on value Offer can be made unconditionally (or conditions may be waived) enabling shares to be acquired very shortly after despatch of offers to shareholders Theoretically, the earlier acquisitions are made, the less the risk of adverse share price fluctuations Minimum thresholds No minimum acceptance threshold Lock in Once the announcement is made, the bidder is obliged to make an offer within 2 months unless material change in circumstances warranting not proceeding or breach of proposed bid conditions as at announcement All or nothing Offer may be made without minimum acceptance thresholds (or minimum threshold condition may be waived) If the bidder gets more than 90% shares but not 75% of shareholders, the bidder may initiate mop up at a later date under standing start compulsory acquisition provisions ASIC approval Not required Flexible Scheme documentation is flexible until first court hearing to convene meeting (subsequently, changes may only be made with court sanction) Can use scheme provisions to facilitate corporate restructure Information Insider information issue is ameliorated - facilitates due diligence by the bidder Responsibility for disclosure is with the target Effectively same level of disclosure Process control and timetable Scheme documentation is prepared by the target No statutory timetable (but in practice time period likely to be similar to bid) Target initiated - directors need to conclude in shareholder's best interests, not merely respond Two court hearings - scope for court involvement/interference in documentation/process Timing of acquisition and focus on value Shares are not acquired until final court approval at second court hearing (ie at very end of the process) Shareholder decision will be focused on value of scrip at time of shareholder meeting which will be at least 1 month after preparation and dispatch of final scheme documentation Minimum thresholds To be effective, requires approval of at least 50% in number and 75% in value of those shareholders who attend and vote at the meeting (whether in person or by proxy) Lock in Announcement does not carry similar statutory obligation to follow through The target needs contractual commitment from the bidder to the scheme process, usually under a Merger Implementation Agreement All or nothing Scheme is all or nothing ie if it is approved, 100% of the shares will be acquired or, if it is not approved, no shares will be acquired Could propose scheme with fall-back bid if scheme not approved ASIC approval The Court may not approve Scheme unless ASIC issues a certificate confirming that they have no objection to the scheme ASIC will issue certificate if satisfied scheme does not prejudice shareholders and, in particular that the documentation contains same level of disclosure as Bid route GLOBAL COUNSEL M&A HANDBOOK

5 CGT roll-over relief CGT roll-over relief In order to be eligible for roll-over relief, a shareholder must have acquired his shares on or after 20th September, 1985 and would have otherwise made a capital gain from accepting the scrip for scrip offer. However, whether or not shareholders can avail themselves of the roll-over relief will ultimately depend on the manner in which the scrip for scrip offer is made to them. For roll-over relief to be available, the scrip offer must satisfy the following conditions: Constitute a single arrangement and result in the bidder becoming the owner of 80% or more of the voting shares in the target. Be made to all owners of voting shares in the target. Be made on substantially the same terms for all of the shareholders of a particular type in the target. Involve the shareholders exchanging their shares in the target for shares in the bidder or its holding company. Alternatively the offer must involve the holder of an option, right or similar interest issued by the target being offered a similar interest in the bidder or its holding company. However, if the offer involves a shareholder being offered an option, right or similar interest in exchange for shares, or vice versa, the offer will not qualify for roll-over relief. Additional conditions apply if neither the target nor the bidder have at least 300 members or if a shareholder, the target and the bidder are sufficiently related to each other. Options It is not uncommon for listed Australian companies to have options on issue. Options have usually been issued under an employee option plan and, generally speaking, are not material in terms of delivering control. Often, as in the Hanson offer, the options are mopped up only after the offer for ordinary shares is successful. The principal methods of acquiring options include: The general compulsory acquisition power (which was introduced in March 2000). Making a separate offer to acquire the options. Procuring the target to make an offer to cancel the options. Which route is adopted will depend on the nature and type of the options. In the Hanson offer, Pioneer itself made an offer to cancel options held by some 30 senior officers. However, there were around 4,000 employees worldwide who held options under a general employee share plan. Hanson decided to acquire those options using the recently introduced general compulsory acquisition power under the Corporations Law. Even if a bidder chooses to do nothing with the options, option holders may still have the right to require the bidder to acquire their options if the bid is successful (see box Mopping up options ). Listing bidder shares on the ASX The issue of foreign scrip as consideration, whether under a takeover or a scheme of arrangement, raises the question of whether or not the bidder will seek a listing in Australia to facilitate the holding of its shares by the target shareholders. The ASX provides for two types of listing: General admission, which entails a full listing on the ASX and adherence to the ASX continuous obligations regime. Admission as a foreign exempt entity which recognises that the ASX is a secondary listing only and imposes a limited regime of continuous obligations. An important part of this decision is often whether or not the company s stock will be included in the ASX indices. The ASX has recently expressed a preference for foreign companies to apply for general admission and, generally, a company can only be included in the ASX indices if it has a full general listing. Without a full general listing, there is a risk of flow back of shares to the jurisdiction of the bidder. Institutional shareholders may only have a mandate to hold index stock and are therefore required to sell the shares. In addition, non-index stock tends to have less liquidity. If there is no liquidity in Australia, it is unlikely that small target shareholders will continue to hold the shares. Quite often, a small dealing facility is provided to enable small shareholders to sell the consideration shares at lower brokerage levels. A further matter when considering listing on the ASX is the uncertificated regime for trading securities which operates in Australia. The ASX has implemented an electronic transfer system, called the Clearing House Electronic Sub Register System (CHESS), for the transfer and settlement of securities quoted on the ASX. Legal title to CHESS securities is transferred electronically, so share certificates are not issued or required. CHESS cannot be used directly for the transfer of securities of foreign companies where the laws of the foreign company s place of incorporation do not recognise CHESS. To enable such foreign companies to have their securities cleared electronically in CHESS, the ASX has established depository instruments called CDIs which work in a similar manner to most other depository systems whereby the securities are held by a CHESS nominee and CDIs are issued and are traded. The stamp duty implications of establishing CDIs are also relevant. Transfers of CDIs on the ASX will give rise to ad valorem stamp duty. Due to the beneficial nature of the instrument traded, transferring a CDI in Australia may also give rise to an exposure to stamp duty in the offerer s place of incorporation. Where the bidder is a UK company, such as Hanson, there is a risk that the transfer or allotment of shares to the CHESS nominee in order to establish the CDI s will incur a liability to UK stamp duty reserve tax of 1.5%. Under UK law this liability would be placed on the CHESS nominee. As a result, the 104 GLOBAL COUNSEL M&A HANDBOOK

6 nominee would expect to be indemnified by the overseas company in respect of any stamp duty liability which may arise. Mopping up options Mopping up options In the Hanson offer, Hanson did not apply for a full general listing but only sought listing as an exempt foreign entity. It also arranged for a small shareholders dealing facility. However, Pioneer shareholders were given the opportunity to elect to take Hanson shares in the form of shares listed on the London Stock Exchange or CDIs listed on the ASX. Elections such as this may increase the non-liquidity in Australia if shareholders elect to hold shares on the London register. This may be exacerbated due to the activities of arbitragers. For example, there was significant arbitrage activity during the Hanson offer period. The arbitragers acquired Pioneer shares on the ASX at a price below the theoretical value of the offer consideration (that is the trading value of one Hanson share plus A$35.75 (US$18.75) was greater than the cost of 10 Pioneer shares). The arbitragers then effectively short-sold Hanson shares on the London Stock Exchange and agreed to deliver into their short position when they received their Hanson share entitlement as consideration for acceptance of the offer. It can be assumed that these arbitragers would have elected to receive London Stock Exchange listed ordinary shares in Hanson to meet their short position as opposed to CDIs listed on the ASX. General compulsory acquisition power. Under the general compulsory acquisition power, a person has a right to acquire any outstanding securities in a company if both: Its voting power in the company is at least 90%. It and its associates have full beneficial interest in at least 90% by value of all the securities of the company that are shares or convertible into shares (that is, on a fully diluted basis). Key features of the general compulsory acquisition process are: The consideration offered must be cash only. An independent expert s report as to fair value is required. Court approval for the acquisition is required (at the acquirer s cost) if holders with more than 10% by value of the securities to be acquired object. Rights to compulsory acquisition are lost if special benefits are given to particular holders. The rights to compulsory acquisition must be exercised within six months after the date on which the person becomes a 90% holder. Post completion cancellation of options. An alternative to general compulsory acquisition is for the bidder to procure the target to make an offer to each option holder to cancel his or her options. This was how Rio Tinto mopped up the outstanding option holders in each of its successful takeover bids for North and Ashton Mining (which became wholly owned subsidiaries of Rio Tinto in October 2000 and January 2001 respectively). In those deals, the offer to cancel was made conditional on 100% acceptance by option holders for the proposal. Where there is a relatively small group of option holders in the target, the considerable momentum and peer pressure created by such a condition can make this method very effective. Post-bid put option Even if a bidder chooses not to mop up the outstanding options, it would still be obliged to make an offer to acquire those options if it has a relevant interest in 90% or more of the company s ordinary shares at the end of the offer period. That offer must be made within one month from the end of the offer period, and must be accompanied by an independent expert s report as to the fair value of the options. The option holders then have a further one month in which to give notice to the bidder requiring it to acquire the options, either: On terms agreed with the bidder. Determined by the Court (upon the option holder s application). The regulation of foreign investment in Australia FIRB. An acquisition by a foreign entity (and its associates) of more than 15% in an Australian company whose gross assets exceed A$50 million (US$26.23 million) requires the approval of the Foreign Investment Review Board (FIRB). This is the government body which advises the Australian Federal Treasurer in the exercise of his power under the Foreign Acquisitions and Takeovers Act 1975 (FATA). Under that Act, such a proposed acquisition in an Australian company must be notified to the Treasurer who may prohibit the acquisition if he considers it to be contrary to the national interest. A company is foreign for the purposes of FATA if it is at least 40% foreign owned. There are similar prohibitions in relation to arrangements relating to management of a company and acquisitions of businesses and land. FIRB registers, but normally raises no objections to, proposals above the A$50 million (US$26.23 million) threshold where the relevant total assets/total investment falls below A$100 million (US$52.46 million). However, proposals in sensitive sectors or those which raise specific national interest issues may be subject to a more detailed examination. The Treasurer normally has 30 days to consider a proposal. However, the Treasurer has power to extend this period up to 120 days. In non-sensitive industries, FIRB approval is unlikely to be an issue. However, the requirement to obtain FIRB approval can be used as a defence by a target where it is possible to argue that migration of control of the Australian company overseas is against the national interest. This argument is currently being put forward by Woodside Petroleum in its defence against an unwelcome bid by Shell. Industry specific legislation. Foreign investment in certain Australian industries is also subject to industry specific legislation. These industries include the banking sector, civil aviation (domestic and international), media (broadcasting and newspapers) and telecommunications. In these industries, approvals in addition to FIRB may be required for foreign investors. Allens acted for Pioneer in relation to the recommended takeover offer by Hanson for Pioneer. GLOBAL COUNSEL M&A HANDBOOK