The disclosure by target boards of approaches from potential bidders is a key issue in the Australian M&A landscape. Most commentators demand immediate disclosure of any approach irrespective of how advanced that proposal may be. That commentary, along with the veiled threat of class actions, leads some boards to lean towards early disclosure. Yet even if boards do disclose approaches, they can face the accusation that they have been too facilitative of the relevant proposal. In the cat-and-mouse challenge of bidder and target there are few hard and fast rules.
Amongst these issues, one theme that does emerge is that those who call for the immediate disclosure of preliminary approaches need to think more deeply. It is not always in the interests of the target or its shareholders that such disclosure be made.
The ASX Listing Rules require listed companies to disclose information that could reasonably be expected to have a material effect on the price or value of their securities. That obligation is subject to carve-outs and importantly, in broad terms, an incomplete proposal that is confidential does not have to be disclosed.
There is a sensible policy reason that the Listing Rules afford the discretion to target boards as to when a proposal is firm enough to meaningfully inform the market. It would not be particularly helpful or informative if every truly preliminary approach was unveiled to the market.
A bidder may wish to keep its proposal out of the public eye. In that case, it will usually declare to the target that the proposal is ‘confidential and incomplete’ to help the target form the view that it sits within the carve-out to the disclosure obligation in the Listing Rules.
At other times, a bidder will want its proposal to become public. A well-informed media leak can destroy the confidentiality of the proposal and force ASX to require disclosure. Sometimes bidders are more direct, publicly releasing their proposals themselves after an initial private rejection by a target. The hope of the ‘bear hug’ announcement is that it will put pressure on the target board to acquiesce to diligence access and to the promotion of the bidder’s proposal.
In receipt of all of these different kinds of proposals sits the target board. Weighed up against the strict legal considerations, sit the commercial and reputational drivers for boards. It may not necessarily be a good thing if every proposal to every company was immediately disclosed, both in terms of the market and the companies involved. Many of these will be genuinely incomplete, requiring further work to turn into something more. But even deals that do complete have to start somewhere, and in the back of a target director’s mind is often the thought that early disclosure is the path of least resistance: surely no one can criticise a prompt discloser.
The reality is that matters are not as simple as that. It may not be in the interests of the relevant target company or its shareholders for immediate disclosure to be made. The proposal could be not be well advanced, and the early disclosure of it could prevent the company from creating value for shareholders for reasons including having an auction timeframe set upon it by either the bidder or possibly by certain target shareholders, rather than being able to control the process and timing. Such control can be vital to maximising shareholder outcomes.
For these reasons, the immediate disclosure of preliminary proposals is not always the best solution for a target or its shareholders.
This article first appeared in AFR Dealbook.
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