Wool worth the wait? DJs and Country Road sale

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1 Ashurst August 2014 Takeovers Legal Update In this update Wool worth the wait? DJs and Country Road sale 1 Green light for "naked no vote" break fees? 4 Changes to frustrating action policy implications for bidders and targets 5 No dividend policy (yet) Panel defers giving guidance 7 No "one [font] size fits all" updated Panel guidance on takeover documents 8 Wool worth the wait? DJs and Country Road sale WHAT YOU NEED TO KNOW David Jones scheme highlights the substantial advantages of schemes over takeovers for transactions involving differential consideration or benefits. The Court did not require an independent expert's valuation of the benefit received by Mr Lew, but that was due to the unusual facts. Background On 9 April 2014, David Jones Limited announced that it had entered into a Scheme Implementation Deed under which South African retail group Woolworths would acquire its shares at $4.00 cash per share. The Federal Court made orders on 22 May 2014 convening a Scheme Meeting to be held on 30 June Entities associated with Mr Solomon Lew began to acquire shares in David Jones in May and lodged a substantial holder notice disclosing a 9.9% interest on 18 June Woolworths and Mr Lew have a long history going back to 1997, when Woolworths made a takeover bid for Country Road Limited offering $2.00 per share. Mr Lew declined to accept the bid in respect of his 10% stake, preventing Woolworths achieving compulsory acquisition. Since then, Mr Lew has continued to hold nearly all shares in Country Road other than those (87.9%) held by Woolworths, and there have been a number of public disputes between them. On 24 June 2014, Woolworths announced that it would make a takeover bid for Country Road at $17.00 cash per share, conditional on the David Jones scheme taking effect. In the 12 months before the announcement, the price of Country Road's thinly traded shares ranged between $3.33 and $ On 30 June 2014, Woolworths announced that: its offer of $4.00 per David Jones share was its best and final offer in the absence of a competing proposal; and its offer of $17.00 per Country Road share was its best and final offer, and it would waive all remaining conditions except FIRB approval if the David Jones scheme was approved. AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

2 Supplementary disclosure and deferred meeting After the disclosure of Mr Lew's stake, David Jones returned to the Federal Court seeking approval to defer the Scheme Meeting to 14 July and approval of supplementary disclosure explaining Mr Lew's interest in Woolworths' bid for Country Road. The supplementary disclosure acknowledged that some shareholders "might consider it unfair that Mr Lew, as a Country Road shareholder, has an offer under the takeover bid for his Country Road shares which very substantially exceeds some recent trading prices of Country Road shares and might exceed the fair value of those shares, the timing of which appears to have been affected by his acquisition of a stake in David Jones". The Federal Court made the requested orders despite ASIC raising a number of concerns. The scheme was ultimately approved at the Scheme Meeting by 96.8% of votes cast, with 51.5% of the issued capital voting. Mr Lew abstained. Decision Justice Farrell approved the scheme, noting among other things that Mr Lew abstained from voting, shareholders had approved the scheme by a substantial majority, no David Jones shareholders sought an adjournment or appeared at the second hearing and ASIC did not oppose the scheme. The decision is a good example of the utility of schemes of arrangement to effect takeovers where one or more shareholders receive benefits that are not offered to all. This is generally not possible under a takeover bid, due to the prohibition against "collateral benefits". However, the fact that the majority voting in favour of the scheme was overwhelming, and that neither ASIC nor anyone else opposed the scheme undoubtedly made this an easier case for the Court to decide. ASIC's approach ASIC withheld its usual letter under section 411(17)(b). This meant that the Court could not approve the scheme unless it was satisfied that it had not been proposed to avoid the provisions of the takeover requirements in Chapter 6. It is very rare for ASIC to do this usually the scheme proponents will make concessions to secure ASIC's agreement to provide its letter. In other circumstances, the Court might have been concerned that a scheme was being proposed, rather than a takeover bid, to avoid the prohibition against collateral benefits in Chapter 6. That was not an issue in this case as the scheme had been proposed before Mr Lew began acquiring his stake and before there was any suggestion that a benefit might need to be offered. Indeed, ASIC acknowledged to the Court that the scheme was not proposed for the purpose of avoiding the provisions of Chapter 6. It appears that ASIC withheld its letter to avoid lending any support to the scheme. Interestingly, however, ASIC also stopped short of opposing the scheme. Collateral benefits Justice Farrell noted that the scheme procedure is "a flexible way of accommodating differences in the treatment of shareholders" and observed that provision of collateral benefits is not necessarily inappropriate, subject to addressing the related questions of fairness and adequacy of disclosure to shareholders who will not participate. Fairness is usually addressed by placing those receiving a collateral benefit in a separate class or arranging for them to abstain or have their votes "tagged". In this case Mr Lew did not need to be placed in a separate class, but his abstention ensured that he did not influence the vote. Accordingly, the Court turned its attention to the adequacy of disclosure. Justice Farrell accepted the relevance of several aspects of Takeovers Panel guidance on collateral benefits, including: that the "net benefits" test (in which benefits conferred are netted off against any given up) is the appropriate measure; and Ashurst Takeovers Legal Update August

3 even where there is no material "net benefit", there may still be "inducement" that should be considered if a shareholder is offered the opportunity to acquire or dispose of an asset for which there is no ready market or easily ascertainable value. Valuation of benefit At the hearing to approve the supplementary disclosure, ASIC had argued that shareholders should be provided with an independent expert's report valuing Country Road. ASIC submitted that this had become the practice of the Court where collateral benefits are involved (referring to earlier decisions including isoft and Aston, discussed in the July 2011 and August 2012 issues of our Takeovers Legal Update). Justice Farrell accepted that an independent expert's report remains the best information about the nature and extent of a possible collateral benefit and the company must justify to the Court departure from that standard. Ultimately, the Court did not require an expert's valuation of the benefit in this case, but it was significant that Mr Lew was not a shareholder (and there was no intention to provide a benefit) when the Scheme Meeting was convened. Because Mr Lew's interest only arose much later, an expert's report could not have been obtained without significant delay. It also appeared that the Court was hopeful, when approving the supplementary disclosure, that Country Road's target's statement (which was required to contain an independent expert's report) might be available before the Scheme Meeting. That proved not to be the case. Justice Farrell considered whether to adjourn the approval hearing to see if Country Road's target's statement indicated such a significant benefit to Mr Lew that David Jones shareholders should have the opportunity to reconsider their vote, but decided against that course. Comment The decision in David Jones is a compelling example of the substantial advantages of schemes over takeovers for transactions involving differential consideration or benefits. However there are signs that, had there been any significant shareholder opposition, things may have turned out differently. Justice Farrell made it clear she would not have required much encouragement to require an independent expert's valuation of the benefit. It also remains unclear how much of a "no vote" is required to persuade a court to decline to approve a scheme involving collateral benefits. Contacts Carl Della-Bosca Partner T: E: carl.della-bosca@ashurst.com Hector Williamson Lawyer Melbourne T: E: hector.williamson@ashurst.com Ashurst Takeovers Legal Update August

4 Green light for "naked no vote" break fees? WHAT YOU NEED TO KNOW A one-way "naked no vote" break fee of over 0.8% of equity value was allowed in the Atlantic Gold scheme. This suggests a more relaxed approach to naked no vote break fees than in some previous decisions. Background In Re Atlantic Gold NL the Federal Court allowed a one-way "naked no vote" break fee that is, one payable by the scheme company where its shareholders reject an offer, even though there is no competing proposal. The break fee of $250,000, which amounted to over 0.8% of the equity value of Atlantic, was payable by Atlantic to cash-box acquirer Spur if the Court convened the Scheme Meeting but Atlantic shareholders did not approve the scheme and a related resolution. Atlantic also agreed to pay a reimbursement fee to the acquirer of $750,000 (2.5% of equity value) in certain circumstances which did not include a naked no vote trigger. Evidence was presented to the Court that the reimbursement fee was negotiated at arm's length and the acquirer's transaction costs would greatly exceed the amount of the fee. In view of that, Justice Jacobson concluded that the amount of the fee would not preclude the Court from approving the scheme even though it was substantially in excess of 1%. Naked no vote break fees The Takeovers Panel's guidance on Lock-up devices (GN7) identifies naked no vote break fees as the kind of break fee that may be unacceptable despite falling within GN7's usual 1% guideline. One Panel decision suggests that such break fees may have a coercive effect on shareholders unless they are de minimis. However naked no vote break fees have been permitted by the courts in schemes in several cases, including where there were: reciprocal naked no vote break fees (see our March 2008 Takeovers Legal Update); and reciprocal break fees, although the naked no vote trigger was not reciprocal (see our September 2010 Takeovers Legal Update). In Re Atlantic Gold NL, Justice Jacobson noted the view expressed in an earlier case that such break fees should not be so large as to have an impermissible coercive effect, but considered this was not a concern in Atlantic's case, given the fee was less than 1% and in any event not a very large figure. Atlantic did not have the benefit of any reciprocal break fee, so this may represent a more liberal approach than earlier cases. Atlantic's small size may also be relevant, although it is not clear why a naked no vote break fee should be any less coercive for a small company. However it may be that a break fee can influence shareholders to some extent without being coercive. That could explain why Atlantic's reasons to vote in favour of the merger included that "as a stand-alone entity, Atlantic would be in urgent need of new equity capital for the purposes of paying the $250,000 break fee". Ashurst Takeovers Legal Update August

5 Comment The decision in Re Atlantic Gold NL suggests a more relaxed approach to naked no vote break fees than some earlier decisions. However, it is not yet clear whether this approach will be consistently followed. For example, a decision last year suggesting that scheme booklets should disclose the fact that a break fee does not have a naked no vote trigger (see our February 2013 Takeovers Legal Update) probably implies greater concern with that form of trigger. Contacts John Sartori Partner Melbourne T: E: john.sartori@ashurst.com Melinda Sanders Special Counsel T: E: melinda.sanders@ashurst.com Changes to frustrating action policy implications for bidders and targets WHAT YOU NEED TO KNOW Failure by a bidder to waive a previously breached bid condition within a reasonable time may result in the bidder losing the protection of the frustrating action policy. Bidders and targets are likely to watch more closely for inconsequential breaches of conditions. Bidders may now be more inclined to set a longer initial offer period and/or avoid unduly broad conditions. Background The Takeovers Panel has made a small but potentially significant change to its guidance on frustration action (GN12). Frustrating action is, broadly, action by a target that may cause a bid to lapse, such as breaching a bid condition. GN12 describes considerations relevant in determining whether frustrating action will be unacceptable. The recent change adds a new consideration whether a condition has been triggered previously and the bidder has not disclosed whether it will rely on it or waive it within a reasonable time. Reasonable time A footnote indicates that what is a reasonable time for this purpose will depend on the prevailing circumstances, including: which condition has been triggered; whether the bidder has varied the terms of its bid since the triggering of the condition; and whether it is still acceptable to wait until the time for giving notice of the status of conditions (referring to Novus Petroleum Limited 01, which was discussed in our April 2004 Takeovers Legal Update). Ashurst Takeovers Legal Update August

6 The notice of status of conditions must be given on a date specified by the bidder (usually the 8th last day of the offer period) which is automatically extended by the same period as any extension of the offer. In Novus 01 the Panel accepted that a bidder could wait until the time for giving notice of the status of conditions to indicate whether it would waive a breached condition. However the recent change to GN12 suggests that by doing so a bidder may make it more likely that the target will be permitted to engage in frustrating action, especially where the bid has been increased or extended after the condition was breached. The rationale for this appears to be that varying a bid (eg by increasing or extending) is inconsistent with the bidder seeking to hold on to the option of allowing the bid to lapse due to a previously breached condition. That inconsistency may not necessarily be unacceptable, but may still result in the Panel denying the bidder the protection of GN12. No fixed time The Panel also considered, but decided against, introducing a fixed timeframe (eg 90 days or 120 days) after which the frustrating action policy would no longer apply. Implications for bidders It will now be more important for bidders to watch closely for breaches of conditions and take account of the likelihood of frustrating action in deciding whether and when to waive any breach. There may also be other implications for bid tactics in hostile bids where a bidder is concerned the target may seek to frustrate the bid: Bidders may be more inclined to set a longer initial offer period, since this could give more time to decide whether to waive any breached conditions or face a greater risk of frustrating action. Bidders may seek to avoid unduly broad conditions (which are more likely to produce inconsequential breaches that the bidder could overlook) and opt instead for more targeted and specific conditions. Implications for targets Targets contemplating frustrating action will no doubt look for breached bid conditions and consider the bidder's response in deciding whether and when to take such action. Some may be tempted to trigger an inconsequential breach early on in the bid to see how the bidder responds. However, that approach could be dangerous the Panel may well be unsympathetic if it thinks the target has manufactured a breach for tactical reasons. Contacts Bill Koeck Partner T: E: bill.koeck@ashurst.com Anton Harris Senior Associate T: E: anton.harris@ashurst.com Ashurst Takeovers Legal Update August

7 No dividend policy (yet) Panel defers giving guidance WHAT YOU NEED TO KNOW The Takeovers Panel has decided not to issue a guidance note on dividends at this time. The Panel's position on a number of issues has not been settled. Background Despite consulting on a draft guidance note on dividends earlier this year, the Takeovers Panel has decided not to issue guidance on this topic yet. The Panel has indicated that: its position on a number of issues arising from the consultation paper has not been settled; and consequently, it has decided not to publicly respond to submissions. The Panel appears to consider that, although there are issues to resolve, the time is not right to address them. It may be that the Panel believes it is better to address these issues in the context of particular fact situations, or simply that it should wait to observe further developments in market practice. Consultation paper proposals The main points made in the Panel's draft guidance note on Dividends were: 1. It is likely to be unacceptable to include the value placed on franking credits in the headline offer price. Rather, any reference to the value of franking credits should be made in a separate and suitably qualified statement. 2. A term of the offer that allows the bidder to deduct the value of franking credits attaching to a dividend paid on the target shares: would not permit the bidder to make individual adjustments depending on an offeree's tax position; and would be likely to be unacceptable if it permits deduction of an amount that is not clearly defined (eg "as reasonably assessed by bidder"). Rather, the bidder's statement should make the basis of the deduction clear either by a formula or as a fixed amount eg 50% of face value (noting that 50% may not always be appropriate). 3. A bidder making a "last and final" statement should clearly address what happens if a franked dividend is paid. The first and third of these points are consistent with previous Panel decisions (see the October 2012, May 2013 and December 2013 issues of our Takeovers Legal Update). However the second point does raise issues that the Panel may have found difficult to settle. For example, making it clear that the amount deducted will be anything less than the full face value of franking credits might well make the declaration of a franked dividend an attractive measure for a target wishing to extract an increase. It appears that further guidance on dividends will need to await more Panel decisions. Dividend issues were recently raised again before the Panel in Envestra Limited. Envestra raised concerns that the bidder's objections to early declaration of its final dividend would deny shareholders the benefit of a dividend previously supported Ashurst Takeovers Legal Update August

8 by the bidder in an announcement. The Panel declined to conduct proceedings on the basis that the application was premature, but noted that a fresh application could be made if the announcement was departed from. It seems unlikely that will be the last time dividend issues come before the Panel. Contacts David Williamson Partner Melbourne T: E: david.williamson@ashurst.com Sophie MacIntosh Senior Associate T: E: sophie.macintosh@ashurst.com No "one [font] size fits all" updated Panel guidance on takeover documents WHAT YOU NEED TO KNOW The Panel's guidance has been updated to emphasise accessibility. The new guidance encourages use of summaries, and provides an example. However the guidance is not intended to be prescriptive. Background The Takeovers Panel has finalised changes to its guidance on Takeover Documents (GN18) proposed in a consultation paper earlier this year. In response to feedback, the Panel has made it clear that the new guidance is intended to be illustrative rather than prescriptive. The changes emphasise that: takeover documents should be accessible to their target audience (including retail shareholders); the Panel encourages brevity and plain English, but accessibility does not necessarily involve reducing the information available to shareholders; and the Panel encourages use of summaries that are accessible to retail shareholders in particular (even in simple bids). The guidance indicates that the summary would most naturally follow the Chairman's letter. It also notes that formatting affects accessibility, and indicates that the font should be "legible eg 10 point" (the consultation draft had specified this as a minimum). Ashurst Takeovers Legal Update August

9 Example of summary The revised GN18 provides an example of what the Panel considers most likely to be important in a summary. The example addresses: offer consideration; reasons to accept/reject offer; recommendation (target's statement only); key dates (in the case of a target's statement if considered helpful); conditions and terms of offer (in the case of a target's statement if considered helpful); bidder information (in the case of a target's statement if considered helpful); summary of expert s report (if any); key risks if offer accepted or rejected; action to take; and other key issues (unusual features eg tax issues, foreign scrip issues). Contact Bruce Dyer Partner Melbourne T: E: bruce.dyer@ashurst.com Ashurst Takeovers Legal Update August

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