A touch of steel in the boardroom

Australian boards should put foreign bids under the microscope to avoid a repeat of the Sundance saga 


The recent failure of a big Australian resources deal has led to much analysis of the regulatory processes involved, but less attention has been given to the board practices that were in play.

The Sundance tale presents a chance for Australian boards to retake the moral high ground when it comes to vetting suitors. It also means that foreign (and particularly Chinese) bidders are going to have a tougher time when seeking to engage with Australian targets.

In April Australian miner Sundance Resources terminated its scheme implementation agreement with Chinese investment company Sichuan Hanlong Group in respect of a A$1.3bn (£880m) offer when financing deadlines were not met – not for the first time.

The 21-month process had already seen Hanlong reduce its initial bid and the original timetable be extended several times.

The legacy of Sundance is that overseas bidders will likely face much greater scrutiny. Target boards will be wary of being strung along by a bidder proposing a conditional offer, particularly when they do not understand or have little visibility of, foreign regulatory conditions.

The discrepancy in Australia between the more certain takeover bid process and the flexibility permitted an offeror under a scheme means that offeror conduct may be open to challenge in the Australian takeovers panel, which could lead to a position whereby Australia follows the UK position in requiring greater certainty of regulatory approvals before announcing a deal publicly.

Financial advisers are also more likely to advise target boards that a discount for uncertainty should be applied to any headline price put forward by a foreign offeror.

But perhaps another legacy of this case should be that target boards toughen up. A practice had arisen whereby target boards erred on the side of caution and felt the need to go public at an early stage of approaches. They also felt the need to engage with and assist all potential suitors.

However, target boards and those advising them may well now want much greater certainty before committing. Accordingly, they should tread carefully and do their due diligence on any offer presented, to such a level that they truly understand the offer, the bidder and the credibility of both before they proceed to disclose.

While this should apply to all bidders, irrespective of nationality, where the suitor is foreign the target board will have an even greater imperative to seek the right advice and ensure it is not measuring itself up for the emperor’s new clothes.

The downside of this is that the process will move more slowly and costs will be incurred upfront, but surely that is preferable to a lengthy public deal falling apart to the detriment of shareholders and other market participants.

The recent focus on corporate governance may have led boards to engage early and keep deals alive past their sell-by dates. Now, it is time for the pendulum to swing back a little in favour of respectful, but tougher, scrutiny of those who come bearing gifts.