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Although Australia is more liberal when it comes to allowing ‘freedom of contract’ on takeover applications, Marie McDonald says that many areas of M&A are echoing UK codes of practice

Recent changes to corporate and competition law in Australia have had the effect of bringing certain aspects closer to the UK position. In many other ways, however, the gap between the two jurisdictions has widened.

Takeovers – bid conditions

The developments in Australia reflect the attitude of the Australian Takeovers Panel to some unusual bids. In general, by comparison with the approach of the UK’s Takeover Panel under the City Code, the Australian Takeovers Panel appears considerably more willing to countenance a ‘freedom of contract’ approach in the terms and use-of-bid conditions, provided that there is full disclosure of relevant material to target shareholders.

A stark example of this was the highly leveraged $A2.2bn (£898.1m) bid announced earlier this year by Burns Philp for Goodman Fielder. Although the bidder had commitment letters from financiers at the time of announcement of the bid, it had not settled or signed financing documents by the dispatch of its offers. The Australian Takeovers Panel permitted the bid to proceed, providing that the bidder allowed accepting shareholders to withdraw their acceptances within 10 days of being notified of the terms of the final financing documents. This is clearly a shift away from the UK requirement for firm financing to be in place when the bid is announced.

Following the Goodman Fielder takeover, there were several leveraged takeovers effected by schemes of arrangement containing ‘subject to finance’ conditions – examples include Constellation’s acquisition of winemaker BRL Hardy at a value of A$1.9bn (£775.7m) and Alinta/AMP Henderson’s A$1.2bn (£489.9m) acquisition of electricity network owner United Energy. There has also been an increase in friendly bids being effected by a scheme of arrangement. This is particularly the case where the offer is debt financed and the bidder and its financiers require certainty as to the outcome and the time of implementation.

Another development is the diversity of conditions being included in takeover documents. In the post-Enron era, nervous bidders are requiring more extensive conditions to protect them for as long as possible, in the absence of being able to conduct due diligence. These conditions often include a condition that there is no material adverse change to the target or a market-related condition, such as a movement in stock market indices or commodity prices. In one case, bidder MatlinPatterson included a condition that its target Anaconda Nickel permit an expert to confirm the production capacities of the target’s key asset, a nickel mine. In other cases, the condition appears to be designed more to put pressure on the target. In the Goodman Fielder example, the bidder included a condition requiring the directors of the target to provide confirmation as to the target’s financial position.

In general, the Australian Takeovers Panel has allowed bidders latitude in framing conditions (providing the conditions are objective and not within the control of the bidder) and appears to assume that they may generally be relied on according to their terms. There are some indications that the Takeovers Panel might find a condition to be unacceptable if it is so unlikely to be satisfied as to make it optional for the bidder to proceed. Although the Takeovers Panel has allowed bidders some freedom in drafting conditions, it does not require targets to satisfy the conditions.

Break fees and lockups

The Australian Takeovers Panel has adopted the UK approach in establishing a general guideline of 1 per cent of bid value as the maximum cap for break fees negotiated between a target and bidder. The panel has allowed this cap to be exceeded, particularly in the case of small bids where actual costs exceed 1 per cent. It has also found that a target’s obligation to reimburse prospective bidders for their due diligence costs, which was not contingent on a successful bid, was not in the nature of a break fee and need not be included when applying the 1 per cent cap.

An interesting development in the area of lockups is the panel’s attitude to undisclosed ‘poison pills’. The panel recently declared that it would be unacceptable for AMP Life, the holder of an undisclosed pre-emptive right that was allegedly triggered by a change of control of grantor AMP Shopping Centre Trust, to exercise that right following a takeover bid for the trust. Exercising the right would have required several key shopping centres to be transferred to various co-owners, including AMP Life. The decision is significant because it affected the contractual rights of a third party, rather than the target or bidder.

There were some unusual aspects of the case, including AMP Life’s role as ‘promoter’ of the earlier offering of units in the trust to the public. Notwithstanding this, the decision may have wider ramifications, particularly in view of the panel issuing a warning that those having undisclosed rights triggered by a takeover are now on notice that they risk a declaration of unacceptable circumstances. This is likely to result in companies conducting an internal review for such rights and to cause the beneficiaries of change of control provisions to require that the existence of those rights be disclosed.

Competition law and policy – fighting hardcore cartel conduct

Australia is joining the UK and other key competition law jurisdictions in intensifying the fight against hardcore cartel conduct.

On 30 June, the Leniency Policy for Cartel Conduct of the Australian Competition and Consumer Commission (ACCC) came into force. Like its UK counterpart, the leniency policy aims to encourage corporations and their executives to blow the whistle on hardcore cartel behaviour such as price-fixing, bid-rigging and market allocation. However, the leniency policy is narrower in scope than the Office of Fair Trading’s (OFT) leniency programme.

Whereas in the UK total immunity is available irrespective of the OFT’s ‘awareness’ of the cartel, the ACCC will grant immunity from ACCC-instituted proceedings to the first person to disclose a cartel only when it is ‘unaware’ of it. Immunity from pecuniary penalty is available to the first immunity applicant where the ACCC is aware of the cartel but has insufficient evidence to institute proceedings. The leniency policy does not offer immunity to subsequent applicants and it does not include a UK-style ‘leniency-plus’ offer.

The Australian Federal Government is now looking at introducing a new penalty regime, similar to the UK regime introduced by the Enterprise Act 2002, including criminal sanctions for cartel conduct (including imprisonment for executives), higher pecuniary penalties, the possibility of disqualifying executives and prohibiting corporations from indemnifying employees against the imposition of fines.

Predatory pricing

The Australian approach to dominance cases differs significantly from the UK analysis. Whereas the UK has adopted an approach based on EU jurisprudence, Australian courts tend to embrace a US-style analysis, as evidenced by the recent High Court decision in Boral Masonry v ACCC (February 2003) in relation to predatory pricing.

The Australian High Court, unlike the UK’s Competition Appeal Tribunal, focuses on the business rationale for below-cost pricing. If the firm, assuming it had no market power, would engage in the same conduct as a matter of commercial judgement, it is unlikely that the firm will be found to be illegally taking advantage of its market power. Accordingly, Boral Masonry’s price-cutting, which occurred in response to falling demand and in an attempt to retain its market share in an industry price war, was held to be legitimate competitive conduct. In particular, the High Court held that the US concept of recoupment is a useful tool for analysis in Australian predatory pricing cases and that evidence of no prospect of recoupment will point away from illegal predatory pricing. n

Marie McDonald is a partner in the corporate advisory group at Blake Dawson Waldron