Market Report (2/4)

Written on the 13 May 2009


Corporate law specialist Glenn Vassallo of Hynes Lawyers highlights the latest in Brisbane’s corporate market.
The Business Survival Guide – Hostile Takeovers: Protecting Your Business (Part 1)
THE market is full of sharks of all kinds and many are looking for the opportunity to strike while prices are low and shareholders are getting a little shaky about where their loyalties lie. Strong businesses with one or two weak links in the chain are also at risk. This article looks at how you can recognise when your business is at risk of an unwanted hostile takeover bid and provides guidance on how to prevent this occurring. Next month’s article will complete our review of takeover management and defence strategies with tips on how to fend off a hostile takeover bid, post launch.
The first weapon in your anti-takeover target armoury, is for directors to recognise the signals that a potential takeover is impending. There are many indicators, but some of the more obvious bells that might sound in the months leading up to the fight are: (1) The company has received requests for information regarding its share register, assets or creditors; (2) Minority (previously uninterested) shareholders are suddenly thirsty for knowledge; (3) The board finds itself being criticised in the press; or (4) Small share trades have increased. 
The second line of defence is to understand how you would protect against a takeover, should the need arise. Takeover defences principally fall into two categories – reactive and preventative. Needless to say, prevention is the best medicine. In this war chest you will find things like ‘shark repellent’, ‘golden parachutes’ and strategies to protect your register, manager your creditors, manage your shareholders and deter your opponent. 
Briefly, ‘shark repellent’ refers to loan contract clauses where a change in control triggers a right to accelerate repayment or to terminate. Use of such clauses have the legitimate purpose of protecting the creditor’s interests and are therefore likely to be well received. ‘Golden parachutes’ describe a situation where contracts for company executives provide for significant and sometimes exorbitant benefits in circumstances where they lose their jobs as a result of a takeover or change in control. 
This has the effect of deterring bidders who will be forced to finance these benefits (noting that there are however, limits on payments to individuals under the Corporations Act and for listed companies, the ASX Listing Rules may prohibit the payment and will impose a cap on termination benefits to all officers of listed entities). These two strategies should however be used with care and in particular, care should be taken to ensure that ‘change in control’ is not too widely cast. Further, they may be a double-edged sword if a friendly merger opportunity is, or may be, on the cards.
As for so many other corporate issues, effective management of members and creditors is critical to fend off a takeover. 
A takeover is expensive and bidders are unlikely to move without some measure of certainty that their bid will be supported from at least one quarter. Many takeover strategies will centre around a bidder’s ability to take control of a target’s debt or win the support of a creditor in exchange for promises to convert the debt into equity, post-takeover. 
Others will focus on building support among members to overthrow the current board and replace it with a ‘friendly’ board. Such strategies are particularly effective where the current management has not maintained strong relationships with creditors and members and made efforts to regularly communicate and converse with them. 
The tip here is to make the bank manager your best friend, keep them in the loop with your business plans and goals and allow them the opportunity for input. 
Equally, equipping shareholders with quality information about the company and allowing them the ability to participate and have their say whenever possible will assist.
Protecting your members register is equally important. This can be difficult, because the Corporations Act has proved to be ineffective in fending off the David Tweed’s of this world.
But some things you can do are: (1) Ensure you understand the circumstances where you are required to provide copies of your register, and when you are not; and (2) Choose your share registrar carefully and if possible, pick one that has had experience acting for companies who have successfully fended off hostile takeover bids in the past.
RICHARD HOULT Moore Stephens
• RICHARD is a principal within the business advisory services of Moore Stephens (Queensland) Ltd.
• He has established his career providing a vast range of services to an extensive client base utilising his in-depth accounting, taxation, management and superannuation knowledge to strengthen business operations, address compliance issues and develop strategies to increase business performance.
Richard has a keen personal interest in the financial and management components of rural operations and has positioned himself as a specialist to the primary production industry.
JACK is a farmer and James is an entrepreneur and both have been watching the market closely. They know that economic crises can give rise to extraordinary opportunities for those who watch and wait. Both have been eagerly watching Earthfarms Australia (EarthAus), the management company of a large number of farming and agricultural projects right across Australia which also holds significant water assets. Both know that EarthAus is a good business.
Jack and James decide to pull together a consortium to launch a takeover bid for EarthAus. In addition to finance, they also need a good strategy.
It’s no secret that EarthAus’s major shareholder (CropCo), has been looking to sell its shareholding for some time and the ASX announcements released by EarthAus indicate they are undertaking a capital raising in order to reduce an already renegotiated debt facility provided by SBHC. Jack and James recognise their opportunity to swoop. 
Equipped with a copy of EathAus’s constitution (downloaded from ASX) Jack, started discussions with CropCo. With a shareholding of more than 5 per cent, CropCo agreed to exercise its right to convene a meeting of members and propose resolutions to replace the board. In addition to candidates suggested by Jack, CropCo also proposed to put up one of its own nominees. 
In the meantime, James started discussions with SBHC, who were getting nervous about EarthAus’s ability to repay the debts due to them. SBHC agreed to provide James with copies of the Facility Agreements with EarthAus, which gave SBHC the ability to assign the debt without EarthAus’s consent. Using his network of high net worth friends and associates, James was able to put together a compelling offer to take control of the debt owed to SBHC. SBHC accepted.
The following Monday, BidCo (a new entity incorporated by Jack, James and others) launched a takeover bid for EarthAus. Having not discussed the company’s affairs with SBHC or its members for some time, EarthAus’s directors were caught unaware. Attempts to bring SBHC and CropCo back were unsuccessful. It was simply too late for any effective management of relationships with them. The board resolved to get some advice about defending against hostile takeovers.
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