UNDERSTANDING WHAT ‘PUT UP OR SHUT UP’ MEANS
Written on the 13 September 2012
THERE has been a significant amount of media coverage recently regarding the proposal by the Australian Securities and Investments Commissions (ASIC) to reform Australia’s takeovers laws, including the introduction of a "put up or shut up" rule similar to that which operates in the United Kingdom (UK).
Public debate regarding the usefulness of such a rule in Australia started late last year following the unsolicited takeover bid by Pacific Equity Partners (PEP) for ASX-listed Spotless Group Limited.
That process vacillated for more than five months before a deal was finally done. During the process, Spotless chairman Peter Smedley lamented the absence of a UK-style rule in Australia.
ASIC chairman, Greg Medcraft, recently reignited the debate regarding the rule in an interview on ABC television. So what does it all mean?
The UK rule, contained in Rule 2.6 of the UK Takeovers Code, essentially provides that a bidding entity must by 5pm on the 28th day following the date of an announcement regarding a potential offer either:
(a) announce a firm intention to make an offer in accordance with the code (“put up”); or
(b) announce that it does not intend to make an offer in which case the announcement would be treated as a statement to which the code applies (“shut up”).
The UK provisions also enable the British Takeovers Panel to grant extensions to this period of time.
The real benefit of the UK provisions are that the timeframe for a potential bidder making a firm offer, or announcing that they do not intend to make a firm offer, starts from the time that an announcement is made to the market regarding the offer – regardless of whether the announcement is made by the target entity or otherwise.
Additionally, Rule 2.8 of the Takeovers Code provides that, in effect, where a person makes a statement that they do not intend to make an offer for a company, that person (along with any person who may have been acting in concert with them) is prevented from making an offer for the relevant company within six months, unless certain qualified exceptions apply.
This effectively ‘locks out’ the bidder and limits the scope for any subsequent bid within this period – providing the target with a greater level of certainty.
Contrary to some media commentary, a ‘put up or shut up rule’ does exist in Australia, in the form of section 631 of the Corporations Act 2001 (Cwth).
However, the key difference between the UK and the Australian provisions is that, in Australia, this rule does not apply when the target of a potential takeover announces the existence of an offer.
Where a target is listed on the ASX, a bidder typically makes an ‘indicative’, ‘nonbinding’ and, more often than not, highly conditional bid. Where there are no existing confidentiality arrangements, the target is required to disclose the receipt of the bid to the market, so section 631 does not strictly apply in these circumstances.
In recent times, this has often resulted in a standoff between a target’s board and the bidder - with institutional shareholders understanding what ‘Put Up or Shut Up’ means and publicity campaigns being leveraged to support a hostile bidder’s offer (as was the case with Spotless).
The other significant difference in Australia, as compared to the UK, is that where a person has publicly proposed to make a takeover bid, they must proceed to make an offer within two months of the initial proposal.
Given the significant amount of management time and energy that a hostile takeover can consume, and the consequential impact on a company’s business, the implementation of a more robust rule in Australia would, arguably, minimise the occurrence, and consequences of, premature and/or uncommitted suitors unnecessarily distracting target entities from getting on with the operation of their day-to-day business.
While the form of the ASIC proposal is yet to be seen, it is important to note that the current form of the UK provisions is still very new (the most recent incarnation - including the 28 day timeframe – was only introduced in September 2011).
As some others have suggested, it may be prudent to hold off any piece-meal changes to the existing law in Australia, in favour of a more holistic approach, before deciding whether the grass is truly greener on the other side.