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LECTURE 9 TAKEOVERS, FINANCIAL SERVICES AND MARKETS

Takeovers
A takeover happens when a BIDDER seeks to gain control over a TARGET COMPANY by acquiring its shares. The Corporation Act regulates takeovers as to protect the interests of shareholders of the target company. ASIC plays a big role in takeovers (to monitor) Section 206: Is to ensure that takeovers of LISTED COMPANIES and UNLISTED COMPANIES WITH MORE THAN 50 MEMBERS, take place in an efficient, competitive and informed market. Shareholders are normally offered a premium for their shares which they can either choose to accept or reject.

Reason for takeovers


Why do companies wish to take over other company? In order to expand In order to diversify In order to ensure constant/adequate supplies To achieve economic scale To add links in the chain of distribution To acquire assets cheaply To utilise tax losses

Why are takeovers regulated? To ensure , as far as possible , that all participants are treated equally and fully informed SECTION 606 (20% threshold for control) S606 outline prohibited acquisitions The point where control comes into play is at 20% A person is not to acquire a relevant interest in the issued voting shares of a company (both listed and unlisted) if to do so would increase his/her voting

power from 20% to more than 20% OR from any amount above 20% to below 90%. What is a relevant interest? Not ownership Control of shares ( associates and downstream companies)

E.g. if the original property is 5%, then shareholder cannot exceed 20% If the original property is30%, then shareholder cannot move except move back to 20% Is such shares are acquired, S 606 has been breached and the person may be fined by ASIC.

Compulsory acquisitions
During a takeover, a shareholder has the choice to either hold on to their shares or accepts the bidders offer and sells them. If they decide to keep their shares, they may find that they are the minority interest (and may experience a fall in their investment) once the takeover has taken place. To avoid this, Section 661A allows the bidder to do a compulsory buy out if the bidder has relevant interest in 90% of voting shares and 75% of the bid is accepted. Section 662A states that shareholders can force the bidder to buy them out once the takeover has taken place. SECTION 661A (Compulsory acquisitions) This sections states that a BIDDER may do a compulsory takeover is it has acquired 90% of company voting shares (i.e. has relevant interest in 90% of voting shares) OR 75% of the shares that the bidder offered to buy under the bid. Once a 5% holding in a listed company is attained, ASIC must be notified and thereafter notified as to each 1% increase.

Acquisitions that do not breach prohibitions


Show the requirement or action that bid company to takeover target company SECTION 611 (what kind of acquisitions are allowed) Acquisitions that are permitted include:permitted means of acquisition (takeover bids) a creeping takeover (if a person holds 19% of a companys shares for a continuous period of 6 months or more may acquire 3% each 6 months thereafter) an acquisition under a will or by operation of law an acquisition that results from an issue under a disclosure document in relation to an initial public offering (a company is floated onto the stock exchange and offers its shares to the public for the first time) Note: acquisitions exempt if takeover bid breach above requirements The permitted means are: Off-Market Bid (S632-633): The bidder prepares the bidders statement and lodges it with ASIC before forwarding it to the target shareholders. The bidder also has the responsibility of providing a target statement. Consideration can be in cash and shares (i.e. target shareholder will get a payment amount in cash as well as shares in the bidders company) target may be list or unlisted Market Bid (S634-635): this happens on the Stock exchange. It involves the SAME STEPS AS THE OFF-MARKET bids except that it only applies for target companies that are listed. Consideration can only be in cash. Takeover procedure (the formal stuff that needs to be done) The Corporations Act requires the preparation of documentation aimed at providing sufficient information for the target company.

SECTION 636 (what a bidder statement needs to have) S636 (2): Bidders statement like an experts report on non-cash consideration Preparation of documentation aimed at providing sufficient information for target company and it shareholder The bidder must prepare a bidders statement which sets out its identify (who it is), intentions (what it wants/plans to do), and means of payment The directors of the target company will then prepare a targets statement for its shareholders which will give the shareholders the benefit of the directors recommendations regarding the bid. The bidder must set out details of its intentions in relation to the continuation of the business of the target and any major changes to be made The bidder must also disclose its plans for future employment of the present employees of the target. Most takeover bids are off-market and involve consideration by cash and shares

Conduct and legal obligation during takeover


SS 181-183: Directors have both statutory and fiduciary duties. S670A: prohibits misleading and deceptive statements in takeover documentation Defence strategies: Recommendation by the targets directors that the bid is inadequate Directors can release favourable information to targets shareholders encouraging them to hold on their shares Payment of higher dividends or the issue of bonus shares

The takeovers panel

It is set up under ASIC and it deals specifically with takeover disputes. Although takeover companies which oppose the takeover may seek to disrupt the bid by appealing to the takeover panel The panels main aim is to deal with issues to allow transparency and genuine market force to operation. (For example if a bidder has failed to provide financial information, the takeover panel has the power to make an order (take action) to protect the rights and interests of the target shareholders. S657A to make a declaration of unacceptable circumstances S671B: a relevant interest in 5% or more of a listed companys shares must be disclosed FINANCIAL SERVICES AND MARKET Chapter 7 of the Corporations Act deals with the regulation of securities and other financial services on the market. It involves:(a) the conduct of the stock exchange (b) the relationship between the participants in the market and the stock exchange (c) the licensing of dealers and advisors (d) improper market practises The regulation of the financial markets is achieved by :(a) promoting the supply of accurate and timely information (b) policing instances of market manipulation (c) maintaining dealer standards (d) promoting an unfettered secondary market wand investment efficiency ASIC plays a role in this by investigating the practices and misconduct of listed companies as well as brokers and traders. It monitors the ASX and provides standards for the education and training of financial service providers. The ASX is actually a public company limited by shares. Its primary responsibilities are to monitor its markets, and to oversee and supervise

market participants. Its objectives are to provide fair and well-informed market for financial securities together with an internationally competitive market. Persons involved in the securities market have to be LICENSED.

S941A: Holders of licence need disclosure requirements (commission) Certain types of behaviour are prohibited by the Corporations act . price

S1020B: prohibits short selling S1041A: prohibits transactions which have effect of creating artificial S1041B: prohibits misleading of acting trading S1041C: prohibits fictitious or artificial transactions S1041D: prohibits dissemination of information S1041E: prohibits false or misleading statement S1041F: prohibits deceptive forecasts or dishonest concealment S1041G: prohibits targets dishonest conduct S1041H: prohibits engage in conduct that is misleading or deceptive

Insider trading
SECTION 1042A (Defines insider trading) It is defined to include any information that is not generally available, and IF it WERE GENERALLY AVAILABLE it would have an effect on the price/value of financial products. SECTION 1043 (prohibits insider trading) If a person posses insider information and uses this information to acquire financial products (or even passes this information on so that other persons can acquire financial products), he/she has breached section 1043. Conduct with the possession of insider information is PROHIBITED.

Defence to insider trading


SECTION 1043H

Just because a person has entered into a transaction (ie is aware that he is entering into a transaction) does not mean he has breached section 1042A. In other words, the act of entering into a transaction cannot prove that the person has got insider information.

SECTION 1042C A person does not contravene section 1042A if the information has been around for a period of time and that this person acquired it by means that are available to anyone who normally invests. ** Important Case!

R v Rivkin [2003] NSW 447 Qantas was about to takeover Impulse Airlines and
the CEO of Impulse Airlines passes this information on to Rivkin. Rivkin buys shares in Qantas (expecting an increase in value) and sells promptly after the takeover is successful. RIVKIN WAS CONVICTED OF INSIDER TRADING AND SENTENCED TO 9 MONTHS DETENTION AND A FINE OF $30 000.