1 December 2016
Re-write of GN 12 Frustrating Action
Public Consultation Response Statement
On 14 September 2016, the Takeovers Panel released a Consultation Paper seeking public comments on a re-write of Guidance Note 12 Frustrating action.
Comments on the Consultation Paper were due by 24 October 2016 and the Panel received 6 submissions in response. The Panel thanks the respondents. Attached to this response statement are the submissions (Annexure A).
Consistent with the Panel's published policy on responding to submissions, this statement sets out the Panel's response to the public consultation.
Attached is a copy of the final GN 12, in mark-up to show the changes from the draft circulated with the Consultation Paper (Annexure B).
Material comments received and Panel's conclusions
Paragraph 20(a): Bids which are not genuinely available to shareholders
Most respondents were supportive of paragraph 20(a).
One respondent submitted there is rarely a clear binary distinction between an offer that is genuinely available to shareholders and one that is not. The respondent was concerned that targets may too hastily rely on paragraph 20(a) as a safe harbour.
Following consideration of the submissions, the Panel has made two amendments to clarify the operation of paragraph 20(a):
- Footnote 24 (formerly 23) has been moved and amended to state that the Panel would ordinarily expect a target to provide the bidder with a reasonable opportunity to address the issue affecting the genuine availability of the bid prior to undertaking the frustrating action (previously it applied only to example 2 of paragraph 20(a) and stated that the Panel would ordinarily expect a target to provide the bidder with a reasonable opportunity to waive the condition). Revised paragraph 12(g) (formerly 12(f)), which is cross-referenced, is in similar terms.
- Example 2 in paragraph 20(a), which previously referred to a "due diligence" style condition, now deals with a condition requiring a third party approval or consent where the third party has ruled out providing that approval or consent. The "due diligence condition" example is now included in paragraph 21(e) (see below).
Paragraph 20(c): Bids dependent on the target directors' recommendation
While paragraph 20(c) was supported by most respondents, some respondents suggested amendments to clarify the intent of the paragraph. One respondent submitted it may be difficult in the context of negotiations surrounding a potential bid to form a definitive view that the bid will only proceed if a target board recommendation is obtained.
A footnote has been added to paragraph 20(c) to clarify that the frustrating action policy will still apply if the bidder has expressly reserved the right to bid without a recommendation and has clearly indicated its proposed bid conditions.
Paragraph 21(e): "Open" triggered bid conditions
Most respondents considered that the mere fact that a bidder has varied the terms of its bid after a bid condition has been triggered, even by increasing the price, should not result in the frustrating action policy ceasing to apply. Respondents generally considered that footnote 31 (formerly 29), which includes "variation" as a relevant consideration to the assessment of whether a bidder has disclosed its intentions within a "reasonable time", sufficiently addresses the issue.
The words "or has varied the terms of the bid…" have been deleted from paragraph 21(e).
The Panel has also included additional words in footnote 31 to state that the assessment of what is a "reasonable time" will take account of whether the target has requested the bidder to disclose its position (with a cross reference to paragraph 12(g)).
An example of a due diligence condition is now included in paragraph 21(e), with a footnote stating "In such a case, it may be unacceptable for a target to undertake a frustrating action until a reasonable time after it has sent its target's statement to the bidder", which follows a suggestion made in the Macquarie Capital submission.
Other changes of a drafting or technical nature have also been made in response to the submissions, including those summarised below.
Comment – clarifying considerations when assessing unacceptable circumstances
Two respondents submitted that more could be done to explain the relevance of particular considerations and the weight which would be given to them by the Panel.
Further explanation has been added in footnotes to paragraphs 12(c) (whether there is already a competing proposal) and 12(d) (whether the frustrating action was undertaken by the target in the ordinary course of its business).
Comment – prior notification
ASIC submitted that the two limbs of paragraph 12(f) should be separate considerations, dealing with potential bids and live bids respectively. ASIC also submitted that the focus of paragraph 12(f) should be on the action or inaction on the part of the bidder (following a notification from the target), rather than the notification by the target itself.
ASIC also submitted that paragraph 12(f) should also extend to a bidder's failure to address an "open" triggered condition in terms of paragraph 21(e).
The Panel has adopted the substance of ASIC's suggested amendments to paragraph 12(f).
Comment – seeking alternatives (paragraph 14(b))
Two respondents submitted that the draft revised GN may have created confusion regarding the Panel's approach to targets seeking alternatives. One suggestion was to include the existing language in paragraph 16 of GN 12.
Footnote 18 (formerly 16) has been amended to clarify this.
Comment – application of frustrating action policy to market bids
Most respondents submitted that the GN should clarify that an action which allows a market bid to be withdrawn is a frustrating action, as there may be some uncertainty over this following the Panel's comments in Freshtel Holdings Limited  ATP 15.
This has been clarified in paragraph 10.
Comment – scope of frustrating action policy
Two respondents queried whether the draft revised GN was intended to convey that an action which does not trigger a condition of a bid or potential bid can still be a frustrating action.
An action which does not trigger a condition of a bid or potential bid or allow a bid to be withdrawn is not prima facie a frustrating action. However, in rare circumstances, such an action may still be unacceptable.1 The Panel has included additional language in paragraph 3, including an additional footnote 3, to clarify this.
1 See for example Babcock & Brown Communities Group  ATP 25 and Gondwana Resources Limited  ATP 9
Download the submissions [PDF 593KB]
- Allens Linklaters
- Herbert Smith Freehills
- HopgoodGanim Lawyers
- Law Council of Australia
- Macquarie Capital (Australia) Limited
Mark-up of GN 12 Frustrating action from the draft in the Consultation Paper
Guidance Note 12 – Frustrating action
- This guidance note has been prepared to assist market participants understand the Panel's policy on frustrating action.
- The examples are illustrative only and nothing in the note binds the Panel in a particular case.
- A frustrating action is an action by a target, whether taken or proposed, by reason of which:
Examples of frustrating action: The following actions may be frustrating actions (assuming they breach a bid condition or allow a bid to be withdrawn under s652C3):
2. Acquiring or disposing of a major asset, including making a takeover bid
3. Undertaking significant liabilities or changing the terms of its debt
4. Declaring a special or abnormally large dividend
5. Significant change to company share plans
6. Entering into joint ventures
- The policy basis for this note is that it is shareholders who should decide on actions that may:
- interfere with the reasonable and equal opportunity of the shareholders to participate in a proposal or
- inhibit the acquisition of control over their voting shares taking place in an efficient, competitive and informed market.
- As was said in Bigshop.com.au Limited 01:
"…frustrating action must be defined in terms of action which prevents a transaction which would bring about a change of control of the target company in a manner, and at a time, when a decision about control of the company should properly be taken by shareholders, rather than directors (even though the relevant decision may be fully within the directors' area of responsibility when the target is not subject to a takeover)."45
- Some ASX Listing Rules require shareholder approval for transactions for similar policy reasons.56
Overlap with directors' duties
- The Panel does not enforce directors' duties – that is for a court.
- Undertaking a frustrating action may give rise to unacceptable circumstances regardless of whether it is consistent with, or a breach of, directors' duties and notwithstanding that there is no express requirement in the law for shareholder approval of frustrating actions.
- Section 657A(3) requires the Panel to take into account the actions of directors when considering the purposes in s602(c) in relation to the acquisition or proposed acquisition of a substantial interest. This includes actions that caused or contributed to the acquisition or proposed acquisition not proceeding (that is, frustrating actions). The provision was introduced in 1994 to broaden the test for unacceptable circumstances in s732 (forerunner to s657A):
"The purpose of this provision is to ensure that the scope of unacceptable circumstances includes cases where the directors of a target company by their action, including such action which caused or contributed to the acquisition not proceeding, did not give shareholders of the company all reasonable and equal opportunities to participate in any benefits accruing to the company.
Existing paragraph 732(d) appears, at present, to only cover actions by the offeror, and it is desired that this should be widened to include, amongst other things, illegitimate spoiling action by the Board of directors of the target company..."67
- Accordingly, the Panel may declare circumstances to be unacceptable if the actions of the target directors cause an acquisition or proposed acquisition not to proceed or contribute to it not proceeding. Typically, this policy applies to an action that triggers a condition of a bid or a potential bid.78 or would allow a market bid to be withdrawn.9
- Whether a frustrating action gives rise to unacceptable circumstances will depend on its effect on shareholders and the market in light of ss602(a)810 and (c)911 and s657A.1012
Considerations when assessing unacceptable circumstances
- Factors the Panel will have regard to in considering whether a frustrating action gives rise to unacceptable circumstances include:
- how long the bid has been open and its likelihood of success (if a potential bid, of proceeding)1113
- any clearly stated objectives of the bidder and whether the triggered condition is commercially critical to the bid
- whether there is already a competing proposal14
- whether the frustrating action was undertaken by the target in the ordinary course of its business1215
- how advanced the frustrating action was when the bid was made or communicated and
- • in the case of a bid, whether before undertaking an action the target notified the bidder that it intends to undertake the action, or that it considers it will not be bound by the frustrating action policy, if the bidder does not remedy,in the case of a bid - whether paragraph 20(a) (bids not genuinely available) or paragraph 21(e) (triggered conditions) applies and is not remedied within a reasonable time, a feature of its bid which makes the bid not genuinely available to shareholders.15 upon request of the target.
f. whether there has been prior notification, namely:
f. • in the case of a potential bid,- whether before undertaking an action the target notified the potential bidder13 that it intends to undertake the action, or that it considers it will not be bound by the frustrating action policy, if the potential bidder does not has failed to make its bid or formally announce16 its proposed bid 14 within a reasonable time orafter becoming aware of the target's intention to undertake the action or type of action17 and
Considerations tending against unacceptable circumstances
- The frustrating action policy is not intended to unduly inhibit target companies from carrying on business during a bid period.
- In general, it will not give rise to unacceptable circumstances under the frustrating action policy if a target:
- does not facilitate a bid
- seeks alternatives1618
- recommends rejection of a bid or
- offers shareholders a choice.
- Shareholders may be given a choice in different ways, as suits the particular transaction dynamics.
3. Entering an agreement conditional on the bid failing or which contains a cooling-off clause which a new management might exercise
- If a target wishes to seek shareholder approval, time is needed to prepare adequate information for shareholders to decide between the competing proposals and to hold the meeting. The Panel will consider issues such as:
- what is a reasonable time to prepare the notice of meeting
- whether the bidder is willing to extend its bid to allow the holding of the meeting2022
- how long the target has been considering the proposed action and
- the benefits to target shareholders of the proposed action.
- If a bidder wishes to require a target to seek shareholder approval, an additional issue the Panel will consider is whether the bidder agrees not to rely on the triggered condition (and perhaps other conditions2123) should the resolution fail. This may require the bidder to vary or waive the condition(s) so the bid remains a viable option for shareholders.
- The Panel generally does not consider it an answer to unacceptable circumstances that, for example, a transaction may be lost because of the time involved in calling a general meeting. Relevant factors include the value of the transaction to the target and why it could not be conditional on shareholder approval.
- In general, a frustrating action is also unlikely to give rise to unacceptable circumstances if:
- the bid proposalor potential bid does not give shareholders a genuine opportunity to dispose of their shares or
- it is otherwise unreasonable to consider the frustrating action as giving rise to unacceptable circumstances.one of sub-paragraphs 21(a) to 21(e) applies.
These are discussed below.
- In considering frustrating action, the Panel considers that a bid proposalor potential bid will not give shareholders a genuine opportunity to dispose of their shares if:
- it is not genuinely available to them because, due to a condition or structural or other feature, it cannot be implemented or completed24
2. A bid which has a condition incapable of satisfaction.23 For example, a condition which requires the target to give the bidder confidential information so it can conduct due diligence or that requires the target's directors to confirm confidential information and the target has declined to do so24 a third party to give an approval or consent and the third party has ruled out giving its approval or consent
- there are reasonable grounds to expectconclude that it will not be successful. The Panel will require very strong evidenceprobative material to reach this conclusion. Factors that may be relevant include:
- where the bid has been open for a long time and has had few acceptances (recognising that a bid may be open because of the need to meet a regulatory condition, and that shareholders may hold off accepting a bid if it is conditional and the final close date is not known)
- where the bid is opposed by key shareholders2526 and
- where there is a superior competing bid
- it is dependent on target directors recommending it.
1. The bidder has indicated that it would only proceed if the bid is recommended by the target directors27
Otherwise unreasonable unlikely to be unacceptable
- Notwithstanding that a bid proposalor potential bid provides a genuine opportunity for shareholders to dispose of their shares, a frustrating action is unlikely to give rise to unacceptable circumstances where:
- the frustrating action is announced before the bid or potential bid
- there is a legal imperative for the frustrating action
Example: Action to comply with a court order, legislative requirement or government directive regarding a licence
- the frustrating action is required to avoid a materially adverse financial consequence, such as insolvency2729
- it is unreasonable for the bidder to rely on the triggered condition before the Panel to claim unacceptable frustrating action2830
- a bid condition has been triggered and the bidder has not within a reasonable time2931 disclosed whether it will rely on or waive the breach or has varied the terms of the bid, such as increasing the bid price, but has not waived the condition or the breach.
Example: A condition which requires the target to confirm or give the bidder information and the target has reasonably refused to do so32
1. A condition that is overly restrictive or invoked unreasonably
2. A condition restricting the target from seeking competing proposals where the target has not agreed to any such restriction
3. A condition that requires the target to enter into material transactions outside its business plan
- The Panel has wide powers to make orders,3033 including to:
- prevent an action or transaction from proceeding
- require the target to seek shareholder approval of the action or transaction and
- unwind an action or transaction.
- The Panel may override directors' decisions even if they were made consistently with directors' duties.
First Issue - 16 June 2003
Reformatted - 16 September 2003
Second issue - 11 February 2010
Third issue - 6 May 2011
Fourth issue - 18 July 2014
Fifth issue - 1 December 2016
GN 7 Lock-up device
1 Section 652B (with ASIC approval; see RG 59ASIC RG 59 Announcing and withdrawing takeover bids (s653 and s746)) or s652C. References are to the Corporations Act 2001 (Cth) unless otherwise indicated
2 In this note, a 'potential bid' means a genuine potential bid communicated to target directors publicly or privately which is not yet a formal bid under Chapter 6. It includes announcements to which s631 applies but is not limited to these: MacarthurCook Limited  ATP 20
3 In rare circumstances, an action that does not breach a bid condition or allow a bid to be withdrawn under s652C may still be unacceptable: see for example Babcock & Brown Communities Group  ATP 25 and Gondwana Resources Limited  ATP 9
34 A small number of convertible securities may be significant if this could, for example, prevent the tax benefits of 100% ownership. In Bigshop.com.au Limited 02  ATP 24 at  the Panel said that a small issue of shares under an employee option plan might trigger a defeating condition but not be such a threat to the bid as to be a frustrating action
78 A bidder may make its bid (or potential bid) subject to any conditions it chooses, with exceptions (see Division 4 of Part 6.4). It must set out the conditions clearly. As this note extends to potential bids, it is incumbent on a potential bidder to make it clear to the target what conditions would apply if a bid were made. This will help establish that it was a genuine potential bid and that the target was aware of the condition in issue
9 Freshtel Holdings Limited  ATP 15should not be taken to suggest otherwise
1113 That is, for a bid whether, having regard to the level and rate of acceptances, it is reasonable to conclude that target shareholders have rejected the bid. It may not be reasonable to conclude this if the bid is still conditional and the final bid close date is not known. See also paragraph 20(b)
14 This may indicate that the bid is unlikely to be successful. See also paragraph 20(b)
13 The parties should also consider disclosure issues
16 Section 631
14 Section 631. This is not a safe harbour and there may be other factors that mean a declaration of unacceptable circumstances is made notwithstanding. MacarthurCook Limited  ATP 20 may be an example of circumstances in which such a notification may have assisted
17 MacarthurCook Limited  ATP 20 may be an example of circumstances in which advance notification of the target's intention to undertake an action may have assisted. However, advance notification is not a safe harbour and there may be other factors that mean a declaration of unacceptable circumstances is made notwithstanding
15 See paragraph 20(a)
1618 This might even involve, for example, breaching a 'no talk' condition if the directors did not agree to that condition. Unacceptable circumstances may still arise if the target's actionalternative transaction pursued breaches a bid condition, for example, if the condition is commercially critical to the bid. See also paragraph 21(d)
24 The Panel would ordinarily expect a target to provide the bidder with a reasonable opportunity to address the issue prior to undertaking the frustrating action. See also paragraph 12(g)
2225 See Austock Group Limited  ATP 12 at  where the Panel considered that Mariner's bid for Austock was not frustrated "because Mariner's proposed bid was not capable of being implemented, because it had not been properly funded"
23 The Panel would ordinarily expect a target to provide the bidder with a reasonable opportunity to waive the condition. See also paragraph 12(f)
24 The example given would not extend to a situation where it is not onerous or harmful for the target to give the information or confirmation requested, for example, if disclosure of the information would be required under section 638: Skywest Limited 03  ATP 17 at 
2526 The Panel will consider whether a shareholder intention statement is made: see Guidance Note 23 Shareholder intention statements and ASIC RG 25 Takeovers: False and Misleading Statements at [RG25.29]-[RG25.34]
27 This example would not extend to the situation where the bidder has expressly reserved the right to bid without a recommendation and has clearly indicated its proposed bid conditions (see paragraph 12(b) and footnote 8)
2628 Transurban Group  ATP 5. However, if the potential bidder included an alternative that was a genuine potential bid, which did not require board support, actions by the target may still give rise to unacceptable circumstances
2830 The bidder is free to choose the bid conditions but an action breaching a bid condition may not give rise to unacceptable circumstances. The Panel will place weight on whether the bidder has clearly stated its objectives and the relevant condition is therefore critical to the bid
2931 What is a reasonable time will depend on the prevailing circumstances, including which condition has been triggered, whether the bidder has varied the terms of its bid since the triggering of the condition, and whether it is still acceptable to wait until the time for giving notice of the status of conditions (see Novus Petroleum Limited 01  ATP 2) and whether the target has requested the bidder to disclose its position (see paragraph 12(g))
32 In such a case, it may be unacceptable for a target to undertake a frustrating action until a reasonable time after it has sent its target's statement to the bidder