The Panel advises that it has today released for public comment a draft Guidance Note on Frustrating Action.
The Guidance Note follows from decisions by the Panel in the Pinnacle 5 and Pinnacle 8 matters (the decisions are published on the Panel's website). In both those matters the Panel advised that it would publish guidance as to what actions that directors of a target company might take during a bid may be unacceptable.
Frustrating action is generally described as corporate action that could effectively prevent a proposal concerning control or ownership of a company. For example, a target company might initiate the sale or acquisition of major assets after the announcement of a takeover where the bid is subject to a defeating condition triggered by such a sale or acquisition.
In such cases, the decision on the success or failure of the takeover bid is taken by the board of the target company, rather than the shareholders. The Panel's primary concern is to ensure that it is shareholders who make decisions concerning the ownership and major direction of their companies.
The Panel's President, Mr Simon McKeon, said that the Panel had worked very hard on the Frustrating Action Guidance Note. He said that the Panel's intention is to create a sensible and workable balance between shareholders' rights to determine the future and ownership of their company, and directors' and management's rights to run the company under their mandate from shareholders.
Mr McKeon said that the Panel assumes that most directors are already sensitive to the potential for conflicts where actions proposed by the directors might affect the viability of an external proposal. On that basis, the Panel expects that it will not see many of these matters.
The principles of the Panel's frustrating action Guidance Note mean that where a proposed action by directors would conflict with an external proposal which relates to the control or ownership of a company, directors' freedom of choice becomes restricted. Therefore, there will be things which a board may properly decide and do in the absence of an external control proposal (indeed may even be required by their directors' duties to do) which those directors will need to seek shareholder approval for when directors are aware of an external control proposal.
The Guidance Note relates to control proposals, not the everyday run of company business. Therefore, the Panel does not consider that its Guidance Note will impose any material chilling effect on the abilities of directors and management to run companies. The Panel's guidance emphasises that not every frustrating action will constitute unacceptable circumstances. Unacceptable circumstances relate to material changes that adversely affect the objectives of a bid, after the bid is announced.
The Panel noted that there may be some very few occasions where the cost to the target company of foregoing a corporate opportunity is so great that target directors consider that undertaking the frustrating action, without shareholder approval, is in the best interests of their shareholders. Where they are faced with such a decision the Panel advises that directors should first look to whatever alternatives are available to put the decision into shareholders' hands before choosing any action which would deny shareholder choice. The Panel noted that there are different ways of achieving shareholder choice, shareholder meetings are but one way. The Panel noted that its Guidance Note provides no safe harbour for directors who choose such a route.
The Panel noted that it does not intend to facilitate bidders abusing the Panel's Guidance Note by making bids subject to laundry lists of conditions that are intended to force target companies into submission.
The draft Guidance Note is available on the Panel's website.
Comments on the draft Guidance Note are invited by Friday 12 July 2002. Comments may be sent by post, fax or email to:
Director, Takeovers Panel
Level 47 Nauru House, 80 Collins Street, Melbourne VIC 3000
Ph: +61 3 9655 3501 Fax: +61 3 9655 3511