TP03/106
The Panel announces that on 24 October it made a declaration of unacceptable circumstances in the BreakFree 04 proceedings in relation to the announcement by S8 Limited (S8) on 8 October 2003 that it would not proceed to make offers under its announced scrip takeover bid (the Scrip Proposal) for BreakFree Limited (BreakFree). However, on the basis of the information currently before the Panel, it does not propose to make any orders.
Background
The Scrip Proposal was announced by S8 on 11 July 2003.
The bidders' statement for the Scrip Proposal was, and is, the subject of the BreakFree 03 proceedings before the Panel. Resolution of the issues in those proceedings had been postponed pending the resolution of the BreakFree 04 proceedings.
On 12 September 2003, BreakFree sent a letter to its shareholders, which was also made available through the ASX Company Announcements Platform, in which, among other things, it stated that:
Survey on Shareholder's Intentions
BreakFree's adviser in these matters [concerning the Scrip Proposal], ABN AMRO Morgans, has undertaken a telephone survey of some of the major individual shareholders [in BreakFree] to ascertain their likely acceptance of the current scrip offer.
Based on the survey responses, ABN AMRO Morgans has advised the Board that shareholders holding a majority of shares indicated that they would not accept the current all scrip offer from S8.
These statements are referred to as the `BreakFree Statements'.
26 days later (on 8 October 2003), S8 announced that it would not be proceeding to make offers under the Scrip Proposal.
Section 631 of the Corporations Act 2001 (Cth) (the Act) would normally require S8 to proceed to make offers the same as, or not substantially less favourable to shareholders than, offers under the Scrip Proposal within 2 months after announcing it (this period had been extended by ASIC first to 2 October 2003, and subsequently to 23 October 2003). However, S8 submitted that it would not contravene section 631 because, if and when the time arose to assess whether it had complied with section 631, it would be entitled to rely on the defence in section 670F of the Act (that is, that S8 could not reasonably have been expected to comply with that section in light of the BreakFree Statements).
In essence, S8 submitted that it was not reasonable to expect it to proceed with the Scrip Proposal because:
(a) the BreakFree Statements indicated that one of the defeating conditions in the Scrip Proposal (that is, the condition requiring acceptance of the Scrip Proposal for a minimum of 50.1% of the BreakFree shares) would not be fulfilled; and
(b) the truth in takeovers policy set out in ASIC Policy Statement 25 `Takeovers: false and misleading statements' would require the surveyed shareholders to act in accordance with the BreakFree Statements.
At the same time as announcing that it would not proceed to make offers under the Scrip Proposal, S8 announced that it would be proceeding with an off-market takeover bid (the Cash Proposal) for BreakFree in which it would offer BreakFree shareholders cash for their shares.
The truth in takeovers policy
The Panel considers that ASIC's truth in takeovers policy is an appropriate policy to apply in relation to statements made by persons about their own circumstances, views and intentions. In general, if weight is to be accorded to statements made about a person's views or intentions, it is preferable if the statements are made by that person.
Repetition of statements of third parties
However, the application of this policy is more complicated when public statements (a Third Party Statement) are made by a person (the Declarant, here BreakFree) about the views and intentions of a third party or third parties (the Third Party, here the shareholders surveyed).
Although the Declarant will place itself at jeopardy of enforcement action if it makes a Third Party Statement that is not accurate, unless certain criteria are met it will not be reasonable for market participants to expect that the Third Party will comply with such a statement. In order for it to be reasonable for market participants to place reliance on a Third Party Statement, the Panel considers that the statement must be made with express authority from, or be publicly supported by, the Third Party in circumstances where it is expressly recognised that the Third Party knows that it will not be able to depart from the statement.
Authority to make a statement in relation to the views or intentions of a Third Party
Market participants will reasonably be entitled to expect a Third Party to comply with a Third Party Statement if the Third Party publicly endorses the statement or the Declarant states that the Third Party has consented to its comments being used in the manner proposed by the Declarant after being:
(a) informed of the manner in which the Declarant proposes to use the Third Party's comments; and
(b) made aware of the consequences under the truth in takeovers policy of authorising the use of its comments in the manner proposed by the Declarant.
It may also be reasonable to expect a Third Party to comply with a Third Party Statement if there is such a relationship between the Third Party and the Declarant that it is reasonable to expect that the Declarant was making the statement on behalf of the Third Party and its relationship with the Third Party is clear from the statement (for example, a statement by a holding company about the views and intentions of a subsidiary).
In general, it is only in the circumstances described in the two preceding paragraphs that it is reasonable for the market to rely on a Third Party Statement.
Unsupported, and insufficiently supported, statements
However, where the Declarant does not advise the market that it has authority (on the bases referred to above) to make a Third Party Statement, the market can reasonably accord the statement less weight than a statement made about the Declarant itself, or one made with apparent authority from the relevant Third Party. For this reason the Panel considers that the making of such statements by Declarants to be undesirable. In such circumstances, while the Declarant has an obligation not to mislead or deceive the market (and may be subject to the actions described below if it does not meet the relevant standards), the Third Party will not usually be taken to be bound by the Third Party Statement.
A Third Party Statement will be particularly unconvincing where:
(a) the statement attempts to encapsulate the views of a disparate group of many people; or
(b) the views of the individuals within that disparate group might reasonably be expected to change in the course of the development of the takeover bid.
Both factors apply in the common case where a statement is made based on a survey of a broad body of shareholders as to their views and intentions. In light of the market's knowledge of the manner in which such surveys are conducted, in general a Third Party Statement based on responses to such a survey should be accorded little weight, especially in forming any expectations about the future actions of the surveyed shareholders.
If there is a reason why a Third Party Statement based on such a survey should be accorded more weight in particular circumstances, then it is the Declarant's responsibility to ensure that the market is aware of the pertinent facts.
Responsibility of the Declarant
If a Declarant wishes to include commercially significant information in a Third Party Statement, it should be careful to ensure that the statement is firmly based on, and is an accurate and complete reflection of, the position of the Third Party. In all cases the Declarant should clearly indicate the basis on which it is making the Third Party Statement on behalf of the relevant Third Party, and have information available to support this.
If a Declarant does not state the basis of its authority to make the Third Party statement, or cannot support its claim to that authority, the statement may be misleading and expose the Declarant itself to a declaration of unacceptable circumstances or other criminal or civil action in the courts.
In essence, the liability for an inaccurate Third Party Statement lies with the Declarant, not the relevant Third Party, unless the Third Party has endorsed the statement.
The BreakFree Statements
Analysis of the information which was the basis for the BreakFree Statements
In the course of these proceedings, the Panel was provided with information concerning the ABN AMRO Morgans shareholder survey, and its results. This information was provided in support of the making of the BreakFree Statements and a further statement (the Further Statement) by BreakFree that a majority of the surveyed shareholders would not accept an offer by S8 of $1.50 cash per share.
That information revealed that:
(a) surveyed shareholders were told that their responses to the survey were not binding on them in any way and were not told of the use to which BreakFree proposed to put their responses;
(b) the responses from the shareholders were quite diverse, and a number of shareholders attached their own qualifications to them;
(c) the survey results did not appear to support the BreakFree Statements. Certain shareholders, whilst expressing concern about receiving S8 shares, indicated that they would speak to BreakFree before selling their shares; and
(d) shareholders were not asked for their views concerning a possible cash offer by S8 and, although some shareholders did comment on that issue, the Further Statement was not borne out by the survey results.
BreakFree submitted that information such as shareholders intentions which is provided in a telephone survey is not binding on the respondent shareholders and can change with the ordinary passage of time and in the ordinary course. However, the BreakFree Statements were not qualified to that effect nor did they refer to any qualifications made by the shareholders themselves.
In light of the above, the Panel is concerned that the BreakFree Statements were misleading. S8 submitted that the Panel should make a declaration of unacceptable circumstances in relation to the making of the BreakFree Statements. The BreakFree Statements formed part of the same matrix of unacceptable circumstances as S8's announcement, to which the Application related. However, the unacceptability or otherwise of those statements was not within the scope of the Application that was before the Panel in these proceedings.
The Panel has no reason to believe that S8 was aware, at the critical times leading up to its announcement on 8 October, of the evidence relating to these deficiencies set out in paragraphs (a) to (d) in this section. Consequently, the Panel did not rely on that evidence when deciding to make its declaration of unacceptable circumstances in these proceedings.
The Panel's decision
Reliance on the BreakFree Statements by S8 was unreasonable
It was unreasonable for S8 to rely on the BreakFree Statements as a basis for not proceeding to make offers under the Scrip Proposal after a delay of 26 days between the BreakFree Statements and S8's announcement during which the market in both S8 and BreakFree shares traded on the basis that S8 would make offers in accordance with its July announcement. The Panel's reasons for this view are set out below in the sections headed `The impact of the delay' and `Terms not substantially less favourable'.
Each of the general problems referred to above under the heading `Unsupported, and insufficiently supported, statements' also existed in relation to the BreakFree Statements. There was no reason why S8 and the market generally would not have been aware of those problems at all relevant times. In such circumstances S8's purported reliance on those statements was not reasonable.
In particular, it was not reasonable for S8, or anyone else, to rely on the BreakFree Statements as a basis to assert that the minimum acceptance condition in the Scrip Proposal could never be fulfilled in these circumstances because:
(a) of the limits (as discussed above) on a person's ability reasonably to rely on the truth in takeovers policy in relation to a Third Party Statement. The BreakFree Statements did not indicate that BreakFree had any authority to make public statements on the basis of the responses from the surveyed shareholders;
(b) at the time that the survey was conducted and the BreakFree Statements were made, the bidder's statement for the Scrip Proposal had not been finalised, and neither that document nor the offers under the proposal had actually been sent to shareholders for their consideration (although the original bidder's statement for the Scrip Proposal was made available for download from the ASX website on 19 August, and a revised bidder's statement was made available on 2 September, those documents were, and are, the subject of the BreakFree 03 proceedings). It was possible that the surveyed shareholders may have changed their views in relation to the Scrip Proposal once they received and considered the final documentation for the Scrip Proposal;
(c) the surveyed shareholders may have changed their views as the Scrip Proposal proceeded, and levels of acceptances of the proposal were advised to the market; and
(d) there was no basis for any expectation that the shareholders who were surveyed by ABN AMRO Morgans would not subsequently sell some or all of their shares for cash on market to purchasers who might accept the Scrip Proposal.
For the same reasons, it is the Panel's view that the existence of the BreakFree Statements did not excuse S8 from complying with section 631 in these circumstances.
S8's statements to the Panel
S8 indicated to the Panel that it was aware of the BreakFree Statements from the time they were made on 12 September.
In one of its submissions to the Panel, S8 indicated that it:
was hopeful that the BreakFree Statements would be amended and that its Scrip Bid would proceed and has dedicated time and resources to seeking to have its Scrip Bid in a form where it could be dispatched.
Although not central to the Panel's decision, it is noteworthy that this statement contradicts S8's submissions to the Panel that it elected not to proceed with the Scrip Proposal because it believed that ASIC would treat the BreakFree Statements as binding on the surveyed shareholders. It shows that S8 at least contemplated that those statements might not be correct, or that the position the statements reflected might change.
The impact of the delay
By making no reference to the BreakFree Statements between 12 September and 8 October, S8 also allowed the market to adopt the impression that it would proceed with the Scrip Proposal.
S8's submissions made it clear to the Panel that:
(a) it did not seek legal advice in relation to the impact of the BreakFree Statement until 29 September (17 days after the BreakFree Statements were made) and did not, in fact, receive the consequent advice until 8 October (a further 9 days later);
(b) the advice received was based on S8 having itself had in principle discussions with ASIC in relation to the BreakFree Statements. S8 did not have its discussions with ASIC until 2 October 2003 (20 days after the BreakFree Statements were made); and
(c) S8 entered into the underwriting agreement for a $35 million preference share issue and received confirmation from the National Australia Bank that funding for the balance of the consideration for the Cash Bid would be available on 8 October (26 days after the BreakFree Statements were made).
The Panel formed the view that S8 refrained from advising the market that it did not propose to proceed to make offers under the Scrip Proposal until such a time as it was able also to announce the CashProposal.
The Panel considered that, based on these facts and the Panel's conclusions from them, it was open to the Panel to infer that S8 was not, in fact, concerned about the impact that the BreakFree Statements had on the potential for the Scrip Proposal to be successful. If it had been so concerned, it was reasonable to expect that S8 would have sought advice from its lawyers and from ASIC on an expedited timetable, which it did not do.
Rather, it waited until it was in a position to announce the Cash Proposal before announcing that it would not proceed with the Scrip Proposal. On the basis of the material before the Panel, there was no apparent reason for it to do so
In light of this, the Panel inferred that S8 did not act the way it did because of the impact of the BreakFree Statements on the prospects for the Scrip Proposal, but because it wanted to proceed with the Cash Proposal rather than the Scrip Proposal.
Even if S8 had formed the view that proceeding with the Scrip Proposal was hopeless, there was no reason for it to wait until it could announce the Cash Proposal before informing the market that the Scrip Proposal would not proceed. There was also no need for S8 to obtain further relief from ASIC in the evening of 2 October (the relief was granted on this day (being the same day as S8 had its discussions with ASIC concerning the impact of the BreakFree Statements) although the Panel was advised that S8's application for relief was made on 30 September) to extend the time for it to comply with section 631 in relation to the Scrip Proposal.
Terms not substantially less favourable
In response to a question asked by the Panel in its brief, S8 submitted that the terms and conditions of the Cash Proposal were not substantially less favourable, when considered as a whole, than those of the Scrip Proposal. On that basis, it submitted, making offers under the Cash Proposal could result in S8 actually complying with its obligations under section 631. However, that was not the basis on which S8 announced to the market that it would not be proceeding with the Scrip Proposal. Rather, S8 indicated that it:
was entitled to withdraw its scrip bid as a consequence of BreakFree's statement on 12 September 2003 that shareholders holding a majority of shares would not accept the scrip bid.
All of S8's public statements prior to 12 September (when the BreakFree Statements were made) tended to induce the market to believe that S8 would proceed with its Scrip Proposal. The fact that a bidder's statement for the Scrip Proposal was available on the ASX website (although it had not been sent to shareholders and was the subject of the BreakFree 03 proceedings) contributed to the impression that that proposal would proceed.
Between 12 September and 8 October S8 did nothing to correct this impression despite the BreakFree Statements having been made, even though it was, for at least some of this time, actually preparing the Cash Proposal in the background. The delay in announcing that offers would not be made under the Scrip Proposal gave market participants a long time to adopt trading and investment positions in S8 and BreakFree based on the assumption that offers under the Scrip Proposal would be made - many of those positions would be less suitable in the context of the Cash Proposal. Although any bid made on the basis of the Scrip Proposal would have been subject to a 50.1% minimum acceptance condition, for the reasons referred to above it would not have been reasonable for market participants to assume that that condition would not be satisfied on the basis of the BreakFree Statements.
The announcement of the Cash Bid in these circumstances does not affect the Panel's concerns regarding the quality of the information in the market concerning the Scrip Proposal in the period between 12 September and 8 October. It is unnecessary in this decision to make a finding on the submissions from S8 concerning the Cash Proposal. The critical factor was S8 allowing the market for S8 and BreakFree shares to continue to trade for a substantial period in reliance on the impression generated by S8 that it would make offers under the Scrip Proposal, when for at least part of that period S8 was formulating an alternative proposal.
That conduct had the potential to mislead the market for S8 and BreakFree shares and the concomitant potential for resultant loss or damage which caused the Panel to consider that the resultant circumstances were unacceptable, whether or not the Cash Proposal would comply with section 631 in relation to the 11 July announcement.
Different from triggered condition situation
S8's actions facilitated the coming into existence, and continuation, of circumstances in which the market for S8 and BreakFree shares traded on an uninformed basis for a significant period on the assumption that offers would be made under the Scrip Proposal. That situation is quite different from one in which:
(a) offers under a takeover bid have been made;
(b) it has subsequently become clear to the bidder and the market that a defeating condition in the bid has been triggered; and
(c) the bidder has not announced whether it will rely on the relevant defeating condition.
In such circumstances, the market can take into account the uncertainty surrounding whether the defeating condition will be relied upon.
However, as discussed above, in these circumstances there was no reason for the market to reasonably expect that the 50.1% acceptance defeating condition would be triggered when offers under the Scrip Proposal were made. The BreakFree Statements simply did not justify such an expectation.
Potential for actions to mislead
The Panel considered that the combination of:
(a) S8's unreasonable reliance on the BreakFree Statements;
(b) the long delay between the making of the BreakFree Statements and S8's announcement that it would not proceed with the Scrip Proposal, in light of:
(i) the reasons for that delay (as described above);
(ii) the uninformed state of the market for S8 and BreakFree shares in that extended period; and
(iii) the significant time that had elapsed since the Scrip Proposal was first announced on 11 July, and the fact that S8 had sought (and obtained) extensions from ASIC on two separate occasions of the time for it to comply with its obligations under section 631 in relation to the Scrip Proposal,
had the potential to mislead market participants and were inimical to an efficient, competitive and informed market in shares in BreakFree, in S8 and generally.
This was the case regardless of whether section 631 would be contravened if S8 proceeded in accordance with its announcement of 8 October.
Declaration by the Panel
Consequently the Panel made a declaration on 24 October that the announcement by S8 on 8 October 2003 that it would not proceed to make offers under the Scrip Proposal constituted unacceptable circumstances in relation to the affairs of BreakFree. A copy of the form of the declaration is included in the annexure to this media release.
Orders
The Panel has received submissions from the parties concerning the orders that should be made on the basis of the Panel's declaration of unacceptable circumstances.
The Panel has before it proceedings (BreakFree 03), in which BreakFree contends that there are deficiencies in the bidder's statement lodged by S3 in relation to the Scrip Proposal. It will not decide whether to order S8 to amend the bidder's statement in relation to the Scrip Proposal or to dispatch offers under the Scrip Proposal until those proceedings are concluded.
On the information currently before it and given the current state of the BreakFree 03 proceedings, the Panel does not propose to make any final orders in BreakFree 04.
The Panel will decide whether to take any further action in relation to BreakFree 03 in the light of parties' submissions and actions.
Interim order
S8 announced on 20 October that it proposed to dispatch the bidder's statement and offers in relation to its Cash Proposal (the Cash Bid Documents) to BreakFree shareholders on 24 October 2003.
On 23 October BreakFree and ASIC requested that the Panel make an interim order to restrain the dispatch of the Cash Bid Documents until such time as the BreakFree 04 proceedings, and any review of the decision in those proceedings, have been finally resolved.
The Panel's decision in these proceedings relates to S8's announcement that it would not proceed to make offers under the Scrip Proposal. The Panel was not satisfied that unacceptable circumstances were likely to result from the dispatch of the Cash Bid Documents while it was still an open question whether, when and in what form offers under the Scrip Proposal must be made.
On this basis, the Panel declined to make the interim order requested by BreakFree and ASIC.
The BreakFree 04 Panel
The sitting Panel comprised Kathleen Farrell (sitting President), Peter Cameron (deputy President) and Meredith Hellicar.
George Durbridge
Director, Takeovers Panel
Level 47 Nauru House
80 Collins Street, Melbourne VIC 3000,
Ph: +61 3 9655 3553
george.durbridge@takeovers.gov.au
Annexure - Declaration by the Panel
Corporations Act
Section 657A
Declaration of Unacceptable Circumstances
In the matter of BreakFree Limited 04
Whereas
A. On 11 July 2003 S8 Limited (S8) announced a takeover bid (the Scrip Proposal) for BreakFree Limited (BreakFree) in which S8 offered shares in S8 as consideration for BreakFree shares.
B. The bidders' statement for the Scrip Proposal was, and is, the subject of the BreakFree 03 proceedings before the Panel. Resolution of the issues in those proceedings had been postponed pending the resolution of the BreakFree 04 proceedings.
C. On 12 September 2003, BreakFree provided a letter to its shareholders, which was also posted through the ASX Company Announcements Platform, in which, among other things, it stated that:
Survey on Shareholder's Intentions
BreakFree's adviser in these matters [concerning the Scrip Proposal], ABN AMRO Morgans, has undertaken a telephone survey of some of the major individual shareholders [in BreakFree] to ascertain their likely acceptance of the current scrip offer.
Based on the survey responses, ABN AMRO Morgans has advised the Board that shareholders holding a majority of shares indicated that they would not accept the current all scrip offer from S8.
These statements are referred to as the `BreakFree Statements'.
D. 26 days after the BreakFree Statements were made (that is, on 8 October 2003), S8 announced that it would not be proceeding to make offers under the Scrip Proposal. S8 indicated that it was entitled to take this course of action because of the BreakFree Statements which meant that one of the defeating conditions (that is, the condition requiring acceptance of the Scrip Proposal for a minimum of 50.1% of the BreakFree shares) in the Scrip Proposal could not be fulfilled.
E. As at the date of this declaration, no offers have been made by S8 under the Scrip Proposal.
Under section 657A of the Corporations Act, the Takeovers Panel declares that the circumstances described in recital D constitute unacceptable circumstances in relation to the affairs of BreakFree.
Kathleen Farrell
President of the Sitting Panel
Dated 24 October 2003
