The situation: The Australian Securities and Investments Commission (“ASIC”) recently released its update on corporate finance regulatory activities for the second quarter of 2022. From a mergers and acquisitions perspective, the schemes of arrangement are at the center of attention, the ASIC providing useful practical advice and reminders on technical problems that can arise during the implementation of a program.
The result: ASIC noted the following points from its observation of the plans during the last quarter: to provide target shareholders with certainty about the value of the earn-out before the vote on the plan; maintaining the independence of an expert in the event of a change of opinion; ensure target companies take steps to send program materials to members as requested; and the appropriate procedures to follow for program-related information materials outside of the program booklet.
Look forward: ASIC observations provide useful reminders and guidance with respect to particular issues that often arise in the implementation of an arrangement scheme. Taking note of ASIC’s advice might help program sponsors follow the program process more easily.
Practice points for arrangement diagrams
Uncertainty in the consideration of price supplements. ASIC raised concerns when target shareholders were asked to vote on a plan – which involved additional consideration – where there was considerable uncertainty about the amount of consideration that would be paid. Although the trade involved a relatively rare set of facts, ASIC’s perspective is worth noting for those considering closing the value gap in a ploy trade by incorporating an earnout.
ASIC’s concerns arose from a recent scheme set up by an unlisted public company, where the consideration included an upfront cash payment, dividends and additional consideration, and where the total consideration to be paid under of the program would not be known until 2026. The arrangement was further complicated by the fact that the earnout was conditional on certain disqualifying conditions that effectively resembled trade restrictions that would normally be negotiated between a company and its employees.
Persuaded by the low-key factual scenario where the unlisted company’s share register consisted almost entirely of current and former employees and officers, and coupled with the independent expert’s opinion that the initial cash payment was fair, reasonable, and in the best interest of shareholders, ASIC chose not to pursue the matter further than to draw the Court’s attention to its “general concerns” about the uncertainty of the plan’s review in his usual letter of “indication of intent” before the first court hearing.
In widely held public companies with a large retail shareholder base – which is much more typically the case with schemes – scheme sponsors should note that ASIC continues to monitor the use and disclosure of add-ons. of price.
Maintain the independence of the expert in the event of a change of opinion. The importance of maintaining expert independence has long been a fundamental principle and remains an issue on ASIC’s radar in the context of change of control transactions. The issue came to the fore in a recent example reported by ASIC, where the expert changed their opinion in their draft report from “fair and reasonable” to “not fair and unreasonable” due to price movements. of a raw material. Relevantly, the change has happened before the first hearing of the Court and therefore before the shareholders of the target company have taken cognizance of the independent expert’s report.
As is often the case, the plan was subject to a condition precedent that the independent expert keep on going to conclude that the plan was in the best interest of the shareholders. In order to advance the plan, the expert’s change of opinion prompted the bidder and the target to lower their bid, with the bidder increasing the consideration so that it was at the lower end of the project’s range. Expert Rating Range – with the Target having provided the Offeror with the revised draft Expert Rating Range.
Dealing with draft independent expert reports before the Court’s first hearing is tricky. Once ASIC was satisfied that the disclosure in the plan booklet and expert report was adequate in light of the circumstances and the resulting change in opinion and increase in consideration, ASIC did not raise any concerns regarding the content of the report or the independence of the expert. . The expert also confirmed that he was aware of ASIC’s RG11 and also that the expert had determined, on his own accord, that there had been a change in material circumstances necessitating revisions to his project. report.
Membership allocation elections for the scheme booklet. Ensuring that target shareholders receive the plan booklet in order to make an informed voting decision is always a priority in the plan process. In this context, ASIC reminds plan supporters that the pay-as-you-go election provisions under Sections 110C through 110K of the Companies Act 2001 (Cth) are applicable to the sending of documents (i.e. physical or electronic) for meetings of members to vote on the schemes of arrangement.
Reasonable steps should be taken to send materials in a manner consistent with each member’s election, including responding to any ad hoc request by a member to receive a copy of a particular document within a reasonable time, either before any deadline for dispatch or after they have been dispatched.
Investor tour briefing materials provided to target shareholders. Effective shareholder engagement is a key objective in preparing for a program meeting, with the goal of maximizing voter turnout and upvote. In this regard, shareholder engagement has long been encouraged, provided that all briefing materials and other communications provided to shareholders prior to the vote comply with the court-approved plan booklet. A cautious approach to this issue in the past has seen proponents of the scheme return to court to seek approval of any additional disclosures, after providing them to ASIC, that it is proposed to give to target shareholders.
In a recent split arrangement scheme, the scheme’s sponsor was on the front foot and won approval at the first court hearing to give its members an informational presentation.
ASIC now seems more comfortable with the disclosure materials provided to target shareholders. ASIC reminds, however, that if plan sponsors wish to engage with target shareholders prior to the plan meeting (and in addition to providing the plan booklet), they must:
- Inform the Court of any proposed briefings and briefings at the first Court hearing;
- Do not interfere with the “message” approved by the Court before the program meeting; and
- Maintain records of any information presented in the form of briefings or other communications, and make such records available to ASIC and the Court.
Four takeaway meals
- It is essential to provide as much certainty as possible when additional consideration is offered as part of a plan of arrangement. With value gaps appearing to emerge on the horizon, targets and bidders should critically consider their proposal for disclosure of any price supplement used in a program, as ASIC is likely to focus on this issue.
- Any change in the opinion of an independent expert resulting in a change in the consideration of the proposed scheme will likely attract the attention of ASIC. It is essential to ensure that the plan documents provided to the target shareholders correctly explain the position and to have an expert who strongly protects their independence.
- Companies should ensure that they send the plan meeting documents in accordance with the elections of their members under the Companies Act.
- Pre-plan shareholder engagement is an essential part of the plan process. Ensuring that the Court stays informed of any informational material provided to members outside of the Scheme booklet, and not interfering with the “message” approved by the Court prior to the Scheme meeting, remain fundamental principles.