Market dynamics prevail over blackletter principles in SGH / Boral "Best and Final" takeover offer

The recent outcome of the SGH off-market takeover bid for Boral, which now sees SGH exceeding the 90% threshold and proceeding to compulsory acquisition, has elicited different reactions. It is either criticised as ASIC's failure to enforce one of the fundamental principles in the conduct of takeover offers in Australia, or applauded for demonstrating that despite the plethora of regulation, market dynamics will prevail to produce an outcome in the best interests of shareholders.

Which is right? Let's examine what actually happened.

Announcing its off-market takeover offer for Boral in February for a combination of SGH shares and cash, SGH said "the Offer Consideration is Best and Final and will not be increased". The cash component of the offer consideration would be increased by $0.10 in cash per Boral share (from $1.50 to $1.60) if one or both of the following occur: SGH reaches in aggregate interest of 80% or more, or the Boral board unanimously recommends that Boral shareholders accept. The offer consideration increases by $0.10 in cash per Boral share (to $1.70) if SGH reaches the 90.6% compulsory acquisition threshold.

The Boral board continuously recommended to shareholders to reject the offer, supported by an independent expert which concluded the offer is not fair and "not reasonable but that this judgement is finely balanced". In its Bidders Statement, SGH stated it would appoint additional directors to the Boral board so its nominees constituted a majority, and seek delisting from the ASX. It also expected the company would be unlikely to pay dividends for some time.

By early April SGH had increased its interest to 78.8% and declared the offer to be unconditional. At some point after that the Boral board reconsidered its recommendation.

On 12 April, the Boral board announced its agreement with SGH. The cash component of the consideration immediately became $1.70 without the need for the previous conditions being met. SGH simply said, "As a result of the package of measures agreed with the [Bid Response Committee], the Maximum Consideration of 0.1116 SGH Shares and $1.70 cash will now be paid to all Boral shareholders who accept the Offer (including those who have already done so)." (footnote omitted). Boral would pay a special dividend to its shareholders, deducted from the cash component of the consideration. It would be free, without penalty, to conduct a limited on-market buyback of shares, and Boral shareholders who accepted the offer would participate in a special dividend to be paid by SGH after the offer had closed.

Both ASIC's and the Takeovers Panel's stated policy is that if a bidder has made an unqualified last and final statement, the bidder would be held to that. ASIC's Regulatory Guide 25 states: "market participants that make a last and final statement should be held to it, as with a promise. Holders of securities in the target are entitled to expect that market participants will act consistently with their last and final statement". The term "best and final" has the same connotation. The Takeovers Panel's Guidance Note 1 likewise notes "unacceptable circumstances are likely to arise if, after making a no increase statement, the bidder (or an associate) announces another bid (or a scheme) within 4 months after the bid closes and offers increased consideration (unless that is contemplated by a clear qualification to the no increase statement)".

Thus, in the Rinker takeover (cited in Guidance note 1), a bidder who had made a last and final statement, but subsequently acquiesced in the company paying a dividend to its shareholders, was found by the Panel to have effectively increased its offer price inconsistently with its statement. This was held to constitute unacceptable circumstances and the bidder forced to compensate certain shareholders, a decision upheld by the Full Federal Court.

Given this, it's reasonable to conclude that the outcome in SGH/Boral likely contravened these principles. Nevertheless, no action was taken by ASIC, while the Takeovers Panel can only act on applications made by another party such as a shareholder or indeed ASIC.

The principle of "truth in takeovers" statements has long been regarded as a fundamental pillar of takeover offers because it helps maintain the integrity of the market. Market participants are expected to comply with them, and shareholders of a target company expect that. It is for this reason that many observers would consider that the SGH/Boral case as a serious failure to enforce a fundamental principle.

The Boral board's decision to seek to secure an outcome which it considered in the best interests of the shareholders, however, is understandable. In our view, it demonstrates that, notwithstanding extensive regulation, the environment in which takeover offers are conducted in the Australian market permits an outcome which was commendable in the circumstances. This is the type of flexibility in regulation of market-related activities which we have long applauded and have sought in many takeovers.

Of course, this likely leaves the strategic advantage which its bidder seeks to achieve by making such a statement in tatters. Perhaps the best observation to make when such a statement is made is that a bidder is likely to be held to it, except where the overriding best interests of shareholders require otherwise.

It will be interesting to see whether or not ASIC and the Takeovers Panel revise their respective guidance as a consequence.