It is often the case that shareholder interests can conflict with drastic changes in their business operations or dealings when confronted with potential takeovers. This article will discuss how some defence tactics such as a shareholders rights plan can become problematic in an Australian context.
Takeovers
To begin, a takeover involves a company successfully bidding to acquire a targeted company. This can take place without any prior discussion or agreement with the target. It is different from a merger because it doesn’t involve a mutual agreement between the two companies. The acquirer can obtain control of the targeted company because they would own more than 50% of their shares. There are circumstances when resistance exists between the the current management team and the acquiring company. How a company responds to a potential takeover is subject to both rules and guidelines set out by by the Corporations Act 2001 (Cth) and other administrative agencies. For more on takeovers, you can also read our guide on ‘What’s a Hostile Takeover?’.
The ‘Poison Pill’
‘Poison pill’ is used to describe the activation of a shareholder rights plan, which is used to prevent a hostile takeover when a bid is announced. To illustrate, this plan involves granting shareholders of a targeted company the right to purchase more shares at a discount. This dilutes the ownership of the company as the number of shares becomes limited, increasing the cost for the bidding company.
Types of Poison Pills
Flip-in: Existing shareholders purchase shares at a substantially discounted price to strengthen their existing equity position. The objective is to raise the percentage ownership in the targeted company. This can effectively deter potential bidders because the interest they were initially acquiring becomes diluted by the increase in allotted shares.
Flip-Over: Occurs once the interested company has gained the right to initiate a takeover. Both ‘flip-in’ and ‘flip-over offer discounted shares for existing shareholders. The difference being that the target shareholders are given the right to purchase shares in the acquiring company.
Position in Australia
Generally speaking, the shareholder rights plans are not feasible in Australian takeover deals.
The following sources prescribe rules and commentary that restrict companies from using this tactic:
- The Australian Government Takeover Panel policies;
- Fiduciary duties under the Corporations Act; and
- The Australian Securities Exchange (ASX) Listing Rules.
Takeover Panel
The Panel considered the use of the poison pill tactic as giving rise to ‘unacceptable circumstances’. This is because it is likely to function contrary to a ‘non-entrenchment’ principle for the purposes of the Corporations Act. The Panel observed that the tactic would make it very difficult to change ownership. This created the question of whether shareholders are upholding their duty to consider the best interests of the company.
Fiduciary Duties
Shareholders must act in good faith and in the best interests of the corporation under section 181 of the Corporations Act. This principle restricts stakeholders from artificially making the company seem less desirable to potential acquirers. For more information on shareholder duties, check out our guide ‘Shareholder Rights and Responsibilities: A Guide’.
ASX Listing Rules
The ASX limits the adoption of a shareholder rights plan by targeted companies through the some of the following rules:
- Once a takeover has been proposed, a company is not permitted to issue shares without shareholder approval for 3 months (Rule 7.9). This is subject to some exceptions.
- Prior to a takeover announcement, the targeted company is prohibited from issuing new shares equivalent to 15% or over within a period of 12 months (Rule 7.1).
- Prohibition against providing termination benefits upon a change in control of the company (Rule 10.18).
- Shareholders are only entitled to one vote for each fully paid share (Rule 6.9).
Summary
- Poison pill is another term for a shareholder rights plan.
- Poison pills are a defense tactic to prevent hostile or unsolicited takeovers.
- Adopting poison pill tactics are restricted in Australia and are subject to a range of laws and policies that preclude its execution.
