How a takeover offer works
In the fourth and final article of our Takeover series, we look at how a takeover offer can be used to acquire control of a New Zealand Code Company.
Read the previous articles in this series:
- Part 1: New Zealand takeover laws; what you need to know
- Part 2: Takeover Offer v Scheme of Arrangement – Structuring a friendly acquisition
- Part 3: How a scheme of arrangement works
What is a takeover offer?
A takeover offer is one of the ways in which control of a Code company can be acquired.
A takeover offer is a procedure governed by the Takeovers Code under which an offeror makes an offer to shareholders of a target company to acquire some (or all of) their voting securities in return for payment of the offer price.
Target shareholders are free to decide whether or not to accept the offer. If a target shareholder accepts the offer, and the offer is successful (i.e. all of the offer conditions, including as to minimum acceptance, are satisfied), the offeror will acquire the target shareholder’s voting securities and pay them the offer price.
If the target board recommends that target shareholders accept the offer from the outset, the offer is considered ‘friendly’. As a takeover offer is driven by the offeror and does not require target consent or co-operation, it can also be used for a ‘hostile’ acquisition of a target company. The recommendation of the target’s board is not binding and is only seen as ‘guidance’ for shareholders.
If the target board recommends that target shareholders accept the offer from the outset, the offer is considered 'friendly'.
Overview of the takeover offer process
The first document that is required to be sent by an offeror is a ‘takeover notice’. A takeover notice sets out the offeror’s intention to make an offer and contains the terms and conditions on which it is prepared to make an offer. When the offeror actually makes the offer, the terms of the offer and other prescribed disclosures are contained in an ‘offer document’ which is sent to all of the target shareholders. The offer document generally contains all information known to the offeror that is material to a target shareholder’s decision whether to accept or reject the offer (discussed further below).
The target company responds to the takeover notice in a ‘target company statement’. The target company statement contains the target directors’ recommendation, and usually an independent adviser’s report on the merits of the offer.
Target shareholders who wish to accept the offer will then lodge an acceptance form and, if the offer is successful, they will receive the offer price. The offer price usually consists of cash or shares in another company (or a combination of both or other financial products).
The key phases and steps for a friendly takeover offer are shown below. For a hostile takeover offer, phases 1 to 3 are more limited.
Key steps in a takeover offer
The first key step in a friendly takeover offer will typically involve the offeror approaching the target company with an indicative offer to acquire 100% (or a specified percentage) of the target company by way of a takeover offer.
If the target company is amenable to the offeror’s indicative offer, the target company will typically grant the offeror a period of due diligence (either on an exclusive or non-exclusive basis) so that the offeror can confirm its interest in the target company and the amount of consideration to be offered by the offeror.
If the proposed consideration includes financial products in the offeror, the target company may undertake some due diligence on the offeror to confirm the value of those financial products.
In a hostile scenario, the offeror will not have access to the target company’s confidential information, but will base its offer price and terms on the offeror’s understanding of the target company as gained from publicly available information such as the target company’s continuous disclosure announcements (if the target company is listed) and periodic financial reporting. This is commonly known as ‘desktop’ due diligence.
The offeror will typically consider building a pre-bid stake. This can be done by buying shares on market or by approaching one or more target shareholders on a confidential basis to seek to purchase target shares up to the 19.9% limit. A pre-bid stake is particularly important for a hostile takeover offer as it gives the offeror momentum and reduces the possibility that a third party will make a rival offer for control of the target company.
In a friendly takeover offer, the need for a pre-bid stake is not as critical as the offeror will have the benefit of the target board’s recommendation that target shareholders accept the offer. Nevertheless, a pre-bid stake over 10% is still very helpful in reducing the possibility that a third party will make a rival offer.
A pre-bid stake is particularly important for a hostile takeover offer as it gives the offeror momentum and reduces the possibility that a third party will make a rival offer for control of the target company.
The offeror may also seek to enter into agreements with certain shareholders under which those shareholders agree to accept the proposed offer. These types of agreements are called ‘lock-up agreements’ and are permitted under a takeover offer. The parties will need to take care to ensure that the terms of the lock-up agreement will not make them ‘associates’ under the Takeovers Code as this will impact the offeror’s ability to, among other things, acquire an up to 20% pre-bid stake.
Offer implementation agreement
In a friendly takeover offer, before the takeover offer is publicly announced, the offeror and the target company may consider entering into an ‘offer implementation agreement’ which:
- sets out the terms of the offer and commits the offeror and the target company to the takeover offer transaction;
- obliges the target company to support the offer, and to ensure that the target company directors recommend that target shareholders accept the offer; and
- sets out how the offeror and the target company will work together throughout the offer process.
The offer implementation agreement may also contain ‘deal protection mechanisms’ such as:
- ‘no shop’, ‘no talk’ and ‘no due diligence’ obligations on the target company to seek to prevent the target company from proactively generating rival offers;
- a notification and matching right for the offeror to be notified of and have the opportunity to match any third party offer for control of the target company before the target company directors may make any recommendation of that third party offer to target shareholders; and
- a break fee payable by the target company to the offeror if a third party is successful in obtaining control of the target company or if the target company directors change their recommendation to accept the offer.
The offer process
As discussed above, the offer process starts with the offeror sending a takeover notice to the prospective target company of its intention to make an offer for the Code company. An offeror is not obliged to send an offer after it has sent a notice, and it may decide not to proceed.
If the offeror wants to proceed with the offer, it must then send the final offer document to target shareholders during the period beginning 14 days and ending 30 days after the takeover notice was sent. This waiting period gives the target company time to respond to the offer.
The offer document generally contains all information known to the offeror that is material to a target shareholder’s decision whether to accept or reject the offer. The Takeovers Code also requires certain information be disclosed in an offer document, including, among other things:
- information about the offeror;
- details of the offeror’s (and its associates’) ownership and trading of any equity securities of the target company;
- names of persons who have agreed to accept the offer (and the material terms of those agreements);
- details of any arrangements with the target company or any directors or officers of the target company; and
- details of the offeror’s intentions about material changes to the target company if the offer is successful.
The offer period must commence with the date of the offer and be not shorter than 30 days and not longer than 90 days (unless the offer period is extended in limited circumstances).
The offer process starts with the offeror sending a takeover notice to the prospective target company of its intention to make an offer for the Code company.
The target company must respond to the offer in a target company statement that is sent to target shareholders, the offeror and the NZX (if the target company is listed) no later than 14 days after the target company receives notice that the offer has been despatched. The target company statement contains the target directors’ recommendation on whether to accept or reject the offer, and usually an independent adviser’s report on the merits of the offer. In a friendly takeover, the target company statement may be sent to target shareholders at the same time as the offer document.
The offer will typically be conditional on one or more events occurring or not occurring, such as the offeror reaching a minimum level of acceptances (often 50.01% or 90%) or obtaining regulatory approvals such as Overseas Investment Office approval. Customarily, there are also other conditions as to performance of the business and no unusual events occurring. In order for the offer to be successful, all offer conditions will need to be satisfied or waived by the offeror, which means that the offeror will need to make strategic decisions about when to waive conditions to encourage target shareholders to accept the offer.
The offeror can increase the offer price not later than 14 days before the end of the offer period, regardless of whether the offer is still conditional. If the offer price is increased, target shareholders who have already accepted the offer are also entitled to be paid the increased offer price.
The offeror must pay the offer price to target shareholders whose financial products are taken up under the offer by no later than 7 days after the later of the date on which the offer becomes unconditional, the date on which an acceptance is received or the end of the offer period first specified in an offer.
Once the offeror becomes the holder or controller of 90% or more of all target securities, the offeror may commence the process of compulsory acquisition of all outstanding securities not held or controlled by the offeror in return for payment of consideration which will, in most cases, be the same as the consideration provided under the offer for the equity securities of the same class.
The compulsory acquisition process involves the offeror sending an acquisition notice to all outstanding security holders stating that the outstanding security holders must, or have the right to, sell their shares to the offeror.
Delisting of a listed target company from NZX will usually take place soon after completion of compulsory acquisition.
Simplified takeover offer process
The timetable for a takeover offer is largely prescribed by law. The offer period is between 30 and 90 days (unless extended in limited circumstances) and may be followed by a period of compulsory acquisition. The total timetable of an offer can vary and will depend on the facts, such as whether due diligence is being undertaken prior to an offer.