Introduction
- ‘Escalator agreements’ have long been prohibited under Australian takeovers law
- In a recent decision, the Panel demonstrated a reluctance to consider finding an escalator which was ‘capped’ at the offer price of a subsequent takeover offer unacceptable
- The decision provides further support for claims that the prohibition should be dropped and ‘escalator agreements’ should be permitted under Australian takeovers law as a legitimate means of building a pre-bid stake
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Despite on-going calls for legislative reform, pre-bid ‘escalator agreements’ or agreements with target shareholders under which the price payable for a shareholder’s shares may increase by reference to a future event (for example, the price of a subsequent takeover offer), have long been prohibited under Australian takeovers law. The policy rationale is that escalator agreements are unfair, and may unduly favour a large shareholder who is more likely to receive one than a small shareholder.
In the Takeovers Panel’s (Panel) recent decision in GoldLink IncomePlus Ltd 02, the Panel considered the effect of an agreement which contained a price escalator which was ‘capped’ at the price of any subsequent takeover offer by the purchaser.
The Panel declined to conduct proceedings. The predominant consideration was whether the agreement created a contravention of the minimum bid price rule or disadvantaged any other shareholders of GoldLink Income Plus Limited (GoldLink). The Panel did not focus on whether the agreement was an ‘escalator agreement’ in breach of the law.
The decision demonstrates a reluctance on the part of the Panel to consider an ‘escalator agreement’ unacceptable, but this is interesting given that the shareholder was selling its entire stake, yet the following bid was a proportional bid. The decision provides further support for claims that ‘escalator agreements’ should be permitted under Australian takeovers law as a legitimate means of building a pre-bid stake.
The facts
On 18 April 2008, Emerald Capital Limited (Emerald) had entered into a share sale agreement with a GoldLink shareholder, Challenger Managed Investment Limited (Challenger), to acquire its GoldLink shares at $0.21 per share. The agreement provided for a future escalation in the purchase price to $0.26 or $0.235 per share, which depended on various events occurring (such as Emerald obtaining board control and the company’s NTA position exceeding a specified amount or Emerald selling into a third party bid).
On 18 June 2008, Emerald announced a proportional bid for GoldLink to acquire 45 per cent of each shareholder’s shares at $0.23 per share.
In response to allegations by GoldLink that the share sale agreement was in breach of the escalator prohibition, Emerald advised GoldLink on 29 June 2008 that the agreement had been varied so that the purchase price could only be increased by $0.02 per share to $0.23 (the same price offered under Emerald’s takeover bid). It appeared that Emerald and Challenger had agreed to amend the agreement on 18 June 2008, being the date that Emerald announced its bid.
The application
GoldLink alleged that the agreement was void due to the prohibition against the use of an escalator agreement in the six months before a takeover bid is made or proposed.
GoldLink also alleged that, in accordance with the minimum bid price rule, Emerald would be required to increase its bid price to either $0.26 or $0.235 if that increased consideration became payable under the agreement. It also claimed that Emerald’s subsequent amendments were an attempt to circumvent the operation of the minimum bid price rule.
The decision
The Panel declined to conduct proceedings on the basis that:
- the agreement had the effect that Challenger would not receive consideration additional to that offered to GoldLink shareholders
- no GoldLink shareholder who accepted the bid would receive less consideration than Challenger, and
- Emerald’s amendments to the agreement were not an attempt to circumvent the operation of the minimum bid price rule.
The decision did not analyse whether the agreement was an ‘escalator agreement’ for the purposes of the Corporations Act 2001 (Cth).
Implications
On its face, it appears that the agreement may have breached the escalator prohibition as it conferred a benefit on the seller, the value of which was attributable to the price payable under the bid.
However, in the absence of any disadvantage to other GoldLink shareholders, the Panel did not apparently consider that it was necessary to address this question. This is a curious outcome, especially in the context of a proportional bid as the early seller is being treated differently to the other shareholders.
Nevertheless, the decision is consistent with the attitude that appears to prevail in the market that escalators should not be prohibited.
In its proposals to reform Australia’s takeovers regime in April 2006, Finsia recommended that the escalator prohibition be removed. It argued that escalators do not have a coercive effect, and would assist bidders with the process of establishing a bid (though it did consider whether the rule should continue to apply to proportional bids).
More information
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