Delisting following a takeover bid

Delisting a company after a takeover while there remain minority shareholders is possible if certain rules are met. These are designed to balance the interests of the company (and its major shareholder) and the interests of minority shareholders.

In brief

• Delisting a company after a takeover while there remain minority shareholders is possible if certain rules are met.

• The ASX’s rules look at how many shareholders are left with marketable parcels and, for 12 months after the bid closes, require an independent vote if that number is more than 150.
• The ASX also has a discretion to refuse a delisting if it is sought for ‘acceptable reasons’.

Delisting following a takeover bid

An important matter to be considered after a takeover has closed is whether or not the company can or should retain its listing on the ASX.

A continued listing will be of vital importance to any remaining shareholders. If there is a risk that the company will be delisted, that may be a compelling reason for shareholders to accept a takeover bid. Recognising this, typically the topic is dealt with in detail in the bidder’s statement (in the intentions disclosure) and would be the subject of comment by the target company directors in the target’s statement issued in response.

One issue for bidders and target companies is clearly spelling out the requirements and risks in materials sent to shareholders during the bid. This was an issue in the recent matter before the Takeovers Panel concerning Bennamon Industries Pty Ltd’s bid for Pact Group Holdings Limited.

Pros and cons of delisting

Delisting a company may be beneficial to the company in various ways:

• delisting will enable the company to get on with its business without the glare and pressure of the public markets. It may be beneficial for the company to be able to make decisions which have long-term benefits, but which some shareholders with shorter term investment horizons may not agree. That may be easier in an unlisted environment;
• the company will be free of corporate governance and compliance requirements that apply to a listed company. That will not only allow the company and its board to focus more on the business operations, but it may also enable the company to attract directors who may not be comfortable being on the board of a listed company with the additional responsibilities and risks; and
• delisting will lead to a saving of the listing fees and will free the company from listing rule restrictions. If there is little trade in the company’s shares and the company is unlikely to raise new capital in public markets, the usual benefits for the company of being listed may be minimal.

On the other hand, delisting has a number of obvious disadvantages for remaining shareholders, such as:

• the absence of an orderly, transparent and timely mechanism for share trading;
• restricted information compared to the amount provided when the company is listed, as the company would no longer be subject to the continuous disclosure requirements of the Listing Rules. If the company remains a public company after delisting and has at least 100 shareholders, it would still be required to disclose material information to ASIC (and likely on its website). Nevertheless, the level of shareholder reporting in these circumstances would be diminished; and
• the ceasing of various requirements and protections for minority shareholders under the Listing Rules. Examples of provisions that would cease to apply include restrictions on the issue of new securities, a governance framework for related party transactions and requirements to seek shareholder approval for significant changes in the nature or scale of the company’s activities.

All of these issues would need to be weighed up when considering a delisting.

What are the tests to delist a company?

If the bidder reaches compulsory acquisition under the bid, delisting is straight-forward. The ASX will delist the target company after the process has commenced.

However, if the bidder does not reach the threshold necessary to compulsorily acquire the remaining shares, there are further rules and requirements before delisting can be undertaken. These are discussed below.

Board resolution

The first point to make is that any decision to apply to ASX to delist the company would need to be made by the board of directors of the listed company. It is not a decision for the major shareholder. The board could only decide to seek a delisting if it concludes that delisting is in the best interests of the company and the company shareholders as a whole at the relevant time. The pros and cons of delisting mentioned above would need to be considered.

ASX policy

The ASX sets out its policy on delisting in Guidance Note 33. This includes a number of guidelines to safeguard the interests of minority shareholders in the context of any proposed delisting.

ASX states that it will use its discretion to ensure that the delisting of any entity is being sought for ‘acceptable reasons’. ASX says that a request to remove an entity from ASX that is primarily or solely aimed at denying minority securityholders a market for their securities or in order to coerce them into accepting an offer from a controlling securityholder to buy their securities at an undervalue, would be an unacceptable reason for requesting removal from the official list of ASX.

A key ASX guideline relates to whether the approval of minority shareholders is required. In a post-takeover scenario (where shareholders have had the opportunity to sell their shares into the bid), ASX says that a vote would most likely not be needed if each of the following four conditions are met:

• the bidder and its associates own or control at least 75% of issued shares;
• there are fewer than 150 shareholders (excluding the bidder and its related bodies corporate) whose shareholding is worth at least $500;
• the takeover bid remains open for at least an additional 2 weeks after the bidder and its associates have attained ownership or control of at least 75% of issued shares; and
• the company has applied for removal from the official list of ASX no later than one month after the close of the takeover bid.

If these conditions are satisfied, delisting should be permitted, though ASX states that it will usually require the following procedural conditions to be satisfied:

• the company must send a letter or email to remaining shareholders advising them of the nominated time and date at which the company will be removed from the official list of the ASX and that, if they wish to sell their shares on ASX, they will need to do so before the company is removed from the official list of ASX and, if they do not, that they will only be able to sell their shares off-market; and
• the removal of the company from the official list of ASX not take place any earlier than 3 months after that statement has been sent to the remaining shareholders, so that they have at least that period to sell their shares on ASX should they wish to do so.

If the above conditions are not satisfied (for example, where the number of shareholders with more than $500 worth of shares exceeds 150 in number), the ASX may approve an application for the company to be delisted if there has been shareholder approval by special resolution (that is, a resolution passed with a 75% majority).

Importantly, as a further protection for minorities, the bidder and its associates are only entitled to vote on the resolution to approve the delisting if the approval is sought more than 12 months after the takeover offer closes. In its guidance note, ASX states that, even if the resolution is passed, it retains its overall discretion, but how that will operate after shareholders have voted is unclear.

Other protections

Even if the ASX requirements are satisfied, a minority shareholder may have rights under section 232 of the Corporations Act to prevent a delisting if they can show that delisting is contrary to the interests of shareholders as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity. That remedy may be available even where the board has acted in good faith for a purpose within the directors' power, but which reasonable directors would think to be unfair.

The ASX states that section 232 must be explained in the notice of meeting at which the special resolution to approve the delisting will be considered.

What is ‘unfair’ will obviously depend on the circumstances of the company and its shareholders. However, factors likely to be relevant will include whether shareholders have purchased shares after knowing about the risk of delisting and whether they have been offered a reasonable price for their shares, either under the takeover bid or subsequently. It cannot be the case that, under this provision, a minority shareholder can insist on the company remaining listed forever.

Comment

There have, in fact, been very few examples of companies being delisted after a takeover bid in recent years where the bidder did not reach compulsory acquisition. That may be because most takeover bids eventually reach the 90% compulsory acquisition level (quite apart from the fact that most public company acquisitions these days seem to be by scheme of arrangement where the ASX treats it as a compulsory acquisition).

Interestingly, to my knowledge, there have been no examples in recent years of a significant company being delisted (or even seeking delisting) where there are remaining shareholders who oppose the delisting. If that was to happen, it may shed some further light on how the ASX (or potentially the courts) may deal with the issue.