Mergers and acquisitions, better known as takeovers, are mostly sedate affairs with lots of agreement from all parties. But occasionally they turn messy and we’ve seen a fair share of that on the JSE recently with the Adcock/Bidvest and the Protech/ Eqstra deals. Rather than delve into the details of these particular deals, we want to have a deeper look at the process when a listed company attempts to take over another listed company and, importantly, how minority shareholders are protected.
For a start, we need to understand who the regulatory role players are. The Competition Commission often plays a role, vetoing takeovers if they would reduce competition or give the combined parties too much inf luence in a particular sector or industry. Obviously the JSE also plays a role with its rules and regulations, and then, lastly, we have the Takeover Regulation Panel.
The Takeover Regulation Panel is the first stop for a company wanting to take over another one. The acquiring company (the bidder) has to lodge details and importantly provide guarantees that it has the funding for the proposed deal. The key purpose of the panel is to ensure the fair treatment of minority shareholders and that the bidding company adheres to the takeover process.
Once a company has satisfied the Takeover Regulation Panel, the next step is to contact the company targeted for acquisition to inform the board not only of the proposed deal but also of the terms being offered. In most cases the company being acquired has already had talks with the bidder, but the proposal may still be a surprise depending on how those talks progressed.
Once the board of the company being acquired has received the terms it needs to notify shareholders of the deal via SENS, it needs to appoint an independent team to evaluate the deal and make a recommendation to shareholders.
But before this happens, things can get messy, as happened with the Bidvest/ Adcock deal. The issue here is that all the conditions in the proposal must be met before the board is required to appoint the independent advisers. If the conditions are not all met then the company being acquired can decline to forward any recommendation to shareholders.
Assuming conditions are met, then the independent board will make its recommendation, which will be communicated to the shareholders, who would then be able to vote on the proposed takeover. If the bidder does not meet their required levels of support after the shareholders have voted, they have the option of accepting the reduced support or they can walk away. This is especially important if the bidder only wants a portion of the company. For example, it may only want to acquire 70% of the company being taken over and if it gets only 55% support, it could just walk away or it could agree to go ahead with the deal but with less shares under its control.
An important level is at 90% support – if the bidder is aiming for 100% control and 90% or more shareholders agree to the deal, the remaining hold-out shareholders can be compelled to sell their stakes. This may seem unfair but the theory is that one can’t let a very small minority of less than 10% derail a process the vast majority want to go forward.
There is of course then the hostile takeover, which is what we’re potentially seeing with Bidvest/Adcock. The Adcock board claims that the conditions in the proposed takeover were not all met so it does not have to put together an independent board to determine the fairness of the offer. The bidder can then go hostile by going directly to shareholders of the company being acquired. Those shareholders would then not have a recommendation from the company being acquired but would be able to vote for or against the proposed deal.
The Protech/Eqstra deal is not hostile in that the Protech board has put the deal to shareholders with their recommendation – but in one sense it is hostile as the Protech board are very much against the deal – however as the conditions were all met, it has had to get a recommendation and give it to shareholders.
Simon Brown is a Finweek contributor and heads justonelap.com, a free resource of f inancial information and investment education.