It’s been an extraordinary week for upmarket retailer David Jones. Last Friday, the company announced that it had received a $1.65 billion takeover bid from UK firm EB Private Equity, and its shares rose by almost 15%. But by Monday the bid had collapsed spectacularly, and the value of its shares had sunk by more than 6%.
This week, ASIC has announced an investigation into the failed takeover bid, which has prompted questions over the issue of continuous disclosure and market manipulation.
Ian Ramsay, professor of commercial law at the University of Melbourne, sheds some light on the unusual circumstances surrounding David Jones, the takeover bid, and its mystery suitor.
Can we start off by explaining what a company’s obligations are under the ASX’s continuous disclosure rules?
The key requirement in the listing rules is one that requires any listed company, once it becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the company’s securities, to immediately tell ASX. In other words, it must tell the market that information - and that is listing 3.1.
Let’s look at the David Jones scenario. David Jones has defended disclosing an unsolicited bid by EB Private Equity on those grounds. But some people are saying that given the lack of credibility surrounding the bid, it should not have been disclosed at all. Others are saying that David Jones could have been a subject of market manipulation. What are your thoughts?
One preliminary point I need to mention is that there’s an important carve-out in listing rule 3.1A. This is quite important because David Jones claimed the carve-out. It basically says you don’t need to disclose information under rule 3.1 if a number of requirements are satisfied. One of them is that a reasonable person wouldn’t expect the information to be disclosed. You need to prove some other things as well – you could, for example, show that the information concerns an incomplete proposal or negotiation.
That’s very important because David Jones received the first letter from the potential bidder in May. They only disclosed the proposal last Friday on 29 June. Throughout that time, David Jones claimed – and I’m sure they are right – that the carve-out applied. All that they had received was information that concerned an incomplete proposal.
What changed, of course, was that information leaked into the marketplace. David Jones was concerned that it needed to put out information to counter other information that had leaked in the most extraordinary way, including through an anonymous UK blogger. That blogger contacted some prominent news services and mentioned the possible bid for David Jones and these news services then contacted David Jones.
It’s important background information because it explains why David Jones didn’t disclose the information they had until June 29. Come June 29, when David Jones became aware of the leaking of information, I think they did the best they could in a difficult situation.
It’s worthwhile noting that companies are particularly sensitive to continuous disclosure obligations at the moment for at least two reasons. The first is that ASIC has clearly indicated continuous disclosure is an important priority for it. It is becoming more active in issuing infringement notices for alleged breaches or contraventions of the continuous disclosure rules. Second, we are seeing more shareholder class actions. Most of these class actions in recent times concern allegations that companies haven’t complied with their continuous disclosure allegations.
There have been some very big settlements recently in these class actions. Only a month ago - the Centro settlement - was $200 million. Multiplex in 2010 - the allegation was breach of the continuous disclosure rules - $110 million. Aristocrat in 2008 - same situation - $145 million. Oz Minerals, $60 million. Australian Wheat Board, $40 million.
The message is clear for companies. They don’t want to be seen to sit on information that might be viewed as “material information”.
And in relation to whether any market manipulation occurred, that is an important issue for ASIC as it investigates the trading in the shares of David Jones.
If we could revisit last Friday for a moment. There was a market surge of about 20% on DJs shares on Friday morning after the bid was disclosed. Given the concerns over credibility, would it have been more prudent to call a trading halt in the interest of market integrity?
There are several important issues about the events of last Friday.
What we saw was the continuous disclosure rules not working in the way that they should have worked. I say that because in its guidance note 8, ASX says that the purpose of the continuous disclosure rule is to “elicit disclosure of the highest quality which is of benefit to the market”. That clearly didn’t occur, because what David Jones reluctantly put out into the market was all the information they had, but it was seriously inadequate information - it wasn’t of the high quality that the continuous disclosure rules are aimed at achieving.
But you’ve highlighted another important point: the David Jones share price goes up almost 15% by the end of Friday - closer to 20% at a certain point in the day. That volatility in the share price where the market is trading on rumour, speculation and seriously inadequate information then creates the possibility of manipulation.
There are two further issues that warrant consideration. The first is the trading halt issue. With the benefit of hindsight, it certainly would have been preferable to have had a trading halt on Friday. But that would have been hard to assess as of Friday as David Jones no doubt struggled to find out what information had been leaked into the marketplace - not through any fault of its own - but through the actions of an anonymous person. You don’t want to go into a trading halt too soon or without some good justification; companies are sensitive about trading halts. They think it can be viewed as negative for the company’s reputation.
But there’s another issue worth teasing out. David Jones made two announcements on Friday. The first one was before the market opened, and was just one paragraph: it said they had received “an unsolicited letter from a non-incorporated UK entity about which no usual public information is available, indicating its interest in making an offer for the company”.
Then, two sentences: “The directors do not believe they currently have relevant information to enable them to quantify or value this approach but should this change, will advise the market accordingly. In the meantime, the directors recommend that shareholders treat any related market comment cautiously.”
That’s what set the market running. Shareholders, at that stage, were unsure of what was happening and many no doubt considered the possibility of a full takeover bid being launched.
Later on that same day, when David Jones became aware of further leakage of information, including that some international news services had details of the possible bid as published by the UK blogger, David Jones then released a three-paragraph announcement, in which they gave the name of EB Private Equity - the potential bidder. If anyone searched the company’s website, you’d be put on notice straight away: there was a real issue with credibility of EB Private Equity. An investor who went on the website would have seen it is a very superficial website. There’s no contact information on it at all.
The second paragraph talks of the David Jones announcement refers to the structure of the possible bid – but the numbers in this paragraph don’t add up. The third paragraph says: “No details of EB Private Equity’s financial capacity, its management, or any of the terms of the residual equity have been made available. No further details of the proposal have been provided”.
This is what then causes the market to go down. These statements tell us: there are credibility issues with the potential bidder and with the structure of the possible bid; and that these three short paragraphs contain all the information David Jones has received from the potential bidder. And in the time between those two announcements, you have an extraordinarily volatile market.
The question is: would it have been better for David Jones to put in its first announcement, that it sent to ASX on Friday morning before trading started, what it put in the second announcement? Would we have had the same volatility in the market? I don’t think so because investors would have quickly seen the problems with the bidder and the inadequate information it had given to David Jones. So looking back on it, it would have been preferable for all the information David Jones had to be in one announcement that was given to ASX before trading commenced on Friday – but we can only say that with the benefit of hindsight.