By Braddon Jolley & Jaclyn Riley-Smith
This means the original decision and orders stand. The reasons for the original decision, released on the same day, have not clarified the confusion we commented on in our recent M&A alert!.
In fact, the reasons raise questions about the future of the truth in takeovers policy.
Curiously, we now understand that this is not a truth in takeovers matter at all. Although the original Panel stated that “We believe that the [truth in takeovers] policy should be applied in the circumstances of this case”, the original Panel found that the statement in question (in a Reuters article headlined “FLSmidth says A$7.20 per share Ludowici bid final” in which FLS’ CEO, was quoted as saying “no” in response to a question as to whether he would consider raising the offer) was not a “last and final” statement to which FLS should be held.
The original Panel was not conclusive as to whether the media interview by the CEO of FLS constituted a “no increase” statement,
“We also regard as significant that the headline and introductory words to the Reuters article were not Mr Rasmussen's words. Moreover, as written the article was ambiguous enough as to whether in fact a ‘last and final statement’ had been made that to hold FLS to the statement seems to us to exceed what is appropriate.” 
This approach would appear to be at odds with ASIC’s approach in its Regulatory Guide that states where a market participant fails to withdraw or qualify comments in a media interview that could be construed as a last and final statement, the market participant should be held to that statement. In this case, the Panel noted that FLS took legal advice following the media interview but did not correct the statement (despite press coverage about the statement) for a week. This would appear to fall within the scope of ASIC’s regulatory guide.
In any event, if the Panel did not conclusively find that FLS made a “no increase” statement, what was the basis for the declaration of unacceptable circumstances? The original Panel found that FLS’ delay in correcting the CEO’s statements to the media had “an effect” on an efficient, competitive and informed market.
It is not clear from the reasons of the original Panel what the “effect” was that they were concerned about. The original Panel rejected FLS’ submissions that the variation in the market price for Ludowici shares was immaterial both after the media interview and after the correction. Yet reviewing the market data it is clear that Ludowici shares did trade below FLS’ offer price in the period the Panel deemed the market to be “uninformed” and dropped after FLS issued a correction statement.
The reasoning for the compensation order and the “effect” it is aimed at remedying are not explained. If there was no “effect” on the market price why is a compensation order appropriate, and what is it intended to remedy?
The appeal Panel, in their reasons for declining to commence proceedings, was similarly unclear in its view: “The initial Panel was satisfied that the circumstances had an adverse effect of the market, and so are we”.
To add to the confusion, while the original Panel decided that the FLS statement to the media was not a last and final statement to which FLS should be held, its compensation order implicitly refers to a “departure” from this statement by capping the limit of any compensable loss per share at FLS’ first increase to its offer price.
There is also a possibility that the compensation order will ultimately be illusory.
Compensation will only be payable if shareholders that traded before the FLS statement was corrected can show (in reasons given in a sworn statement) that:
It is likely the legal fees involved in proving reliance to a level a retired judge would accept may comfortably exceed any compensation that may ultimately be paid.
We have set out above some points that financial advisers, practitioners and market participants may take from this decision. But in terms of policy, what does the Ludowici decision mean for future of the truth in takeovers?
Allowing a “compromise” compensation order where holding a market participant to a last and final statement would “exceed what is appropriate” gives the Panel another way to avoid having to apply the policy strictly in the future.
If every case involving truth in takeovers can be distinguished on its facts and a bidder is prepared to increase its offer, when will the Panel ever decide that it is “appropriate” to deny target shareholders a higher price?
The Panel has repeatedly stressed the importance of truth in takeovers...in theory. In practice, neither ASIC nor the Panel has been prepared to apply the policy as strictly as their other statements suggest and the Panel in particular has distinguished each case that has comes before it.
The UK has a truth in takeovers regime that is applied strictly. Indeed with an iron fist – and not ever a velvet glove! And yet the UK market has not ground to a halt as a result.
The great thing about the market is that when it understands what the rules are, it adapts to those rules and continues to work.
In Australia, we no longer know what the rules are.
If neither the Panel nor ASIC is prepared to implement the policy in its current form, it must be time to re-think the policy so that market participants have a clear understanding of the consequences of making, and departing from last and final statements.
Is it time to just accept that we do not have a truth in takeovers policy, other than to expect that anyone who suffers loss as a result of being misled by “last and final” statements will be adequately compensated?
It might not be best practice but it would have the benefit of being consistent with the reality of enforcement in Australia.
 Corrs M&A Alert February 2012 “Show me the money – price trumps policy again”, Braddon Jolley and Jaclyn Riley-Smith http://www.corrs.com.au/assets/thinking/pdf/MAAlertFeb2012.pdf   ATP 3 at   RG 25.41  In particular, see Bryan Frith “Truth policy could trip up Danish bidder” The Australian 31 January 2012.  Ludowici Limited 01R  ATP 4 at