ANNUAL REVIEW - Australian Centre For Financial Studies

Public Companies being taken private:
a research report into private equity
DAVID MICHELL
CASE STUDY 3
10
In 2008 the Melbourne Centre for Financial
Studies was contracted by The Australian
Council of Superannuation Investors (ACSI)
to conduct a study into the key governance
issues arising from recent private equity
activity.
During 2006 and 2007, large debtfunded
bids to privatize a number of major
public companies (such as Qantas, Coles
and Alinta) prompted shareholders to
question the governance arrangements for
such bids. Areas of concern were scope
for ‘owner-agent’ conflicts of interest and
the possibility that private equity bidders
were being advantaged over the company’s
existing owners in their access to information.
ACSI’s intention in commissioning
this study was to provide some guidelines
which would assist boards to improve their
governance practice and ensure that existing
shareholders did not unnecessarily surrender
value to PE bidders.
ACSI members manage $250 billion
on behalf of 5 million superannuation fund
members. ACSI provides independent
research and advice to its member funds
on environmental, social and corporate
governance investment risk.
Lead investigator for the project
was Dr Chander Shekhar, Senior Lecturer,
Department of Finance at University of
Melbourne who has published widely in
corporate governance field. His co-author
was David Michell of MCFS, who has
previously worked as a portfolio manager
and company secretary. Research assistance
was provided by Ewa Krawiec of MCFS, and
University of Melbourne post-graduates. The
work is expected to provide a basis for future
academic publications.
The MCFS research report ‘Public
companies being taken private’ reviews
academic literature, analyses Australian
and international case studies, and applies
finance theory to the specific questions
raised when public companies are subject
to bids intended to take them into private
ownership.
Key issues were information
asymmetries between bidder and existing
shareholders, the role of executive and nonexecutive
directors in companies subject to
the bids, director and manager remuneration
pre and post bid, and the identification and
mitigation of conflicts of interest for these two
groups.
Key outcomes of the research are a
set of Guidelines and a Code of Conduct
which have been adopted by ACSI.
Guidelines for company boards
subject to PE bids may be summarised as:
1. Target shareholders must be given a
reasonable opportunity to consider and
decide on any bid that involves a change
of corporate control.
2. The target board must ensure that the
bidder does not have any advantage
in information quality and quantity over
target shareholders.
3. An independent board committee, led
by non-executive directors and excluding
any participating insiders, must control all
aspects of the takeover including setting
limits on insider participation, disclosing
identity of insiders, and incentives offered
to them.
Additional guidelines were developed
for participating insiders, investors and nonexecutive
directors. A copy of the Report
including Guidelines and Code of Conduct is
available at www.acsi.org.au and
www.melbournecentre.com.au.