This article was written by Michelle Siekierka.
This article considers issues raised by applications to the Takeovers Panel (Panel) since 1 January 2019. It explores the role of the Panel (in relation to bid tactics and delisting) and the Panel's broad decision-making powers. We also touch on some of the current areas of focus of ASIC of relevance to takeovers.
Recent Panel matters
The applications considered by the Panel this year have predominantly centred on disclosure. The Panel's consideration of these matters is depicted in the table and themes arising from the applications are explored below.
| # |
Activity (1 January 2019 – 31 March 2019) |
| 10 |
Applications made to the Panel (including 4 review applications)[2] |
| 3 |
Applications in which the Panel declined to conduct proceedings[3] |
| 3 |
Declarations of unacceptable circumstances made[4] |
| 2 |
Applications being considered as at 31 March 2019[5] |
Panel and bid tactics
Panel applications have long been factored into the strategy of bidders, targets and market participants during control transactions. While it is, rightly, a check and balance to ensure control transactions take place in an efficient, competitive and informed market, with enough information being made available to market participants, the number of applications made this quarter in respect of which the Panel quickly concluded that it would not conduct proceedings, or for which the applicant subsequently withdrew its Panel application, does raise questions about the use of the Panel by applicants.
We have also seen in this quarter:
- An application to the Panel in relation to the affairs of an unlisted company that did not have more than 50 members (that is, in circumstances in which section 606 of the Corporations Act did not apply and the Panel did not have jurisdiction); and
- Four review applications made in relation to the Panel's decision to make a declaration of unacceptable circumstances, each of which was withdrawn once final orders were made (or undertakings accepted) by the Panel.
We are not asserting that these were tactical applications to the Panel. However, the willingness of the Panel to accept applications to withdraw applications, and the readiness of the Panel to decline to conduct proceedings, should reinforce to participants and their advisers that the Panel considers its jurisdiction, powers and the circumstances of each application carefully before proceeding.
Delisting and shareholder coercion
Two applications were made to the Panel in relation to the affairs of Flinders Mines Limited (Flinders Mines). These applications concerned Flinders Mines' proposal to delist after undertaking an on-market buy-back and an unmarketable parcels sales process. This was the first time that the Panel has closely examined, and provided guidance on, delisting.
Flinders Mines announced in December 2018 that it had applied to, and received in-principle approval from, the ASX to delist (subject to conditions that included shareholder approval by ordinary resolution). It indicated that its major shareholder, TIO (NZ) Limited (TIO) (which had acquired control of Flinders Mines through a takeover bid in 2016), intended to vote in favour of the delisting. Flinders Mines also announced that it would undertake an on-market buy-back of up to 10% of shares on issue, to provide shareholders who did not wish to retain their shares with an opportunity to exit their investment in Flinders Mines. Flinders Mines entered into a loan agreement with a subsidiary of TIO to fund the proposed buy-back, with this funding to be repaid by a rights issue – this had the potential to increase TIO's voting power in Flinders Mines from 55.56% to 65.3%.
Although the ASX had approved the proposed delisting, the Panel considered that it was not prevented from conducting proceedings in relation to the combined transaction and from making a declaration of unacceptable circumstances, even if the proposed delisting itself complied with the requirements set out in ASX Guidance Note 33 (Removal of Entities from the ASX Official List) (GN 33). The Panel considered that, where delisting (together with other elements of the proposed transaction) has or is likely to have an effect on control or the acquisition of a substantial interest in a listed company, and appears inconsistent with the purposes in section 602 of the Corporations Act, it is appropriate for the Panel to consider whether the proposed transaction gives rise to unacceptable circumstances.
The Panel was concerned here about a number of aspects of the proposal. Its concerns centred on the effect of the proposal (rather than the purpose of seeking to be delisted), and the facts that:
- There was a large proportion of 'free float' shareholders who may not wish to hold shares in an unlisted entity and the limited liquidity in trading of Flinders Mines' shares;
- Flinders Mines' proposed exit opportunity capped the buy-back (which the Panel considered was coercive as it would operate on a "first in" basis), had a maximum price and no floor price; and
- The strategy of delisting in these circumstances had not been clearly contemplated during TIO's takeover bid or in any subsequent entitlement offer booklets.
The Panel made a declaration of unacceptable circumstances because of the coercive effects of certain features of the proposed de-listing and associated transactions. It ultimately accepted undertakings in relation to the circumstances (including that Flinders Mines seek ASX approval for a revised process to delist involving an equal access scheme (off-market) buy-back of 10% of shares at a fixed price with a pro rata scale back).
It is interesting to note that this application was being considered by the Panel at the same time as the ASX was consulting on simplifying, clarifying and enhancing the integrity and efficiency of the ASX Listing Rules – including by proposing changes to GN 33. The existing version of GN 33, and the proposed changes to GN 33, would not have impacted Flinders Mines' compliance with the ASX's usual conditions to removal. However, companies should also be conscious of the Panel's role in relation to applications for delisting, where these applications are associated with a proposed acquisition of a substantial interest.
Panel's broad discretion in decision-making
In our October 2018 alert, we discussed the matter of Finders Resources Limited (Finders), in which Taurus Management Pty Ltd (Taurus) (a manager of two vehicles who, together, held a substantial holding in Finders) accepted the offer made by Eastern Field Developments Limited (Eastern Field) under its takeover bid for Finders, after making a statement that it did not intend to accept Eastern Field's offer (intention statement).
The initial Panel made orders holding Taurus to its statement, with these orders varied on review. The review Panel allowed Taurus to accept Eastern Field's offer under the takeover bid (on deferred terms), although required Taurus to pay compensation to affected shareholders.
Eastern Field was not happy with the review Panel's decision on orders, and decided to contest it by making an application to the Federal Court of Australia (Court) for judicial review. This was a line ball call – 50% of applications for judicial review of a Panel decision have been successful.
Eastern Field contended that the review Panel:
- Did not consider and discharge their statutory task when it came to awarding the relevant relief;
- Failed to properly consider the prejudice to Eastern Field and the takeover process itself; and
- Imposed, without warrant, an evidential burden on Eastern Field, contrary to the established flexible practice of the Panel generally.
Judicial review is not simply a rehearing on the merits – to make an application for review, Eastern Field had to plead one or more of a number of specified grounds. Eastern Field pleaded that the review Panel:
- Improperly exercised its decision making power – it alleged that the decision was unreasonable and that the review Panel failed to address relevant considerations (including that Taurus' conduct did not conform with Regulatory Guide 25 Takeovers: False and misleading statements (RG 25) and that Eastern Field relied on the intention statement);
- Failed to consider relevant matters (and considered irrelevant matters) and proceeded without evidence – it alleged that, in making the orders, the review Panel failed to adequately consider the unfair prejudice that the orders would have on Eastern Field and concluded, without basis and in an irrational or illogical manner, that the orders would not unfairly prejudice Eastern Field or that Eastern Field's rights and interests were appropriately protected; and
- Made an error of law – it alleged that, by the Panel misconstruing its statutory power to make orders as requiring it to be satisfied, by contemporaneous evidence, that Eastern Field relied on the intention statement in declaring its takeover bid unconditional and, later, final.
The Court dismissed Eastern Field's application for judicial review on each ground.
The Court had regard to the experience of the Panel members in evaluating the takeovers process, and noted that the legislature had conferred on the Panel specialist expertise with particularly wide discretion. The Panel is "entitled to use expert judgement, based on the material before it and the experience of its members".
The Court also noted that decisions are made without laws of evidence necessarily applying and in abbreviated timeframes, and that this must inform an assessment of reasonableness of a Panel decision.
The decision affirms the wide discretionary powers and decisional freedom of the Panel. With this affirmation, it is difficult to see circumstances in which an application for judicial review will be upheld. A decision to apply for judicial review would appear to be largely a tactical one (or a last gasp effort in a high-stakes situation such as this).
From a truth in takeovers perspective, the decision also reinforces that the Panel is not obliged to ensure there is compliance with the object of the 'truth in takeovers' policy laid out in RG 25 – the Court noted on a number of occasions that RG 25 does not have the force of law and is not binding on the Panel.
Putting this to one side, however, ASIC still proposes to update RG 25 and intends to consult on these updates in May later this year. We will discuss that consultation in our next edition.
ASIC's current focus
ASIC published Report 612: ASIC regulation of corporate finance: July to December 2018 on 15 March 2019. In addition to reiterating its position in relation to stub equity, which we discussed in our January 2019 alert, ASIC notably:
- Cautioned market participants in relation to entering into, and disclosure of, relevant agreements – ASIC took the view in relation to Blackstone's bid for Investa Office Fund (IOF) that Blackstone had obtained a relevant interest in another unitholder's voting shares. IOF's largest shareholder, the unlisted Investa Commercial Property Fund (ICPF) (which owned a 19.95% interest in IOF at the time), announced that it would vote in favour of the scheme if Blackstone increased its offer price. Blackstone subsequently increased its offer price and ASIC considered that Blackstone had obtained a relevant interest in ICPF's units in IOF, and required Blackstone to file a substantial holder notice reflecting this. Blackstone agreed to act in accordance with ASIC's view that it had voting power in ICPF's interest in IOF (filing a substantial holding notice reflecting this). ASIC did not restrict the units from being voted or otherwise seek to discount such votes cast; and
- Emphasised its close focus on governance and conflict issues that, in ASIC's words, may undermine the ability of a target board to carry out its duties and, in turn, the integrity of the takeover process. ASIC, in particular, reminded participants that some restrictions on fiduciary outs may not be acceptable, such as requiring unanimity in the board's decision.
[1] Yowie Group Ltd (see TP19/21) (which also involved a range of structural issues); Riversdale Resources Limited (see TP19/20); IndiOre Limited [2019] ATP 4; Flinders Mines Limited 02 & 03 [2019] ATP 2; Benjamin Hornigold Limited 02 and Henry Morgan Limited 02 [2019] ATP 1.
[2] The Panel received 1 review application in relation to the affairs of Flinders Mines Limited – Flinders Mines Limited 04R (TP19/11) was an application for review of the Panel's decision to make a declaration of unacceptable circumstances in Flinders Mines Limited 02 & 03 [2019] ATP 2. This application was withdrawn (TP19/16) following the Panel accepting undertakings (in lieu of the Panel making orders) from Flinders Mines Limited and TIO (NZ) Limited (see TP19/12).
The Panel received 3 review applications in relation to the affairs of Benjamin Hornigold Limited and Henry Morgan Limited (TP19/05). John Bridgeman Limited sought a review of the Panel's decision to make a declaration of unacceptable circumstances in relation to the affairs of each company. Each company also separately sought a review of the Panel's decision to make a declaration of unacceptable circumstances in relation to its affairs. Each review application was subsequently withdrawn (TP19/13) following the Panel making final orders (see TP19/08).
[3] Factor Therapeutics Limited [2019] ATP 5, IndiOre Limited [2019] ATP 4; Nimrod Resources Limited [2019] ATP 3.
[4] Flinders Mines Limited 02 & 03 [2019] ATP 2; Benjamin Hornigold Limited 02 and Henry Morgan Limited 02 [2019] ATP 1.
[5] In relation to the affairs of Riversdale Resources Limited, an unlisted public company, in the context of a cash off-market takeover bid by Hancock Corporation Pty Ltd (TP19/20). On 1 April 2019 the Panel announced that it had declined to conduct proceedings in relation to this application (TP19/23). The other application was made by Keybridge Capital Limited in relation to the affairs of Yowie Group Limited (TP19/21). As of the date of this alert, the Panel is still considering this application.
[6] See, for example, the comments of the Panel in Taipan Resources NL 07 [2001] ATP 18 at [54].
[7] In accordance with the purposes of Chapter 6 set out in section 602 of the Corporations Act.
[8] Nimrod Resources Limited [2019] ATP 3.
[9] Flinders Mines Limited 04R; Benjamin Hornigold Limited 03R & 04R and Henry Morgan Limited 03R & 04R. Noting that this also raises queries regarding the review process in circumstances where the Panel makes a declaration of unacceptable circumstances prior to making orders – parties only have 2 business days after the date on which the declaration was made to make a review application (section 657EA(3) of the Corporations Act, regulation 6.10.01 of the Corporations Regulations).
[10] Diana Nicholson was a member of the relevant Panel. The following comments are the views of Michelle Siekierka, not Diana Nicholson.
[11] Flinders Mines Limited 02 & 03 [2019] ATP 2 at [20].
[12] Flinders Mines Limited 02 & 03 [2019] ATP 2 at [16(d)], [19].
[13] Although query whether ASX may have excluded TIO from voting in relation to the application pursuant to section 2.7 of the proposed amended GN 33.
[14] Eastern Field Developments Limited v Takeovers Panel [2019] FCA 311 at [135].
