Time to embrace rebuttable presumptions on association issues in the Takeovers Panel?

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This article was written by Shaun McRobert, David Jewkes, Brenda Valdez and Caitlin Morris.

Suggesting the Takeovers Panel finds it difficult to deal with association matters is not ground breaking, but the recent series of Panel proceedings involving Molopo Energy Limited has put the issue back in the spotlight. If the initial Panel and review Panel proceedings are combined, Molopo took over 80 days to convince the Panels that two of Molopo's largest shareholders, Keybridge Capital Limited and Aurora Funds Management Limited, were associated in relation to Molopo.[1] This contrasts with the Panel's target time for reaching a decision in only two to three weeks. Although ultimately the review Panel found an association, the Molopo proceedings illustrate the time consuming and resource heavy battle which many applicants face when seeking to prove an association.

The Panel was designed to be a low cost jurisdiction able to deliver quick commercial outcomes without being restricted by the same rules of evidence as the courts. The Panel generally excels at this and is central to the proper regulation of corporate control transactions in Australia. But association matters have been notoriously difficult for the Panel to manage – given it is for the applicant to produce sufficient evidence to justify a finding of association and the applicant will seldom, if ever, be able to produce a 'smoking gun'.

In the UK and Hong Kong, rebuttable presumptions switch the burden of proof so that certain classes of persons are presumed to be acting in concert unless the presumption is rebutted. The use of similar presumptions in Australia by the Takeovers Panel would arguably benefit the entire investment community.

Challenges in proving association

There are significant challenges facing an applicant and the Panel in association matters:

  • Difficult to prove – by their nature, allegations of undisclosed association are difficult to prove. Rarely will direct evidence of an association exist. As the Panel noted in Anaconda Nickel Limited 15 [2003] ATP 17, it is unlikely that "parties to such agreements carefully document them and leave them on file for production." Rather, establishing an association often requires the Panel to draw inferences from patterns of behaviour, commercial logic and other evidence suggestive of association.
  • The "association hurdle" must be overcome – between 30 June 2016 and 30 June 2017 the Panel received eight applications alleging association (other than the Molopo applications).[2] The Panel declined to conduct proceedings in four of those instances[3] on the basis that the applicant failed to overcome the initial "association hurdle" (i.e. the Panel considered that there was no reasonable prospect that it would declare the circumstances unacceptable as there was insufficient evidence to justify the Panel making further enquiries as to the alleged association). Given applicants are almost always at an information disadvantage, this hurdle is a significant initial obstacle in association matters.
  • The application must be "in time" – the time limitation which requires applicants to bring their application within two months of the alleged unacceptable circumstances is often impracticable. We believe this time period could and should be extended, given association relationships are often latent and only come to light once the relevant relationship has been on foot for some time. In addition, the Panel can only make a declaration within the later of three months after the circumstances occur, or one month after the application was made. In the Molopo proceedings, the initial Panel sought (and was granted) an extension of time from the Federal Court to make its declaration.
  • The Panel has limited investigatory powers – the temporal issues highlighted above are exacerbated by the Panel's limited inquisitorial powers. The Panel cannot order discovery to address deficiencies in evidence and so relies heavily on the quality of the submissions put forward by applicants. Material provided by ASIC, which ASIC may obtain using its own inquisitorial powers, is often of great assistance. The Panel is also starting to use conferences to elicit further evidence.
  • Procedural fairness issues loom large – even if an application is successful, there is the ever present risk that the parties will appeal the decision to the Federal Court on procedural fairness grounds. This has occurred on multiple occasions following Panel decisions on association matters.

The UK and Hong Kong Panels rely on rebuttable presumptions

The equivalent Panels in the UK and Hong Kong have adopted the use of rebuttable presumptions to help determine when parties in certain relationships are "acting in concert".

Under both the UK and Hong Kong Takeover Codes, companies with their directors, companies within the same corporate group, financial advisers and their clients, as well as close relatives are specifically listed as classes of persons presumed to be acting in concert with others in the same class, unless rebutted.

The addition of close family relationships as a class to which a rebuttable presumption applies was only introduced under the UK Takeover Code in 2015. However, in consulting on the proposed changes, the Panel Executive recognised its long-standing practice to presume persons to be acting in concert with their close relatives. The rebuttable presumption codified existing practice.

In Australia, a similar growing practice has arisen where a family relationship is relevant in assessing whether the broader factual matrix establishes association. In Ainsworth Game Technology Limited 01 & 02 [2016] ATP 9, Mrs Ainsworth did not consider there was any "association" between herself and her husband. The Panel disagreed and was prepared to find an association, significantly observing that "marriage is an institution which not only creates the status of husband and wife but also, without specific or further agreement, creates mutual rights and obligations owed to and by the respective spouses". Similarly, in Merlin Diamonds Limited [2016] ATP 18 the Panel found an association existed between a father and son and, earlier, between a father and daughter in CMI Limited [2011] ATP 4. We noted this growing boldness of the Panel to draw inferences in association matters in our article on the Takeovers Panel's activities last year.

Reform Time

The Panel has previously considered the introduction of rebuttable presumptions. In 2015, respondents to a Panel stakeholder survey noted that they preferred to seek resolution through the Panel in instances where jurisdiction is shared with the court - except for association matters.

Now the Panel has an opportunity to re-think the way it handles association matters by formalising the introduction of rebuttable presumptions.

Rebuttable presumptions could:

  • accelerate the hearing of Panel matters by shifting the evidentiary burden of proof to the party who is best-placed to produce the relevant evidence (ultimately reducing the time spent and cost incurred for all parties);
  • provide market participants with greater clarity on the relationships which definitively give rise to an association; and
  • in the case of close family relationships, represent the formalisation of an existing practice.

While we recognise the Australian Panel is structured differently (with different powers) to its UK and Hong Kong equivalents, this should not be a barrier to rebuttable presumptions being introduced in Australia.

Concluding remarks

Introducing rebuttable presumptions is not without some challenges, both legal and practical. While the Panel can make substantive rules to clarify or supplement the provisions of Chapter 6, such rules cannot be inconsistent with the Corporations Act, the ASIC Act or the Regulations. The Panel could introduce a guidance note outlining the types of relationships that will be viewed closely in the context of an association (for instance, husband and wife), providing market participants with greater certainty.

We believe rebuttable presumptions will allow the market to understand relationships giving rise to an association, reduce some of the time and expense committed to Panel applications and produce a more effective and efficient market for corporate control. We think the time for adopting these change is here.

[1] The authors acted for Molopo.

[2] McAleese Limited [2016] ATP 13; Sovereign Gold Company Limited 01R [2016] ATP 14; Jervois Mining Limited [2016] ATP 16; Merlin Diamonds Limited [2016] ATP 18; Kasbah Resources Limited [2016] ATP 19; Kasbah Resources Limited 01R [2017] ATP 1; Innate Immunotherapeutics Limited [2017] ATP 2; Indiana Resources Limited [2017] ATP 8.

[3] Jervois Mining Limited [2016] ATP 16; Kasbah Resources Limited [2016] ATP 19; Kasbah Resources Limited 01R [2017] ATP 1; Innate Immunotherapeutics Limited [2017] ATP 2.

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