1.1 Takeovers lololololololololololololo lolololololol jhjhjii PDF

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Regulation of Corporate Ownership Takeovers, on and off market bids Introduction What is a takeover? Because companies are made up of shareholders and contain constitutional voting procedures, a company is said to be taken over when there is a substantial change in the pattern of shareholding so that a different group acquires the capacity to control the way a company votes in a general meeting. This change in shareholding patterns obviously occurs as a result of a transfer of share ownership. It would be easy to assume that takeover is only complete once the ‘bidder’ controls over 50% of the shares, but in large companies where many shareholders do not vote, as little as 20% may be sufficient to constitute effective control. There are competing public policy aims which guide takeovers policy, namely:  A perceived economic benefit in maintaining a competitive market where underperforming companies may be taken over by others who think they could be more efficient  Optimum utilization of capital and resources  The need to protect the interests of shareholders in target companies (from loss or oppression)  The need to ensure that shareholders are protected in bidder companies (from misleading information about target companies prospects)  The need for transparency about who has effective control of Australian companies  The need to resist monopolisation S 602 sets out the purposes of the takeovers’ legislation:  Acquisition of control to take place in efficient, competitive and informed market  Target shareholders to have equal opportunity to participate in any benefits  Target shareholders to o Know the identity of acquirer o Have a reasonable time top consider proposal o Be given enough information to assess proposal

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The legislation applies to the acquisition of control over voting shares in both unlisted companies of more than 50 members and listed companies. That is, the transfer of voting shares in a company sufficient to change control. There is no set percentage of shares which can achieve this as it all depends upon the shareholding structure and spread of shares (but anything > 20% the legislation implicitly assumes change in control). Other legislation also impacts on takeovers: 

Competition and Consumer Act 2010 – S 50 prevents takeovers that result in market dominance (monopolisation) unless authorised by the ACCC.



Foreign Acquisitions and Takeovers Act 1975 – Treasurer may prohibit acquisitions of shares by foreign interests in Australian companies and interests in Australian land.



Foreign Investment Review Board – May prohibit acquisitions in the media sector, government agencies and the establishment of new businesses such as tourist facilities, mining or agricultural projects. (makes recommendation to Treasurer)

We shall deal with the Corporations Act – Ch 6.

Overview of Chapter 6 The problem of legalism An ongoing problem for corporate regulation in Australia has been that the courts have continued to pursue a very limited legalistic rather than purposive interpretation of legislation. This attitude by the courts, particularly to the interpretation of Tax and corporate law reached a high point in the 1970s under Chief Justice Barwick, a former liberal party attorney general whose sympathies with the big end of town led to a string of decisions upholding quite artificial schemes which exploited loopholes in tax and corporate legislation. This particular approach was not just confined to tax and corporate law, Barwick was one of the chief advisors to Malcolm Fraser and Sir John Kerr immediately prior to the dismissal of the Whitlam government, and the circumstances of the dismissal indicate a similar “exploit the loophole” approach to the Constitution.

Purposive interpretation

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The fundamental debate surrounds whether the judiciary should give effect to the spirit and intention of laws or merely to the formal text. Frustration with excessive legalism in the 1970s led to amendment of the Acts Interpretation Act to mandate that the courts adopt a purposive style of interpretation of statutes in the commonwealth and state Acts Interpretation Acts from 1981 onwards. Despite this the courts have continued to be overtly legalistic, particularly in relation to takeovers regulation, which has had the effect of forcing the parliament to enact more and more complex legislation to head off various artificial means of frustrating the legislation. Legislation applies to natural persons and corporations within jurisdiction. However it can have an extra territorial operation: see below the Brierley Investments Case.

The basic legislative scheme  The prohibition S 606 – Prohibits a person or company acquiring a relevant interest (used to say becoming entitled) in more than 20% of voting power in an unlisted company which has more than 50 members or a listed company. ‘Relevant interest’ is defined in relation to the right to vote or dispose of shares. (S 608) Once a company owns between 20% and 90% of the voting power it is prohibited from acquiring more (S 606(1)(c)). 

The exceptions to the prohibition Effectively the legislation provides specific procedures (off-market and on-market bids) whereby an actual takeover (ie more than 20%) can take place. This includes requirements of disclosure of interests, intention to make a bid, and the lodging of formal documentation. There are other exemptions from the prohibitions which include; (S 611)



initial shares acquired pursuant to a prospectus.



downstream acquisitions. That is where the acquisition of a greater than 20% interest in one company results in the acquisition of a greater than 20% interest in another company. The exemption applies where shares are acquired in a listed company regardless of whether this (upstream acquisition) was lawful or otherwise.



acquisitions approved by a majority of ordinary shareholders (7), (no votes by acquirer or disposer; full information provided). (ie. where acquirer proposes to acquire an interest from a shareholder that would breach the 20% threshold.)



creeping takeovers (9). It is permitted to acquire up to 3% of the voting shares in a company every six months provided the person had been entitled to at least 19% of the shares for a period of at least six months.

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The prohibition also ceases once 90% control is achieved. These restrictions cease to apply once an entitlement to 90% of the voting power exists at which stage certain compulsory acquisition procedures become available. As we shall see the essence of the regulatory scheme is to ensure the existence of an open and completely informed market such that offerees can make sensible decisions based on all the available information. There are also compulsory disclosure provisions to ensure that corporate management may be forewarned as to a possible takeover occurring and not be ambushed. We shall examine some of these aspects in greater detail. Quiz Questions: 1. How has the courts attitude to interpretation added to the complexity of takeover regulation, do you think the court should adopt a more purposive approach? 2. Why is 20% control of voting power considered to amount to a potential takeover? 3. What is the policy rationale behind the regulation of takeover procedures? Who gains the benefits of regulation? 4. Why could the market not be relied upon to achieve these outcomes?

Relevant Interest The prohibition in s 606 is expressed to apply where a party acquires a ‘relevant interest’ which transgresses the 20% control rule. The term is deliberately wider than ‘ownership’ because it is meant to allow for the identification of effective control not just formal ownership. Defined by s 608(1) – holder, control votes, power to dispose Power or control may be indirect or by means of a trust, agreement or practice, whether or not enforceable. (S 608) Voting Power Under S 610 a persons voting power comprises the aggregate votes of the person and their associates S 610 abandons the reference to an entitlement to voting shares in favour of a reference to voting power. Thus it counts the number of votes rather than the number of shares – counts interests of Associates (ie. counts the number of votes that the person or an associate has a relevant interest in.) What is an associate?

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Ss 10-17 includes: A body corporate that the bidder controls or is controlled by a person with whom a bidder has an agreement for controlling a body corporate or a person with whom the bidder acts in concert. Relevant interest (ie power or control) arises in a number of ways including: 

through voting arrangements,



through a constitution restricting share transfer,



through common directorships,



through interposed companies.

Relevant Interests through Voting Arrangements Arrangements which enable one party to exercise votes attached to another’s shares are likely to give rise to a relevant interest. Proxies: would not give rise to a relevant interest unless valuable consideration has been provided for the grant of the proxy. However under ss (5) a proxy for two or more meetings does not fall within the exception (S 609). That is, ok if for one meeting only and no “valuable” consideration provided. Shareholders have a right to remove directors and they can consult with other shareholders but they must not reach secret understandings or arrangements.

Relevant Interests through Constitution Restricting Share Transfer Illustrated by: North Sydney Brick and Tile Co Ltd v Darvall (1986) 5 NSW LR 662; 10 ACLR 822. Facts: Articles of the target company gave each shareholder a right of first refusal on any shares which were to be sold. D, a shareholder, made a takeover bid (had 16.99%). He argued no need to comply with chapter 6 because he already had a relevant interest in all of the shares by virtue of his first right of refusal. (ie. pre-emptive right) (ie. not requiring a relevant interest as already had 100%) Held: (NSW COA)

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For D. Ability to enforce articles gave D the power to exercise control over the disposal of all of the shares. Did not matter that control was negative and capable of only being exercised in limited circumstances provided that those circumstances were not merely minor. In the North Sydney Brick & Tile case the result was that pre-emptive rights took away the protection of the takeover regulation in the event that the bidder was an existing shareholder. It also prevented an outsider from acquiring a single share because the acquisition would have the acquirers interest move from 0-100%. S 609(8) now provides that a member of a company does not have a relevant interest merely because the constitution gives members pre-emptive rights, provided that all members have pre-emptive rights on the same terms.

Relevant Interests through Common Directorships Ds A

B

T Illustrated by: Clements Marshall Consolidated Limited v ENT Limited (1988) 13 ACLR 90; 6 ACLC 389. Facts: Companies A and B each held shares in company T. A and B were linked by a common directors. Held: Each of A and B were entitled to the shares of company T held by the other company. (ie. had relevant interests in the others shares in T) Each BOD had control over shares in T. Therefore each director deemed by the old S 30(5) to have the same voting power as the others. Co B was entitled to all relevant interests of its directors as they were associates of Co B. Therefore Co B had relevant interests of directors of Co A (S 11). [Now see S 608(2) “alone or jointly”.] In the Clements Marshall case the existence of common directors meant that the companies were entitled to the shares in the third company held by each other.

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S 609(9) avoids this result by stating that a person does not have a relevant interest in securities merely because the person is a director of a company that has a relevant interest in those securities.

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Relevant Interests through Interposed Companies Under S 608(3)(b) a company that controls another company which in turn controls a third company is deemed to have the same relevant interest in the third company as the interposed company. That is a look through provision that operates to determine the ultimate controllers no matter how many companies are in the chain. (control defined in S 608(4)(5))

A Co n t r o l B

I n t e r e s t C

Under (a) a company will be deemed to have the same relevant interest in the shares of a third company as the interposed company if the company has a relevant interest of above 20% of the shares of the interposed company whether or not this shareholding constitutes control of the interposed company.

A >2 0 B I n t e r e s t C

Another company which acquired 20% of the interposed company could also be subject to para (a), ie would also be seen as a controller: see NCSC v Brierley Investments Limited (1988) 14 NSW LR 273; 14 ACLR 177; 6 ACLC 95. Facts: BI L( NZ)

C

IEL

2 0 % C (NZ) v i a D o p t i o R

R (NZ) P (NZ)

W( A) ( Wo ol wo r t hs )

T

SP

20% interest) (ie. was there a downstream acquisition of W?) (ie. downstream acquisition of all the other companies but no takeover issues if R (NZ) listed. If R (NZ) unlisted and 50 shareholders.)

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Held: Yes, because BIL (NZ)’s purchase of more than 20% of the shares in R (NZ) caused its entitlement to voting shares in W to rise to just under 40%. By virtue of para (a) BIL (NZ) was deemed to have the same relevant interest as R (NZ) which interest arose through the control relationships running through the other companies. ie. there was a deemed relevant interest arising from the 20% holding although there was no indication that BIL (NZ) was actually exercising control over the shares in W. => Would need to make a T/O bid for W(A). S 608(2) Power to control includes a) power to control that is indirect b) Power based upon Trust Agreement Practice Any combination of the above Whether or not they are enforceable See Edensor Nominees Pty Ltd v ASIC [2002] 20 ACLC 881 Facts: NCG

E 27.81

GCM

12.56

(T)

NCG

E 49.9

50.1

YGH

YG

(B)

The Normandy Consolidated Group and Edensor (the Gutnick family) held a 49.9% and 50.1% interest respectively in Yandal Gold Holdings that in turn owned a wholly-owned subsidiary Yandal Gold. Edensor and Normandy held 12.56% and 27.81% respectively of the shares in Great Central Mines. The companies entered into an agreement on the 11th January 1999 that provided for participation in a takeover bid for Great Central.

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One aspect of the agreement concerned financing. Under the agreement $285 million was to be borrowed but E was effectively not to be at risk with N covering its potential liability. 

The agreement in clause 1.5 provided that each party agreed that the other did not acquire a relevant interest in the shares in the Great Central held by the other.

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The following day YG issued a bidder’s statement for Great Central and the takeover was subsequently successful. YG then purported to exercise its rights to compulsory acquire the remaining minority.

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The ASIC argued that as a consequence of the agreement the parties became associates of each other and entitled to relevant interests in the shares in Great Central held by each other. Thus both E’s and N’s relevant interest increased to 40.37 percent. Similarly the interest held by YG & YGH increased to this level. Accordingly this was a contravention of s 606.

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It was further alleged that the section was contravened by the parties entering into agreements, said to be informal and not legally binding, the effect of which were that the companies were not to accept the takeover offers and would retain their shares for the purpose of the bid.

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The trial Judge found for the ASIC finding that clause 1.5 could not override the inference to be drawn from all the circumstances. Orders were made allowing the shareholders who had accepted the takeover offers to avoid their contracts. Also E was to pay the ASIC $28.5 million, being the value of the benefit it received for its contravening conduct, to be distributed amongst the shareholders in Great Central (other than the respondents).

The benefit to E was the cost that N was prepared to bear to secure E’s support. The payment of that price deprived the Great Central shareholders of the opportunity of receiving an offer at a higher price. This decision was appealed to the full Federal Court that set it aside for lack of jurisdiction. The ASIC successfully appealed to the High Court that remitted the matter to the full Federal Court. Held: (Full Federal Court) Appeal dismissed. The agreements were in breach of s 606. 

Although for the purposes of the section the power to exercise control might be informal and unenforceable it must involve some true or actual measure of control over disposal of shares. Where there was an unenforceable arrangement the question whether some true measure of control existed must be determined on the assumption

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that the parties acted in accordance with rather than contrary to their arrangement. Thus the trial Judge's conclusion on the effect of clause 1.5 was correct. Once a contravention of s 606 was found a necessary consequence was that the bidder’s statement was false. The compensatory orders made were appropriate. Subsequently YG and Great Central mines were taken over by Newmont. Another example of when relevant interests arise: MYOB Limited -takeovers panel application 26 November 2008 Facts: On 30 October 2008 Manhattan announced an off market takeover bid for MYOB. The bidder’s statement disclosed that certain shareholders in MYOB had indicated that they would accept the offer as soon as it opened. MYOB claimed that this amounted to unacceptable circumstances. Held: These unqualified intention statements amounted to Manhattan obtaining relevant interests in approximately 34% of the shares of the target in contravention of s 606. In any event, these statements generated unacceptable circumstances because they inhibited an efficient, competitive and informed market. Orders were made that the investors could not accept Manhattan's bid before 9 December and must accept a superior bid should it be announced before that date.

S 608(3) and repeat applications S 608(3)(b) can have repeated applications. On the other hand (a), the > 20% rule, cannot. This was the intended effect of the previous law but it was unclear. (ie. deemed control only permissible once in a corporate chain.) ie. Not: A

>2 0

B

>2 0

C

D

(A does not control C in the above.)

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Exemptions from relevant interest definition (S 609) 1.

mortgagee (1)

2.

bare trustee (2)

3.

option holder (6) (exchange traded but not call options generally because the former are all about hedging/speculation not control)

Consequences of a breach of s 606 prohibition:  

Does not invalidate the transaction (s 607) Constitutes an offence (s 1311)

Disclosure of share ownership The relevant interest provisions also trigger another mandatory procedure under the legislation as follows: Shareholders who have ‘relevant interests’ in not less than 5% of voting shares of a LISTED company are obliged (by ss 671B and s 671C) to disclose to the company full particula...