Lead-Up to Reforms
Compulsory Acquisition Rights
Managed Investment Schemes
Takeovers Code Anomalies
Application of the Takeovers Code
During the 1990s Australian politics has focused on economic efficiency and this has had an impact on Australia's Corporations Law. Further reforms will come into effect on March 13 2000 with the Corporate Law Economic Reform Programme Act 1999 (CLERP Act), which reforms key areas of corporations, securities and investment law.
The CLERP Act is the culmination of several years of corporate law reform programmes under both the former Labour government and the incumbent conservative Liberal/National coalition government. The CLERP Act incorporates many of the recommendations contained in the 1994 and 1996 reports of the Companies & Securities Advisory Committee, as well as much of the redraft of the takeover provisions of the Corporations Law (Takeovers Code) initially proposed by the Corporations Law Simplification Task Force.
The CLERP Act incorporates the goals of the Corporate Law Economic Reform Programme initiated by the coalition government on its election to office in 1996. These goals include:
- improving productivity;
- responding to technological developments;
- liberalizing trade and capital markets;
- promoting international competition; and
- balancing the benefits of regulation against the cost of compliance.
These aims compete with investor protection. The coalition government claims to have achieved a balance between these competing objectives. Overall, the CLERP Act represents a shift away from the protection of parties (eg, investors and shareholders) towards implementation of business decisions. This is a shift in the philosophy of Australian corporate regulation. Nonetheless, the Corporations Law was long overdue for streamlining and rationalization and the CLERP Act introduces a number of sensible reforms.
The CLERP Act contains provisions that comprehensively reform the following key areas:
- directors' duties and corporate governance; and
- accounting standards.
This article covers the reforms to takeover law. Two further articles to be published shortly will cover the fundraising reforms and reforms in the areas of directors' duties, corporate governance and accounting standards.
The CLERP Act involves an attempt to rewrite Australia's Takeovers Code using plain English. This has not been met with enthusiasm. Recent attempts to rewrite other areas of the Corporations Law have had mixed success. The benefits of plain English legislation, namely that it is simpler to understand and administer, must be weighed against the substantial loss of certainty. Any rewrite will be susceptible of errors and points of confusion.
Judicial consideration of the previous provisions, as well as the established practices of the Australian Securities and Investments Commission (ASIC), provided guidance and certainty as to the meaning and operation of various provisions. Much of this is rendered redundant upon the rewrite. It will take time before a new body of precedent is built up. In the meantime contradictions in the interpretation, administration and enforcement of the law will occur and so Australian companies will be forced to operate within a less certain regulatory framework.
The rewrite involves a limited number of policy changes. The most radical of these are as follows:
Procedures for resolving takeover disputes
The power to deal with takeover disputes has been almost completely removed from the courts. Instead, a specialist takeovers panel - which has so far played only a limited role in regulating takeovers - will have this power.
Compulsory acquisition rights
Compulsory acquisition powers have been extended. The existing post-bid compulsory acquisition power has been streamlined and new compulsory acquisition powers have been added. These will facilitate (i) the acquisition of the remaining securities of a class by a person who holds at least 90% by number of the securities in that class; and (ii) the acquisition of the remaining shares and securities convertible into shares in a company by a person who holds at least 90% by value of all the shares and such securities in the company and whose voting power in the company is at least 90%.
Listed managed investment schemes
The Takeovers Code will be extended to listed unit trusts and other managed investment schemes, ending a perceived anomaly in the Corporations Law.
This list of radical reforms contains one notable omission. There was an initial proposal for the CLERP Act to introduce a UK-style mandatory or follow-on bid rule. This sparked a heated debate among takeover lawyers, investment bankers and regulators about its merits and purpose. The rule would have allowed a bidder to acquire a parcel of shares over the 20% takeover threshold if an unconditional cash bid were immediately announced for all of the remaining target shares in the same class. This reform was rejected in the Australian Senate, where the government does not hold the balance of power. The mandatory bid rule, arguably a major element of the proposed takeover reforms, died a silent death. Although it was a contentious proposal its rejection has attracted little comment.
The most radical innovation of the CLERP Act, in relation to takeovers, is in the resolution of takeover disputes. The Corporations and Securities Panel (Takeovers Panel), which played a limited role in regulating takeovers in Australia, will now determine these disputes. This was previously in the domain of the courts. Given the scant success that the Takeovers Panel has achieved in its more limited role to date, the idea of investing this specialist body with a pivotal role in takeovers has raised questions. Opinions are divided as to whether the innovation will be a success or a failure.
For the last quarter century, most highly-contested takeover bids have involved court proceedings. This has often involved the alleged invalidity (sometimes technical only) of the bidder's Part A statement. This is the statement given by the bidder to the target company at least two weeks before the bidder's offer is dispatched (a copy of which accompanies the offer) explaining details of and the background to the bid, and the bidder and its intentions.
At other times the litigation involves bid rules such as the prohibition on providing or offering collateral benefits to target shareholders outside the formal offer.
Such litigation has often been seen as a delaying tactic by the target company to (i) gain more time to seek out a 'white knight' or pursue other defences, or (ii) gain more time than the very short period allowed by past and present takeover legislation to seek out competing bids.
Despite the objective virtues of this last activity, the coalition government has focused in the CLERP Act on efficient asset allocation within the economy rather than target shareholders obtaining the best price for their shares (as the Corporations Law did before the CLERP Act). It has therefore taken the view that litigation during the takeover period should be eliminated and that, to the extent disputes genuinely arise, they should be dealt with by the Takeovers Panel focusing on expedition rather than the objectivity and rigour typically expected from the Australian courts.
Time will reveal whether the Takeovers Panel will become the quick and effective forum for resolving takeover disputes that is heralded. However, even if this is ultimately achieved, it is fair to ask: How long it will take before the Takeovers Panel is a faster, fairer and more certain dispute resolution forum than the courts?
Under the CLERP Act, the Takeovers Panel will become the principal forum for resolving takeover disputes. It will have the power to:
- declare circumstances to be 'unacceptable' (on expanded grounds) and to make a wide range of orders including an order stopping a takeover bid;
- review the merits of decisions by the Australian Securities and Investment Commission (ASIC) to grant exemptions from or modify the takeover rules, replacing the current Administrative Appeals Tribunal jurisdiction; and
- make rules to clarify or supplement the operation of the takeover provisions.
There is an internal review procedure for the appeal of Takeovers Panel decisions. Also, all interested parties, including the bidder, the target and ASIC, will be able to bring matters before the Takeovers Panel. At present, only the AISC has the power to bring a matter before the Takeovers Panel.
The Takeovers Panel will have an expanded power to declare circumstances to be unacceptable. This will give a significant power to a non-judicial body and may therefore be controversial. The Takeovers Panel could declare otherwise lawful conduct to constitute unacceptable circumstances and refrain from declaring otherwise unlawful conduct to be unacceptable.
The Takeovers Panel may only declare circumstances relating to the affairs of a company to be unacceptable:
- having regard to their effect on the control, or potential control, of the company or another company, or the acquisition or proposed acquisition by a person of a substantial interest in the company or another company; or
- if they involve a contravention of the Takeovers Code; and
- in either case, where it would also be in the public interest, taking into account any relevant policy considerations, to make the declaration.
The Takeovers Panel is required to have regard to the core purposes of the Takeovers Code. These include provisions that:
- acquisitions of control take place in an efficient, competitive and informed market;
- an appropriate procedure is followed as a preliminary to compulsory acquisition of securities; and
- the 'Eggleston Principles' are observed when a person proposes to acquire a substantial interest in a company, body or scheme.
The long-standing Eggleston Principals require that holders of shares or interests, and directors:
- know the identity of the person who proposes to acquire the substantial interest;
- have reasonable time to consider the proposal;
- are given enough information to enable them to assess the merits of the proposal; and
- as far as practicable, have a reasonable and equal opportunity to participate in any benefits accruing to holders through the proposal.
The Takeovers Panel must also have regard to the Takeovers Code, and any generally applicable rules made by it, and may also have regard to any other matters it considers to be relevant.
Range of orders
The Takeovers Panel will have the power to make a wide range of orders either on an interim basis, following an application for a declaration of unacceptable circumstances, or as a final order once the declaration is made.
For example, the Takeovers Panel will be able to make an order to protect the rights or interest of any person affected by the circumstances, and ensure a takeover bid proceeds (as far as possible) in a way it would have proceeded had the unacceptable circumstances not occurred. It may also award a party the right to be reimbursed its legal expenses by the other party. The Takeovers Panel may not make an order directing a person to comply with a requirement of the Takeovers Code.
The Takeovers Panel or its president may make interim orders, even if no application for a declaration of unacceptable circumstances (or such declaration itself) has been made. Any use made of such power will be the subject of considerable interest and will have a substantial effect on a bidder's ability to proceed with its bid.
It will be an offence to contravene any order of the Takeovers Panel.
Diminished role of the court
Under the changes made by the CLERP Act, the Takeovers Panel replaces the courts as the principal forum for resolving disputes about a takeover bid until the bid period has ended. Only the Australian Securities and Investment Commission or another public authority of the Commonwealth or a state may start court proceedings in relation to a takeover bid, or a proposed takeover bid, before the end of the bid period.
The courts will retain jurisdiction over claims made after the end of a bid period. However, the range of orders that a court may make in respect of civil claims after the end of a bid period has been considerably reduced. For example, the only remedial order that the courts may make is the award of damages.
The Takeovers Panel may refer a question of law arising in a proceeding to the court for a decision. While this seems sensible, it will not be without difficulties in practice, which highlights the potential problems in the Takeovers Panel being the primary forum for the resolution of disputes. How often will the Takeovers Panel refer questions of law to the courts? How much time will referrals take? How will any divergence between the views of the Takeovers Panel and the courts on a given dispute be resolved, given the involvement of both in its resolution?
The following may apply to the court for enforcement of a Takeovers Panel order:
- each party to a Takeovers Panel proceeding;
- any person to whom an order relates;
- the Australian Securities and Investment Commission; and
- the president of the Takeovers Panel.
Administrative Appeals Tribunal replaced
In a significant extension of its powers, the Takeovers Panel will have the power to review on its merits a decision by the ASIC to grant an exemption from or modify the takeover provisions. This will replace the semi-judicial Administrative Appeals Tribunal, which presently performs this role.
Power to make rules
The Takeovers Panel will also have the power to make generally applicable rules to supplement or clarify the operation of the Takeovers Code. Rules made by the Takeovers Panel will prevail to the extent of any inconsistency with ASIC releases such as policy statements and practice notes.
This new power is troubling. The Takeovers Panel's powers both to declare unacceptable circumstances and to review the ASIC decisions gives rise to separation of powers issues.
There is a question of constitutional validity that has the potential to unravel the positioning of the Takeovers Panel as the main forum for takeover dispute resolution. The Takeovers Panel's powers to determine takeover disputes may constitute the exercise of judicial power and accordingly be unconstitutional (see Section 71 of the Australian Constitution).
Some who recall the debacle of Precision Data Holdings Ltd v Wills (1991 173 CLR 167) are surprised that the government is prepared to take the risk that the reconstituted Takeovers Panel will face constitutional challenge. The Precision Data Case involved a question - debated all the way to the High Court of Australia - as to whether the Takeovers Panel exercised the judicial power of the Commonwealth of Australia, and accordingly was unconstitutional. If similar action were taken against the Takeovers Panel while it was coming to terms with its new role and needed to focus its efforts and resources accordingly, the effect would be challenging.
In the Precision Data Case the courts found that the Takeovers Panel (as then and presently constituted) did not exercise the judicial power of the Commonwealth. However, given the wider powers granted to it under the CLERP Act, the matter may be tested again. Nevertheless, a number of factors tend towards a characterization that the Takeovers Panel does not exercise judicial power. These include the fact that the Takeovers Panel may take into account matters of policy (and not merely apply legal principles) in making declarations and is not given the power to enforce its own orders.
In any event, there is an argument that the principles of separation of powers do not apply (at least in part), and that the Takeovers Panel can therefore be invested with judicial power. The basis for this is that the Takeovers Panel's jurisdiction in the various Australian states is dependent on state rather than federal legislation and the principle of separation of powers is arguably not applicable at the state level. In particular, the Takeovers Panel was formed under the exercise of the 'territories power' in the Commonwealth Constitution and its jurisdiction is extended to the states by state application legislation. This follows from the fact that the Takeovers Panel is established under the ASIC Act, itself enacted in reliance on the Commonwealth's territories power under the Commonwealth Constitution.
Purposes of the changes
The reforms to the Takeovers Code reflect a shift in thinking over recent years towards the view that corporate law should be judged by reference to its economic outcome and its contribution to economic growth. Consistent with this frame of reference, the reforms are aimed broadly at stimulating more takeover activity, and thereby more economically efficient asset allocation in Australia.
It is questionable whether this is a worthy objective for takeover law for two reasons. First, to regard corporate law as essentially an instrument of economic management may undermine its other purposes, such as protection of investors. Second, even if it is accepted that an aim of corporate law reform is to enhance economic efficiency and growth, will the changes increase takeover activity and will this activity achieve greater economic efficiency? These may be questions for economists but (leaving to one side the interests of investment bankers and takeover lawyers in generating fees) increased takeover activity of itself is not necessarily a desirable ultimate aim.
It is apparently intended that the changes to takeover dispute resolution will minimize tactical litigation, and allow takeover disputes to be resolved more quickly and efficiently so that the outcome of the bid can be determined by target shareholders on the basis of its commercial merits.
While the goals of quick and efficient resolution of takeover disputes are admirable, the perceived delays associated with litigation appear to have been overstated. Litigation only occurs in a relatively small number of takeovers overall, and it only rarely leads to significant delay. The courts tend to be mindful of the benefit of allowing the bid to be put before target shareholders on a timely basis and expedite takeover litigation appropriately.
A certain delay can, in fact, be beneficial for target shareholders as it provides time for competing bidders to emerge and can lead to an auction for corporate control. While this may make a bid more expensive for the bidder, it allows one of the express purposes of the Takeovers Panel to be more fully realized, that of target shareholders having a reasonable and equal opportunity to participate in any benefits accruing to them through an acquisition of control of target.
After the end of a bid period, a party may bring court proceedings for damages arising out of a breach of the Corporations Law. This may limit the efficacy of the prohibition against a party bringing proceedings during the bid period. A party such as a competing bidder may inform a bidder of its intention to start proceedings for damages after the conclusion of the bid. If the amounts involved are substantial, this may be an unacceptable risk for a bidder. The bidder may therefore decide to abandon the bid. Because of the uncertainty introduced, the risk in persisting with the bid and facing an action for substantial damages in the future may introduce more imponderables for the bidder than facing an application for interlocutory relief, as under the present regime.
Compulsory acquisition and buy-out procedures under the Corporations Law are fairly limited in scope. The government's stated purpose is to promote economic efficiency and so the CLERP Act modifies and extends compulsory acquisition procedures. This will assist majority shareholders to acquire outstanding securities to take advantage of 100% ownership. The amendments could greatly reduce the scope afforded under the present law for minority shareholders to extract high prices for their shares from majority shareholders seeking 100% ownership of a company. The changes made by the CLERP Act introduce a shift in policy towards the interests of the majority and away from the interests of minorities that have prevailed in recent years (as exemplified by the decision in Gambotto v WCP Ltd (1995) 182 CLR 432).
The CLERP Act:
- modifies and extends the present post-bid compulsory acquisition procedure;
- introduces a new compulsory acquisition power to enable a person who has a full beneficial interest in at least 90% of the securities in a particular class to compulsorily acquire all the other securities in that class;
- introduces a new compulsory acquisition power to enable a person who has a full beneficial interest in at least 90% by value of all securities in a company to compulsorily acquire all shares or securities that are convertible into shares; and
- provides for certain associated buy-out rights.
Post-bid compulsory acquisition procedure
The existing post-bid compulsory acquisition power has been subject to modifications and extensions. The new compulsory acquisition threshold requires the bidder and its associates to have relevant interests in at least 90% by number of the securities of the bid class and 75% by number of the securities the subject of the bid. Until now, the 75% requirement only applied if the bidder had a pre-bid stake of more than 10%.
The securities that must be compulsorily acquired are all of the outstanding securities of the bid class which were issued or granted before the end of the bid period and in which the bidder does not have a relevant interest. In addition, the bidder may elect to compulsorily acquire securities in the bid class that were issued after the end of the bid period and before the compulsory acquisition notice is issued. The bidder may also elect to compulsorily acquire securities and options in existence when the bidder issues the compulsory acquisition notices that are convertible or exercisable into securities in the bid class which are exercisable within six weeks after the notice is given. This compulsory acquisition power may only be exercised for one month after the end of the takeover offer period.
A bidder who either directly or through associates has relevant interests in at least 90% by number of the securities in the bid class at the end of the offer period must offer to buy out the remaining holders of bid class securities, or securities that are convertible into bid securities.
Power for 90% security holder
A new compulsory acquisition power is introduced to enable a party that has a full beneficial interest in at least 90% of the securities in a particular class (a '90% holder') to compulsorily acquire all the securities in that class in which neither the person nor any related corporate bodies have full beneficial interests.
In addition, a party that holds full beneficial interests in at least 90% by value of all the securities of the company that are either shares or convertible into shares (also a '90% holder'), may compulsorily acquire all of the shares and securities convertible into shares of which they do not already have full beneficial interest.
The CLERP Act also provides for an early warning device. Shareholders in a company are notified upon a person becoming an 85% holder that the person will be able to compulsorily acquire the securities in that class if the person becomes a 90% holder in relation to that class.
The terms of the compulsory acquisition must give a fair value for the securities, which must be a cash sum and the same amount for each security in the class acquired. The provisions set out the procedure to be followed to complete the acquisition as well as a number of additional requirements including a requirement for an expert's report to accompany compulsory acquisitions notices. The expert must be independent and nominated by the ASIC.
The compulsory acquisition powers of a 90% holder (i) do not require a bid to have been made, and (ii) need not be exercised immediately, but must be exercised by the later of 12 months after the provisions have started or six months after the holder becomes a 90% holder.
The Takeovers Code does not extend to listed unit trusts or other managed investment schemes. This reflects a view that they involve passive investments on the part of investors, and are different from shareholdings in companies whose members have traditionally had more extensive voting rights - and consequently the possibility of a more active role in controlling the direction of the company than passive investors.
In recent years this distinction has blurred. Because of this, some regard the fact that the Takeovers Code does not apply to managed investment schemes to be an anomaly. The changes under the CLERP Act mean that takeover rules, compulsory acquisition provisions, substantial holdings and ownership tracing provisions will all apply to managed investment schemes.
The provisions will not apply to unlisted unit trusts and other managed investment schemes because, according to the Australian Treasury Department, certain features of many unlisted schemes make the application of company takeover law impractical.
As well as introducing major reforms, the CLERP Act has involved a supposedly plain English re-write and some rationalization of anomalies in the Takeover Code provisions. Some of the more significant are outlined below.
Bidders giving collateral benefits
Most notably, the CLERP Act will repeal part of the contentious collateral benefits provision of the old Corporations Law. A person who proposes to make a takeover bid for a company within four months was prohibited from giving a benefit not to be provided for under the bid to one of the company's extant shareholders (or its associates). The prohibition will be removed on March 13 2000.
This prohibition has given rise to extensive litigation over the last two years. As a result of this bidders (and their bankers) have insisted that it unfairly and improperly impedes their ability to build a pre-bid stake. It either deters them from making takeover bids or makes it harder for them to make a takeover bid that is successful.
Under the new law, such a benefit is not prohibited but must be disclosed in the bidder's statement. Presumably, however, a benefit given contrary to the Eggleston Principles could be brought to the attention of the Takeovers Panel if it may constitute unacceptable conduct, for example, if it robbed target company shareholders of their proper share of a takeover premium. This may be an appropriate area for the Takeovers Panel to exercise its rule-making power.
The rest of Section 698 of the old Corporations Law remains, albeit rewritten. A bidder is still prohibited from giving a collateral benefit during a bid period that is not offered to all holders of securities in the bid class, if the benefit is likely to induce the person to accept an offer under the bid or dispose of securities in the bid class.
Acquisitions through on-market transactions conducted in good faith are still excluded from the prohibition.
Powers of target shareholders
The primary rule under the Corporations Law remains that no person may acquire more than a 20% voting interest in a company except by:
- a written takeover offer (preceded by delivery of a Part A statement - now a bidder's statement - to the target company);
- a takeover announcement (ie, an on-market offer); or
- one or more of other exceptions to this primary rule.
Removing the previous requirement that the acquisition must occur by way of allotment or purchase has widened one exception to this primary rule, that is, permitting acquisitions approved by target shareholders. Any acquisition will now be capable of being approved by shareholders for the purposes of the exemption. This will remove the need to seek relief from the ASIC in such cases.
The exemption to the primary takeover prohibition of downstream acquisitions has also been widened. The new exemption will extend to an acquisition in any manner of shares in an upstream corporation wherever incorporated provided that it is listed on an Australian stock exchange or on a foreign stock exchange approved in writing by the ASIC.
The previous exemption was limited to acquisitions under a takeover scheme or takeover announcement and the upstream corporation had to be a listed Australian body. However, the ASIC relief was often granted to widen the carve-out so the main practical effect of the change will be to negate the need to obtain ASIC relief.
Agreements subject to consent
The scope of relevant interests disregarded for the purposes of the operation of the Takeovers Code has been amended. The most significant new category disregarded is in respect of the interest of a purchaser under an agreement conditional upon either approval by shareholders' resolution or an ASIC exemption. While such an interest is now disregarded for the purposes of the primary takeover prohibition, it is not disregarded for the purposes of the substantial holding notification provisions.
The concept of 'entitlement' to shares has been replaced with that of a person's 'voting power'. This is not a substantial change. The new approach is justifiable on the basis that the focus of the Takeovers Code is control of target companies, which essentially is determined by votes on the election of directors.
A person's voting power is, expressed as a percentage of the total votes in a corporation, the total votes that can be cast in respect of the election of a director (or if this is not determined by a vote, on the adoption or amendment of a constitution) attaching to all voting shares in the corporation in which a person or their associate has a relevant interest. The primary rule referred to above (see Powers of target shareholders) focuses on acquisitions of voting shares which increase a person's voting power beyond 20%.
Application of the Takeovers Code
The Takeovers Code will not apply to unlisted companies with less than 50 members. This replaces the previous exclusions for acquisitions of shares in a company which does not have more than 50 members and proprietary companies with more than 50 members where the members have consented in writing to the non-application of Chapter 6 to the acquisition.
However, the Takeovers Code now applies to options. Options over unissued shares now constitute securities for the purposes of the takeover provisions. A takeover bid can therefore now be extended to such securities and they can attract the application of the compulsory acquisition provisions.
For further information on these topics please contact John Atanaskovic or Danny Simmons at Atanaskovic Hartnell by telephone (+61 2 9777 7000) or by fax (+61 2 9777 8777) or by e-mail ([email protected] or [email protected]).
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