Failure to Comply
On March 11 2002 amendments to the Corporations Act introduced onerous telephone monitoring requirements on bidder and target companies during takeover bids. The amendments are part of a general programme of reform of Australian corporations law under the Financial Services Reform Act. The new telephone monitoring provisions are designed to give shareholders additional protection against misleading and deceptive conduct by bidder and target companies during takeover bids.
The New Recording Requirements
The new provisions require bidder and target companies to record telephone calls with shareholders that occur during the bid period to discuss the takeover bid (whether or not the calls occur for some other purpose as well). The provisions appear to apply irrespective of whether the calls are made to or from persons in their capacity as a shareholder, as opposed to, for example, in their capacity as employees of, or advisers to, the bidder or target. However, in the past courts have interpreted similar provisions imposing restrictions on dealings with shareholders as confined to dealings with such persons in their capacity as shareholders. As the new provisions have yet to be considered by an Australian court, it is uncertain whether a similar limit will be implied, but in any case legislation is pending to address this issue.
It will be necessary to record both calls made to shareholders by the bidder or target to discuss the bid (ie, a telephone campaign directed at shareholders to ascertain their response to a takeover bid), and incoming calls from shareholders where the bidder or target has invited the call. Inviting a call is likely to include circumstances where the bidder or target has set up an 'information line' and also more subtle circumstances where, for example, the bid documentation specifies a contact person and telephone number for shareholder queries or further information. The Australian Securities & Investments Commission (ASIC) has indicated that if the bid documentation includes contact numbers for advisers or agents (eg, a share registry or communications firm) this may also amount to an invitation, with the result that the telephone recording requirements may apply to those advisers or agents.
As the recording requirements apply to all telephone calls with shareholders during the bid period that discuss the bid, bidder and target companies will need to avoid making or receiving calls where there are no recording facilities in place (eg, from mobile phones or to or from the homes of executives or directors).
The new provisions also prescribe in some detail how telephone recordings should be made and stored. These include the following:
- The bidder or target must notify the shareholder that the telephone call is being recorded. Failure to do so is an offence under the Telecommunications (Interception) Act 1979. A mere beep at the start of the conversation is probably insufficient to satisfy this requirement.
- The bidder or target must comply with very specific requirements as to the identification, indexing, storage, use, copying, security and maintenance of recordings.
- The recordings must be kept for 12 months after the end of the bid period or for a longer period as specified by the ASIC.
- The recordings must be destroyed the day after the 12-month period (or the longer period specified by the ASIC) expires.
The recording requirements do not apply to calls with 'wholesale holders', which includes shareholders who:
- hold at least A$500,000 in securities of the target;
- are professional investors;
- had net assets of A$2.5 million or a gross income of at least A$250,000 for each of the last two financial years; or
- are directors or executive officers of, or financial advisers to, the bidder or target company.
Currently, these exemptions do not include calls to discuss the takeover bid with other professional advisers to bidder or target companies (eg, lawyers and accountants) where those advisers also happen to hold shares in the target. This appears to be an oversight, given that it would be inappropriate to require that telephone conversations of any person acting in a professional capacity on behalf of the bidder or target be recorded merely because they also hold securities in the target. Legislation is expected to be enacted shortly to correct this by expanding the exemption to include anyone acting on behalf of the bidder or target where the telephone conversation relates to the discharge of their duties to that bidder or target.
Failure to Comply with the Requirements
Failure to comply with any of the recording requirements constitutes an offence. The general principles of criminal responsibility under the Criminal Code apply. Penalties for an offence include terms of imprisonment ranging from six months to two years (where the offence is committed by an individual) and/or a monetary penalty.
Implications of the New Requirements
As a consequence of the new provisions, bidder and target companies contacting or inviting discussions with shareholders by telephone during takeover bids will need to ensure compliance with all aspects of the recording requirements in order to avoid penalties. Bidder and target companies will also need to take account of how the recording requirements affect their obligations and the rights of shareholders under recent changes to the Privacy Act that came into effect in December 2001, which prescribe how personal information must be handled by private sector organizations.
Further, although information lines and adviser contact points have long been common to takeover bids, bidder and target companies will now need to reconsider the substantial costs likely to be associated with the ongoing provision of such services due to the new recording requirements (eg, costs involved in staff training, installation of recording devices, and indexing and storage of recordings). In this sense, the new recording requirements may well militate against the policy of an informed shareholder base as they are likely to discourage bidder and target companies, particularly smaller companies for whom the issue of cost is paramount, from making or accepting telephone calls from shareholders in relation to takeover bids.
For further information on this topic please contact Danny Simmons or Elissa Edgerton Black at Atanaskovic Hartnell by telephone (+61 2 9777 7000) or by fax (+61 2 9777 8777) or by email ([email protected] or [email protected]). The Atanaskovic Hartnell website can be accessed at www.ah.com.au.