- GPG held 56% of Touch Holdings, an unlisted public company, and sold its stake to four buyers each of whom acquired less than 20%.
- The Panel found that certain of the buyers were associated (one Panel member thought all the buyers were associates of each other), meaning that the acquisition resulted in a breach of the 20% rule in section 606.
- The Panel also found that each buyer was, as a result of an earn out arrangement, an associate of the vendor, which also gave rise to a breach of section 606.
In Touch Holdings Ltd  ATP 3, the Panel found that the purchase of 56% of the shares in Touch by four purchasers breached s 606, the 20% rule. The Panel declared that the purchase had given rise to unacceptable circumstances, cancelled the sale, and ordered the shares returned to the vendor. The decision provides further guidance on the Panel’s approach to association issues and shows the dangers of importing arrangements suitable for private company transactions into transactions to which Chapter 6 of the Corporations Act applies.
Touch is an unlisted public company. Chapter 6 applies to it, because it has more than 50 shareholders. A subsidiary of GPG plc held 56% of Touch, which it was trying to sell, on an all-or-nothing basis. No one buyer could take the entire 56% without contravening s 606, but four buyers agreed to take 19.9%, 19.9%, 8% and 8% respectively, so that no one of them took more than 20%. One buyer was a director of a company which already held 28% of Touch, and another held 3%.
The buyers seem to have thought that there was no need to seek the approval of other shareholders for their purchase as no individual purchaser was acquiring more than 20%. They warranted to the vendor that they were not associated with one another, that is, none of them was party to an agreement, arrangement or understanding with any other for the purpose of controlling the conduct of Touch’s affairs or the composition of its board. If any two or more of them had been associates, their respective parcels would have had to be aggregated for the purposes of s 606.
The approach of the Panel
Three matters concerned the Panel. First, there were pre-existing business and personal connections between the purchasers, suggesting that they were associated with one another. Secondly, the four purchases were negotiated and documented as one transaction, and financed together, suggesting that all four purchasers were associated with one another. Finally, clauses of the agreement relating to an ‘earn-out’ seemed to create associations between each purchaser and the vendor.
Association between the buyers
The share purchase agreement, and the financing of the purchases, were negotiated by one of the purchasers, with another taking an active interest. The other two purchasers left the arrangements to those two. All three members of the Panel were convinced that this process, together with other links between them, was sufficient evidence to find that one of the passive buyers was associated with the lead buyer.
One of the Panel members was so strongly persuaded that these events demonstrated that all four of the buyers were associates that he gave dissenting reasons to that effect. This dissent was not about a point of principle or law, simply about the inferences each member was prepared to draw from the same set of background facts. But it does illustrate that Panel members are entitled to draw on their own professional experience in evaluating the evidence put to them, unlike judges, who are entitled to bring very little specific information into the courtroom.
On the majority approach, s 606 had been contravened because the associated buyers had bought 28% of Touch and one already held 3%, taking them well over the 20% threshold. On the dissentient’s approach, s 606 had been contravened because four associates had bought 56% between them.
Association between the buyers and GPG
Part of the transaction agreed between the buyers and GPG was an earn-out, under which the purchasers would pay additional consideration to the vendor calculated from the profit of Touch in the financial year after the purchase was settled. To protect the vendor’s interest in this additional consideration, each purchaser agreed with the vendor that during that year, it would use its shareholding to ensure that Touch was run in ways which would tend to maintain its profit level, and to maintain in office a director representing the vendor.
None of these clauses would be unusual in a sale of shares in a private company, but they are unusual in a purchase of a substantial stake in a public company. They had the effect that the vendor retained a relevant interest in all of the shares, even after settlement of the sales.
The Panel found that each purchaser became an associate of the vendor by giving these promises, because each entered into an agreement, arrangement or understanding with the vendor for the purpose of controlling the conduct of Touch’s affairs or the composition of its board. Because each purchaser, as an associate of the vendor, had voting power over all of the 56% in which the vendor had retained a relevant interest, each purchaser acquired shares in Touch and obtained voting power in more than 20% of Touch. Accordingly, each of them contravened s 606 as a result of these arrangements with the vendor (quite apart from the contraventions resulting from the associations between purchasers, and from their pre-existing interests in Touch).
Interestingly, the Panel seems not to have considered whether their entry into the purchase agreement was evidence of an understanding between each of the purchasers that they would pool their votes in Touch to control the conduct of Touch’s affairs, to the extent of ensuring that it complied with the earn-out arrangements. The purchasers did not promise one another, only the vendor, that they would do those things. But an association need not be a contract: a shared understanding that the associates will co-operate to do a thing is enough. Each purchaser signed the same agreement, under which each of them agreed with the vendor to bring those things about, so each was fully aware that each of the others had undertaken the same obligation, an obligation which each of them must have understood it would have to perform by pooling its own votes with theirs to install a board who would manage Touch in such a way that the earn-out agreement was satisfied.