- ASIC’s policy on downstream acquisitions will be very narrowly applied in practice.
- Downstream Bid Relief (relief conditional on a follow-on bid) is more likely to be available than Standstill Relief (relief subject to voting restrictions or acquisition standstill) or Unrestricted Relief (relief which is not subject to voting, acquisition or bid conditions).
- Lenders who are seeking to enforce security taken over parcels of listed shares of more than 20 per cent should not expect any relief to allow sales other than in compliance with standard takeover gateways.
In February 2009, Cape Lambert bought the secured debt of insolvent listed resources company CopperCo Limited. Following a comprehensive sale process conducted by CopperCo’s receivers, Cape Lambert successfully bid for and acquired CopperCo’s assets, including mining projects in Queensland and Greece and shares in various listed resources companies. The acquisition took place via an asset-by-asset purchase as well as an acquisition of all of the shares of CopperCo’s subsidiary Mineral Securities Ltd, a British Virgin Islands incorporated company which remained listed on ASX, notwithstanding its recent takeover by CopperCo.
As part of the Mineral Securities Ltd acquisition, absent any restructure Cape Lambert would have acquired downstream interests in above 20 per cent of the voting shares in four ASX listed companies.
Why did Cape Lambert need to apply for ASIC relief?
Chapter 6 of the Corporations Act prohibits acquisitions resulting in a person’s voting power increasing from below 20 per cent to above 20 per cent, unless the acquisition falls within certain exceptions. One of the exceptions is the ‘downstream acquisition’ exception (section 611 item 14), where a company acquires shares in an Australian company (the downstream acquisition) as a result of acquiring shares in a body corporate listed on ASX or a prescribed financial market (the upstream acquisition).
ASIC, under its ‘downstream acquisitions’ policy (Regulatory Guide 71), may grant relief even if an upstream acquisition does not fall within the prescribed exception. Broadly, there are three forms of relief:
- restricted relief subject to voting restrictions and acquisition standstill (‘Standstill Relief’);
- restricted relief subject to a downstream bid or scheme for the remaining shares (‘Downstream Bid Relief’); and
- relief which is not subject to voting, acquisition or bid conditions (‘Unrestricted Relief’).
Cape Lambert sought relief in respect of the acquisition of these downstream interests. Due to listing rule escrows and the complex structure of the CopperCo group, the transaction parties considered that a pre-completion restructure of the group to remove the above 20 per cent portions of the downstream interests would be unnecessarily costly.
ASIC expressed concerns about Cape Lambert relying on the exception in section 611 item 14, on the basis that Mineral Securities Ltd remained listed in name only. Cape Lambert sought relief on the basis that (consistent with ASIC’s downstream acquisition policy) the downstream shares did not comprise a substantial portion of the upstream company’s assets, control of the downstream company was not one of the main purposes of the upstream acquisition and there was an adequate level of investor protection at the upstream level.
ASIC declined to grant relief in respect of three of the downstream companies, but indicated it was prepared to grant Standstill Relief with respect to the fourth company. Cape Lambert applied to the Takeovers Panel for a review of ASIC’s decision.1
What did the Panel decide?
The Panel declined to declare that section 611 item 14 applied because, amongst other reasons, Mineral Securities Ltd was listed in name only, was wholly owned and suspended from trading. The Panel also indicated that it would not grant Unrestricted Relief in respect of any of the four companies.
The Panel affirmed ASIC’s decision not to grant Standstill Relief in relation to the three downstream companies and was also not minded to grant Standstill Relief in relation to the fourth company.
Particular points noted by the Panel were that:
- Section 611 item 14 was not designed to facilitate the sale of assets by a receiver and manager in an upstream entity;
- ASIC has only once given relief under its downstream acquisition policy where an unlisted upstream transaction did not involve a regulated takeover or merger, and then only with a follow-on bid condition. The acquisition of Mineral Securities Ltd did not involve a regulated bid or merger, so it fell outside the policy for relief;
- The Panel did not consider that the receivers’ sale process was regulated and offered comparable protection to a bid or other Chapter 6 process. The Panel acknowledged that the process may have been regulated, but it was not analogous to a Chapter 6 process and did not provide downstream or upstream shareholders with the relevant protections; and
- The Panel did not consider that the interests of creditors of CopperCo or Mineral Securities Ltd should be preferred over downstream shareholders’ interests, notwithstanding the circumstances of administration and receivership.
Following the Panel’s decision, Cape Lambert and the receivers implemented a pre-completion restructure so that the vendor retained the above 20 per cent portions of the downstream interests to allow completion of the rest of the transaction to occur.
What is the significance of the decision?
This decision is significant because it indicates that ASIC’s policy on downstream acquisitions will be very narrowly applied in practice. It appears that there is very little scope for ‘Unrestricted Relief’ to be applied outside of the circumstances of a foreign exchange or ASX regulated upstream transaction (which, in most if not all cases, would likely qualify for the section 611 item 14 exception and would therefore not require relief). It also appears that there are few if any circumstances in which ‘Standstill Relief’ would be granted (despite ASIC’s policy stating that it would generally be granted where the 50 per cent threshold is not exceeded).
The outcome in this transaction indicates that ‘Downstream Bid Relief’ is more likely to be available. The Panel appeared to consider that ‘Downstream Bid Relief’ would be the more appropriate form of relief, if any relief was to be granted. ASIC has also previously granted ‘Downstream Bid Relief’ in other cases.
The Panel decision also highlights the harsh reality of Chapter 6 for lenders. While the exceptions to the takeovers prohibition allow a lender or receiver to take security over a parcel of more than 20 per cent and to enforce it by taking possession, they do not permit the lender to sell that parcel as a whole. It appears that, in the absence of a bid or other Chapter 6 process (such as shareholder approval), lenders should not expect any relief to soften this position.