ASIC's concern appears to be that exceptions in section 611 of the Corporations Act may deliberately be used to acquire more than 20% without having to make a takeover bid.
The law may say you can do it – but that cuts no ice with ASIC. The corporate regulator has issued a warning against "abuse" of the rules governing takeovers.
ASIC Report 406 was released recently. Among other things, it details both policy developments and enforcement actions in relation to M&A over the first six months of 2014.
The report pays particular attention to section 611 of the Corporations Act. That says that a person can, in specified circumstances, move to over 20% of a company without having to make a takeover bid.
The four specific circumstances targeted by ASIC are:
- item 10 (pro rata rights offers which result in one or more persons' moving over 20%);
- item 4 (scrip bids which result in one or more target shareholders moving over 20% in the bidder);
- item 14 (upstream acquisitions in a listed company which result in the acquirer's moving over 20% in a downstream company); and
- item 13 (underwritten fundraisings which result in the underwriter's moving over 20%).
ASIC's concern appears to be that these exceptions may deliberately be used to acquire more than 20% without having to make a takeover bid. In other words, the apparent deal mechanism (rights offer, scrip bid, etc.) is only a cover for the "real" transaction – the acquisition of more than 20% of the company.
In the case of the underwriting exception, ASIC nominates inadequate "dispersion strategies" as a live concern. "Dispersion strategies" means things like shortfall facilities, which can reduce the number of shares that fall through to the underwriter.
ASIC is also on the lookout for dummy underwriting agreements. This concern first emerged last year, when ASIC issued a new Regulatory Guide on section 611. According to that Guide, an essential component of underwriting is the underwriter's taking on the risk that not all of the shares on offer will be taken up. In ASIC's view, that requirement is not satisfied if:
- there are terms and conditions which effectively give the underwriter a general discretion to terminate the underwriting (such as by making the underwriting conditional on an event that is near certain to happen or that is within the underwriter's control);
- the underwriter is relieved of its obligations (in whole or in part) if a sub-underwriter defaults.
The report flags a number of other section 611-related concerns for ASIC.
The pro rata rights offer exception only applies when the same offer is made to all shareholders. Sometimes the cost of complying with overseas prospectus laws makes it impractical to extend a rights offer to overseas shareholders. In that instance, the rights offer can exclude overseas shareholders and still fall within section 611, but only if the rights or shares to which they would be entitled are sold on their behalf by an ASIC-approved nominee.
ASIC reports having come across instances of nominees trying to waive any liability if they fail to sell the rights or shares entrusted to them. ASIC says that this is not on: "As foreign nominees are required under the Corporations Act to sell the rights or shares issued to them, this liability cannot be waived."
It also encountered a takeover bid that, in its view, may have been more appropriately structured as an acquisition under section 611. Item 7 of section 611 allows a person to move over 20% by buying shares from one shareholder, provided the acquisition is approved by a general meeting. ASIC reports a takeover bid which had three uncommon features:
- it was proportional (ie. for a percentage of each shareholder's shares);
- it was at a discount to the company's market price; and
- one of the target shareholders was indebted to the bidder, and the bidder had effectively agreed to acquire that shareholder's shares under the bid in settlement of the debt.
ASIC "raised concerns that the transaction was … more in the nature of an acquisition" of the debtor's shares. Although ASIC doesn't say so explicitly, it presumably thought that the fact that the bid was proportional and at a discount could deter other shareholders from accepting the bid. In that case, said ASIC, the acquisition would more usually be conducted by shareholder approval under Item 7 of section 611.
So what can ASIC do?
A court is unlikely to prohibit a transaction that complies with the takeover provisions of the Corporations Act, even if it doesn't meet "the underlying purposes" of those provisions. That does not, however, mean that ASIC is toothless.
The regulator's first option is often a quiet, behind the scenes, chat with the parties. In many cases, this will result in some modifications to address ASIC's concerns. However, ASIC also has a couple of big sticks that it can use if talking doesn't produce the desired result.
The first is the Takeovers Panel. Unlike a Court, the Panel is not restricted to enforcing the law. Indeed, a number of ASIC's section 611 concerns have already been raised by the Panel and the subject of adverse rulings (rights offers with inadequate shortfall facilities being one common example). Of course, there is no guarantee that the Panel will always uphold ASIC's concerns (and the recent David Jones case showed that it is possible to take on ASIC and win). Nevertheless, getting taken to the Panel is not an optimal course: even leaving aside the possibility of losing the case, Panel proceedings can be a source of both adverse publicity and delay.
ASIC also has a weapon which it can deploy without reference to the Takeovers Panel. As noted above, many rights issues only comply with section 611 because an ASIC-approved nominee takes and sells shares for excluded foreign shareholders. ASIC has long made it clear that, when it is asked to approve a nominee, it will not just look at whether the nominee is a suitable person for the task. It will also look at the rights issue itself. It will refuse to approve a nominee if it believes that the rights issue (including the underwriting arrangements) "may be inconsistent with the purposes of Ch 6".
Not unsurprisingly, ASIC concludes this section of its Report by encouraging "parties proposing potentially novel deal structures to consult with us early in the process".