Regent Pacific's proposed acquisition of BC Iron (BCI) by scheme of arrangement illustrates some of the key differences between the regulation of takeovers and of schemes of arrangement.
The transaction came under the review of the Takeovers Panel recently, when Regent Pacific sought to terminate the deal by relying on a termination right in the implementation agreement between the parties that had not been disclosed to the market.
Regent Pacific sought to acquire BCI by scheme of arrangement and the parties entered into an implementation agreement. Both Regent Pacific and BCI made their own announcements about the proposed transaction: BCI made an announcement to ASX, and as a Hong Kong listed company, Regent Pacific made an announcement to the Hong Kong Stock Exchange. Both announcements set out a summary of the agreement. In BCI's case, the announcement contained a 7 page appendix setting out matters such as the transaction structure, conditions precedent, exclusivity provisions and termination rights. Regent Pacific's Hong Kong announcement was also disclosed on the ASX.
One feature of the transaction was that as well as being subject to BCI shareholder approval, by virtue of the Hong Kong listing rules, Regent Pacific shareholder approval was also required. Under the implementation agreement, Regent Pacific had a right to terminate if the Regent Pacific's board's fiduciary duties dictated that they must withdraw their recommendation that Regent Pacific shareholders vote in favour of the transaction. However, this termination right was not disclosed in BCI's announcement nor in Regent Pacific's announcement.
Subsequently, a media report described Consolidated Minerals Limited, BCI's largest shareholder at just over 20%, as "flatly opposed" to the transaction. While the veracity of this article was challenged by BCI, the Regent Pacific board withdrew its recommendation to its shareholders in favour of the deal and sought to terminate the implementation agreement. BCI challenged this termination at the Panel.
Disclosure: be comprehensive
The Takeovers Panel found that it was unacceptable for Regent Pacific to rely on the change of recommendation termination right as it had not been disclosed to the market, particularly given it was an uncommon termination right. The Panel found that the market was entitled to assume that, given no mention was made of this termination right in the summaries of the implementation agreement provided in the announcements, there was no such termination right.
The Panel dismissed submissions from Regent Pacific that it should not be precluded from relying on the termination right because BCI had not fulfilled its disclosure obligations to ASX, saying that Regent Pacific, as the bidder, had an opportunity to review the announcement before publication.
The lesson here is that in a scheme, bidders and targets alike need to be careful to disclose all material terms of a deal once the implementation agreement is signed. In many cases this will mean that it is easier to simply release the full implementation agreement, rather than taking the risk of overlooking a feature that down the track proves to be significant.
The outcome of the Takeover Panel decision is that the Regent Pacific/BCI scheme is back on foot. However, the scheme remains subject to a number of conditions including Regent Pacific financing and shareholder approval. It remains to be seen if, notwithstanding the Panel decision, the acquisition fails on other conditions, some of which (eg financing and Regent Pacific shareholder approval) may be influenced by the Regent Pacific board.
Schemes vs takeover bids: the debate continues
This case brings into focus some recent market commentary in relation to the regulatory gap between schemes of arrangement and takeover bids, the two alternative methods for corporate control transactions under the Corporations Act.
Once announced, a bidder under a takeover bid is compelled to proceed on at least as favourable terms by section 631 of the Corporations Act. There is no such equivalent requirement in the Corporations Act in relation to schemes, however the disclosure standard set by the Panel in the BC Iron case draws the two structures a little closer together: if the full terms of the implementation agreement are disclosed up front, then there is less chance the market will later learn that a proposal is not as favourable as it was initially understood to be.
While it wasn't a point considered by the Panel, it is also interesting that the termination right was determined by an action which was solely within the control of Regent Pacific. It is debatable whether a similar condition in a takeover would be permissible given the prohibition in the takeover rules on conditions that turn on the bidder's opinion or an event within the bidder's control. But this is a question for another day.
More generally, the debate around the regulatory gap between schemes and takeover bids is a complex one. A takeover bid is subject to the black letter rules of the takeover law provisions of the Corporations Act. However, schemes are subject to a much more rigorous review regime, given that ASIC conducts a comprehensive review and the transaction is subject to two rounds of court approval. There are also different dynamics at play, since once a proposed scheme is announced, target directors have already considered, and agreed, that the transaction is in their shareholders' best interests, while a takeover bid can be announced without even consulting target directors first. Whichever transaction structure is used, parties should always be aware that electing to run a scheme rather than a takeover bid certainly does not render the Takeovers Panel irrelevant: this case is one of a growing list of examples of the Panel applying its takeovers policy to all control transactions, regardless of their legal structure.
Perhaps then it might make sense to avoid the potential for regulatory arbitrage by harmonising the rules applying to takeovers and schemes. Perhaps the Takeovers Panel might also be given further oversight of schemes and avoid the need for court approvals.