So, you haven’t had an opportunity to keep up with what’s happened in the Takeovers Panel this year? No matter, we’ve done the hard work for you. The 10 things you need to know are:
1. Bidders should exercise caution when seeking to deduct the value of franking credits from their bid consideration.
Bidders generally reduce their bid consideration by the value of any dividend received by a target shareholder during the bid period. Recently, bidders have also sought to deduct the value of any franking credits associated with the dividend. The Panel consulted on this issue in 2014 but ultimately didn’t publish any formal guidance. Responses to the consultation paper showed divergent market views on whether the value of franking credits should be deducted from bid consideration at all, and how value should be assessed if it was to be deducted.
The issue came before the Panel this year in Sedgman Limited  ATP 2, where the Panel was softly critical of the bidder’s proposal to reduce the bid consideration by the value of franking credits, in particular because the bidder’s statement did not make it clear how the deduction would be calculated and did not set out a basis for that calculation. Bidders considering deducting the value of any franking credits will need to ensure that they clearly explain how the deduction is established (either by formula or as a fixed amount) and demonstrate that the basis for adopting that amount is reasonable.
2. The Panel is still prepared to order costs against parties in appropriate matters.
The Panel is intended to be an accessible and low cost forum, so making an order for costs is the exception not the rule. However, the Panel may make a costs order against a party in certain circumstances including if the party presents a case that was not arguable or delays or obstructs proceedings. This year costs orders were only made once, despite being requested in 4 proceedings.
In Condor Blanco Mines Limited  ATP 8 the Panel felt that a party did not present a case of reasonable merit in a businesslike way. As a result, the Panel agreed to a request for costs, in particular because the applicant identified serious breaches of the Corporations Act in response to which the party continued to make submissions that lacked reasonable merit. In addition, the applicant’s request for costs was modest (A$5,045). The takeaway here (and in most of the other instances in which the Panel has awarded costs) – it might cost you a little to flog a dead horse.
3. Spouses need to be aware of potential inferences being drawn as to an “association”.
Unless you were living under a rock this year, you would have caught some of the press around Len Ainsworth’s decision to sell his controlling (~52%) stake in the company he founded, Ainsworth Game Technology Limited (AGT) to Novomatic AG (his stake was worth approximately $470 million). Given the size of the holding, shareholder approval was required for the sale, with Mr Ainsworth and his “associates” ineligible to vote. Mrs Ainsworth (with an additional ~8%) and Mr Ainsworth’s sons (with an additional ~2%) did not consider there was any “association” between them and Mr Ainsworth with respect to AGT.
When the matter came before the Panel, the Panel disagreed with respect to Mrs Ainsworth. While the Panel did not finalise its view (accepting an undertaking in lieu of making a declaration and orders), it indicated that its preliminary view was that Mr and Mrs Ainsworth were associated. Matters relevant to the Panel’s view included: an AFR article in which Mr Ainsworth was quoted as suggesting that Mrs Ainsworth would align her vote with his as a matter of course; email records showing that Mr Ainsworth had communicated with officers of AGT in relation to company matters via Mrs Ainsworth’s personal email account; and that Mrs Ainsworth had not engaged financial advisers (which the Panel considered was unusual given she was the second largest shareholder and that the investment formed a very large proportion of her portfolio). Fortunately for Novomatic, the vote got up even without her (or Mr Ainsworth’s son’s) stakes.
“Associations” amongst family members is not entirely new territory for the Panel. In the UK and Hong Kong the equivalent Panels have the ability to rely on rebuttable presumptions in association matters – with husband and wife specifically rebuttable – the Australian Panel does not. We have, however, seen a growing boldness on the part of the Panel to draw inferences in association matters.
4. There may be a new category of ‘disinterested shareholders’ for the purposes of shareholder approved acquisitions above 20%.
The Panel’s decision in Ainsworth Game Technology Limited 01 & 02  ATP 9 also provided some guidance with respect to the class of persons who should be excluded from voting on a resolution for the purposes of item 7 of section 611 of the Corporations Act (shareholder approved acquisitions above 20%). On its face, item 7 clearly excludes the votes of “associates” and nothing more. Nevertheless, the Panel was prepared to infer that item 7 also requires that the vote be approved by ‘disinterested shareholders’ (based on the underlying purpose of item 7) and that Mrs Ainsworth was not a disinterested shareholder (by virtue of her connection or closeness of relationship with Mr Ainsworth) and her voting on the transaction would give rise to unacceptable circumstances. This was in addition to the Panel’s preliminary view that Mr & Mrs Ainsworth were “associates” (see point 3 above).
The decision could signal a willingness of the Panel to effectively extend the voting restriction under item 7 from “associates” to a broader category of ‘interested shareholders’ which might include spouses (and potentially other family members).
5. Takeover participants should be aware of the Panel’s guidance regarding shareholder intention statements.
The Panel had its first opportunity to consider shareholder intention statements since publishing its guidance on the subject in December last year. In Gulf Alumina Limited  ATP 4, the Panel considered the use of intention statements by Gulf in its target’s statement which stated that fifteen Gulf shareholders holding in aggregate 70.6% of Gulf’s shares had a current intention not to accept the bidder’s offer.
In its application to the Panel, the bidder submitted that the statement had failed to particularise the number of shares and percentage holding of each of the shareholders and was therefore contrary to the guidance note. The Panel agreed and Gulf provided corrective disclosure. The Panel is obviously keen to scrutinise market behaviour with respect to shareholder intention statements – accordingly, the Panel’s guidance is a minimum requirement to adhere to when intention statements are used in the context of a control transaction.
6. Timing of the offer to provide an undertaking (in lieu of orders) is relevant to the Panel’s exercise of its discretion to accept the undertaking.
Parties to Panel proceedings often elect to offer an undertaking in lieu of the Panel making a declaration and orders against them. Undertakings can be beneficial from a publicity perspective and may also allow a matter to be concluded more quickly. The Panel has this year proposed amendments to Guidance Note 4: Remedies to clarify that the timing of the offer of an undertaking is relevant to the Panel’s decision to accept it. The Panel has always been more receptive to undertakings offered earlier in the process. Comments on the Panel’s consultation paper were due by 14 October although no formal guidance has been released.
7. The Panel has clarified the circumstances in which a frustrating action will not be unacceptable.
The Panel’s policy on frustrating actions seeks to ensure that actions by target boards do not frustrate the success of a control transaction at a time when the decision about whether control should pass should properly be made by target shareholders. This position has been used to the advantage of bidders, who have sought to include restrictive and numerous conditions which paralyse target directors from taking legitimate business actions.
The Panel released today updated guidance on the subject after a period of public consultation. The update clarifies that the policy will generally only be enforced where a bid provides a ‘genuine opportunity’ for shareholders to dispose of their shares. For instance, where a bid is conditional on a target board recommendation or there is a lack of funding certainty, the Panel considers a ‘genuine opportunity’ may not exist and, in those circumstances, that the policy should not restrict the target board.
In addition, the policy won’t apply where it would be unreasonable for the Panel to conclude that a frustrating action gives rise to unacceptable circumstances (for instance, the target board is required to undertake certain actions to relieve financial stress or if there is a legal imperative for the action). This is a welcome clarification of the Panel’s policy for target directors.
8. If you say you’re going to utilise a shortfall facility in a rights issue to ameliorate any control impact, make sure you do so.
Rights issues that may have an effect on control will generally employ features to reduce the control impact. This includes making the offer renounceable and adopting a shortfall facility – ie where existing shareholders can elect to take more than their pro rata share of the offer. Where a shortfall facility is utilised, it is not uncommon for issuer boards to reserve the right to allocate the shortfall in their absolute discretion.
The Panel has previously considered the manner in which a board’s direction is exercised and had to do so once again this year in Regal Resources Limited  ATP 17. Regal (as issuer) accepted applications for less than two thirds of the number of shortfall shares applied for, and issued the remaining shortfall shares to the underwriter – notwithstanding Regal’s public statements including that: “Shareholders have ability to reduce [the underwriter’s] voting power by participating in the Rights Issue”.
The Panel considered that the circumstances were unacceptable and that the discretion retained by the directors did not overcome the impression created by the disclosures that the shortfall facility would help reduce the control impact. The Panel ordered that Regal make a new offer of shares to shareholders whose shortfall applications were scaled back and that shares held by the underwriter be cancelled, equivalent to the number of shares issued by Regal pursuant to the new offer.
9. “Rights issue” matters were the most common proceedings before the Panel in 2016.
Assuming no further applications are made this year (possibly a big assumption given the surprising appetite for Christmas applications), the Panel has received 17 applications in 2016. In 2 of these the Panel declined to conduct proceedings, another 2 represented review applications – so really there were only 13 fresh matters heard which reflects a quiet year. Rights issues affecting control (47%) and association allegations (41%) were the most popular matters to take to the Panel.
10. The composition of the Panel Executive has changed.
Alan Shaw has concluded his 9 year stint as Panel Counsel, with Bruce Dyer assuming the role effective 3 October 2016. We can personally attest to the enormous contribution Alan has made to the workings of the Panel. He will certainly be missed. While Bruce is no stranger to the role (he served as Panel Counsel in 2006 – 2007), it will be interesting to see what, if any, differences result from this change.