• The Panel has made a declaration of unacceptable circumstances in relation to the bid for Firestone Energy by the Waterberg Coal Company on the basis of deficient disclosure.
  • Parties seeking to rely on the relevant interest exemption for conditional agreements should promptly seek shareholder approval and ensure shares are not tied up for over three months.
  • The decision reinforces the importance of adequate and accurate disclosure.

The Takeovers Panel (the Panel) has in Firestone Energy Limited made a declaration of unacceptable circumstances in relation to the bid for Firestone Energy Limited (Firestone) by the Waterberg Coal Company Limited (Waterberg) on the basis of deficient disclosure of the identity of Waterberg shareholders and the exposure Firestone shareholders would have to the Waterberg coal project joint venture (Waterberg JV). The Panel ordered disclosure, extension of the bid and a withdrawal right.

The decision addresses the concerns about the relevant interest exemption for agreements conditional on shareholder approval being used to lock up a large parcel of securities inappropriately. The Panel has again demonstrated that it will apply the policy behind the exemption, which is not just to prevent shares being tied up for over three months, but to enable parties to submit their transaction to shareholders. Accordingly, bidders risk a declaration of unacceptable circumstances if they are unable to demonstrate they have taken proper steps to call a shareholder meeting.

Additionally, the decision serves as a reminder of the importance of cutting through complex shareholding and other arrangements in relation to the identity of the bidder, as well as ensuring rigorous testing of each statement in the bidder’s statement to ensure it is not misleading.

The Panel also canvassed issues around collateral benefits, the obligation under section 651A of the Corporations Act to offer an all cash alternative and participating insiders, which are not dealt with here. 

The facts

On 17 December 2012, Waterberg announced a proposed off-market scrip takeover bid for all the shares in Firestone. Firestone’s main asset was a 60% participation interest in the Waterberg JV with Sekoko Resources (Pty) Ltd and Sekoko Coal (Pty) Ltd (together, Sekoko) holding the other 40%.

Firestone made an application to the Panel on 18 April 2013 seeking a declaration of unacceptable circumstances in relation to the bid.

The issues primarily arose out of the followings agreements:

  • the agreement between Sekoko and Ariona Company SA (Ariona) dated 13 June 2012 under which Ariona agreed to, among other things, acquire from Sekoko up to a maximum of 800 million shares in Firestone (representing 25.69%) as well as a 10% direct interest in the Waterberg JV (the SPA) – the SPA was subsequently amended to, among other things, reduce the number of shares to be acquired by Ariona to 480 million shares, and
  • the heads of agreement dated 5 December 2012 under which Waterberg agreed to acquire Ariona from Haworth Finance Limited (Haworth) – the acquisition was conditional on, among other things, ‘Firestone obtaining shareholder approval for the acquisition of a relevant interest by [Waterberg] in Firestone as a result of [Waterberg] acquiring Ariona’.

The conditional agreement exemption for relevant interests

Waterberg sought to rely on the exemption in subsection 609(7) of the Corporations Act in relation to a relevant interest in 800 million shares in Firestone as a result of entering into the heads of agreement to acquire Ariona, who in turn, had a relevant interest in the 800 million shares which it was to acquire from Sekoko under the SPA.

The exemption prevents a relevant interest in securities arising by reason of an agreement conditional on shareholder approval under item 7 of section 611 of the Corporations Act provided that, among other things, there is no restriction on disposal of the securities for more than three months.

The Panel found that there was a restriction on disposal that exceeded three months. The Panel noted that the heads of agreement contained a provision restricting the disposal of any of Ariona’s assets, including any of the 800 million Firestone shares resulting from Ariona’s proposed acquisition from Sekoko. It disagreed with Waterberg’s submission that the clause could not restrict disposal of the shares because Ariona’s interest in the shares was only a right to acquire them, not the shares themselves. The agreement, and therefore the restriction, only terminated if the conditions in the agreement were not satisfied by a date which was more than three months from the date of the agreement. Accordingly, Waterberg could not rely on the exemption, and it contravened section 606 of the Corporations Act.

The Panel also considered that in any event, Waterberg did not take proper steps to convene a meeting of Firestone shareholders to approve its acquisition and accordingly, unacceptable circumstances may have arisen in that connection.

It outlined that:

‘The policy of s609(7) is not simply to allow shares to be tied up for a period not exceeding 3 months, but to enable parties to submit their transaction to shareholders. If the parties do not take proper steps to effect this, it may constitute unacceptable circumstances if the locking up of the shares has or may have affected the market for control of the target.’

Bidders should therefore ensure that if they are seeking to rely on the exemption they promptly take proper steps to convene a meeting of the target’s shareholders.

The decision provides some insight into matters which the Panel is likely to consider when determining whether proper steps have been taken. The Panel observed that Waterberg could have (but had not) taken steps such as:

  • making a formal request to Firestone to convene a meeting
  • giving an undertaking to reimburse Firestone for the costs of convening the meeting
  • providing the wording for the resolution
  • requiring Sekoko, as holder of more than 5% of shares, to requisition a meeting
  • complaining to ASIC if Firestone did not act promptly to convene the meeting, or
  • making its own Panel application if it was not satisfied with Firestone’s actions.

The Panel was also critical that the parties had unilaterally agreed to extend the restriction period beyond the initial period and said that, if time was running out, the parties should have sought a modification from ASIC.

Waterberg’s breach of section 606 of the Corporations Act did not ultimately lead to unacceptable circumstances in this case as the Panel noted that it had no evidence that the restriction on the disposal of 800 million Firestone shares had deterred any rival bidders. In addition, the Panel noted that the amendments to the SPA meant that there was ultimately no lock up of Firestone shares over 20%.

Deficient disclosure

Identity of the bidder

Bidders must provide adequate disclosure in the bidder’s statement of their identity, including in relation to persons holding a substantial interest in the bidder.

The circumstances in Firestone Energy Limited were as follows.

Haworth (the vendor for the Ariona sale) was a trustee company for a discretionary trust. It was entitled to 125 million Waterberg shares (approximately 70% voting power in Waterberg) as consideration for the sale of Ariona to Waterberg. However, it became apparent in the Panel proceedings that there was some uncertainty as to which beneficiaries of the Haworth trust (and in what proportions) the Waterberg shares were issued following completion of the acquisition on 28 March 2013.

Haworth submitted it had been agreed with such beneficiaries at arm’s length that Waterberg shares were issued to beneficiaries at the discretion of the trustee based on a number of factors including such beneficiaries’ relative contribution of funds, consultancy services and the progress of the transaction.

The Panel considered these arrangements unusual and noted that the idea than an investor would accept being allocated shares at the discretion of the trustee suggests that there is more to the arrangement. It considered the omission of information in relation to the Haworth beneficiaries gave rise to unacceptable circumstances.

Separately, Ariona had entered into arrangements with the ‘Standard Bank Group’ to provide it $45 million in convertible note funding. Waterberg’s bidder’s statement disclosed that on conversion of the facility, 459,375,000 Waterberg shares (46% of Waterberg) would be issued to the Standard Bank Consortium, but did not disclose the identity of the members of the Standard Bank Consortium (other than Standard Bank itself).

Waterberg submitted that the identity of individuals of the financing consortium is not material to a shareholder’s assessment of the bid, but rather the only relevant fact is the identity and financial wherewithal of Standard Bank. Furthermore, as a result of strict confidentiality obligations it could not make the disclosure required.

The Panel disagreed. It considered that regardless of whether such obligations could override a bidder’s disclosure obligations, some disclosure in relation to the Standard Bank Group was required and its omission gives rise to unacceptable circumstances.

Misleading statements

Bidders must ensure that statements made in the bidder’s statement are not misleading. 

In this case, the bidder’s statement provided that Firestone shareholders ‘will have exposure to a 70% interest in the Waterberg Project (whereas currently [Firestone] holds a 60% interest)’.

Waterberg submitted that it would have a 70% interest in the Waterberg JV on completion of the bid, comprising the 10% interest acquired from Sekoko and the 60% participation interest already owned by Firestone. Firestone shareholders who accept the offer will accordingly have exposure to this 70% interest and all of Waterberg’s other assets, so that the statement was ‘literally true’.

The Panel did not share this view and considered that the statement was misleading, giving rise to unacceptable circumstances. The Panel observed that Firestone shareholders’ indirect economic interest in the Waterberg JV, assuming Waterberg obtains 100% of Firestone would be initially only 36%.

What does it all mean?

There are two key messages.

Merely meeting the technical legal requirements for the conditional agreement relevant interest exemption is insufficient. The Panel will continue to scrutinise the conduct of bidders seeking to rely on the exemption to determine whether they have taken proper steps to convene a meeting of target shareholders.

Adequate and accurate disclosure is paramount. The Panel will not permit a bidder to hide behind complex financing or shareholding arrangements to avoid disclosure of its identity. Bidders should also rigorously test in each statement in the bidder’s statement to ensure that is it not misleading.