In recent years, an increasing percentage of friendly acquisitions have been effected by scheme of arrangement rather than takeover bid. The flexibility of structure and the increased certainty of a 100% ownership outcome makes the scheme an attractive option to bidders and targets alike. ASIC has an influential role in assisting the court in the approval of schemes, given that it has a statutory 14 day review period and if it is satisfied, can give the court a statement of 'no objection' to the scheme. Given its role, and the desire of the parties to secure a 'no objection' statement, ASIC generally closely scrutinises schemes of arrangement.
On 22 September 2011, ASIC published its revised Regulatory Guide 60 (RG 60) that outlines its approach to schemes, following industry consultation and an internal policy review since the last update in 2009.
What has changed?
The key changes relate to:
- when ASIC will give its 'no objection' statement under s411(17)(b);
- closer consideration of schemes involving collateral benefits and/or unequal consideration; and
- examination of schemes which result in a reverse takeover on a "case-by-case basis".
'No objection' statement
In 2009, ASIC released a consultation paper with a proposal that it would be "cautious" in giving its 'no objection' statement even if it was satisfied that the scheme met its policy in RG 60 but a shareholder undertook to object to the scheme on the grounds that the scheme is being proposed to avoid the takeovers provisions in the Corporations Act. ASIC's rationale was that a member's objection may be given less weight by the court if ASIC had already provided its 'no objection' statement. However the downside with this approach is that it would open the door to minority dissenting shareholders and greenmailers to derail a scheme that is otherwise within ASIC's stated policy and generally supported by shareholders and ASIC. Where ASIC has provided its 'no objection' statement, the court is still empowered to consider whether the scheme has been proposed to avoid the takeover provisions in Chapter 6 and take into account a member's objection in approving the scheme. Those who responded to the consultation paper made these points.
In its revision of RG 60, ASIC decided not to adopt its original proposal, however the guide now says that if an objection relates to the matters ASIC takes into account when deciding to give a 'no objection' statement, ASIC will consider the objection before providing the statement.
We agree that ASIC should consider whatever factors it considers necessary in reviewing a scheme. However there is still scope for uncertainty here, as all a dissenting shareholder would need to do to give ASIC pause is to fashion its complaint in terms that, in part, have a connection with the content of RG 60. Given the breadth of the regulatory guide and policy and the discretions that ASIC builds into the policy for itself, this is not difficult. It will be interesting to see how ASIC implements this approach on the ground going forward.
Collateral benefits: a question of class
The revised RG 60 states that ASIC will "closely consider" a scheme if some security holders within a class receive a collateral benefit or there are collateral benefits associated with the consideration offered for different classes (under the scheme or a separate agreement). ASIC will consider whether the consideration offered for each class is proportionate, at a similar premium and reasonable.
The solution to this issue is for those shareholders who receive the benefit to vote in a separate class, which reflects market practice. The updated guidance states that ASIC will generally not object to a scheme if the affected holders vote in a separate class and the explanatory statement explains the benefit and includes an independent valuation of the benefit.
Reverse takeovers: a (fuzzy) line in the sand
In the new guidance, ASIC is encouraging "very early" consultation in the planning stage where a target company shareholder will obtain more than 20% voting power in the bidder by virtue of a scrip scheme of arrangement. ASIC has indicated that it will monitor this area and provide further guidance where necessary.
The Takeovers Panel's consideration of reverse takeovers in the 2009 Gloucester Coal case seems to have been the impetus behind ASIC's review of its policy on reverse takeovers. The updated guidance makes reference to the Panel's Guidance Note 1 on Unacceptable Circumstances, and has adopted a broad definition of a reverse takeover as "a change of control, or a material effect on control by an issue of shares as consideration for a bid, that either disenfranchises shareholders or does not meet the policy of Chapter 6" (even if strictly it satisfies s611 which allows for increases in voting power that result from a bid or scheme).
The updated guide unfortunately brings the market no closer to definitive guidance in this area. The Corporations Act specifically allows for a shareholder to increase its holding beyond the 20% takeovers threshold if it is as a result of scrip takeover by scheme, and the updated guidance doesn't shed any light on when a scheme that complies with the law would still raise concerns for ASIC. While a "case-by-case" approach and the requirement for early consultation may provide ASIC with more flexibility, this is not always practical for bidders and targets, given the short timeframes the market has become accustomed to for these transactions to be effected.
What does this mean in practice?
Overall, the updates to RG 60 are not substantial changes but are a useful indicator of the level of ASIC's scrutiny of transactions effected by scheme. In our experience, ASIC is increasingly expanding its regulatory role and involvement. For example, in one recent scheme we have been involved in and although not part of its published policy, ASIC required draft court affidavits to be submitted to it before it would issue its 'no objection' statement. The amendments to RG 60 reserve a wide discretion in a number of areas, and it is not at this stage possible to predict with certainty what ASIC's practical approach will be in relation to these changes. Moving forward, the market will need to be prepared to engage with ASIC in detailed discussions on proposed transactions and be prepared to take on board ASIC's feedback.