The recent decision of the Takeovers Panel (Panel) in RCL Group Limited (RCL Group) has put "poison pills" back on the radar.

In RCL Group, the Panel declined to conduct proceedings in relation to the operation of a contractual right given to Torchlight Real Estate Fund Limited (Torchlight) under the terms of its corporate facility agreement with ASX-listed, RCL Group Limited (RCL). That right allows Torchlight to declare an "event of default" if a director of RCL is replaced by someone not approved by Torchlight in circumstances where Torchlight is not satisfied that the change will not have a material adverse effect on RCL.

Torchlight's contractual right became relevant as three shareholders in RCL requisitioned a meeting for the removal and replacement of two directors of the company. One of those shareholders, Payce Industries Pty Ltd (Payce), reached out to Torchlight seeking a waiver of what was, given RCL's precarious financial position, very close to a veto right.  Torchlight refused to grant the requested waiver, prompting Payce to make an application to the Panel for a declaration of unacceptable circumstances. 

The basis of Payce's application was that Torchlight's contractual right resulted in the incumbent board and management of RCL being effectively entrenched, restricting shareholders' ability to exercise their voting in an unfettered manner and preventing a takeover bid from being made without the consent of the RCL board and Torchlight.

Payce's arguments were largely derived from those successfully made by Centro in the 2003 Panel decision, AMP Shopping Centre Trust. In that case, Centro was able to convince the Panel that certain pre-emptive rights – that may or may not have been triggered by a change of responsible entity (RE) of AMP Shopping Centre Trust (ART) – were unacceptable. These rights (assuming they existed) entitled parties who co-owned various shopping centres with ART to acquire ART's interest in those shopping centres upon a change of RE. The Panel made orders preventing the co-owners from exercising any pre-emptive rights, allowing Centro (or, as it turned out, Westfield) to acquire ART and replace the RE without the risk of losing key assets in the process.

In RCL Group, the Panel distinguished the circumstances at issue from those in AMP Shopping Centre Trust on the basis that Torchlight's contractual right, although "somewhat unusual", was "generally consistent with the rights of all lenders". The Panel also noted that the relevant context was a board spill (rather than a control transaction), reminding the market that its principal focus is voting power; indeed, it is unlikely that circumstances affecting board control will be unacceptable unless they also in some way affect voting power (see Bowen Energy Limited and GoldLink Growthplus Limited).

Despite Payce's argument that Torchlight's contractual right would deter potential bidders by creating uncertainty as to whether they could reconstitute the board without RCL's debts becoming repayable, the Panel did not consider there to be the requisite nexus between the contractual right and voting power in RCL to warrant further investigation.

Whilst we agree that the circumstances did not appear to justify the Panel restricting Torchlight's ability to exercise its contractual right, we do think they may have justified the Panel taking a closer look. Notably, Torchlight is not a bank but rather a private equity firm, and it presented a recapitalisation proposal to RCL around the same time as it agreed to take on the company's debt facilities, being shortly after the company disclosed that there was a "material uncertainty" as to whether it will continue as a going concern. This suggests that Torchlight may have been partially motivated by control, in the Chapter 6 sense (as they say, debt is the new equity...). 

[Postscript: Torchlight appointed receivers and managers to RCL shortly following the conclusion of the Panel proceedings (for defaults unrelated to the proposed board changes). We will watch with interest to see if they cut a deal with Torchlight.]