Summary

  • If a reverse takeover results in a change of control of the bidder, the reserve takeover should be conditional on the approval of the bidder’s shareholders.
  • Not all reverse takeovers will necessarily result in a change of control of the bidder.
  • The mere fact that target shareholders vote in favour of a reverse takeover does not make those shareholders ‘associates’ - something more is required.

Reverse takeovers have been an area of controversy in Australia since the 2009 reverse takeover by Gloucester Coal Ltd for Whitehaven Coal Ltd, which was conducted by way of an all-scrip takeover bid. 

As a result of the Takeovers Panel’s decision in proceedings brought in relation to the Gloucester/Whitehaven transaction, it appears to be the Panel’s view that, if a reverse takeover would result in a change of control of the bidder, the transaction should be conditional on approval by the bidder’s shareholders.

Around the same time as Gloucester was embarking on its reverse takeover, IOOF was seeking to acquire (the much larger) AWM by way of an all-scrip scheme of arrangement.

Before the transaction, IOOF had an ‘open register’ - its only substantial holder (Bendigo and Adelaide Bank Ltd) had a 13.2% stake and AWM itself had a 2.1% stake in IOOF.

Following the successful implementation of the reverse takeover:

  • 70% of the enlarged share capital of IOOF was held by (former) AWM shareholders, and
  • there were only two substantial holders in IOOF: Bendigo and Adelaide Bank whose stake was diluted to 7.8% and a former AWM shareholder with 12.11%.

IOOF was a party to a 2006 share sale and purchase agreement under which IOOF had acquired outright ownership of Perennial Investment Partners Ltd (PIPL). That agreement contained an ‘earn out’. The PIPL vendors were entitled to an accelerated payment if a ‘change of control’ of IOOF occurred. The ‘change of control’ trigger was expressed as follows:

‘In relation to the shareholding in IOOF where a person and that person’s Associates together become entitled to more than 40% of the voting shares in IOOF’.

The PIPL vendors argued that a change of control of IOOF had occurred as a result of the reverse takeover of AWM. This was despite the fact that no one shareholder, or group of shareholders, had control of IOOF before or after the reverse takeover.

Specifically, the PIPL vendors argued that all of the AWM shareholders who had voted in favour of the scheme of arrangement (the Voting Members) were, by virtue of so voting, ‘associates’ and that, as they held in aggregate 48% of the enlarged share capital of IOOF, this triggered the change of control provision.

The court rejected the argument that AWM and the Voting Members were associates. It concluded there was no basis for suggesting that:

  • the purpose of the Voting Members and AWM was to control or influence the composition of the IOOF board or the conduct of IOOF’s affairs, or 
  • the Voting Members and AWM were acting in concert in relation to IOOF’s affairs or in relation to the acquisition by the Voting Members of IOOF shares.

The court stated:

‘The more probable inference, and one which I draw, is that the various Voting Members were separately pursuing their own interests (acquiring a stake in IOOF), which interests coincided with those of the other Voting Members and those of AWM.’1

Comment

The court’s decision in the IOOF matter is important in the context of reverse takeovers. As noted above, it appears the view of the Takeovers Panel is that, if a reverse takeover results in a change of control of the bidder, the reserve takeover should be conditional on the approval of the bidder’s shareholders.

There is a natural temptation to state that all reverse takeovers will result in a change of control of the bidder if the target’s former shareholder will emerge holding, in aggregate, more than 50% of the enlarged share capital of the bidder. However, such a statement is overly simplistic and ignores the fact that there will only be a change of control if a single shareholder (either alone or together with its ‘associates’) is able to control the bidder going forward. It is not right to state that former target shareholders are able to control the bidder just because, in aggregate, they hold more than 50% of the shares in the bidder.

The court’s decision correctly confirms that not all reverse takeovers will necessarily result in a change of control of the bidder.

If the target shareholders who approve the reverse takeover would, if their shares were voted as a block, theoretically be able to control the bidder, this does not, of itself, make them ‘associates’ and thus mean there has been a change of control of the bidder - something more is required to make them ‘associates’.

To express this in non-technical terms: in order for there to be a change of control in the context of a reverse takeover, it will be necessary to identify a block of target shareholders who, going forward, intend to assert control over the bidder’s affairs. The court’s decision in this regard is consistent with that of the Review Panel of the Takeovers Panel in 2009 in relation to the Gloucester/Whitehaven transaction.