Two recent decisions of the Takeovers Panel have caught our eye:Billabong International Limited [2013] ATP 9 (Billabong) and RHG Limited [2013] ATP 10 (RHG).1

Billabong related to the terms of an agreed proposal for the recapitalisation of Billabong International Limited (BBG). That proposal involved the provision of bridge financing and long term financing from a consortium comprising Altamont Capital Partners LP and entities sub-advised by GSO Capital Partners LP (together, the Altamont Consortium). The long term financing included a hybrid instrument which, if converted into equity, could give the Altamont Consortium a 40% equity interest in BBG. The applicants, Centerbridge Partners LP and Oaktree Capital Management LP, who had put forward a rival recapitalisation proposal, alleged that various aspects of the Altamont Consortium’s funding package constituted unacceptable lock-up devices.  

RHG related to a scheme of arrangement proposal pursuant to which Pepper Australia Pty Ltd (Pepper) would acquire all the issued shares in RHG for consideration including shares in ASX-listed Cadence Capital Limited (CDM). CDM is the largest shareholder in RHG with a 17.1% interest, and was to be treated differently to other shareholders under the proposed scheme; as CDM could not receive shares in itself, it would receive all-cash consideration. CDM would also receive an additional cash payment from Pepper as consideration for issuing shares under the proposed scheme. The applicants, Australian Mortgage Acquisition Company Pty Ltd and Resimac Limited (together, the Resimac Syndicate), who were in the process of implementing their own scheme of arrangement proposal as agreed with RHG, alleged (among other things) that collateral benefits CDM would receive under the Pepper scheme had induced CDM to vote against the Resimac Syndicate scheme.2 The Resimac Syndicate sought an order from the Panel that CDM be restrained from voting against the Resimac Syndicate scheme unless the RHG board withdrew its recommendation of that scheme.

Billabong: the three things you need to know

  1. Whilst financing arrangements are a matter for a company’s board, if they involve lock-up devices such as exclusivity provisions and break fees, they could come within the reach of the Panel and the Panel’s guidance on lock-up devices in Guidance Note 7. This is more likely to be the case where the financing arrangements have an equity component, in particular where there are potential control implications.
  2. Payments by a borrower under financing documents that are triggered by a change of control and exceed 1% of equity value or (if the borrower is highly geared) enterprise value are susceptible to being declared unacceptable by the Panel on the basis that they act as a deterrent to change of control proposals.3
  3. If a lower rate of interest is payable on debt in the event that shareholders approve a control transaction and the interest savings that would be achieved are material in the context of the borrower, this kind of construct will be susceptible to being declared unacceptable by the Panel on the basis that it is likely to substantially coerce shareholders into approving the transaction.4 This is the inverse (but arguably the functional equivalent) of the traditional ‘naked no vote’ break fee trigger that is generally frowned upon by the Panel; rather than a penalty being payable on a no vote, a benefit is only received on a yes vote.  

RHG: the three things you need to know

  1. The Panel has jurisdiction to hear matters related to a scheme of arrangement where the court process is yet to commence. However, the Panel will still be reluctant to interfere in matters falling squarely within the court’s jurisdiction such as collateral benefits. An additional reason for this is the enhanced regulatory role played by ASIC in schemes of arrangement as compared to takeover bids, ie ASIC must review the scheme booklet before it is dispatched to shareholders and can appear at court to object to a proposed scheme.
  2. Unlike takeovers bids, schemes of arrangement allow for differential treatment of shareholders provided that those shareholders treated differently vote in a separate class (all classes must approve a scheme by the requisite majorities5 in order for it to proceed). The relevant question is whether a shareholder’s legal rights under a scheme are the same as those of other shareholders; an entitlement to a different form/amount of consideration will likely be sufficient to warrant placing a shareholder in a separate class, however this is unlikely to be the case where there is only a divergence in commercial interests/objectives. 
  3. A shareholder will not be precluded from voting on a scheme proposal just because it is involved in a competing proposal. More generally, the Panel will be reluctant to make an order having the effect of depriving a shareholder of its rights, particularly if this means the shareholder will not have an opportunity to vote on a proposal that could result in the acquisition of its shares.