In brief

  • The Panel is seeking submissions in relation to the possible application of the minimum bid price rule to schemes of arrangement.
  • The courts have previously confirmed that it is not appropriate to strictly apply the minimum bid price rule to schemes in the same way as it is applied in takeovers.
  • Schemes already contain effective shareholder protection safeguards and mechanisms which are directly relevant to the minimum bid price rule, not all of which are present in takeover bids.
  • Freehills has made a submission to the Panel to the effect that the minimum bid price rule should not be mandatorily applied to schemes and is monitoring this potentially significant development with interest.  

Summary

The Takeovers Panel has issued a consultation paper seeking submissions in relation to, among other things, the possible mandatory application of the minimum bid price rule to schemes. If implemented, this development may constitute a significant encroachment on the supervisory jurisdiction of the courts in relation to schemes of arrangement.

Background

The Takeovers Panel issued a Consultation Paper on 23 December 2010 (Consultation Paper) relating to the proposed rewrite of Guidance Notes 6 (minimum bid price), 13 (broker handling fees) and 15 (trust scheme mergers).

This article is limited to Guidance Note 6 and, in particular, whether the Panel should apply the minimum bid price rule to schemes.

The minimum bid price rule – section 621(3)

The minimum bid price rule is an application of the ‘equality principle’ underpinning the takeover regime in Chapter 6. The principle contemplates that, as far as practicable, all holders must have a reasonable and equal opportunity to participate in any benefits accruing to holders through any proposal under which a person would acquire a substantial interest in a company.

The minimum bid price principle extends the equality principle to the period immediately before the offer period. This is to ensure equality of opportunity between holders who sell prior to the offer period and holders who receive an offer under the takeover bid.

The minimum bid price rule operates where a bidder (or associate of the bidder) has provided or agreed to provide consideration for shares in the target in the four months before the date of its offer. In such circumstances, the consideration offered under the offer must equal or exceed the amount provided or agreed to be provided during the relevant four-month period.

It has to date generally been understood that the minimum bid price rule does not apply to schemes of arrangement in the same way as it applies in takeovers. Instead, if a bidder under a scheme of arrangement had previously offered consideration in excess of that which it was proposing to pay under the scheme of arrangement, this is just one factor that the court can take into account in deciding whether to approve the scheme. However, it is not necessarily fatal to granting such approval.

No basis for applying the minimum bid price rule to schemes of arrangement

Freehills has made submissions in response to the Consultation Paper to the effect that the Panel should not apply GN6 and the minimum bid price rule to schemes of arrangement. Some of the principal reasons for this view include the fact that such an application would:

  1. law reform – be inconsistent with, and cut across, the recent recommendations (made after a lengthy public consultation process) of the Corporations and Markets Advisory Committee (CAMAC) to the Federal Government in relation to schemes of arrangement. In short, CAMAC’s recommendation is that it does not see the need to mandate the Eggleston principles (which were developed in the context of Chapter 6 bids) to schemes and that those principles were not necessarily appropriate in the context of schemes, even where control may be at stake
  2. adequate shareholder protections – ignore the existing shareholder protection mechanisms and safeguards which apply to schemes (but which do not necessarily apply to takeovers). These include the fact that:
    • any pre-scheme acquired shares cannot be counted towards the approval threshold: a scheme must be approved by disinterested shareholders only
    • only schemes which are recommended by target directors (no doubt having regard to any pre-scheme acquisitions) are put to target shareholders
    • members ought to be adequately protected through full and frank disclosure of any pre-scheme acquisitions in the scheme booklet, and
    • an independent expert report (such reports are standard in schemes) will have considered any pre-scheme acquisitions in concluding that the scheme is fair and reasonable and in the best interests of shareholders
  3. case law – ignore the existing case law in which the courts have confirmed that it is not appropriate to strictly apply the minimum bid price rule to schemes, and
  4. role of court – be inconsistent with the role assigned by Parliament to the court in relation to schemes of arrangement: the court has the exclusive function of assessing the substantive fairness of schemes of arrangement and is entitled to take into account any factors it considers relevant, including the policy underlying the minimum bid price rule, when deciding whether to approve a scheme.

Further, a mandatory application of the minimum bid price rule to schemes of arrangement would represent a marked departure from the Panel’s previous stated policy and approach in relation to schemes.

Next steps

The time for comments on the Consultation Paper ended on 4 February 2011. Whilst it is currently unclear as to when the Panel will announce the outcome of the consultation process, we will continue to monitor this development and provide an update following the outcome of that process.