On 24 June 2016, the Takeovers Panel published its preliminary findings in Ainsworth Game Technology Limited 01 & 02 [2016] ATP 9, taking the view that Mrs Ainsworth, a significant minority shareholder in Ainsworth Game Technology Limited (AGI), should be precluded from voting on a resolution to allow Novomatic AG to acquire a 52.52% shareholding in AGI from her husband, Mr Ainsworth, for over $473 million. Notwithstanding this, a resolution was passed on 27 June, by over 60% of the voting minority shareholders in AGI, to approve the transaction.

The Panel’s findings are notable for the breadth of sources to which it had recourse in order to draw inferences concerning whether Mrs Ainsworth was an “associate” of Mr Ainsworth. These included emails sent from Mrs Ainsworth’s personal account, an article in the AFR, and common shareholdings and directorships held by Mrs Ainsworth and Mr Ainsworth. In addition, the reasoning adopted by the Panel reflects an apparent willingness by the Panel to effectively extend the voting restriction under Item 7 from “associates” to “disinterested shareholders”, by making a declaration of unacceptable circumstances on the basis of policy considerations even where a strict associateship cannot be made out under the Act.

The Panel’s findings were not binding, as it had already accepted undertakings from Mrs Ainsworth to refrain from voting on the resolution – however, they offer valuable insight into the matters which the Takeovers Panel is willing to take on board when considering when shareholders should be excluded from voting.

Accordingly, if you are a significant minority investor in a company and you have links to another of the company’s shareholders which is intending to put forward a proposal at the next general meeting, in order to avoid having your right to vote on that proposal impugned as a result of the “associateship” principle, you should:

  1. Always seek independent, personal advice in relation to your shareholdings - the Panel took particular note of the fact that Mrs Ainsworth had not obtained personal financial advice in relation to her shareholding in AGI, despite the considerable size of these holdings and the fact that they made up the majority of her portfolio. This evidence provided a basis for the Panel to infer that Mrs Ainsworth was not, in fact, operating as an independent shareholder in AGI.
  2. Take time to consider your voting options as a shareholder - the Panel’s suspicions were aroused by the fact that Mrs Ainsworth had voted to approve the resolution within five days of the notice of meeting being released, rather than taking time to process the information provided in the notice and allow for a potential competing transaction to arise. The Panel saw this as further evidence of a possible arrangement between Mrs Ainsworth and Mr Ainsworth in respect of Mrs Ainsworth’s holdings in AGI.
  3. Structure your transactions consistently with your expressed intentions - the Panel took into account the creation of a “blocking stake” which it said would be held collectively in AGI by Mr Ainsworth and Mrs Ainsworth following the transaction, as a result of Mr Ainsworth’s decision to participate in a dividend reinvestment plan by AGI. In the absence of evidence from AGI or Mr Ainsworth explaining his decision to participate in the plan despite his purported intention to exit the company as a result of the transaction, the Panel was prepared to draw the inference that this had in fact been structured to ensure that no third party could acquire full control of AGI without the consent of Mr Ainsworth acting in concert with his wife.

In May 2016, the Australian Securities and Investments Commission (ASIC) and a minority shareholder (Fortress) in Ainsworth Game Technology Limited (AGI) made separate applications to the Takeovers Panel, each seeking a declaration of unacceptable circumstances in relation to the affairs of AGI. They submitted to the Panel that certain shareholders in AGI, including Mrs Ainsworth, should be restrained from voting on a resolution (Resolution) to allow Novomatic AG (Novomatic) to acquire a 52.52% shareholding in AGI from Mr Ainsworth for over $473 million (Transaction) by reason of their association with Mr Ainsworth.

Ultimately, the Panel was not required to make a final decision on these issues, as undertakings were proffered by the relevant parties shortly thereafter to refrain from voting on the Resolution. However, the preliminary findings 1 which were published by the Panel in June 2016 offer considerable insight into the Panel’s views on, first, what constitutes “association” between individuals and, secondly, the role which policy may play in extending the prohibition on voting by “associates” under Item 72 in future Panel decisions, through the Panel’s authority to make a declaration of unacceptable circumstances.

Background

Under the Corporations Act 2001 (Cth) (Act), a person must not ordinarily acquire a relevant interest in a listed company’s issued voting shares if doing so would cause his or her voting power to exceed 20% of the company’s voting power.3 An exception to this is where the acquisition is approved by a resolution of the company’s shareholders – provided that no votes are cast in favour of the resolution by the proposed buyer or seller of the shares and/or any of their respective “associates” (Item 7).4

Here, the Transaction would result in Novomatic increasing its shareholding in AGI from 0.23% to around 52.74%. AGI therefore had to seek shareholder approval, via the Resolution, before the Transaction could proceed. ASIC and Fortress sought to challenge the right of Mrs Ainsworth, who held an 8.96% stake in AGI through a controlled entity (Votraint), to vote on the Resolution by reason of either her association with Mr Ainsworth (association issue) or, alternatively, her interest in the Transaction (policy question).

The association issue

An association is more likely to be established between persons where there are elements suggesting a shared purpose between them, structural links, uncommercial actions undertaken by the purported “associate” and/or common investments and dealings.5 Here, the Panel inferred that a number of these indicia were present. In so doing, it had regard to a very broad range of sources, including:

  • an article in the Australian Financial Review, quoting Mr Ainsworth as suggesting that Mrs Ainsworth would align her vote with his as a matter of course;
  • email records, showing that Mr Ainsworth had communicated with officers of AGI in relation to company matters via Mrs Ainsworth’s personal email account;
  • past substantial holding notices provided by AGI on behalf of both Mrs Ainsworth and Mr Ainsworth;
  • past disclosure documents, referring to Mrs Ainsworth and Votraint as “associates” of Mr Ainsworth; and
  • common shareholdings and directorships held by Mrs Ainsworth and Mr Ainsworth.

The Panel also questioned the lack of engagement between Mrs Ainsworth, Mr Ainsworth, AGI and Novomatic in relation to the Transaction, noting that Mrs Ainsworth had not engaged financial advisers to advise her about how she should approach the Resolution. The Panel considered this highly unusual given that Mrs Ainsworth was the second largest shareholder in AGI, and her investment in AGI represented a “very large proportion” of her portfolio.

Based on this evidence, the Panel drew preliminary conclusions as to the existence of an agreement or understanding between Mr Ainsworth and Mrs Ainsworth such that it could be inferred that they were “associates” in relation to the affairs of AGI.

The policy question

When making a declaration of unacceptable circumstances, the Panel has a broad discretion driven primarily by considerations of policy and public interest rather than black letter law.6

Fortress took the view that the principle underpinning Item 7 was that approval of the Transaction should be decided only by those shareholders who are, and are seen to be, “disinterested”. It submitted that, even if the relationship between Mr Ainsworth and Mrs Ainsworth fell short of an actual “association” between the two, it was nevertheless likely to give Mrs Ainsworth an “interest” in the outcome of the Resolution.

The Panel agreed with these submissions. Taking into account principles of public policy and other mandatory considerations under the Act, the Panel expressed the view that the expression “disinterested shareholders”, taken from an earlier, unrelated Panel decision,7 should be interpreted as covering an even broader category of persons than those set out in Item 7.8

The effect of this is that, through operation of the principles underlying the Panel’s power to make a declaration of unacceptable circumstances, a person may lose the right to vote on a resolution to authorise the acquisition of shares in a company even where his or her relationship with the buyer or seller falls short of an “association” as defined under the Act.

What does this mean for you?

As noted earlier, the Panel was not required to, and did not, finalise its conclusions on the matters raised, as it had accepted undertakings from Mrs Ainsworth to refrain from voting on the Resolution. Even so, the issues raised may have broader implications for significant minority shareholders with links to other shareholders in the same company, particularly in light of the Panel’s apparent willingness to extend the voting restriction under Item 7 from “associates” to “disinterested shareholders” through its power to make declarations of unacceptable circumstances

Therefore, if you are a significant minority investor in a company and you have links to another of the company’s shareholders which is intending to put forward a proposal at the next general meeting, in order to avoid having your right to vote on that proposal impugned as a result of the “associateship” principle, you should:

  1. Always seek independent, personal advice in relation to your shareholdings

Despite Mrs Ainsworth’s assertions of independence from her husband as both a shareholder in AGI and in terms of her personal financial situation, the Panel found that her actions did not reflect the former. Mrs Ainsworth had not engaged financial advisers to advise her about her holding or how she should respond to the Resolution; nor had she approached AGI or Novomatic to discuss either the Transaction or the Resolution. She had, instead, relied solely on the information made publicly available by AGI, which was of a general nature.

  1. Take time to consider your voting options as a shareholder

The Panel considered it unusual that Mrs Ainsworth had voted to approve the Resolution within five days of the Notice of Meeting being released rather than taking time to process the information provided by AGI and allow for a potential competing transaction to arise. It noted that this marked a significant deviation from the “usual commercial behaviour” of shareholders, particularly professional or sophisticated and independent shareholders.

  1. Structure your transactions consistently with your expressed intentions

The Panel took particular note of a 10.15% “blocking stake” which it said would be held collectively in AGI by Mr Ainsworth and Mrs Ainsworth following the Transaction. This comprised the interest currently held by Mrs Ainsworth (8.96%) and a new holding which would be acquired by Mr Ainsworth (1.19%) as a result of his election to participate in AGI’s dividend reinvestment plan (DRP). AGI did not disclose to the Panel the reasons for implementing the DRP, which would result in Mr Ainsworth acquiring a brand new holding in AGI (not to be acquired by Novomatic as part of the Transaction), despite his purported intention to exit the company as a result of the Transaction. In the absence of that evidence, the Panel was more than ready to draw the inference that this had been designed to ensure that no third party could acquire full control of AGI without the consent of Mr Ainsworth acting in concert with his wife.