- ASIC has published its updated policy on schemes. It is essentially a re-write of its previous policy.
- ASIC is consulting on whether it should withhold its no objection statement under section 411(17) if an objector wishes to raise takeover avoidance issues.
- ASIC’s updated policy does not
ASIC has released its updated policy on schemes of arrangement.
First, the good news
ASIC’s updated policy is, with one exception, essentially just a re-write of its previous policy.
ASIC’s policy remains that:
- persons proposing to undertake change of control transactions are free to proceed either by way of scheme of arrangement or takeover bid
- target shareholders should receive equivalent treatment and protections (including disclosure) under both methods, and
- SIC will consider the Eggleston principles in section 602 of the Corporations Act in performing its regulatory functions in relation to schemes.
Now, the bad news
Section 411(17) provides that a court must not approve a scheme of arrangement unless either:
- it is satisfied that the scheme has not been proposed for the purpose of enabling any person to avoid the operation of any provision of the takeovers chapter in the legislation, or
- ASIC produces a statement indicating that is has no objection to the scheme.
In its updated policy, ASIC has re-affirmed its position that, in deciding whether to give a no objection statement, the primary question is whether target shareholders are adversely affected by the transaction being implemented by way of a scheme rather than a takeover.
However, ASIC is seeking submissions in relation to its (previously unwritten) position that, if a target shareholder wishes to object to a scheme on takeover avoidance grounds, ASIC will withhold its no objection statement, thus forcing the court to positively satisfy itself that the particular scheme was not proposed for the purpose of enabling any person to avoid the operation of any of the takeover bid provisions.
ASIC says that it does not wish to disenfranchise a shareholder from raising such an objection. This is because the effect of issuing a no objection statement is that the court is not required to positively satisfy itself that there was no takeover avoidance purpose; however, courts have indicated that they may still take such issues into consideration in deciding whether to approve a scheme.
ASIC’s approach is unfortunate. It can add significant uncertainty to a scheme of arrangement, which uncertainty is likely to only manifest itself at the end of the scheme process; that is, after the great time and expense involved in a scheme has been incurred.
In enacting section 411(17), it was Parliament’s intention that, even if a takeover avoidance purpose existed, there would be circumstances where it was still appropriate for ASIC, after taking into account all relevant policy considerations, to facilitate the transaction by publishing a no objection statement. In this regard, ASIC’s no objection statement is akin to its power to grant modifications to, and exemptions from, various provisions in the Corporations Act. ASIC’s proposed position effectively allows an objector to dictate whether ASIC will exercise its discretion to issue a no objection statement; thus allowing the objector to trump all other policy considerations by simply raising a takeover avoidance issue.
As a broader policy matter, CAMAC is expected to shortly publish its final report containing its recommendations to the Government on reforms to the scheme regime. One of the reforms that was the subject of public consultation was the possible repeal of section 411(17). The repeal of this subsection would allow schemes to proceed unfettered by the threat of intervention on takeover avoidance grounds.
This (very sensible) reform proposal would remove the commercial and legal uncertainties unnecessarily imposed by this subsection, yet would have no detrimental effect on minority protections. ASIC and objectors would retain the ability to object to a particular scheme on the grounds of, among other things, inadequate disclosure, class composition, the existence of extrinsic interests or fairness.
What about reverse takeovers?
One disappointing aspect of ASIC’s updated policy is that it does not clarify ASIC’s views on reverse takeovers. Although it states that reverse takeovers which involve a change of control or a material effect on control will be of interest to it, ASIC’s policy position in relation to reverse takeovers remains elusive.
Reverse takeovers became topical earlier this year when (the smaller) Gloucester Coal announced an all-scrip reverse takeover bid for (the larger) Whitehaven Coal. Gloucester’s 21 per cent shareholder, Noble, subsequently announced its own bid for Gloucester and challenged the legitimacy of the reverse takeover.
The Takeovers Panel ultimately decided that Gloucester’s board should be entrusted with deciding which of the two transactions was superior, thus allowing that transaction to proceed. In arriving at its decision, the Panel indicated that if a reverse takeover would result in a change of control of the bidder—which was not the case in relation to Gloucester’s bid for Whitehaven—the transaction should be conditional on the approval of the bidder’s shareholders.
The new regulatory guide notes that ASIC is considering what future guidance it may provide in light of the Panel’s decision in the Gloucester matter.* A further instalment might be expected in the new year.