The Takeovers Panel has made a declaration of unacceptable circumstances in relation to Coppermoly Limited’s (Coppermoly) 1 for 4 non-renounceable entitlement offer (Rights Issue), which was fully underwritten by Jelsh Holdings Pty Ltd (Jelsh). It was alleged that the structure of the Rights Issue, if it proceeded, would enable Jelsh to become Coppermoly’s largest shareholder, contrary to section 602.1
In considering whether the Rights Issue constituted unacceptable circumstances, the Panel looked to whether sufficient disclosure had been made in relation to Jelsh and whether steps were taken to mitigate the potential control effect of the acquisition by Jelsh as underwriter.
The Rights Issue
Coppermoly is an ASX and Port Moresby stock exchange listed company which holds key assets in Papua New Guinea (PNG). On 26 July 2013, Coppermoly announced:
- it had entered into an agreement to acquire further interests in the West New Britain Project in PNG, which was conditional on Coppermoly raising a minimum of $2 million on or before 14 August 2013 (a condition Coppermoly could waive) (Re-acquisition Agreement);
- the Rights Issue, which was fully underwritten by Jelsh; and
- a placement of 3,700,000 Coppermoly shares to Jelsh to raise $166,500.
The Rights Issue prospectus stated that Jelsh had voting power of 0.53% in Coppermoly. The prospectus contained little other information concerning Jelsh. Subsequent to Coppermoly’s announcement, Jelsh increased its voting power in Coppermoly to 12.06% through on-market acquisitions and by entering into an agreement to acquire 16,290,333 shares from Coppermoly’s largest shareholder.
The Rights Issue was priced at a premium to market and the directors reserved the right to reject any application under the shortfall.
The Rights Issue closed on 30 July 2013 and 1.75% of the total available shares were taken up. This entitled Jelsh to 35,342,331 shares pursuant to the underwriting agreement, increasing Jelsh’s voting power in Coppermoly to approximately 26.76%.
Structure of the Rights Issue
The Rights Issue was priced at a 61% premium to the lowest price, and a 25% premium to the highest price, of Coppermoly shares in the 3 months prior to the announcement of the Rights Issue. The Panel considered that “regardless of whether Coppermoly had a legitimate reason for the pricing of its Rights Issue, the pricing made it more likely to be considered unattractive by shareholders…leading to a larger shortfall and a greater increase in the underwriter’s voting power.”
The directors reserved the right to reject applications for shares under the shortfall facility. The Panel has been critical of shortfall facilities that incorporate such discretion in relation to allocation.
Acquisitions of shares by an underwriter that result from an issue under a disclosure document, where the disclosure document disclosed the effect that the acquisition would have on the underwriter’s voting power in the company, constitute an exception to the prohibition contained in section 606(1), which prohibits acquisitions that result in an increase of voting power from 20% or below to more than 20% or from a starting point that is above 20% and below 90% (item 13 of s611).
The Panel has previously stated that ensuring the underwriting exception in item 13 of s611 is not being used in a way that infringes the policies, or avoids the protections, of Chapter 6 is an important element of the policy behind the exception.
In this regard, the Panel agreed that Jelsh’s subsequent acquisition of shares in Coppermoly “exacerbated” the potential control effect of the underwriting and put Jelsh in a position where it would be likely to increase its voting power to more than 20%. The Panel concluded that notwithstanding the fact that Coppermoly had considered alternative funding proposals to that provided by Jelsh, Jelsh’s acquisition of Coppermoly shares after accepting the role of underwriter gave rise to unacceptable circumstances.
On the issue of sufficient disclosure, the Panel stated that the prospectus contained limited information on Jelsh. The Panel turned its mind to Guidance Note 25 in determining that the “very limited disclosure” did not afford shareholders to consider “the desirability of making a further investment in the company, the control implications of the rights issue and whether to take steps to protect against the dilution of their existing holding.”
The Panel did not accept Coppermoly’s submission that any control effect was “at the lower end of the spectrum of ‘control'’”, nor did it accept Jelsh’s submission that even if it had acquired 26% voting power, it would not be necessary or appropriate in the circumstances to make disclosure about its intentions.
The Panel noted that directors who state an intention to take up their full entitlement under a rights issue, but who ultimately do not take up their full entitlement, should promptly notify the company so that the company can disclose this information to the market. A Coppermoly director failed to take up his entitlement, notwithstanding that the prospectus stated that the director intended to do so. This failure affected the adequacy of disclosure in the prospectus, as the prospectus calculated Jelsh’s maximum potential voting power on the assumption that the director would take up his full entitlement.
Declaration of unacceptable circumstances
The Panel made a declaration of unacceptable circumstances and concluded that the acquisition by Jelsh of control over voting shares in Coppermoly had not taken place in an “efficient, competitive and informed market, and the holders of shares were not given enough information,” as:
- all reasonable steps to minimise the potential control impact of the entitlement offer were not taken; and
- the Rights Issue prospectus had failed to sufficiently identify Jelsh and its intentions for Coppermoly, or the changed intentions of a director concerning taking up his entitlements, which together constituted a material deficiency in Coppermoly’s disclosure.
The Panel made final orders (amongst other things) that:
- Jelsh may not rely on any rights it may have to terminate the underwriting agreement as a result of the Panel proceedings and must complete its obligations under the underwriting agreement to acquire the shortfall shares;
- Jelsh must divest the shortfall shares by offering them to eligible shareholders at the Rights Issue price, such offer to be open for two weeks after the date the last of the offers is dispatched. Eligible shareholders who did not take up their full entitlement may take up the offer up to their original entitlements and Jelsh and any other eligible shareholders may apply for the remaining shares. The offer to the shareholders must include disclosure in relation to the identity of Jelsh, its financial position and its intentions for Coppermoly; and
- if Jelsh’s shareholding in Coppermoly remains above 20% after its re-allocation of the shortfall shares, shares acquired by Jelsh over a 20% holding will be subject to a voting freeze with such voting rights being restored at a rate of 3% every six months (being the rate permitted under item 9 of s611).
Where a company is relying on the exception for an underwriter in section 611:
- the prospectus must contain adequate disclosure of the underwriter, its financial position and intentions; and
- even if alternative fund raising methods have been considered, there is a risk premium rights issue pricing will be found inappropriate where that contributes to an unacceptable impact on control.
Directors should also be hesitant to include in a prospectus the ability for directors to reject applications under a shortfall facility at their discretion, as the Panel has again reaffirmed its criticism2 for rights issues which include a shortfall facility, but afford a discretion to directors under the prospectus to reject any application under the shortfall facility.