In brief

  • In its consideration of the Aston Resources–Whitehaven Coal scheme of arrangement, the Federal Court considered the relevance of the collateral benefits rule in an acquisition by scheme of arrangement.
  • The transaction involved Whitehaven acquiring 100% of Aston under the scheme, and also acquiring an asset from some of the Aston shareholders. Notwithstanding that the particular Aston shareholders in question were receiving consideration for the asset that was greater than an independent expert’s valuation of the asset, the court concluded that there was no collateral benefit received by those shareholders because the transaction had been struck as a result of arm’s length negotiations.
  • It remains an open question as to whether an undertaking by a shareholder receiving a collateral benefit in a scheme context not to vote on the scheme is an absolute answer to the consideration of collateral benefits in schemes.

The collateral benefits rule

The collateral benefits rule applies to takeover bids and provides that, subject to certain exceptions, a bidder (or an associate of it) must not, during the offer period of a bid, give, or offer or agree to give, a benefit to a person if:

  • the benefit is likely to induce the person (or an associate) to accept an offer under the bid or dispose of bid class securities, and
  • the benefit is not offered to all holders of bid class securities.

This rule is intended to ensure equality of treatment between all shareholders.

As a technical matter, the concept of a ‘benefit’ for the purpose of the Corporations Act rule is broad and may include, for example, a right to sell other assets to the bidder if the bid is successful, even if the price has been negotiated on arm’s length terms or is for a value which is within a range determined by an independent expert. However, for the purposes of determining whether unacceptable circumstances exist, the Takeovers Panel will consider whether there is a ‘net benefit’ to the shareholder(s) in question, meaning it is less likely that a right to sell assets to the bidder for ‘fair’ value would be considered unacceptable by the Panel.

Application to schemes

The collateral benefits rule in the Corporations Act does not apply to schemes of arrangement. However, the court and ASIC’s view is that this rule is relevant to schemes.

As a result, where an acquisition is being effected by scheme, and one or more target shareholders are getting something not offered to all shareholders, both ASIC, through the scheme booklet review process, and the court will take an interest.

The court and ASIC have previously been satisfied with:

  • the expert opining on the acquisition also opining that the ‘something’ or ‘benefit’ is on market/arm's length terms1, or
  • the shareholder receiving the ‘benefit’ undertaking not to vote at the scheme meeting.2

Those approaches are consistent with the Panel’s ‘net benefit’ approach as well as the Panel’s view that a collateral benefit is unlikely to give rise to unacceptable circumstances if it is approved by fully-informed, non-associated shareholders.3

Re Aston Resources Limited

In Re Aston Resources Limited, the court considered a transaction between the proposed acquirer of Aston Resources, Whitehaven Coal, and certain shareholders of Aston, to acquire from those shareholders, shares in a third company, Boardwalk Resources. The Aston scheme was not conditional on the acquisition by Whitehaven of Boardwalk but the acquisition by Whitehaven of Boardwalk was conditional on the scheme being implemented.

The court considered whether the effect of the proposed Boardwalk transaction was to confer a ‘collateral benefit’ on the Aston shareholders who held Boardwalk shares and/or whether those shareholders were in a separate class of shareholders to other Aston shareholders.

Interestingly, the court seemed to only consider that the collateral benefit question arose because the value of Boardwalk, as determined by the independent expert was less than what Whitehaven proposed to pay (the independent expert for the scheme had considered the value of Boardwalk and its determined valuation range was less than the consideration proposed to be paid for Boardwalk by Whitehaven).

The court concluded there was no collateral benefit because the transaction had been struck as a result of arm’s length negotiations and that the Boardwalk shareholders were not in a separate class because their different interest was a commercial one flowing from their interest in a separate transaction which was not a condition of the scheme. However, on the class question the court noted the importance of the fact that the relevant shareholders had indicated that they would not vote at the scheme meeting.

In conclusion …

While the court gave a detailed analysis of rules regarding collateral benefits in the context of schemes, it is unclear what can be taken away from the decision.

Would the Panel have come to the same conclusion in a takeover context? It is possible the Panel would have concluded there was a collateral benefit (on the basis that they may have considered there to be a ‘net benefit’ to Boardwalk’s shareholders having regard to the valuation) but given that the shareholders receiving the benefit did not vote on the scheme, it seems unlikely it would have been considered to be unacceptable and therefore the outcome would have been the same.

It also leaves unanswered the question of what the court would do if it determined that the transaction did confer a collateral benefit on a target shareholder. It seems unlikely that the court would refuse to approve the scheme for this reason alone. It seems more likely that it would be answered by disregarding the votes of the shareholder(s) receiving the benefit, and therefore if those shareholders undertake not to vote at the scheme meeting, should it matter whether or not there is a collateral benefit? If this is the approach adopted by the courts, will it make a scheme a more attractive option than a takeover where transaction with certain target shareholders may be involved?