Without evidence of abuse, shareholders who knowingly buy into a company with a 55% majority shareholder might get little sympathy from the Takeovers Panel if the ownership of the shareholder changes.
Monday's decision on the Leighton Holdings case also saw the Panel placing a high premium on the value of certainty to the market.
In a late-breaking development last night, the Panel announced that it has been asked to review some aspects of its decision. We will keep you informed of how that application fares.
In 2007, ACS (a Spanish company) acquired 25% of Hochtief (a German company). Under the Corporations Act, that meant that ACS obtained a relevant interest in Hochtief's 55% holding in Leighton, an Australian company.
In 2010, ACS announced its intention to move to just over 50% of Hochtief. This would give it real control of Hochtief's 55% of Leighton, rather than just a relevant interest.
The Act allows a person to take over Company A without having to bid for "downstream" Australian companies in which Company A has more than 20% - provided that Company A is listed on ASX or an approved foreign exchange. Hochtief was listed on the Frankfurt exchange, which had been approved by ASIC in 2002.
Hochtief asked ASIC to modify the Act to require ACS to make a separate, downstream bid for Leighton. ASIC refused. Hochtief appealed to the Takeovers Panel. Leighton also went to the Panel.
A separate bid for Leighton?
The Panel took the view that anyone who had bought shares in Leighton did so in the knowledge that, among other things:
Hochtief owned 55% of Leighton
- under the Corporations Act, anyone was entitled to take over Hochtief without making a separate downstream bid for Leighton;
- in any event, the horse had bolted back in 2007, when ACS acquired a relevant interest in Hochtief's 55% of Leighton.
The Panel also noted that ACS had publicly stated that it didn't propose any change to existing governance arrangements between Hochtief and Leighton.
On this basis, the Panel concluded that ACS's acquisition of Hochtief would not affect Leighton's shareholders:
"We consider that it is not possible to conclude that anything of substance is changing for Leighton shareholders, particularly with the statements made by ACS that nothing will change."
Should ASIC have modified the law to require a bid for Leighton?
Even if ACS was completely within the terms of the Act, should ASIC have intervened to force it to bid for Leighton?
The Panel agreed with ASIC that requiring ACS to make a bid would, in effect, be changing the rules half way through the game.
In the Panel's view, asking ASIC to modify the Act "seeks to make ACS’s actions or proposed actions a contravention of the Act. We agree with ASIC that it should be reluctant to modify the Act to reverse its intended effect and impose more onerous obligations on a person where the person has already acted in reliance on the existing statutory provisions."
It was not only ACS which had proceeded on the basis of the existing law and policy. The Panel said that Leighton's Australian shareholders (and, by extension, the Australian market) would have known that Hochtief could be taken over without any need to make a downstream bid for Leighton.
Substantial shareholder notice
The Panel did note that, despite having acquired a major relevant interest in Leighton in 2007, ACS had not apparently lodged the requisite substantial shareholding notice until 2010.
The Panel was relaxed about this, because it believed that the acquisition had been widely reported in Australian newspapers at the time:
"While this may be of interest to ASIC, we do not think it gives rise to unacceptable circumstances."
Downstream acquisitions are one of a number of exceptions to the takeover rules.
Those exceptions are spelt out in section 611. As well as downstream acquisitions, they include the acquisition of shares which are issued under a scrip bid and the acquisition of shares under a pro rata rights issue.
The Panel has consistently made the point that an acquisition can still be unacceptable even if it complies with the strict terms of one of the exceptions. It is particularly anxious to prevent the exceptions being used as loopholes to strip shareholders of the protections that they can reasonably expect under the Act. Given that policy, Leighton and Hochtief were on solid ground in asking the Panel to review ACS's actions.
The Panel, however, found that ACS's acquisition of its stake in Hochtief in 2007 was widely publicised and that no action was then taken. From this, it followed, in the Panel's view, that:
"The market and ACS would be entitled to expect that there would be no further issues [if ACS increased its stake in Hochtief]. The current acquisitions will not change ACS’s relevant interest in Leighton."
Of course, this is not to say that every downstream acquisition within the strict terms of the exception will be greenlighted by the Panel. For example, it noted, with apparent approval, ASIC's view that it would be unacceptable to use the exception as a cover to acquire control of a downstream company. In the case of Leighton, however, the Panel thought that there was no real evidence that that was ACS's purpose.