M+A practitioners will agree that in recent times control transactions can take longer and can be more difficult to complete. In this context, it may come as no surprise that some may seek to consolidate control by novel ways and others may seek to challenge conduct they regard as suspicious.
Interestingly, 3 of the first 4 Takeovers Panel cases for 2011 have been about alleged associations leading to an illegal consolidation of control. The recent decisions of the Panel in Viento Group Limited  ATP 1, Brockman Resources Limited  ATP 3 and CMI Limited  ATP 4 give some guidance on when the Panel will, and will not, infer that an association exists. In Viento and CMI, the evidence suggested that the alleged associates had acted with a common purpose, leading the Panel to infer that they were associates. In Brockman, although being concerned by coincidences in the behaviour of, and connections between, the alleged associates, the Panel concluded that the evidence did not support the inference of any associations.
Often it is difficult for applicants alleging an association to prove their case. Since 2000, there have been 52 cases concerning undisclosed associations. Only in 17 cases, less than one-third, has the Panel found an undisclosed association. The Panel is loathe to delve into associations without evidence supporting the allegations. However, where the parties act in an uncommercial manner or family or other relationships exist, the Panel may infer an association.
To succeed in claiming an association (or indeed before the Panel will investigate allegations of association) an applicant to the Panel will generally either need to have sufficient evidence of collusion or show conduct which is uncommercial.
We now look further into the 3 recent cases where the applicant was successful in 2 of them.
At the heart of the facts in Viento were two "blocks" of shareholdings in Viento Group Limited. These blocks belonged respectively to two people in a de facto relationship (Mr C and Ms B).
After considering the evidence submitted by the parties as a whole, the Panel drew the following inferences:
- Mr C and Ms B used entities they controlled to accumulate stakes in Viento, doing so in a manner that may have been designed to conceal their respective interests in, and the connection between, those stakes; and
- through their combined stake in Viento, Mr C and Ms B sought to install a nominee director on the board of Viento and to enter into commercial arrangements with Viento that would be of personal benefit to them.
The Panel concluded that Mr C and Ms B (and each of the entities they controlled) are associates in relation to Viento as they intended to control the composition of the Viento board or the conduct of its affairs, and acted in concert in relation to those affairs. The Panel ultimately found that there had been various breaches of the Corporations Act (including breaches of the 20% rule and the substantial holder provisions) and made a declaration of unacceptable circumstances, ordering the divestment of the Viento shares acquired by entities controlled by Mr C and Ms B after their voting power in Viento reached the 20% threshold.
The Panel proceedings in Brockman arose following the announcement by Wah Nam International Holdings Ltd of an intention to make a takeover bid for Brockman Resources Limited.
The bid in itself is interesting as Wah Nam, a Bermudian company listed on the ASX and the Hong Kong Exchange and which until recently had engaged primarily in a limousine rental business, decided to make 2 separate takeover bids for 2 Australian resources companies (Brockman and FerrAus) on the same day using scrip rather than cash.
Brockman sought a declaration of unacceptable circumstances on the basis that, in addition to the 22.63% of Brockman held by Wah Nam, a further 7.1%, and as much as 17.57%, may be held by its associates.
From the evidence submitted in Brockman, it emerged that there were:
- coincidences in timing of acquisitions and disposals of Brockman shares by alleged associates of Wah Nam;
- loan arrangements between alleged associates established in connection with the acquisition of Brockman shares;
- business, family and social connections between alleged associates; and
- discussions between alleged associates about investing in Brockman.
While the Panel expressed concern about these aspects of the matter, considering them worthy of further investigation, it ultimately concluded that the evidence did not support the inference of any associations and, accordingly, declined to make a declaration of unacceptable circumstances.
The Panel's decision in Brockman suggests that, where it is not clear from the evidence that alleged associates have a shared goal or purpose, the Panel may be reluctant to infer that an association exists if the alleged associates put forward plausible evidence showing that they acted independently of each other.
While the Panel did not find an association it went on to say that should the alleged associates of Wah Nam accept Wah Nam's bid, this may enable further inferences to be drawn in support of an association. In such an event, the Panel may be able to infer, having regard to the entire body of evidence, that the alleged associates have acted with the common goal of Wah Nam securing control of Brockman. The shareholders will need to tread carefully.
The alleged associates in CMI were a father and daughter who both had a relevant interest in shares in CMI Limited. The father is a director of CMI.
In CMI, the Panel examined the circumstances surrounding the acquisition of 9.22% of the shares in CMI by Tinkerbell Enterprises Pty Ltd, a company wholly owned by the daughter. Tinkerbell is the trustee of a trust, the beneficiaries of which include both the father and daughter. They are also the beneficiaries of a trust which, through its trustee (a company wholly owned by the father) holds 36.8% of the shares in CMI.
The Panel found that the conduct of certain parties in connection with Tinkerbell's acquisition of its 9.22% stake was uncommercial and unusual. It inferred that this acquisition was made in furtherance of the shared goal or purpose of the father and daughter of consolidating control of CMI. The Panel arrived at this view based on its consideration of, among other things, the following evidence:
- Tinkerbell acquired its 9.22% stake using funds gifted to the daughter by the father;
- the daughter did not participate in any of the negotiations or discussions with the party who sold the 9.22% stake to Tinkerbell. In this regard, each director of CMI other than the father participated in those negotiations and discussions; and
- the father and daughter are cross beneficiaries under multiple trust arrangements.
Ultimately, the Panel concluded that the father and daughter had not acted independently of each other in relation to Tinkerbell's acquisition of its 9.22% stake – that is, they had either acted (or proposed to act) in concert, or had entered into (or proposed to enter into) a relevant agreement, in relation to that acquisition. The Panel made a declaration of unacceptable circumstances and ordered the divestment of Tinkerbell's 9.22% stake.
Tinkerbell sought a review of the Panel's decision, however the Panel declined to conduct review proceedings on the basis that it did not believe there was any reasonable prospect that it would change its decision.
Relevant criteria for proving associations
In summarising these cases and other key association cases including Mount Gibson Iron Limited  ATP 4, the following circumstances will be relevant to establishing an association:
- a shared goal or purpose;
- prior collaborative conduct;
- structural links and familial relationships;
- common investments and dealings;
- common knowledge of relevant facts; and
- actions which are uncommercial.
In both Viento and CMI, each of these circumstances existed. Whilst the Panel did not say in either case that this is mandatory for an association to be established, it can be taken from the Panel's citation of these circumstances in Viento and CMI that where each of them exists, the argument in favour of an association will be a strong one.
The key to success in showing an association will often be giving in the initial application to the Panel a body of evidence which shows suspicious conduct which is highly unusual or uncommercial. This will lead the Panel to delve further. Once the Panel does so, emails and other correspondence (or the failure to provide such correspondence) can often be damning.