In brief

  • Issues relating to compliance with Australia’s foreign investment rules have come before the Takeovers Panel again, in the context of the Alinta Energy deleveraging transaction.
  • In the earlier 2008 Midwest case, the Panel found that a breach of the FIRB rules gave rise to unacceptable circumstances.
  • Although there was ultimately no decision made in the Alinta Energy case, it does illustrate that a failure to comply with the FIRB rules can result in an acquisition being challenged in the Takeovers Panel.  

Issues relating to compliance with the Foreign Acquisitions & Takeovers Act (FATA) have recently been raised in Takeovers Panel proceedings, in connection with the current Alinta Energy debt for equity swap transaction.

Midwest 02

In the controversial Midwest Corporation case in 2008, a bidder applied to the Panel seeking a declaration of unacceptable circumstances on the basis that a US-based shareholder of the target had acquired shares in the target in excess of the 15% threshold under the FATA without obtaining the Treasurer’s approval and argued that this gave rise to unacceptable circumstances.

The Panel agreed and made orders that the US-based shareholder dispose of its shares in excess of the 15% threshold if it did not receive FIRB approval by a certain date. The Panel concluded that the breach of the FATA detracted from an efficient, competitive and informed market (Masel principle) by providing the US-based shareholder with a ‘competitive advantage’ in the competition for control of the target. In essence, the Panel decided that the Masel principle encompasses compliance with legal requirements beyond the Corporations Act.

Alinta Energy

Background

As a result of well publicised financial difficulties, Alinta Energy has recently implemented a deleveraging and debt for equity swap transaction via a number of creditor schemes of arrangement and a trust scheme of arrangement.

To implement the transaction, Alinta Energy required, amongst other things, the approval of its securityholders for the trust scheme (under which Alinta Energy securityholders would receive 10 cents per unit) and to dispose of the majority of its business to an entity owned by the lenders to the Alinta Energy group.

During the weeks prior to the securityholders’ meeting, Coastal Capital International (a New York-based hedge fund) increased its securityholding in Alinta Energy to 16.53% without obtaining prior approval under the FATA to acquire more than the 15% threshold.

Media reports speculated that Coastal intended to vote against the resolutions to approve the transaction, unless the consideration to be paid under the trust scheme of 10 cents per unit was improved.

Panel application by Alinta Energy

To mitigate the publicised threat posed by Coastal, Alinta Energy made an application seeking orders from the Panel to prohibit Coastal from acquiring any further securities in Alinta Energy, and to prevent it from voting the Alinta Energy securities it held in excess of 15%.

The grounds for the application were that Coastal’s contravention of the FATA constituted unacceptable circumstances, given the effect (or likely effect) on the control of Alinta Energy and having regard to the Masel principle.

Outcome of application by Alinta Energy

Unlike the Midwest 02 decision, the Panel did not have to make a decision on Alinta Energy’s application.

Alinta Energy withdrew its application following an undertaking provided by Coastal to the Panel (and accepted by the Panel) that it would not vote in excess of 14.9% of its securityholding in Alinta Energy at the securityholders’ meeting, unless it obtained approval under the FATA that there were no objections to its acquisition of securities above the 15% threshold. (Ultimately, Costal did not vote any of its shares at the securityholder’s meeting.)

Lessons to be learned

Application of the Masel principle by the Panel

In deciding what constitutes an efficient, competitive and informed market, the decision in Midwest 02 demonstrates that a contravention of legislation other than the Corporations Act can provide grounds for an application to the Panel.

There is nothing coming out of the Alinta Energy case to suggest the Panel has changed its views on this.

Application of the FATA – valuing a business or corporation

The reason why Coastal did not seek FIRB approval to acquire in excess of 15% of Alinta Energy’s securities is not clear.

However, one interesting point in this context is that although Alinta Energy’s market capitalisation was only around $80 million, its gross assets were in the range of $3 billion to $4 billion, well in excess of the FIRB thresholds.

This serves as an important reminder that in considering the application of the dollar thresholds under the FATA, a target company’s gross assets need to be analysed, not just its net assets or market capitalisation or the consideration to be paid.