In an important victory for the Takeovers Panel, the Federal Court has upheld the Panel’s decision in CMI Limited  ATP 4 (CMI) and in the process confirmed the legitimacy of the Panel’s practice of deciding issues of association on the basis of inferences drawn from partial evidence and patterns of behaviour.
The CMI Panel proceedings
The alleged associates in CMI were the late Mr Raymond Catelan and his daughter, Ms Leanne Catelan, who both had indirect relevantinterests in shares in CMI Limited. Mr Catelan was the Managing Director of CMI and Ms Catelan was an employee of that company and worked for her father as his personal assistant.
The Panel examined the circumstances surrounding the acquisition of 9.22% of the shares in CMI by Tinkerbell Enterprises Pty Ltd as trustee for the Leanne Catelan Trust. Ms Catelan was the sole director and shareholder of TinkerbellEnterprises Pty Ltd. The beneficiaries of the Leanne Catelan Trust included both Mr Catelan and Ms Catelan. They were also the beneficiaries of a trust which, through its trustee (a company wholly owned by Mr Catelan) held a relevant interest in 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 Ms Catelan by Mr Catelan – the gift in question, being an amount of $2.35 million, was larger than other gifts provided by Mr Catelan to either of his daughters in the past;
- Ms Catelan did not directly 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 Mr Catelan was said to have participated in those negotiations and discussions and no-one appeared to be able or prepared to tell the Panel who actually spoke to the seller of the shares to agree the sale price; and
- Ms Catelan and Mr Catelan were cross beneficiaries under multiple trust arrangements which, in the Panel’s view, suggested that Ms Catelan’s investment affairs were not entirely separate from those of her father.
Ultimately, the Panel concluded that Ms Catelan and Mr Catelan had not acted independently of each other in relation to Tinkerbell's acquisition of its 9.22% stake – that is, they had acted (or proposed to act) in concert, or had entered into (or proposed to enter into) a relevant agreement, or both, 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.
Federal Court proceedings
Unsatisfied with the outcome of the Panel proceedings, Tinkerbell applied to the Federal Court, seeking judicial review on the basis that, amongst other things, the Panel drew inferences that were not reasonable and definite, did not afford the parties an oral hearing and should not have used their collective experience to draw conclusions about whether conduct was unusual or uncommercial.
The Federal Court dismissed the application, finding that:
- an inference of association was open and indeed based on a very long list of facts before the Panel;
- the relevant administrative law principle applying to a review of the Panel’s decision allows an inference reasonably open to be drawn without the Panel making an error of law – in other words, simply because the Panel reached the conclusion that it did when another conclusion was available on the facts does not mean it erred in law;
- the legislation establishing the Panel makes it clear that an oral hearing is not necessary – indeed, the statutory framework in which the Panel operates contemplates that it will conduct its deliberations with as little formality as possible and on the basis of written submissions; and
- the Panel is entitled to draw on its members’ skills, experience and knowledge in assessing evidence and drawing inferences and if it is not so entitled the Panel’s capacity to effectively resolve takeover disputes would be seriously undermined.
Tinkerbell has requested that the Panel orders be stayed, as it is considering whether to appeal the decision further, to a full bench of the Federal Court.
As well as a vote of support for the manner in which the Panel resolves takeover disputes (including those relating to alleged associations), the Federal Court decision illustrates the notorious difficulty faced by third parties, in this case aggrieved CMI shareholders, who allege parties are “associates”.
It’s against the law for someone to acquire a relevant interest in shares, such that they and their “associates” have over 20% of the available votes in a public company (or a proprietary company with more than 50 members), unless they rely on one of a few limited exceptions – like making a takeover bid or the creep rule. To prove a breach of this rule (or those which relate to the disclosure of substantial holdings), often requires the applicant to prove two apparently unrelated parties are “associates” and their votes should therefore be counted together.
In theory, that’s easy. If the parties:
- have an agreement to influence the composition of the company’s board or its affairs; or
- act in concert in relation to the company’s affairs,
they are “associates”.
However, being an “associate” takes more than doing the same thing at the same time - circumstances which are relevant to establishing an association include a shared goal or purpose, structural links, prior collaborative conduct, investments and dealings, common knowledge of relevant facts and actions which are uncommercial. These matters can be very hard to prove and the Panel does not draw adverse inferences lightly.
While the Panel inferred a shared goal on the basis of what it considered to be compelling evidence in CMI, it is far from the usual result - about 50 applications concerning alleged association have gone before the Panel and in the vast majority of cases, association could not be proved.
This is the reason proving association has made it onto Treasury’s 5 October scoping paper in respect of potential reforms to Australia's takeover laws. Australia is one of few jurisdictions without rebuttable presumptions of association for close relatives and others such as parties with common directors or shareholders and those participating in uncommercial dealings. While that remains the case, most third parties will find proving association very difficult.