01 July 2005
This afternoon, the Takeovers Panel delivered a serious blow to the use of cash-settled equity swaps (contracts for difference) in takeovers.
It ruled that Glencore's use of swaps in the context of the Centennial bid for Austral Coal amounted to unacceptable circumstances.
It then made orders that could seriously erode Glencore's ability to block Centennial's bid, but those orders have been stayed pending the decision of a Review Panel.
Background
The application related to the acquisition by Glencore of 4.9% of the voting shares of Austral and the entry into cash settled equity swaps with two investment banks over a further 7.4% of the voting shares of Austral. The two banks had acquired and held Austral shares sufficient to hedge their exposure under the swap transactions.
As such Glencore's direct holdings and the bank's hedge shares together well exceeded 5% of Austral. (A 5% direct holding is the trip level for the disclosure provisions of the substantial holder provisions.)
However, despite having the economic interest in the combined holding from an earlier date, Glencore only disclosed the existence of its physical and swap interest to the market on 4 April.
The Panel essentially held that from the time Glencore's economic interest in Austral voting shares exceeded 5% (21 March) Glencore had an obligation to disclose the combined holding to the market and the terms of the swaps.
While the Panel did not go to the level of finding that Glencore had a relevant interest in the hedge shares or was an associate of the banks, the Panel noted that there was a strong economic incentive for the banks to hold the hedge shares which gave Glencore a real degree of effective negative control.
The Panel considered that Glencore's strategy of delaying disclosure went directly against the policy and objectives of the substantial holder provisions.
The Panel said that, had information about Glencore's interest been disclosed on 21 March, Austral shareholders might have formed the view that Glencore was a potential rival bidder to Centennial and would have flagged the existence of a potential 10% blocking stake.
Accordingly, subject to the outcome of the Panel review, it ordered that Glencore make immediate disclosure of the terms of the swaps and offer any shareholders who had sold Austral shares in a transaction reported to the ASX from 22 March to 5 April the opportunity to buy an equal number of Austral shares to essentially enable then to reverse their prior sale transaction.
If Glencore's own Austral holding is not sufficient to meet the demand, Glencore is to meet the excess demand by buying hedge shares from the two investment banks.
Comment
This decision effectively brings cash-settled equity swaps into the substantial holding disclosure regime at the very least in the context of a bid. The Panel did not debate any legal obligation on Glencore to disclose its swaps under the substantial holder rules. However it considered that the "Eggleston" principle of an informed market made Glencore's position unacceptable regardless of its legality.
The Panel noted that this decision does not inhibit "the legitimate use of equity derivatives in the Australian market". However the legitimate uses of such derivatives may be more limited if this decision is upheld by the Review Panel.
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