23 April 2007
On Friday, the Federal Court said that much of the power of the Takeovers Panel is constitutionally invalid. This decision is likely to have major ramifications for the conduct of takeovers in Australia.
The statement was made in the Alinta appeal. A 2:1 majority of the Full Court of the Federal Court said that most applications to the Panel require the Panel to exercise judicial power insofar as they require the Panel to decide whether there has been a contravention of the takeover provisions of the Corporations Act. As such, the Panel's powers are in contravention of the Australian Constitution and are ineffective.
The Full Court said that both limbs of the Panel's powers are affected:
The immediate effect of this decision is to call into question the Panel's power to deal with any applications that directly or indirectly relate to one of the takeovers provisions of the Corporations Act. It is clear that section 657A(2)(b) is (unless the High Court rules otherwise) invalid. However, the Court's statements about section 657A(2)(a) were not binding. Accordingly, until someone directly challenges the Panel's use of section 657A(2)(a), it will presumably continue to hear applications.
Is this the final word?
It is highly probable that the Full Court decision will be appealed to the High Court.
The High Court, in the Precision Data case (1992), held that the pre-2000 version of the Panel was not unconstitutional. However, there were significant statutory changes to the Panel's process and powers in 2000, to make it the main forum for resolving takeover disputes. The Full Court said that these changes mean that the Precision Data case doesn't apply to the current Panel.
No doubt the Panel and Treasury will analyse this decision closely, with a view to determining if there is a legislative fix (as they did in the wake of the Glencore decision in relation to cash-settled equity swaps in 2005).
So what happens to takeover disputes?
Until the High Court rules otherwise, the Panel cannot make declarations about contraventions of Ch 6 under section 657A(2)(b). The Panel may still make declarations of unacceptable conduct under section 657A(2)(a); however, although it didn't have to decide the point, the Full Court majority clearly thought that section 657A(2)(a) may also be invalid. That is an issue which another court will have to decide down the track.
Of course not all Panel applications under section 657A(2)(a) will necessarily involve the exercise of judicial power. Some matters (not involving judicial power) could potentially still be considered by the Panel but it will be a much narrower scope of matters than they have considered to date.
In terms of the majority of matters which may involve judicial power, this is where the matter gets tricky. Private parties are currently barred from launching court proceedings during a takeover (section 659B). Even if (as now appears possible) the Panel has limited or no power to hear takeover disputes, that bar on private court proceedings still stands. Whether a court will uphold the bar to the extent that the Panel has no jurisdiction remains to be tested. Further, many of the remedies were under the 2000 changes referred to the Panel and so the courts are left with a blunter range of instruments.
While private parties are barred from launching court proceedings during a takeover, certain Government bodies including ASIC are not constrained from taking proceedings. Whether ASIC would have the budget or the appetite to run cases for private parties is debatable.
The Panel has the power to refer "questions of law" to a court (section 659A). In theory, therefore, one could launch a proceeding in the Panel and have the Panel refer the legal issues to a court, while the Panel dealt with "non-legal" issues (ie. "pure" unacceptability). This would then result in two sets of hearings (Panel and court) arising out of the same application. There may be constitutional problems with such referrals and, in any event, the Full Court seems to be of the view that it may be very difficult to separate out "legal" and "non-legal" elements from most Panel applications.
The Panel probably could not just refer the whole application to a court, because then you would have the current situation in reverse: a large chunk of Panel power is non-judicial, and a court would have no constitutional capacity to deal with it. In addition, the courts have no statutory power to make declarations of unacceptable circumstances, so they could not dispose of the application.
It would therefore seem that, except in a few situations, "unacceptable circumstances" applications are now subject to some fairly major doubts (unless and until the High Court decides otherwise or a legislative solution is found). It remains to be seen whether the courts will be able to step into the breach to deal with allegations of breaches of Ch 6 (including the pre-2000 favourite of alleged defects in bidder's and target's statements), but it is clearly unacceptable to have this level of uncertainty in terms of the regulation of takeovers in Australia.
Mark Paganin is a member of the Takeovers Panel. He did not participate in the drafting of this Alert.
