25 February 2004
Key Points:
Prospectuses and other fundraising documents may be scrutinised by the Takeovers Panel, to ensure that they meet the requirements of the Takeovers Chapter of the Corporations Act.
A recent decision raises the prospect of the Panel's poring over prospectuses as well as bidders' and targets' statements.
This could be the most significant development in fundraising procedures since the NRMA prospectus decision 10 years ago.
Back then, a small group of members successfully used the Federal Court to challenge the prospectus used in the first attempt to demutualise the NRMA. Since that time, courts have rarely been called upon to examine fundraising disclosure documents. The reason is fairly straightforward: small shareholders simply don't have the money or time to initiate court action, while ASIC and institutions prefer to negotiate with a fundraiser rather than incur the expense and publicity of legal proceedings.[1]
Institutions are not likely to change their ways of operating, but ASIC and small shareholders may start looking at the Panel as a low-cost and speedy way of raising concerns about some aspects of fundraising disclosure documents.
The catalyst for this development lies in the Panel's recent intervention in a fundraising by Perth-based research company QRSciences.
Rights issue
QRSciences wanted to raise $4.5 million, to repay a loan to its 51% shareholder. It proposed to do this through a rights issue.
Under an Offer Information Statement (OIS), QRSciences offered a non-renounceable rights issue to its shareholders on the basis of two new shares for every three shares. The OIS stipulated a maximum total subscription value which was slightly more than half of the maximum possible total subscription value, and placed a corresponding limit on the number of issuable shares. A pro-rata scale-back formula applied in the event of subscriptions over this limit. According to this formula, a shareholder could receive anywhere between one in three and two in three shares depending on the level of applications from other shareholders.
A minority shareholder went to the Panel with two complaints about the rights issue.
The first complaint was that the structure of the rights issue would allow the 51% shareholder to increase its percentage holding in QRSciences in a way not allowed by the Corporations Act. The Panel largely upheld this objection.
The second complaint related to the OIS that QRSciences had sent to its shareholders. The minority shareholder argued that it was misleading. Agreeing with this argument, the Panel made it clear that it is willing to hear complaints about disclosure in prospectuses and other fundraising documents.
Panel's decision
The Panel decided that the offer to shareholders was not the same percentage of the securities to be issued as the percentage they held before and therefore did not strictly comply with Item 10(b) of section 611.[2]
The Panel considered that the rights issue did not provide all shareholders with an equal opportunity to participate in the offer because the scale-back mechanism, the absence of underwriting and the absence of a minimum subscription level prevented shareholders being able to accurately estimate their exposure under the rights issue. The rights issue would have complied if it had offered a definite number of shares with the possibility for each shareholder to underwrite any shortfall in the rights issue proportionally.
The Panel also said the disclosure document should have explicitly disclosed:
On the first point, the Panel took into account the majority shareholder's involvement in the management of the issuer and the use of funds raised to repay the issuer's debt to the majority shareholder.
Ultimately the Panel accepted an undertaking by the issuer not to proceed further, thus avoiding a declaration of unacceptable circumstances.
A properly informed market
In relation to the disclosure inadequacies of the OIS, the Panel's reasoning was this.
The takeover provisions in the Act (Ch 6) recognise that some types of fundraising (rights issues, dividend reinvestment schemes, IPOs and underwriting) may result in a shareholder's increasing its holding above the 20% takeover threshold.
Accordingly, s 611 of Ch 6 provides specific exemptions for those types of fundraising activity. For example, s 611 allows a shareholder to increase its percentage shareholding under a pro rata rights offer (which would happen if other shareholders didn't take up their entitlement). The Panel says that, in order to fall within such an exemption, a transaction is required to comply not only with s 611, but also with the "Eggleston Principles" in s 602 of Ch 6.
From the Panel's point of view, a key provision of s 602 is the requirement that the acquisition of shares takes place in "an efficient, competitive and informed market". The "informed market" requirement, says that Panel, is additional to the normal prospectus and fundraising disclosure requirements elsewhere (in Ch 6D of the Act).
In other words, it's not enough for a fundraiser simply to produce a prospectus that complies with Ch 6D: that prospectus must also satisfy s 602.
Implications
With this decision, the Panel may have opened its doors to complaints by investors about fundraising disclosure documents.
In most cases, of course, a disclosure document that fully complied with Ch 6D would probably also satisfy s 602. The Panel's requirements should not, therefore, impose a significant additional workload on those responsible for drafting and sign-off of disclosure documents.
The real change may come after the documents have been signed-off. Minority shareholders who would have baulked at the cost of a court action will be able to take their complaints to the Panel (application fee, $500). The Panel will then be able to sit in judgment on whether the disclosure document gives rise to unacceptable circumstances. Its powers allow it to make any order that it thinks "appropriate to protect the rights or interests of any person affected by the [unacceptable] circumstances".
The upshot of this approach is that many non-private fundraising exercises will potentially be open to challenge in the Panel.
A key provision in this regard is s 657A(2)(a)(ii). That allows the Panel to make orders in relation to an "unacceptable" acquisition - or proposed acquisition - of a "substantial interest" in a company. A substantial interest may be as little as 3%.[3] Apart from the fact that 3% is a common "creep" acquisition, it could also be well within the bounds of possibility for a spin-out or some rights issues. This would provide the Panel with the necessary jurisdiction to examine the disclosure documents for such a spin-out or rights issue.
Comment
The circumstances of the QRSciences offer were unusual. In most cases a prospectus that discloses all the information required by the fundraising provisions of the Corporations Act will probably also satisfy the Takeovers Panel.
The real problem for companies and listed trusts lies in the prospect of being hauled before the Panel during the time-critical period of a fundraising. This introduces an element of uncertainty into the fundraising process. Unfortunately, the Panel can't give advisory opinions, so a fundraiser won't be able to safeguard its prospectus by discussing potential problems with the Panel during drafting.
It's to be hoped that the Panel exercises its new-found power sparingly.
_______
[1] ASIC also has the option of issuing a stop order against a fundraising document.
[2] "Offers ... made to every person who holds securities in [a] class to issue them with the percentage of the securities to be issued that is the same as the percentage of the securities in that class that they hold before the issue".
[3] Brierley Investments Ltd v ASC (1997) 24 ACSR 629; 15 ACLC 1341
