25 February 2004
Key Points:
The Takeovers Panel can be called in to examine - and order changes to - a takeover scheme of arrangement.
There is a common belief that the Takeovers Panel can't or won't intervene in takeover schemes of arrangement.
The National Can Industries (NCI) public-to-private scheme showed that that belief is a misconception. A minority shareholder called in the Panel, which forced an increase in the offer price before the scheme was put to members.
This development is important for those involved in planning bids and public-to-private transactions. On a wider policy front, it highlights some grey areas of the Panel's jurisdiction.
Voluntary restraint
The belief that the Panel avoids schemes of arrangement had its origins in the 2000 battle for Taipan Resources (one of the Panel's first outings).
A scheme of arrangement involves two court hearings. The first hearing usually results in a court order for a meeting of company members to vote on the scheme. If the members vote in favour of the scheme, a second court hearing is held to approve the scheme.
Taipan obtained court approval for a meeting to vote on a merger with St Barbara Mines. Before the meeting was held, some Taipan shareholders complained to the Panel about the scheme.
The Panel decided that it did have the power to intervene:
"The Panel is empowered to declare that unacceptable circumstances exist in relation to the affairs of a company, because of their effect on the control of that company. There is no express exclusion of a change of control resulting from a members' scheme of arrangement under Part 5.1 of the Law. "
- but as a matter of discretion, this was something best left to the Court:
"[W]ere the Panel to involve itself in a scheme of arrangement which was already before the Court, it would be pursuing similar ends to the Court, but without the Court's power to deal with all aspects of the matter. That may lead to unproductive confusion."
So far, so good. It was now clear that the Panel will not generally get involved in a scheme that had already been to court. But what about a scheme that had not yet been to court?
Four years ago, the Taipan Panel was ambiguous on this point. However, the National Can Panel did not appear to have any doubts about the correctness of getting involved in a dispute about a scheme that had not yet been to court.
Scheme or bid?
In many respects, the National Can scheme was run of the mill. The holders of 51% of the company wanted to take it private and, not unexpectedly, proposed to do this by a scheme of arrangement.
After the terms of the scheme had been announced, but before it got to court, a minority shareholder lodged a complaint with the Panel. The Panel held a hearing and, as a result, the 51% holders agreed to increase their offer price.
The principal dispute concerned a break fee that had been previously paid to the 51% holders. The Panel required the 51% holders to lift their offer price by an amount equal to the break fee (which equated to 1.5 cents per share). (For details of this aspect of the decision, see "Break fees - not just a percentage game").
Implications
It's almost unknown for a court to examine the commerciality of a scheme of arrangement. Courts take the view that, provided they have all the relevant information, the shareholders are best placed to decide whether a scheme is commercially worthwhile.
As the National Can case shows, the Takeovers Panel apparently takes a more interventionist view. This has important implications for M&A planning.
The first is that, up until the first court hearing, a scheme will be potentially subject to Panel intervention. In other words, M&A planners will have to take account of factors such as the Panel's policies on break fees, funding, frustrating action, etc. There is also the possibility that the Panel will start to cut down the greater flexibility that schemes offer over Chapter 6 takeover bids.
This prospect is flagged in the Panel's draft policy on listed trust schemes. Although the policy acknowledges that trust schemes are very similar to schemes of arrangement, the Panel makes it clear that it wants trust schemes to follow the procedures of Chapter 6, including:
If carried through to schemes of arrangement, this policy would erode their usefulness as a tool for transactions that don't fit neatly into the Ch 6 takeover stereotype. This is a point which courts have recognised for many years, more recently in the Ranger Minerals case:
"[T]here are material distinctions between a takeover and a scheme for merger. The legislative purposes and the policy considerations differ in a number of respects. It is not the position that the legislature has applied the Ch 6 provisions to schemes of arrangement, and no search to find a harmonious, practical and mutually supportive operation would appear to be justified if its consequence was, in effect, simply to apply Ch 6 in every case as though it were part of Ch 5, subject only to necessary adaptations."
By contrast, a more formalistic approach to schemes may encourage rival bidders or shareholders to lodge "technical" objections with the Panel, based on allegations of "non-compliance" with Ch 6.
Comment
It is not clear whether the legislature ever intended the Panel to get involved in schemes of arrangement.
For example s 659B of Ch 6, which expressly separates the roles of the Panel and the courts during a Ch 6 takeover bid. The fact that Parliament did not make an equivalent rule for schemes suggests that it was not envisaged that the Panel would have a role in schemes.
Notwithstanding these policy considerations, it is now clear that the Panel regards itself as free to intervene in schemes, at least until the first court hearing. Unless and until that is changed by legislation, M&A scheme planning should, at a minimum, include a review of Ch 6 and a consideration of the extent to which Ch 6 procedures could and should be incorporated into the scheme processes.
For further information, please contact Nicholas Mavrakis.
