20 December 2006
Key Points:
The Government's push to reduce over-regulation will produce some benefits for M&A players, with changes proposed for both takeover bids and takeover schemes.
Next year may see some changes in the regulation of takeovers and schemes.
The changes are contained in two law reform proposals recently released by the Federal Government:
Throw away those microphones
The good news here is that mandatory recording of phonecalls during takeovers will be dropped.
This requirement, which was introduced into the Corporations Act in 2002, has imposed considerable costs on bidders and targets, for no readily discernible benefit. The Government has now recognised this, admitting that: "[t]here appears to be no evidence that the telephone monitoring provisions available during takeover bids have enhanced investor protection".
As a result, the Government proposes to drop the requirement - a move which appears to have received unanimous support from the business community.
Share-splitting
Another proposal will probably not be so universally popular, but is nevertheless worth pursuing: negating the effects of share-splitting in takeover schemes.
Share-splitting is an attempt to game the system in schemes of arrangement. It relies upon the fact that scheme approval requires approval of more than 50 percent by number of shareholders voting at the scheme meeting (as well as 75 percent of shares voted).
To defeat a scheme, a share splitter doles out small parcels of shares to a large number of friends, sufficient to ensure that together they will make up more than 50 percent of the bodies voting at the meeting (in person or by proxy). Even if that group of shareholders holds only a tiny percentage of the company's shares, their votes will defeat the scheme.
The actual extent of share-splitting is unclear.
The most high-profile share-splitting battle of recent times - Xstrata's 2003 takeover of MIM by way of scheme - saw allegations of share-splitting by both opponents and supporters of the takeover, and culminated in a threat of ASIC intervention. As it turned out, the scheme received the support of 58.5 percent in number of the shareholders voting at the meeting, holding 89.1 percent of the value of the shares voted at the meeting. When the scheme went back to court for approval, it emerged that any share-splitting had been relatively small: MIM reportedly had 23,000 voting shareholders, but the only evidence of splitting showed that there may at most have been 215,250 shares split into 574 parcels.
Of course, if the MIM scheme voting margins had been closer, those 574 voters could have been significant. For that reason, the threat of splitting is never one which can be completely discounted and is a potential distraction from the central issue of putting an attractive proposal to the shareholders.
The Government intends to address this issue by allowing the court to approve a scheme even if it fails to get more than 50 percent of the shareholders voting for it, provided that it is supported by 75 percent of the shares voted. The Government says that this will give the court a discretion that could be used "where there is evidence that the result of the vote has been unfairly influenced by activities such as share splitting".
Interestingly, the proposed amendment (as currently worded) would also seem to allow the court to refuse approval to a scheme that had got the necessary majority through share-splitting. This is not a theoretical possibility: as well as the unproved allegations of share-splitting in the MIM case, there is at least one documented case of a scheme getting up because a major shareholder used share splitting.
In 1987, Direct Acceptance Corporation proposed a corporate restructure through a scheme. A few days before the scheme meeting, a major shareholder created a large number of small shareholdings and distributed them to parties supportive of the scheme. The stated object of the exercise was "to be sure we have the votes to put the scheme through''. The scheme was supported by the necessary majorities. The NSW Supreme Court rejected an argument that the share splitting was a good reason to withhold approval of the scheme. It commented that there was nothing in the Act which specifically outlawed share-splitting.Under the proposed amendments, such a scheme could be refused court approval.
The NSW Supreme Court rejected an argument that the share splitting was a good reason to withhold approval of the scheme. It commented that there was nothing in the Act which specifically outlawed share-splitting. Under the proposed amendments, such a scheme could be refused court approval.
(It may also be worth noting that the amendment does not restrict itself to votes won or lost as a result of share splitting. It is possible that other methods of "interfering" with the voting may also result in the Court's varying the strict requirements of the statute.)
Compensation in schemes
At present, a court can impose conditions on its approval of a scheme of arrangement. The Government proposes to allow compensation orders if such a condition is breached. It says that the "desirability of such a mechanism was highlighted in the context of the James Hardie Report."
Under the proposed provisions a court will be able to order a target company to comply with the conditions it has imposed on the scheme and/or to pay compensation to anyone who has suffered loss as a result of a breach of a condition.
85 percent holder notices
It's a fair bet that section 665D is the most frequently-breached provision in the Corporations Act.
It was introduced into the Act in 2000, when the CLERP amendments introduced the "90 percent holder" general compulsory acquisition provisions. The section requires anyone who gets to 85 percent of a company to notify that fact to the company. The idea is that the company and its shareholders are then aware that someone is close to getting the 90 percent necessary to begin compulsory acquisition.
The Government itself acknowledges that this notification is almost a dead letter. In listed companies, it is redundant, because the substantial shareholding disclosure requirements achieve the same effect. In unlisted companies, the ability to secretly amass 85 percent of the company is somewhat hindered by the lack of an anonymous market in the company's shares - and, even where it happens, there is often no awareness of the existence of section 665D. It is, therefore, difficult to disagree with the Government's belief that "the 85 percent notice is frequently not given".
The removal of section 665D (and section 665E, which requires a company that receives an 85 percent notice to notify other shareholders) will be a triumph for common sense.
When's it all going to happen?
All of these proposals are still at draft stage. Comments on the takeover scheme proposals close on 23 February 2007. Comments on the other changes close on 22 December 2006.
The takeover scheme proposals are in draft Bill form, and so might be introduced into Parliament in the first half of 2007. The other changes have not yet got to draft Bill stage, so any legislation is still probably some considerable way off. The picture is further complicated by the pending Federal election, which is most likely to be held in the second half of 2007.
