27 Sep 2010
The Takeovers Panel on reverse takeovers
by Karen Evans-Cullen, John Elliott
"Unacceptability" is judged by reference to the interests of shareholders, rather than strict compliance with the letter of the law.
Reverse takeovers have been problematic since the Gloucester Coal battle last year. The Panel has just released some guidance on this issue.
It will be remembered that the Panel twice ruled in favour of Noble Group against the reverse takeover of Gloucester Coal that would have resulted from Gloucester's bid for Whitehaven Coal.
On the first occasion, it ruled that the acquisition of 21% of the nominal bidder without the approval of its shareholders was an unacceptable change of control.
That decision went on review. The Review Panel ruled that, by itself, a 21% acquisition was not a change of control. However, it held that the takeover in question was unacceptable because it did not allow the bidder's directors to consider a superior competing takeover bid for the bidder.
These decisions caused considerable debate, with some commentators expressing the view that they would cruel reverse takeovers (which are allowable under section 611 of the Corporations Act). There was, therefore, considerable interest when the Panel announced that it was considering whether to include reverse takeovers in a rewrite of its Guidance Note on unacceptable circumstances.
That rewrite has now been published. The Guidance Note says that:
- unacceptable circumstances may include "a change of control, or a material effect on control by an issue of shares as consideration for a bid, that either disenfranchises shareholders or does not meet the policy of chapter 6 (even if strictly it satisfies item 4 of section 611 - acquisitions that result from acceptance of a bid)";
- "A reverse takeover may also offend the principles in sections 602(a) and (c). It may 'lock up' the bidder and adversely affect competition. The Panel takes into account whether the transaction is subject to the approval of bidder shareholders (relief from section 629 can be sought from ASIC if necessary) and/or is subject to a condition that allows a superior proposal to be considered by those shareholders. A 'superior proposal' condition, however, if it depends on the opinion of, or an event controlled by, the bidder or an associate is void (section 629) so should be drafted in objective terms."
The Guidance Note is a little cryptic, but these comments appear to suggest that:
- where the reverse takeover has a material effect on "control" (however that's judged), shareholder approval is necessary; and
- where the reverse takeover effectively prevents rival bids for the nominal bidder (even if there is no change of "control"), the reverse takeover must be subject to either the approval of the bidder's shareholders or a condition that allows an objectively superior rival proposal to be put to those shareholders.
This is not a definitive template for the planners of future reverse takeovers: the Panel rarely issues cut and dried sets of guidelines. Nevertheless, it is a significant development, because the Panel has sent a clear message that it will not back away from its preparedness to intervene in reverse takeovers. In other words, the fact that a reverse takeover complies with section 611 of the Act does not mean that it will not be ruled to be unacceptable by the Panel.
This will be particularly relevant to boards of companies which make reverse takeover bids in an attempt to frustrate a potential bidder for that company.
Looking more widely, it is yet another reminder to all M&A players that the fact that something is allowed by Chapter 6 of the Corporations Act doesn't put it beyond the power of the Panel. This point was clear to all experienced M&A practitioners even before the Gloucester Coal battle last year, and was emphasised by both Panels' findings against Gloucester Coal: "unacceptability" is judged by reference to the interests of shareholders, rather than strict compliance with the letter of the law.