07 Jul 2011
Do you really know where you stand with a pre-emptive rights regime?
by Graham Taylor, Samy Mansour, Jessica Salinger
When drafting and interpreting pre-emptive rights arrangements, parties need to pay close attention to when those rights may or may not be triggered.
Pre-emptive rights are commonly seen across the energy and resources industry and while the clauses can operate differently from project to project, recent court cases now show that their operation can also be affected by external events, such as a scheme of arrangement or insolvency.
Pre-emptive rights and a takeover by way of scheme of arrangement
A pre-emptive rights agreement required a shareholder to give notice if it "proposed to transfer" any of its shares.
Subsequently, a takeover was proposed for the company by way of a scheme of arrangement. Under the proposal, shareholders would vote on whether to approve the scheme. If the scheme was approved, the shareholders' shares would be transferred to the bidder.
The NSW Supreme Court in RJL Investments Pty Ltd v Oceania Healthcare Technology Investments Pty Ltd  NSWSC 483 was asked whether a shareholder's intention to vote for the scheme triggered the pre-emptive rights agreement. In other words, did an intention to vote for the scheme constitute a proposal to transfer the shares?
The Court held that the pre-emptive rights regime was not triggered. Acting Justice Windeyer stated that a proposed scheme vote was not a proposal to transfer even if the effect of the scheme was to transfer the shares:
"It is true that the [shareholder] proposes at present to vote in favour of the scheme. If it does so propose then it may be likely that the scheme would be approved by the members and it may then be likely that the Federal Court would approve the scheme. But all that is a result not of a proposal by the [shareholder] to transfer [the] shares, but is a result, first, of a vote of members at a company meeting, second, by operation of court order and third, by operation of the provisions of s 411 of the Act."
As a result, it appears that a proposed scheme of arrangement may be able to override an existing pre-emptive rights arrangement.
Context, context, context
The issue in this instance was whether a share buy-back triggered a pre-emptive rights clause which governed "transfers" of shares. The issue was considered by the Full Federal Court during the 2005 battle for control of Coopers Brewery (Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560). The court said that the pre-emptive rights clause was not triggered for two reasons:
even though a buy-back was a transfer of shares to the company, because the transfer was immediately followed by a cancellation of those shares, this demonstrated that this was not a "transfer" within the meaning of the pre-emptive rights provision; and
the purpose of the provision was to control the continued ownership of Coopers Brewery shares.
That second point shows that Court will look at the context and intended purpose of a pre-emptive clause as well as its wording. This is borne out by a recent decision in England discussed below.
Pre-emptive rights and a liquidation
In Leedon v Hurry  UKPC 27, the Privy Council held that a pre-emptive clause in a joint venture agreement, relating to the assets of the joint venture company, ceased to have effect once the joint venture company went into liquidation.
The clause stated that, before the joint venture company sold any assets, it had to offer them to one of its shareholders, with an open offer period of 30 days. When liquidators were appointed to the joint venture company, a shareholder claimed that the pre-emptive provision required the liquidators to offer it the company's assets before selling them to a third party.
The liquidators successfully argued that the pre-emptive provision could not have been intended to have any effect after the company had gone into liquidation for two reasons:
upon liquidation, the company had ceased to be the beneficial owner of the assets; and
if the pre-emptive clause applied while the company was in liquidation, it would adversely affect the liquidators' performance of their duties (eg. by interfering with their ability to liquidate the assets).
In essence, the Privy Council said that the pre-emptive provision operated – and was designed to operate – only for so long as the joint venture company was a going concern. While this decision is not strictly binding on Australian courts, it demonstrates that pre-emptive rights may not operate in all circumstances.
These cases show that pre-emptive rights clauses must be carefully drafted and carefully read and that certain corporate arrangements which result in the transfer of an interest may not be caught under a pre-emptive rights regime. Essentially, not all transfers of interests should be assumed to trigger a pre-emptive rights provision!
Pre-emptive rights will not be applied to transactions that fall outside the terms of the relevant clause. Similarly, a court will be reluctant to enforce a pre-emptive clause in situations in which the parties never intended it to operate.
In practical terms, therefore, these recent rulings show that:
- a pre-emptive rights clause must be drafted in such a way as to cover all relevant transactions, insofar as allowed; and
- a pre-emptive clause is not a "set and forget" matter – it should be regularly reviewed, to ensure that it continues to meet the parties' needs and responds to new and previously unanticipated contingencies.