27 May 2011

Member-approved takeovers - ASIC acts

No, not schemes of arrangement, but approvals under item 7 of section 611 of the Corporations Act.

Item 7 allows a general meeting to approve an acquisition that would take the acquirer over the 20% ownership threshold.

It is not often used for full takeovers of companies, largely because that would require special relief from ASIC. However, following the Takeovers Panel 2002 decision in relation to Colonial Mutual Property Trust, it has provided a statutory alternative for certain takeovers of listed managed investment schemes (MISs – for which section 411 schemes of arrangement are unavailable).

ASIC has now released a draft new policy to reflect both the use of item 7 by MISs and changes in the regulatory environment since its original policy was published in 1994.

Managed investment schemes

A major hurdle for MIS takeovers by item 7 is that item 7 prevents target unitholders from voting in favour of the acquisition. This means that, without an ASIC modification, no-one could actually vote for a full takeover.

The new draft policy sets out the basis on which ASIC will grant such a modification. It also indicates what other relief the deal may require.

A major consideration is whether the deal complies with the Takeovers Panel policy on trust schemes. In brief, this requires MIS schemes to follow the principles and shareholder protections in Chapter 6 of the Corporations Act. In other words, ASIC is confirming that it does not want item 7 to be used just to avoid Chapter 6.

ASIC also notes that an MIS item 7 vote may require some modifications to other parts of the Corporations Act, including:

  • if the MIS is illiquid and the acquirer makes withdrawal offers, it would require an exemption from Pt 5C.6 to allow it to offer consideration from its own resources, rather than from the MIS’s own assets;
  • if the acquirer is offering scrip and there are foreign unitholders, it would require an exemption from the s 601FC equal treatment obligation before it could offer cash to those foreign shareholders; and
  • the acquirer may require relief from various requirements relating to Product Disclosure Statements, Financial Services Guides and financial services licences.

General voting restrictions

As noted above, item 7 prevents anyone voting in favour of an acquisition if they are the acquirer or a person from whom shares or units are to be acquired (or an associate of either).

Even where the deal is less than a complete takeover, this provision can cause problems if the acquirer holds shares on trust or as nominee for a person who would not be precluded from voting if they held the shares or units directly. Under the new draft policy, ASIC would allow those votes to be counted if:

  • the beneficial holder is not an associate of the acquirer or otherwise prevented from voting; and
  • the beneficial holder directs the legal holder to vote

Of course, full takeovers of companies by item 7 vote face the same problem as full takeovers of MISs: target members can’t vote in favour of the takeover. As with MISs, ASIC is prepared to grant relief from this roadblock, but will require a lot more convincing (noting that a section 411 scheme could be an available alternative for a company):

“We will not give relief… unless we are satisfied that there is a commercial or legal reason why it is not practical to structure the offer as a takeover bid or scheme of arrangement.”

Time limits and game-changers

Although ASIC’s current policy is that information packs and notices of meeting should be shown to it in draft form, there is no written policy about the time for doing that; the proposed new policy “strongly encourages” entities to do so 14 days before they are printed (longer if ASIC relief is required).

If there is a material change between dispatch of the notice of meeting and the meeting itself, the target members should be given a supplementary information pack – and should have at least 10 days to digest it before being asked to vote (a shorter period may be acceptable if the supplementary information has already been flagged or is already out in the market).

If an event after the vote materially changes the nature of the deal (eg. by increasing the acquirer’s stake in the company or MIS), a fresh vote should be held.

Information requirements

Item 7 requires that members be given all information that is material to their decision to vote. As with the current policy, ASIC provides an indicative list of information that should be provided. ASIC’s longstanding policy is also that members should receive an analysis of the transaction. The draft policy says that this analysis should comply with Regulatory Guide 111 (rewritten in March this year).

That analysis can, in ASIC’s view, be prepared by the target’s directors, but only if it is of the same standard as an independent expert’s report (which requires the directors to have the necessary expertise, experience and resources). The proposed new policy increases the pressure on directors to comply with what ASIC observes is standard market practice: ASIC says that, in its experience of item 7 documents, there is a “significant risk that a report prepared by directors will not provide all material information to members”.

The draft policy also draws attention to the need for the notice of meeting to be “clear, concise and effective”. In the Consultation Paper accompanying the draft policy, ASIC notes that it has provided extensive guidance on “clear, concise and effective” in last month’s Consultation Paper 155.

Where to from here?

The draft policy is up for public comment until 1 August 2011.

ASIC then plans to publish a final policy by the end of this year.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.