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Chapter 3 - Takeovers
Proposed changes to takeovers
3.1
The rationale for the reforms to the takeovers
provisions are set out in the Explanatory Memorandum to the Bill:
The Takeovers reforms contained in the Bill are designed to
improve the efficiency of the market for corporate control while encouraging
better management and enhancing investor protection. Takeovers, or the prospect
of takeovers, provide benefits for shareholders, the corporate sector and the
economy since they provide incentives for improved corporate efficiency and
enhanced management discipline, leading to greater wealth creation. The reforms
are aimed at ensuring that these incentives operate effectively.[1]
3.2
The Bill recasts the existing provisions dealing
with takeovers and makes some significant changes.
Mandatory bid rule
3.3
Under this rule bidders will be permitted to
exceed the statutory takeover threshold of 20 per cent of the total voting
rights in a company provided that they immediately make a full takeover bid
(the mandatory bid). The bid price must be the same as or higher than the best
price paid by the bidder for shares in the company in the previous four months.[2]
Corporations and Securities Panel
3.4
The provisions relating to the Corporations and
Securities Panel (the Panel) are extensively revised by the Bill so that it,
rather than the courts or the Administrative Appeals Tribunal (AAT), becomes
the primary forum for resolving takeover matters.[3] The courts will continue to
determine any damages claims after the bid period and any criminal
prosecutions. This will be achieved by:
- opening up access to the Panel to the bidder, the target, the
ASIC, or any other person whose interests are affected (rather than being
limited to ASIC as at present);[4]
- ensuring that the courts will not grant injunctions during the
bid period except on the application of the ASIC or another public authority of
the Commonwealth or a State; and
- having the Panel, rather than the AAT, deal with appeals against
ASIC exemption and modification decisions relating to takeovers.
3.5
The Bill permits any interested person,
including the bidder, target and ASIC to bring matters before the Panel, which
will have the power to make a wide range of orders.[5]
Compulsory acquisition
3.6
The rules relating to compulsory acquisition
will be modified to facilitate the acquisition of the outstanding securities in
a class by any person who already holds 90% of the class. This is intended to
make it easier for majority shareholders to obtain the benefits of 100% per
cent ownership. The changes in the Bill will:
- allow all types of securities (not just shares) to be
compulsorily acquired;
- removes the requirement currently contained in section
700(2)(c)(ii) that three-quarters of the registered holders have sold their
shares during the takeover;
- allow compulsory acquisitions to take place at any time (not just
following a takeover bid); and
- allow the minority shareholders to object to the acquisition and
provide for the 90% holder to apply to the court for approval of the
acquisition.[6]
Listed managed investment schemes
3.7
The Bill extends the takeover provisions to
listed managed investment schemes. As a result of this the managers of these
schemes will face the same competitive pressure to perform as company directors
and members of these schemes will have the same rights to share in a control
premium as shareholders.
Streamlining of current provisions
3.8
The rules for off-market and market bids are
streamlined. The disclosure requirements are brought together into a single
bidder’s statement replacing the current Part A and Part C statements and a
single target’s statement replacing the current Part B and Part D statements.
These statements will replace the existing checklist of contents with a general
requirement to disclose all information material to a shareholder’s decision
about acceptance of an offer.
3.9
The Bill rationalises the liability regime for
the contents of takeover disclosure documents. The new provisions are generally
consistent with the proposed new fundraising rules.
3.10
The Financial Sector Reform (Consequential
Amendments) Act 1998 carried into the ASIC Act the consumer protection
provisions contained in the Trade Practices Act. It excluded those
provisions in the TPA from operating in relation to financial services.[7] This Bill will also remove the
overlapping application of the various state Fair Trading Acts.[8]
3.11
In addition, provisions in the Bill will have
the effect of removing the immunity of federal government business enterprises
from the takeover provisions.
Mandatory Bid Rule
3.12
In its submission the Securities Institute of
Australia supported the introduction of a mandatory bid rule. However, it
expressed concern that the draft legislation and Explanatory Memorandum were
unclear about whether a scrip for scrip bid was permitted. The provisions of
the draft Bill have been altered in the Bill currently before the Parliament
and now clearly state that while the bid must include a cash offer, the bidder
may also offer either securities, or cash and securities, as an alternative.[9]
3.13
The Australian Institute of Company Directors
(AICD) also commented on the mandatory bid rule in its submission. The
mandatory bid provisions require that a takeover bid made under the mandatory
bid rule must be unconditional.[10]
However, under its general power to modify the application of the takeover law
in particular cases, the Australian Securities and Investments Commission will
be able to relieve persons from the obligation to proceed with a mandatory bid,
or to allow mandatory bids to be conditional[11].
The Institute considers that the ability to make a conditional mandatory bid
may be fundamental to the bid and should be provided for in the legislation.[12]
3.14
The Committee has not been persuaded that the
Bill should be amended in this regard. One of the objectives of the mandatory
bid rule is to ensure that where control of a company has passed to a bidder
all of the remaining shareholders should be given an opportunity to sell their
shares on the same terms. The Committee is concerned that the objectives of the
rule could be circumvented by a bidder attaching conditions to a bid which
would make it highly unlikely that the bid could proceed. Given that the
mandatory bid rule is opening a new avenue for takeover bids in addition to
those already existing under the current legislation, the Committee does not
consider that the restriction on conditional bids will unreasonably restrict
takeover activity.
3.15
The Committee is also mindful that the
Government has undertaken to review the operation of the mandatory bid rule two
years after its commencement, to ensure that the Government's policy goals with
the introduction of the mandatory bid are being achieved.[13] The requirement that bids be
unconditional can be reviewed at that time in light of experience with the
legislation as proposed.
Withdrawal of market bids
3.16
The AICD considers that the provision of
proposed section 652C, which allows a bidder to withdraw a market bid under
certain circumstances, should be extended to mandatory bids.[14] The circumstances set out in
section 652C largely deal with actions which might be taken by the target
company to thwart a bid.
3.17
In considering this matter the Committee has
taken into account the objectives of the introduction of the mandatory bid
rule; the provisions of section 614, which places some restrictions on the
actions of target companies; section 652B which allows a bid to be withdrawn
with the consent of the ASIC; and the powers of the Takeovers Panel to declare
conduct to be unacceptable. In light of these avenues for redress the Committee
does not consider that any amendment to the Bill is currently required.
However, this issue could be considered as part of the Government’s review.
Escalation Clauses
3.18
The Securities Institute of Australia also
expressed concern about the general prohibition on escalation clauses contained
in section 622 of the Bill.
In our view, escalation clauses should be allowed in any
takeover situation. They allow a seller, prior to the offer, to reach an
agreement that, if a full bid occurs, any price obtained will be increased to
match the bid price if that price is higher than the one obtained prior to the
bid. This will be of comfort to the seller and encourage the development of
stakes by bidders in preparation for a bid. It is illogical to allow escalation
clauses only in mandatory bid situations and we recommend that they be allowed
for all takeovers.[15]
3.19
The Bill merely maintains the current
prohibition on these clauses except in the case of an acquisition which
triggers a mandatory bid and is, therefore, part of the active takeover
process.[16]
The Committee has not been persuaded that the Bill should be amended.
Consideration offered during the bid
3.20
In correspondence to the Committee Chairman, the
Minister for Financial Services and Regulation, the Hon Joe Hockey MP, outlined
some additional takeover issues raised by the Companies and Securities Advisory
Committee (CASAC). This followed a recent takeover bid and Federal Court
decision which highlighted problems with the provisions of the current law, and
the CLERP Bill which contain the equivalents of these provisions.
3.21
Under section 621(4) of the Bill, where a bidder
makes a cash-only bid or includes a cash-only alternative:
(4) If:
- a person
makes a takeover bid; and
- the
consideration, or one of the forms of consideration, offered under the bid for
the securities in the bid class consists solely of a cash sum for each
security;
the amount of that cash sum must equal or exceed the maximum
consideration that the bidder or an associate provided, or agreed to provide,
for a security in the bid class under any purchase or agreement during the 4
months before the date of the bid.
3.22
This provision is consistent with section 641 of
the existing Corporations Law. By contrast, where a bidder makes a
non-cash-only bid, that is, any bid that does not provide a cash-only
alternative, neither the current legislation nor the Bill require that the
value of the bid consideration match any price the bidder paid for target
company shares in the four months prior to the takeover bid.
The Evans Deakin takeover bid
3.23
In October 1998, Evans Deakin purchased 78
million ANI shares on the stock market for $1.05 each. Subsequently Evans
Deakin made a conditional Part A cash and scrip bid, with no cash-only option,
for ANI. The bid valued the ANI shares at approximately 90c each.
3.24
Under the current provisions, which are
reflected in the Bill, Evans Deakin was not required to offer consideration at
least equivalent to the on-market cash price it paid for ANI shares immediately
prior to the takeover bid because it made a non-cash bid.
3.25
CASAC considered whether section 621(4) of the
Bill should be extended to all bids or alternatively should not be proceeded
with. CASAC advised that, under section 621(4) of the Bill as it stands, some
shareholders could obtain premiums for selling their target company shares in
the pre-bid period, compared with the consideration offered to offeree
shareholders. This might create an impression of inequitable treatment among
shareholders. Institutions might also be placed under pressure to enter into
pre-bid share deals on terms that would not be available to offeree
shareholders under the bid.
3.26
CASAC recommended that section 621(4) be
extended to all bids, including non-cash-only bids, adding:
The Advisory Committee recommends that CLERP Bill s 621(4) be
extended to all bids, including non-cash-only-bids. The Bill should stipulate
that the value of any quoted shares offered as part of the consideration should
be determined as the average of the market price paid for those shares in the
five trading days prior to the announcement of the bid.[17]
3.27
The Committee has considered this issue based on
the evidence contained in the CASAC report and agrees with the recommendations
contained in that report. However, there is some concern among Committee
members that they have not had the opportunity to canvas this issue with a
wider range of interested parties. While the Committee, on the basis of the
evidence it has considered, would agree with a decision by the Government to
act on that recommendation, it would also be prepared conduct a more detailed
examination of the issue following the passage of the Bill as currently
drafted.
Collateral Benefits
3.28
The Australian Institute of Company Directors
has suggested that section 623 of the Bill be amended. Section 623(2) of the
Bill, as well as the equivalent current provisions, prohibit an intending
bidder, in the four months preceding the bid, from giving target company
shareholders any benefit not provided to all shareholders under the takeover
bid. Section 623(3) prohibits a person, or an associate, from giving a benefit
to a person as an inducement to dispose of securities in a way which leads to a
mandatory bid unless that inducement is provided to all shareholders under the
bid.
3.29
The Institute considers that the provision
creating the prohibition during the 4 months prior to the bid is too broad and
creates unnecessary difficulties for companies trying to move to the 20%
control level prior to a bid.[18]
This matter was discussed during the Committee’s public hearings.
there is an issue which has plagued practitioners in this area
and companies wishing to make takeover offers. That is the area of collateral
benefits.
... It has been particularly problematic in the four months up to
the bid and there have been a number of cases on this issue. It still has not
resolved the issue. There has been recent litigation, both in the Federal Court
and the Supreme Court, which has left the issue uncertain as well.
CASAC[19]
has analysed that issue and takes the view in its anomalies report on the
takeover law that the policy underlying 698(2) and (4), which covers the
four-month period prior to the bid, is misconceived because what the takeover
provisions are seeking to do is to regulate opportunity of participation while
the takeover offer is on foot, not in the four months leading up to the
takeover offer. CASAC recommended that those provisions be repealed, and the
institute would recommend that as well.[20]
3.30
In its submission to the Committee the Institute
said that it believes that the prohibition contained in proposed section 623(2)
of the Bill should be repealed and that the prohibition in proposed section
623(3) should be limited to apply only to the bidder or a person who proposes
to make a takeover bid or an associate.
3.31
In Correspondence with the Committee the
Minister for Financial Services and Regulation, the Hon Joe Hockey MP, has also
raised issues relating to this section. Following a recent court case he
requested CASAC to examine whether sections 623(2) and (3) of the Bill should
be retained. This move follows on from the Federal Court’s decision in Aberfoyle
Ltd v Western Metals Ltd (1998) 28 ACSR 187. The Federal Court’s decision
raised market concerns about the application of the current provisions in the
Law and the equivalent provisions in the Bill. In particular the Court’s
findings raised concerns that:
- a bidder cannot make unconditional acquisitions of target company
shares from institutions prior to a conditional bid;
- pre-bid acquisitions cannot be made through stock market
crossings (where the broker acts for both the buyer and the seller); and
- a bidder company cannot fund a bid by placing shares with
institutions that hold shares in the target company.
3.32
In the Aberfoyle takeover bid, various
institutions sold their target company shares to the intending bidder in the
four-month pre-bid period under unconditional cash contracts. By contrast, the
subsequent takeover bid was a conditional cash offer.
3.33
The Federal Court stated that these institutions
may have gained a “very real commercial advantage (perhaps measurable in money)
...when compared with a person who enters into a conditional contract [under the
subsequent takeover bid] and whose ability to sell his [target company] shares
is contingent on a range of events none of which he has any ability to
control.”
3.34
Before the Aberfoyle decision, it was
generally regarded that this form of pre-bid cash transaction for target
company shares would not constitute a benefit prohibited by the current
provisions, given that the bid price could be no less than the highest cash
payment in that period.[21]
3.35
The pre-bid sale by some institutions of their
target company shares to the bidder was conducted under a crossing arrangement
on SEATS, that is a prearrangement between buyers and sellers. The Federal
Court ruled that only those transactions that operated on a ‘first come first
served’ anonymous basis would satisfy the ordinary course of trading test,
whether they took place on the trading floor, or on SEATS.
3.36
CASAC indicated that the distinction made by the
Court between anonymous trading and a crossing may not be practical for the
purposes of large lines of stock. CASAC considered that the Court’s ruling
would restrict a bidder’s ability to acquire a pre-bid stake.
3.37
The Court also held that a placement by the
bidder to institutional shareholders of the target company contravened section
698 of the Corporations Law as it constituted an inducement for those
shareholders to accept the bid.
3.38
Until the Aberfoyle decision, many practitioners
had taken the view that a placement of bidder’s shares with institutional
investors holding target company shares would not contravene section 698, as
any benefits the institutions received would not be in their capacity as
shareholders of the target. The Court’s decision casts doubt on the legality of
such placements and, as CASAC has noted, restricted the ability of bidders to
fund their bids.
3.39
CASAC advised that the Court’s decision extended
the previously accepted meaning of “benefit” and placed restrictions on the
acquisition of target company shares in the four months prior to the bid.
According to CASAC, the restrictions imposed by the Aberfoyle decision
are inconsistent with the underlying principle that a person should be free to
acquire up to 20 per cent unfettered by takeover regulation. [22]
3.40
CASAC has therefore recommended the removal of
sections 623(2) and (3) from the Bill. But, as CASAC advised, this may be seen
as undermining the equal opportunity rule by allowing bidders to offer benefits
to some target company shareholders that are not offered under the bid.
However, these concerns would be allayed if CASAC’s recommendation to extend
the operation of section 621(4) of the Bill were adopted.
3.41
The Committee has not had an opportunity to take
evidence on this issue from other parties. The Government may therefore care to
accept CASAC’s recommendation, or proceed with the Bill as drafted and refer
this matter to the Committee for further consideration.
Bidder’s statement formalities
3.42
Section 637(1)(a)(ii) of the Bill requires that
where a bid is made other than on a cash only basis, the bidder’s statement
lodged with the ASIC must be approved by “a unanimous resolution passed by all
the directors of the bidder”. The Australian Institute of Company Directors
have urged that this provision not be included as it is likely to cause
significant problems where directors are on the board of both the offerer and
target.[23]
3.43
The Committee appreciates that there may be some
circumstances where a conflict of interest may arise. However, it notes that
this requirement only applies to bids made other than on a cash basis and that
the ASIC has the power to modify the law in this respect if necessary.
Target’s statement content
3.44
The AICD considers that the standard for
disclosure contained in section 638 is too onerous in light of the limited time
available to the target to prepare a statement.
The AICD considers that the expanded test imposed for disclosure
in the target’s statement should not be determined by having regard to what
“professional advisers would reasonably require to make an informed assessment
whether or not to accept the offer under the bid”. While this test is
appropriate in the context of a company issuing securities the AICD submits
that it is not appropriate for a target company having to respond to a takeover
bid within a 14 day time period.[24]
3.45
The Explanatory Memorandum to the Bill outlines
the reasoning behind the provisions and how they take into account the time
constraints faced by a target.
The general disclosure rule for the target is based upon the
general disclosure rule in the proposed fundraising provisions. This type of
disclosure rule is considered appropriate as it will require the target to
focus on what information is required by holders of the target's securities to
make an informed decision.
The general disclosure rule will only require information to be
included in the target's statement if the target actually knows or ought
reasonably to have obtained the information by making enquires (proposed
paragraph 638(1)(b)). In addition, given the different circumstances in which
takeovers occur, in determining what information it is reasonable for a target
to include, regard may be had to the time period in which the target's statement
must be prepared (proposed paragraph 638(2)(d)).[25]
3.46
The Committee is satisfied that the provisions
contained in the Bill make adequate allowance for the time constraints which
will be faced by target companies.
Scope and powers of the Panel
3.47
The scope and powers of the Panel have been
criticised in several submissions received by the Committee. In particular
Justice Santow, the Securities Institute of Australia and the Australian
Institute of Company Directors have all expressed reservations about some aspects
of the legislation.
3.48
The Securities Institute supports the proposal
to make the Corporations and Securities Panel the main forum for resolving
takeover disputes. However, it considers that the Takeovers Panel should have
wider powers. It should be empowered to make rules for takeovers, to enforce
its own rulings, to declare conduct to be ‘acceptable’, and to initiate its own
inquiries. The Institute has also expressed concern about the removal of the
courts ability to provide injunctive relief and the ability of the Panel to
fill this void.[26]
3.49
While the concerns raised by the Institute are
not unreasonable, the Committee is satisfied that the proposed legislation will
be effective. For example, the Securities Institute has raised concerns about
the ability of the Panel to act quickly. However, section 657E of the Bill
gives the Panel, or the President of the Panel, the power to make an interim
order, even where no application for a declaration of unacceptable circumstance
has been determined, or even received.
3.50
Similarly section 657C provides that the bidder,
the target, the ASIC, and any other affected person can apply to the Panel for
an order. While the Securities Institute may feel that the Panel should have
the express power to intervene when the takeover process is being abused, it
appears to the Committee that it is highly unlikely that the Panel would need
to intervene if all of the affected parties, and the regulator, were satisfied
with events.
3.51
The Australian Institute of Company Directors
has expressed dissatisfaction with proposed section 657(G)(2). This section
allows only the ASIC to apply to the courts for an order to enforce compliance
with an order of the Panel. The AICD considers that any party who can apply to
the Panel for an order should be able to apply to the court for enforcement of
that order.[27]
While the Committee has some sympathy with the AICD’s position it notes that
one of the objectives of the legislation is to curb the egregiously litigious
nature of Australian takeover activity and that section 657 is consistent with
that objective.
3.52
The Committee strongly supports the objective of
making the Panel, rather than the courts or the Administrative Appeals Tribunal
(AAT), the primary forum for resolving takeover matters. The UK Panel on Takeovers
and Mergers has been operating successfully for thirty one years and has
regulated over 6,000 bids.[28]
It provides a good example of how a Panel can quickly and effectively dealt
with such matters. Mr Peter Lee, Deputy Director General of the UK Panel,
emphasised to the Committee the commitment of the business community in the UK
to the Panel. He outlined the importance of being able to recruit the best
people available for secondment to the Panel, and pay them appropriately.
we would always pay our staff whatever they would have
received back at their own office. Whether they are lawyers, merchant bankers
or accountants, they would not be out of pocket in any sense. Nor, indeed,
would their employer. We have felt that this is an incredibly important point
because, as I know from talking to other commissions around the world, it has
often been a problem to pay people at a level above, say, the normal civil
servant rate in that particular country. But that is how we achieve it.[29]
3.53
Mr Lee indicated that about half of the
executive of 30 were on secondment from city firms. When asked whether those
executives were paid market rates he said:
Yes, they are paid market rates and if you are going to earn X
in a firm of lawyers, you would be paid X by the Panel. The pay they receive
from us is entirely dictated by what they would have received back at their
firm.[30]
3.54
He then went on to outline the benefits of this
approach:
..... it means that an awful lot of people in the city have been
to the panel. There is a general commitment to the system. I think also that
practitioners obviously have respect for a body which itself is largely made up
of practitioners. For example, our chief executive, the director-general, is by
tradition and always has been a leading merchant banker. So I think it is a
very key element in gaining the respect of those practitioners involved in this
field.
Incidentally, I think the benefits to the people who come to us
and then return to the industry are enormous. Many of our former secondees are
now, for example, leading lawyers or merchant bankers in the takeover world. I
think it also greatly benefits the firms who second them to us. [31]
3.55
Mr Lee went on to describe how this level of
commitment to the UK Panel has also contributed to the acceptance of its
rulings and the rarity of any legal challenges.
We are a non-statutory body, and I readily recognise that we are
unusual in the world, so we do not have any legal powers. The fact is that over
the years people have been prepared to do what we rule and they have not sought
to disobey that or generally to take issue with us and go to the courts. I know
this is always a very difficult thing for somebody not of the UK to understand,
but the fact is that the area of sanctions and getting people to do things for
us amounts to an incredibly small percentage of our daily concern.
Our daily concern is trying to reach the right answer for a
particular issue. I think it works because of the commitment to the system,
directly or indirectly, by people involved in the takeover world. Public
criticism is regarded as a dreadful thing to happen, as something that will
almost certainly adversely affect your profit and loss account and, if you are
a private individual, as something that may adversely affect your career. That
is really how it has worked in the UK.
The Committee considers that the Bill will
establish an effective system and that the roles of the Panel and the ASIC as
set out in the Bill are reasonable at this stage. The Government has stated its
intention to review the reforms in relation to the Takeovers Panel after 2
years.[32]
The Committee hopes that this review will consider further expanding the role
of the Panel.
Compulsory Acquisitions
3.56
Several individual shareholders and the
Australian Shareholders’ Association have expressed concerns about the
compulsory acquisition provisions of the Bill. Mr Elkington, for example, has
said that the proposed amendments “reflect the view that dissenting
shareholders and other minorities are simply a nuisance, to be swept away
without any regard to general considerations of fairness”.[33] Their concerns range across
several provisions in the Bill and the main areas of concern are summarised
below.
Extended scope of compulsory acquisition provisions
3.57
Proposed section 664A will introduce into the
Corporations Law a new provision allowing a 90% majority shareholder to
compulsorily acquire the remaining shares at any time. In the existing
legislation a compulsory acquisition can only occur where it follows on from a
takeover bid. Witnesses before the Committee said that this confers a
significant new power on majority and controlling shareholders, which has the
potential to be used as an instrument of oppression either immediately or at
some future time. The section is confiscatory in nature and it is therefore
important to consider whether it always operates fairly or can be used as a
means of oppression.
3.58
The Explanatory Memorandum to the Bill sets out
the objectives of this provision.
Extending the power to compulsorily acquire securities will:
- allow better management of company groups;
- reduce the administrative and reporting requirements of
associated companies by:
- helping
parent companies distribute funds between subsidiaries;
- protecting
the confidentiality of commercial information and avoiding conflicts of
interest in dealings between associated companies; and
- discourage minority shareholders from demanding a price for their
securities that is above a fair value (often referred to as ‘greenmailing’).[34]
3.59
The Committee received evidence from several
small shareholders and from the Australian Shareholders’ Association expressing
concern that this provision disregarded the rights of minority shareholders.
While the Committee is not unsympathetic to their views it is also aware that
those minority shareholders are not the only stakeholders who need to be
considered. The presence of a small minority interest can impede the efficient
running and profitability of a corporation. This then affects the value of the
business to the ultimate owners of the majority shareholder and can also have
some effect on Australia’s overall economic efficiency. The Committee believes
that, provided the minority shareholders receive fair compensation, this
extension of the compulsory acquisition provisions is justified.
3.60
However, the Committee is concerned that the
absence of any time limits on this extended power may place minority
shareholders in a position of ongoing uncertainty about the status of their
shareholding in a company. The Committee therefore feels that some time limit
should be imposed on this extension of the compulsory acquisition provisions.
Recommendation
3.61
The Committee recommends that section 664A be
amended so that a compulsory acquisition can only occur within 6 months of the
proclamation of the legislation or within 6 months of the person seeking to
make the acquisition becoming a 90% holder.
Limited powers of the court to intervene
3.62
Proposed sections 661E and 664F limit the power
of the court to order that securities not be compulsorily acquired to cases
where the consideration offered is not regarded as fair. Objections have been
raised to these sections on the basis that they disregards other aspects of the
fairness of a compulsory acquisition such as the offerers conduct preceding the
offer.
3.63
The Committee believes that these provisions
should be considered in the context of the whole Bill. Although these sections
do not allow the court to consider matters other than fair value the Bill makes
extensive provision in other places to deal with any illegal or inappropriate
conduct preceding the offer. The Panel, for example, is empowered to declare
circumstances relating to a takeover to be unacceptable (section 657A) and to
make appropriate orders to protect the rights and interests of any person who
has been affected by those circumstances (section 657D). Part 2F.1 of the Bill
gives the court extensive power to deal with oppressive conduct against
minority shareholders. Part 2F.1A of the Bill introduces a statutory derivative
action which will allow shareholders to commence proceedings on behalf of a
company where the company is unwilling or unable to do so. The ASIC Act and the
Corporations Law now contain extensive provisions aimed at remedying false,
misleading and unconscionable conduct. The Committee feels that these
provisions provide adequate protection for minority shareholders and that there
is no need to duplicate these protections within the compulsory acquisition
provisions.
3.64
In its Report on Compulsory Acquisitions and
Buy-outs, the Companies and Securities Advisory Committee highlighted the
possible consequences of expanding the range of matters which can be considered
by the court.
There should be no “proper purpose” requirement for the exercise
of a compulsory acquisition power, nor should the court have any power to set
aside a compulsory acquisition on any non-procedural grounds other than fair
value. Either provision could give rise to protracted litigation and legal
uncertainties, ...[35]
The Committee also notes that minority shareholders may benefit
from being offered fair value for their shares. Those shareholders could be
disadvantaged if a small group of dissident shareholders could stop the
compulsory acquisition process by arguing grounds other than fair value.[36]
3.65
The Committee is satisfied that the only issue
which should be considered by the court is whether terms set out in the
compulsory acquisition notice give a fair value for the securities.
Valuing securities
3.66
Proposed section 667C proscribes a new method of
valuing company securities for the purpose of compulsory acquisition. Sections
667A and 667B deal with the production of an experts report to support the
compulsory acquisition. Witnesses were concerned that the proposed method of
valuation does not take into account all of the relevant factors, such as
whether the offer is both fair and reasonable, and takes into account the
actions of the majority shareholder prior to the offer. Concerns have also been
expressed that an expert report prepared by an expert appointed by the majority
shareholder may not be independent.
3.67
In the preceding paragraphs the Committee
considered the arguments put before that the court should be able to block a
compulsory acquisition on the basis of previous actions by the majority shareholder.
The same arguments can be applied to the question of whether the valuation of
the minority interests should be amended in the light of previous actions of
the majority shareholder or some overall assessment of reasonableness. The
Committee does not believe that any inappropriate or illegal actions by a
majority shareholder should form the basis of an increased valuation of the
minority interests. These matters are dealt with elsewhere in the Corporations
Law. Similarly, the introduction of a test for the valuation based on whether
it is reasonable under the circumstances could give rise to protracted
litigation and legal uncertainties.
3.68
The Bill itself creates an incentive for the
majority shareholder to offer a fair value for the securities. The Bill provides
that if more than 10% of the minority shareholders disagree with the compulsory
acquisition the majority shareholder will have to seek approval from the court.
The Bill places the onus on the majority shareholder to prove that the terms
set out in the compulsory acquisition notice give a fair value for the
securities. The Bill further provides that the majority shareholder must bear
its own costs and those of the minority shareholder unless the court is
satisfied that that person acted improperly, vexatiously or otherwise
unreasonably.[37]
The Committee feels that these provisions create a powerful incentive for a
majority shareholder to appoint a reputable independent expert and to make an
attractive offer to minority shareholders.
Other issues
3.69
A number of other minor issues were raised
during the inquiry. One proposal was that section 661B, which sets out the
requirements for compulsory acquisition notices, could be amended so that the
notice is required to draw the readers’ attention to their rights under
sections 661E and 661D. The Committee supports the inclusion of this
information in the notice.
Recommendation
3.70
The Committee recommends that the compulsory
acquisition notice required by section 661B be required to draw the readers’
attention to their rights under sections 661E and 661D.
3.71
The Australian Shareholders’ Association has
pointed out that a notice to the holders of convertible securities under
section 665B is not required to include the additional information given to
recipients of compulsory acquisition notices under the compulsory acquisition
powers set out in section 664C(1)(c)-(e). The Committee considers that this is
a deficiency in the Bill.
Recommendation
3.72
The Committee recommends that a notice to the
holders of convertible securities under section 665B be required to include the
additional information given to recipients of compulsory acquisition notices
under the compulsory acquisition powers set out in section 664C(1)(c)-(e).
3.73
Sections 663C and 665C of the Bill both allow
the court, upon application by a holder, to make orders about the terms on
which convertible securities can be bought out. It has been suggested that
those orders should be applied to all securities of the same class, thereby
ensuring that there is only one court determination. This would be consistent
with the approach taken elsewhere in Chapter 6A. The Committee supports this
view.
Recommendation
3.74
The Committee recommends that sections 663C and
665C be amended so that any court order made under those sections applies to
all securities of the same class.
Effect of CGT on Takeovers
3.75
During the Committee’s public hearing in Sydney
a number of witnesses expressed concerns about the effects of capital gains tax
(CGT) on shareholders whose shares are acquired during a compulsory
acquisition.[38]
Mr Jarrett explained the problem faced by shareholders:
In any compulsory acquisition situation you will have
shareholders who have not wanted to have their shares taken over. But, under
the current capital gains tax provisions, not only will the shares be taken
from them in the compulsory acquisition but, in fact, the tax liability will
arise by virtue of the current provisions that apply to capital gains tax.[39]
3.76
Discussion on this issue also encompassed the
effect of capital gains tax on the willingness of shareholders to accept a
takeover offer. The evidence to the Committee focused particularly on the
effects on self-funded retirees who are considering a scrip for scrip offer.
It is particularly an issue for self-funded retirees because they
are relying on an income stream which comes from their capital base. If they
are subject to capital gains tax liability, then their capital base will be
diminished and therefore their income stream will be diminished, even though
they have continued their investment, so to speak, through the merged vehicle.
So it is quite a serious issue for people who are relying on the income stream
from their shareholdings.[40]
3.77
The Committee also heard that in a merger the
burden of facing an immediate capital gains tax obligation falls on the
shareholders of only one company.
The other serious concern we have about capital gains tax is
that in those types of circumstances you have two different sets of
shareholders: you have the shareholders in the bidding vehicle and the
shareholders in the target. The shareholders in the target are subject to
compulsory acquisition and a capital gains tax liability. Those in the bidding
vehicle do not get any tax liability at that time. In fact, it is quite a big
concern in friendly mergers, such as some of the bank mergers and the like
between regional banks and some of the major national banks that have been
taking place.[41]
Advance Bank and St George are particularly relevant here,
because you had two companies of more or less equal size who wanted to merge.
Because the acquiring company was St George, it meant that the Advance Bank
shareholders paid the capital gains tax and the St George shareholders did not.
If it had been the other way around, it would have been the reverse. What you
had was a merged group with a common group of shareholders who continued
holding equity in the merged group. They had not sold their shares; they were
just forming part of a larger group.[42]
3.78
The witnesses before the Committee said that
these problems were a major impediment to takeovers in Australia.
I understand from the Bank of Melbourne merger that over 50 per
cent of the objections were related to the capital gains tax issue. Also, the
recent AMP‑GIO takeover seems, from media reports, to be a clear example
of the fact that a lot of small shareholders decided not to accept the takeover
bid because they were very concerned about capital gains tax. In fact, I was
speaking to someone who was a shareholder and that was pretty much the prime
issue. They looked at their shareholding before the takeover and after the
takeover and, with the capital gains tax liability, they had less and they were
going to have less of an income stream, and they said, `I don't want any of
that,' despite what the price was. We think it is a very serious problem. In
Western economies, Australia is almost totally isolated on this issue. Nearly
all other jurisdictions have a form of rollover relief which is reasonably easy
to access.[43]
Tax has the potential, if it is not changed, to undermine the
good work that the current bill is doing by enabling business conduct to be
more efficient. If there is not a CGT rollover relief introduced, while the
mechanisms of the takeover law and takeover procedures may be streamlined, the
impediments on the offers will still be there because, where there are
share-for-share exchanges, there will be a major detriment on behalf of the
offeree in accepting the offer.[44]
3.79
In concluding his evidence Mr Jarrett said that:
The institute is a strong supporter of implementing rollover
relief of capital gains tax in share swap merger situations, regardless of
whether they involve compulsory acquisition or not.[45]
3.80
The Committee has also noted that this issue is
being considered by the Review of Business Taxation. In its discussion paper
the Ralph Committee also mentioned many of the points which were raised in
evidence before the Committee.[46]
In its discussion paper that Committee said:
Where a scrip-for-scrip merger or takeover occurs, the CGT
provisions are currently triggered because the taxpayer has disposed of one
asset for another, even though there has been no realisation of cash. Countries
that allow rollover do so on the basis that the cost base has not changed and
the shareholder has a continuing interest in the same assets together with
those combined through the merger. If the transaction is wealth generating the
tax ultimately collected is greater since the original cost base is retained.[47]
3.81
The Committee is of the view that the capital
gains tax implications of accepting a takeover offer will deter many of
investors from accepting an offer. The effect of this will be to frustrate, to
a significant extent, the economic objectives of the reforms contained in this
Bill. The Committee is also concerned that the absence of roll over relief may
have a deleterious effect on the ability of many self-funded retirees to
continue to independently support themselves. It also accepts that compulsory
acquisitions are confiscatory in nature, albeit beneficial in the overall context.
However, in principle and in practice such confiscation should not trigger a
capital gains tax liability. For these reasons the Committee considers that it
would be appropriate for roll over relief to be provided where shares are
compulsorily acquired and in the case of scrip for scrip offers for publicly
listed companies, irrespective of the revenue implications for the Government
of such an initiative.
Recommendation
3.82
The Committee recommends that, irrespective of
progress on other much needed capital gains tax reform, roll over relief from
Capital Gains Tax be provided where shares are compulsorily acquired and when a
takeover offer for a publicly listed company is accepted on a scrip for scrip
basis. An amending tax bill should be introduced urgently to accompany debate
on this legislation to give effect to this recommendation. Failing this, the
legislation should be amended so that a potential, unwanted capital gains tax
liability provides an absolute defence against compulsory acquisition.
Nominee for foreign holders of securities
3.83
Under the current law, where the consideration
for a takeover bid includes an offer of securities the bidder must appoint a
nominee to receive the offer on behalf of foreign holders. That nominee must be
approved by the company’s home stock exchange or, where the company is not a
listed company, by the ASIC.[48]
The provisions of the Bill are consistent with the existing law.[49]
3.84
The ASX has said that the person approving the
nominee in all cases should be the ASIC. It says that it has no particular
expertise in approving nominees and the approval is for the purposes of the
Corporations Law.[50]
In response to this proposal the Australian Shareholders' Association has said
that it has no objection to the ASX’s proposal.[51]
3.85
The ASX proposal appears to be reasonable to the
Committee and would simplify the legislation. It does not appear to the
Committee that the proposal would lead to any reduction in investor protection
or would undermine in any way the objectives of the legislation.
Recommendation
3.86
The Committee recommends that sections 615 and
619 of the Bill be amended to require that the nominee be approved in all cases
by the ASIC.
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