Appendix 3

Summary of Mariner Matter

Background to the Mariner matter

In April 2014, ASIC brought legal action in the Federal Court of Australia against Mariner Corporation Limited (Mariner) and three of its then current and former directors.[1] The action was concerned with Mariner’s public announcement on 25 June 2012 of an off-market takeover bid for Austock Group Limited at a price of 10.5 cents per share. 

ASIC alleged that Mariner was reckless as to whether it could perform its obligations in relation to the announced bid because, at the date of the announcement, Mariner did not itself have the financial resources necessary to the fund the bid, nor any commitment or assurance from another party to provide funding for the bid.

Specifically, ASIC alleged that in making the public announcement Mariner had contravened s631(2)(b) of the Corporations Act 2001 (Act). Subsection 631(2) provides that:

“A person must not publicly propose, either alone or with other persons, to make a takeover bid if:

1. the person knows the proposed bid will not be made, or is reckless as to whether the proposed bid is made; or
2. the person is reckless as to whether they will be able to perform their obligations relating to the takeover bid if a substantial proportion of the offers under the bid are accepted.”

Section 631 of the Act was enacted in its current form as part of amendments to the takeover provisions made by the Corporate Law Economic Reform Program Act 1999 (CLERPA) in March 2000. Subsection 631(2) had not been the subject of judicial consideration prior to the Mariner matter.

In addition to s631(2), ASIC alleged that the making of the public announcement in the circumstances also gave rise to contraventions of s1041H (misleading and deceptive conduct) and s180(1) (director’s duty of care and diligence) of the Act.

The policy underlying the requirement to have funding for a bid

The predecessor provisions to subsection 631(2) date back to the early 1970s. Their genesis is the 1969 Eggleston Committee Report[2] which set out a number of key principles that still underpin takeovers laws today.

As with its predecessors, subsection 631(2) seeks to address the concern that takeover bids should not be announced where a proposed bidder either does not in fact have any intention to proceed with a bid, or does not have reasonable grounds to expect that they will be able to pay the consideration offered under the bid.[3] It is an important market integrity provision which recognises that the announcement of a takeover bid will often have a significant effect on the market for target securities even before offers are made.

The importance of ensuring bidders have sufficient funding is also highlighted in the Takeovers Panel’s (Panel) Guidance Note 14: Funding Arrangements (GN 14) which discusses when the inadequacy of a bidder’s funding arrangements may give rise to ‘unacceptable circumstances’. Since it was first published in 2004, the Panel’s guidance has noted that unacceptable circumstances may arise if a bidder does not have funding in place, or a reasonable basis to expect that it will have funding in place, to pay for all acceptances when its bid becomes unconditional. GN 14 seeks to outline the standard of funding certainty necessary to give effect to the principles underlying the takeover provisions set out in section 602 of the Act—in particular the objective of ensuring that the acquisition of control of an entity takes place in an efficient, competitive and informed market. ASIC generally supports the policy settings in GN 14 and applies them in its day to day role regulating takeover transactions in Australia.

Prior Takeover Panel proceedings

At the time of Mariner’s proposed bid, the Panel had cause to consider Mariner’s funding arrangements as a result of Mariner itself applying for a declaration of unacceptable circumstances from the Panel in relation to Austock’s announcement that it had agreed to sell its property funds management business to a third party. Prior to Mariner’s application ASIC had made inquiries regarding the company’s funding arrangements. ASIC subsequently raised concerns with Mariner that it did not have adequate arrangements in place and indicated that it was minded to make a separate application to the Panel in relation to its concerns. Following this Mariner announced that would not be proceeding with the proposed bid.

The Panel ultimately made a declaration of ‘unacceptable circumstances’ in relation to Mariner’s announced bid on the basis that it appeared to the Panel that Mariner had not had a reasonable basis to expect that it would have funding in place to pay for all acceptances in the event the bid became unconditional and that the market was not sufficiently informed regarding the circumstances of Mariner’s bid.[4]

In making the declaration the Panel noted that Mariner’s intention was to obtain bridging finance that was to be repaid from the proceeds of selling off Austock’s businesses, but that Mariner had acknowledged that it did not have concluded financing arrangements to this effect in place. The Panel commented that, in its view, the bid should not have been announced, or allowed to proceed at all, unless and until finance had been arranged and that the announcement was likely to have had an adverse effect on Austock and its shareholders.[5]

Issues of construction raised by the Mariner matter

In deciding the Mariner matter, the Court opined on a number of aspects of the construction of s631(2). The two principal issues of interpretation discussed by the court were:

1. the relevant test of when a person is ‘reckless’, and in particular, whether this is a subjective or objective test; and
2. the question of what is meant by a ‘substantial proportion of the offers’.

Recklessness

The court disagreed with ASIC’s submission that s631(2)(b) is an objective test. Rather the court found that the question of whether a person is ‘reckless’ requires the application of a subjective test of recklessness, such as the test set out in Section 5.4 of Ch 2 of the Criminal Code or a similar common law test. To meet a test of this kind the Court stated that it is necessary to show that:

1. the person alleged to be reckless was aware there was a substantial risk that they may not be able to perform their obligations under the bid if a substantial proportion of offers were accepted; and
2. on the basis of what was known to the person, it was unjustifiable to take that risk (or that the person went ahead in conscious disregard of, or indifference to, the risk).[6]

The court, after examining the evidence regarding the state of mind of the directors of Mariner, concluded that it had not been shown that Mariner was actually aware of the substantial risk that Mariner would not be able to perform its obligations under the bid.[7] The court also found that, even if Mariner’s actual awareness of the risk had been established, it had not been demonstrated that the risk was unjustifiably taken.[8]

The Court also opined on whether, if s631(2)(b) had an objective element, Mariner had reasonable grounds to believe it would be able to perform its obligations under the bid. The Court was prepared to accept that in the specific circumstances of the Mariner case, notwithstanding that Mariner did not have sufficient funding itself, or sufficient commitments or assurances from external parties to fund the bid, the ‘arbitrage opportunity’ reflected in the difference between Austock’s market capitalisation and the value of Austock’s assets that could be realised on a break-up of Austock supported a case that there was reasonable grounds to believe that the requisite funding could be sourced.[9]

‘Substantial proportion of offers’

In considering the application of s631(2)(b), it was also necessary for the Court to construe the level of funding required if ‘a substantial proportion of offers’ under the proposed Mariner bid were accepted.

This aspect of the provision raises two difficulties in particular:

1. while s631(2)(b) requires a bidder to consider their obligations if a substantial proportion of ‘offers’ are accepted, the offers under a bid are made to registered shareholders who generally hold different quantities of shares in the company. The amount of funding required is a function of the number of shares held by those shareholders who decide to accept the offers; and
2. it is unclear what percentage of offers (or shares the subject of offers) constitutes a ‘substantial’ proportion.

The Court noted that the concept was potentially unclear on both of these points, and with some hesitation, decided that the most appropriate approach to take was to assume that the concept required funding for at least 50% of the shares in Austock.[10]

Possibilities for legislative reform

In response to the decision in Mariner, the Takeovers Panel consulted on proposed amendments to GN 14. The amendments were designed to clarify that GN 14 is based on the general principles in s602(a) and (c) of the Act and, consistent with those principles, to confirm the existing requirements in GN 14. ASIC supported the Panel’s update of the guidance note.

ASIC would generally support a review of s631(2) to consider amendments aligning the requirements of the provision with the broader regulatory policy settings discussed in GN 14. This would potentially include:

1. amending s631(2)(b) to require that a bidder have an objectively reasonable basis that it will be able to comply with its funding obligations under a bid; and
2. addressing the uncertainty arising from the reference in the provision to a ‘substantial proportion of offers’ by clarifying that funding is required to pay for all securities to which the proposed bid relates.

As previously noted, s631(2) is a key market integrity provision that recognises the announcement of a bid will often have a significant effect on the market for a target entity’s securities. It is also the principal provision in the regulatory framework for takeovers imposing a direct obligation on a bidder to have a level of certainty in relation to funding the cash component of a takeover bid.

The requirement for an objectively reasonable basis for funding was a feature of each of the predecessor provisions to s631.[11] As such the objective standard, reflected in the principles based policies of ASIC and the Panel, has represented market practice in relation to takeover bid funding since the revamp of Australia’s takeover laws in response to the Eggleston Committee Report.

Moreover, we note that the importance of ensuring an announced bidder has adequate funding is a feature of takeovers regulation internationally. Specific requirements in connection with the announcement of cash offers is common to most comparable jurisdictions. Reasonableness appears, in one way or another, to be a factor in each—with some even requiring independent verification as to funding at varying stages of the offer. The table below outlines some of the requirements in comparable overseas jurisdictions.

Requirements regarding funding of cash bids in comparable jurisdictions

Jurisdiction	Requirements at announcement
UK	An offeror should announce a firm intention to make an offer only after the most careful and responsible consideration and when the offeror has every reason to believe that it can and will continue to be able to implement the offer...[12] Where the offer is for cash, or includes an element of cash, the announcement must include confirmation by the financial adviser or another third party that sufficient resources are available to satisfy full acceptance of the offer.[13] There is no requirement in the code to discuss funding in connection with announcement of a possible offer (which triggers the 28-day ‘put up or shut up’ rule).[14]
Hong Kong	The announcement of a firm intention to make an offer should be made only when an offeror has every reason to believe that it can and will continue to be able to implement the offer. Responsibility in this connection also rests on the financial adviser to the offeror.[15] Preliminary announcements may be made however before this time (for example in the case of a leak), and sometimes will need to be made prior to approaching parties to seek financing.[16]  Prior to a binding ‘firm intention’ statement being made, only a brief announcement is required that the offeror is considering an offer.[17]
Singapore	When a firm intention to make an offer is announced, if the offer is for cash or involves an element of cash, the announcement should include an unconditional confirmation by the financial adviser or by another appropriate third party that the offeror has sufficient resources available to satisfy full acceptance of the offer.[18]
EU (Directive)	As a general principle, an offeror must announce a bid only after ensuring that he/she can fulfil in full any cash consideration, if such is offered.[19]
New Zealand	Takeovers Code notice announcing an intention to bid must include confirmation by the offeror that resources will be available to the offeror sufficient to meet the consideration to be provided on full acceptance of the offer and to pay any debts incurred in connection with the offer.[20]

Given the emphasis placed on the importance of ensuring adequate funding arrangements in announced takeovers generally, it may also be appropriate to re-examine whether the provision should continue to require funding for only some, rather than all, of the securities the subject of the announced bid.

ASIC is also aware that some market participants have supported reform to bring the requirements of s631(2) into line with ASIC and the Panel’s regulatory policy position following the Mariner decision.[21]

Criminal Liability

While the Mariner case was a civil action, ASIC also considered the criminal operation of s631(2) and discussed this with the CDPP.

A difficulty with s631(2) is that it has not been harmonised with the general principles of physical and fault elements in Chapter 2 of the Criminal Code.   There are potentially a number of interpretations of how the section would operate in a criminal prosecution.  This would require judicial interpretation in any prosecution, and creates uncertainty for the regulators, prosecutors and the regulated community.  

In addition, the defence in s670 presents some difficulties.  The defence provides that:

"A person does not commit an offence under subsection 631(1) or (2), and is not liable under s670E for a contravention of those subsections if the person proves that they could not reasonably have been expected to comply with those subsections because:

1. at the time of the proposal or announcement, circumstances existed that the person did not know of and could not reasonably have been expected to know of; or
2. after the proposal or announcement, a change in circumstances occurred that was not caused, directly or indirectly, by the person."

While the offence in s631(2) applies at the time of the public proposal, the defence in s670(b) purports to apply retrospectively to circumstances that occur after the public proposal.  The operation of a defence in this matter is arguably inappropriate and again adds to the uncertainty surrounding the operations of these provisions. 

ASIC, answer to question on notice, 9 March 2016 (received 19 April 2016).

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