Australia: Role of the Takeovers Panel beyond formal takeovers

What you need to know

• Late last month, the Takeovers Panel considered a Rights Issue undertaken by MEC Resources Limited which serves as a reminder of the Panel's role in considering matters beyond formal takeovers which could affect control in a company.
• In this recent case, MEC Resources was able to overcome concerns about its Rights Issue by agreeing to make changes to the allocation of shortfall.
• The Panel's consideration of this case illustrates the importance of evaluating the 'optics' of a proposed transaction that will affect control in a company, regardless of a party's subjective intentions.

The Takeovers Panel regulates the conduct of takeovers in Australia, as its title obviously suggests. But the Panel's recent consideration of a Rights Issue undertaken by MEC Resources Limited (MEC Resources)¹ illustrates the Panel's role in reviewing broader matters – specifically, capital raising transactions which could affect control in a company.

Recap on the role of the Takeovers Panel

The Takeovers Panel has power to review circumstances affecting the existing or potential control of a company and declare those circumstances to be 'unacceptable' whether or not the relevant party's actions breach the Corporations Act. In other words, its role goes beyond reviewing takeovers.

Application involving MEC Resources

An application was made for a declaration of 'unacceptable circumstances' concerning a 1 for 2 non-renounceable Rights Issue announced by MEC Resources which was not underwritten and for which the company's Board retained an "absolute discretion regarding the allocation of shares" under any shortfall. The applicants, who were the holders of 12.67% of MEC Resources and the only substantial shareholders in the company, maintained that the structure of the Rights Issue was likely to affect the control or potential control of MEC Resources "... otherwise than in an efficient, competitive and informed market".

The Takeover Panel's decision

The applicants' submissions did not identify that anyone would obtain a relevant interest in more than 20% in MEC Resources as a result of the Rights Issue (with 20% being the threshold at which a formal takeover bid would be required, unless an exception applies). The only impact on control identified by the applicants was the potential dilution of their voting power if they did not take up their full entitlement.

The Panel observed that without more significant impact on control, it was unlikely to find the circumstances unacceptable. The Panel referred to previous decisions where it had identified that a dispersion of control is unlikely to amount to unacceptable circumstances, whereas the creation of a new control block might warrant further consideration.

However, the Panel also referred to previous decisions where it had criticised directors for retaining a discretion to allocate the shortfall of a Rights Issue.² The Panel asked MEC Resources whether it would be prepared to offer priority to existing shareholders in taking up any shortfall. MEC Resources agreed and also announced that no shortfall shares would be allocated to any related party or to any other person to the extent that doing so would result in a breach of the Corporations Act.

The Panel concluded that these changes to the allocation process would lessen any potential control effect, noting that in the unlikely event that a new control issue arose, any interested person could make a further application.

The applicants had also alleged a number of deficiencies in the documents for the Rights Issue. The Panel confirmed that its role is not to oversee the disclosure aspects of Rights Issues and that any concerns about the documents' contents ought to be raised with ASIC instead.

Key takeaways

This decision is a reminder of the role of the Takeovers Panel in matters that could affect control of the company even when no formal takeover is in play.

In the case of a Rights Issue, a Board reserving a discretion to allocate the shortfall may be regarded as 'unacceptable circumstances'. Though there may be good faith intentions behind a Board reserving such discretion, the Panel's role is to consider the effect of the circumstances, not the subjective intentions of those who bring them about.³ This illustrates the importance of considering the 'optics' of a proposed transaction, even where there may be good commercial reasons for undertaking it.

Footnotes

¹ MEC Resources Limited [2017] ATP 6, reasons for decision available at http://www.takeovers.gov.au/content/DisplayDoc.aspx?doc=reasons_for_decisions/2017/006.htm&doctype=RD.
² Guidance Note 17 on Rights Issues includes strategies to mitigate potential control issues in a Rights Issue, at paragraphs 22 and 23.
³ Guidance Note 1 Unacceptable Circumstances at paragraph 24.

This article is intended to provide commentary and general information. It 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 article. Authors listed may not be admitted in all states and territories