11 min read
On Friday, the government released its long awaited consultation paper on a proposal to transfer jurisdiction over schemes which effect a control transaction to the Takeovers Panel. This proposal was originally foreshadowed in last year's budget, and the government is seeking feedback on the proposal by 3 June 2022.
In essence, the paper gives four reasons for the proposed changes:
- the 'comity' argument – that all control transactions, whether they occur by way of takeover or scheme, should be dealt with by the same body (ie the Panel), applying the same principles and rules. In particular, the paper points to the fact that the courts when dealing with a scheme, are not expressly required to consider the Eggleston principles in their assessment (even if they do in practice);
- the 'consistency' argument – that if a disclosure issue is tested in the Panel, the parties are more likely to get a more consistent result than in the courts;
- the 'market approach to disclosure issues' argument – that the Panel members have specialist knowledge in relation to takeovers, and can make decisions on disclosure and voting issues by reference to market practice; and
- that transferring jurisdiction over schemes to the Panel may significantly reduce costs.
As discussed in our previous Insight on the proposal1, the idea of transferring jurisdiction over schemes from the courts to the Panel is not a new one. It has been raised and dismissed a number of times since the Panel was established in its current form in 2000. While there is a superficial attraction to having all control transactions dealt with by one body, we think that there are strong reasons not to make the proposed changes. Our major concern is that by 'fixing' something that isn't broken, the government will render schemes unworkable, which would be a bad outcome for the market for corporate control in Australia.
In thinking about the proposal, it's worthwhile considering the following points:
1. Not all schemes to effect a control transaction can be dealt with by the Panel in any event
Regardless of what happens, a significant proportion of schemes will need to stay with the courts. For example, most scrip bids by way of scheme rely on foreign prospectus exemptions which are only available if the transaction is approved by a court. The Takeovers Panel is not a court. It is, and must be, purely an administrative body. If the government did seek to amend the legislation to give the Panel the same powers as the court in relation to schemes, those changes would likely be unconstitutional. Also, importantly, trust schemes (ie most acquisitions of REITs and infrastructure entities) require judicial advice from a court. Those transactions would need to stay with the courts. The Takeovers Panel would also not be able to deal with more complex schemes involving restructuring, as it wouldn't have the powers to do so.
2. Some of the takeover rules shouldn't be applied to schemes, as takeovers and schemes are different processes with different potential outcomes
The argument that schemes and takeovers should all be dealt with by the Takeovers Panel, so that all control transactions are dealt with by the same body under exactly the same rules, ignores this obvious point. The paper gives the following as examples of takeover rules which don't apply to schemes: the rule against collateral benefits; the minimum bid price rule; and the rules regarding content requirements for a bidder's statement. But those issues are dealt with in a scheme in a different way. For example, if a shareholder is receiving a collateral benefit, that benefit needs to be fully disclosed in the scheme booklet, and that shareholder will constitute a separate class and will not be permitted to vote with other shareholders on the scheme.
With respect to document content requirements, the disclosure requirements for a scheme booklet are, if anything, more onerous than for a takeover (ASIC on its review insists on this). Lastly, it is true that the minimum bid price rule does not apply to schemes, but it is also unclear how and for what period it would apply in the context of a shareholder vote on a scheme as opposed to an offer to purchase shares (and, quite frankly, the policy basis for this rule is not clear, even in relation to takeovers).
3. The courts already apply most Takeovers Panel policies to schemes, and the Panel already have jurisdiction in relation to schemes if it wants to exercise it
The 'comity' argument ignores that the courts have consistently had regard to Takeover Panel policy on relevant issues, such as break fees and exclusivity provisions. It also ignores the fact that the Takeovers Panel can intervene if there is a takeover bid competing with a scheme for the same target, as it did in the Citect scheme a few years ago, and that the Panel can intervene in relation to a scheme before it comes before the court.
4. It's not necessarily a better outcome for shareholders to do away with court (and ASIC) review of scheme documents
Proponents of the changes argue that you don't need court (or ASIC) review of scheme documents before they are sent to shareholders. They argue that if target shareholders or ASIC have a problem with the disclosure, or a problem as to whether particular shareholders should be allowed to vote on the scheme, they can apply to the Panel for a declaration of unacceptable circumstances and appropriate orders. A few points on that argument:
- It is not a great outcome for target shareholders if they are forced to take action through the Panel, or to rely on ASIC taking action, as the only means of addressing voting or disclosure issues. It is also worse from a market integrity perspective if action has to be taken to correct inadequate or misleading disclosure, once it is already in the market. At present, ASIC and then the court undertake a review of the scheme booklet before it goes to shareholders. At the court hearing, counsel for the scheme company is required to bring to the attention of the court any issues in relation to the scheme, and there are material consequences if they do not. While this process isn't perfect, it is an important discipline imposed on the proponents of the scheme to get it right, so that there is appropriate disclosure in relation to, and class voting on, the scheme.
- It is important to remember that a scheme is effectively a compulsory acquisition process, as opposed to an offer and acceptance process. It has a lower compulsory acquisition threshold than a takeover (75% of votes cast at the meeting and 50% of shareholders voting at the meeting vs relevant interests in 90% of total target shares under a takeover bid), but with the adherent protection of court supervision of the process. Because it is a compulsory acquisition process, it is appropriate that the court review the disclosure which is going to shareholders before they vote on the proposal.
- If the Takeovers Panel was to have some pre-vetting role in the place of ASIC and the courts, it is unclear who is going to do it. It won't be the Panel members (no Panel member is going to want to spend weeks every year reviewing scheme booklets, and, in any event, it usually takes a week or more just to find a sitting Panel to sit on a matter). That leaves the Panel executive. With the greatest respect to the Panel executive, they do not have the resources to undertake the task, and we suspect that some scheme proponents will be a lot less careful with their disclosure if it is the Panel executive reviewing it rather than the court.
5. There is no evidence to suggest that having the Panel determine disclosure and voting issues in relation to a scheme will result in more consistent outcomes than the courts
The consistency point is interesting. The argument seems to be that, if a disclosure issue is tested in the Panel, the parties are more likely to get a more consistent result than if the matter were tested before the court. The fact is that there are a handful of judges around Australia who hear most scheme applications versus 50 part-time members of the Panel. As we have seen in other areas of the Panel's jurisdiction (like association cases), there isn't always consistency of thinking or approach on issues.
6. Many of the Panel members do not have the necessary experience
As to the point that the Panel is 'constituted by experts with specialist knowledge of the takeovers market and makes declarations with reference to common market practice', the fact is that a significant proportion of the Panel have no relevant experience in dealing with disclosure issues in what is effectively a compulsory acquisition process. The small number of judges who do deal with schemes do generally have deep experience in dealing with disputes around disclosure.
7. There is no evidence to suggest that having the Panel involved will speed up resolution of disputes
As to speed, there will be a few days saved by not going through the court process (usually the period between coming out of ASIC and the first court hearing is a few days only), but we suspect that if there is a dispute, it will take much longer to resolve before the Panel than the court. Most complaints around disclosure or voting on schemes are dealt with by the court almost immediately. When hearing the dispute, the court has the benefit of having reviewed the disclosure at the first hearing. Compared with this, the average time to establish a sitting Panel on a matter is around one week, with an average of three weeks to resolve matters. Therefore, there is an increased risk of delays if jurisdiction over schemes is transferred to the Panel.
8. Claims that there will be significant costs savings are overstated
If schemes were transferred out of the courts, the proponents of the scheme would still need to prepare a scheme booklet, with presumably the same attention to accuracy and completeness of disclosure as is currently the case. The costs saved would be the legal costs (counsel's and the target's lawyers) of the two court hearings themselves (note that, unlike the Takeovers Panel, the court does not charge fees to hear an application). We know that those incremental costs can appear high in the context of a scheme for a small market cap company, but, as discussed above, there are real integrity benefits in having court oversight of the scheme, and having the scheme company's counsel confirm to the court ahead of despatch that the disclosure is adequate and that any other issues have been addressed. Also, court supervision of the scheme is the price that the scheme proponents pay if they want to use the scheme process to compulsorily acquire a target shareholder's shares.
There are changes which could be made to make schemes more efficient, while leaving schemes with the courts. For example, it would be a simple matter for the government to amend the schedule to the Corporations Regulations which sets out the content requirements for a scheme booklet to express those requirements in the same terms as for a takeover, with necessary modifications. In practice, this isn't necessary, as ASIC requires that the disclosure be effectively the same anyway, but if the government felt it necessary to do this, it is an easy change.
There are other things apart from the proposed changes that the government could be doing to improve the efficiency of public M&A in Australia. These include:
- A review of the 'creep' exception to the 20% takeovers prohibition. For example, what is the policy basis for the 'creep' exception which can allow control to change without an offer to target shareholders? This was the subject of another Treasury review almost 10 years ago, but without any outcome.
- Remove takeover rules which are outdated and have no remaining policy basis. For example, it is now almost 40 years since CAMAC recommended the removal of the section 622 prohibition on escalators from the takeover rules.
- Amend the takeovers provisions so that the black letter law is consistent with the way it is applied by the Takeovers Panel (for example, in relation to collateral benefits where a benefit which is in contravention of the Act may not be against Panel policy, and vice versa).
- Implement CAMAC's recommendations to fix the many anomalies in Australia's insider trading laws. For example, by extending the ‘own intentions’ defence to anyone trading on behalf of a takeover bid consortium.
- Consider the introduction of a mandatory bid rule, as in other jurisdictions, which would allow acquisitions above the 20% takeover threshold if it was immediately followed by a bid for all of the remaining shares on the same terms and conditions.
- Consider the introduction of a mandatory non-waivable 50.1% minimum acceptance condition, to prevent an existing major shareholder using a nil or low premium offer to increase control below 50%.
- Amend the substantial shareholding notification provisions of the Corporations Act to make those disclosures less onerous on institutional shareholders, and to require more information when lodged by a potential acquirer.
This is by no means a complete list, but are the areas we would recommend Treasury focus on rather than the proposals which are the subject of the consultation paper.
Also see our AFR article on this issue from June last year: https://www.afr.com/markets/equity-markets/leave-scheme-takeovers-to-the-courts-20210627-p584oj