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CompanyLawLectureTopic7slides.pdf
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LAW00004 Company Law
SCHOOL OF LAW & JUSTICE
Session 2, 2018
TOPIC 7 TAKEOVER REGULATION
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Topic 7 Takeovers AIM: At the end of this topic you
should understand:
• Legal concept of ‘takeover’ • Ch 6 Corporations Act’s application to regulation of
takeovers • Takeover bids • Takeover defensive strategies • Role of Takeover Panel • Potential conflict with directors’ duties
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Topic 7
• Takeovers: Chapter 6 Corporations Act • Substantial Shareholdings; Part 6C.1 • Share ownership tracing; Part 6C.2 • Takeovers Panel • (Securities Regulation; Chapter 7 Corporations Act )
Gaining control over a company’s business Acquire business Acquire company
• Takeover bid • Scheme of arrangement • Merger
Reasons for takeovers
• to expand • to diversify • to ensure constant/adequate supplies • to achieve economies of scale • to add links in the chain of distribution • to acquire assets cheaply • to utilise tax losses
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Takeovers
= acquisition of sufficient shares to gain control of a company • Generally refers to change in control of a
company • By transfer of shares • Target company continues to exist with assets
unaffected by the takeover • Sellers = shareholders who transfer shares to the
bidder
Concept of ‘control’
• 100%? • 75%? • 51%?
Regulation of takeovers
• Chapter 6 Corporations Act entitled ‘Takeovers’. • ‘Chapter 6 … in regulating takeovers, seeks to preserve
an efficient, competitive and informed capital market, and to protect the legitimate interests of investors in that market.’; AG (Cth) v Alinta (2008) 233 CLR 542 Gleeson CJ at [6]
Section 602 purposes of the takeover rules • all participants are treated equally and fully informed • protection of the shareholders of the target company
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To whom do provisions apply? Acquisitions in Australian incorporated companies: • Listed • Unlisted with more than 50 members
Acquisitions in listed managed investment schemes
Chapter 6 is set out as follows: Purpose of Chapter 6 section 602 Provisions extending rules to other bodies sections 603-604 Classes of securities section 605 (note that section 92(3) defines ‘securities’ for the purposes of Chapter 6.) Part 6.1 – Prohibited acquisitions of relevant interests in voting shares sections 606-610 Part 6.2 - The exceptions to the prohibition sections 611-615 Part 6.3 - The different types of takeover bid (off-market bids and market bids section 616 Part 6.4 - The formulating the takeover offer sections 617-630 Part 6.5 – The takeover procedure sections 631-648U Part 6.6 – Variation of offers sections 649A-651C Part 6.7 – Withdrawal and suspension of offers sections 652A-652C Part 6.8 – Acceptances sections 653A-653B Part 6.9 – Other activities during bid period sections 654A-654C Part 6.10 – Review and intervention sections 655A-659C esp. Div 1 – ASIC’s power to exempt and modify AND Div 2 – The Takeovers Panel (note standing to bring an application before the takeovers panel is “any person whose interests are affected by the decision” section 656A(2)
Overview of takeover regulation
• Acquisition > 20% restricted under Ch 6 section 606 exceptions outlined in section 611
• Strict rules - terms and conditions of takeover (eg, minimum price and duration)
• Both bidder and target companies - formal explanatory statements to target shareholders
• Disputes resolved by the Takeovers Panel • Once takeover completed bidder may compulsory
acquire up to 10% of the bid-class of securities if they have obtained 90%
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Prohibited acquisitions of relevant interests in voting shares
• Section 606 provides a general prohibition on the acquisition of shares > 20% of the voting shares in target company
• Implied in 20% threshold – exceed it > take control of a company;
• Note section 606(1)(c)
• Part 6.2 (sections 611-615) exceptions
Key concepts in the prohibition ‘Relevant interests in securities’ = • holder of the securities or power to vote or dispose of the
securities section 608 • situations not giving rise to relevant interests section 609 Bodies corporate - person has a relevant interest if • hold more than 20% of the voting power section 608(3) • deemed to ‘control’ a body corporate if have capacity
to determine outcome of decisions about financial and operating policies section 608(4)
Note also ‘deemed’ relevant interests in anticipation of agreements section 608(8) (see Text [23.60], 10th ed p.692)
Section 610 - how the voting power is determined: Person’s + Associates’ votes _____________________________ x 100 Total votes in designated body
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‘associate’ defined in section 12: Associate of body corporate 1) Any other body corporate controlled by first body corporate
(eg subsidiary company) 2) Any other body corporate that controls first body corporate
(eg holding company) 3) Any other body corporate that is controlled by entity that
also controls first body corporate (eg sibling subsidiary company)
‘control’ defined section 50AA ‘Relevant agreement’ – controlling/influencing Board of Directors or conduct of company’s affairs Definition ‘relevant agreement’ section 9 Definition ‘conduct of the body’s affairs’ section 53 ‘Acting in concert’ in conduct of body’s affairs Adsteam Building Industries Pty Ltd v Queensland Cement & Lime Co (No 4) [1985] 1 Qld R 127
Prohibited acquisitions of relevant interests in voting shares
• Section 606 provides a general prohibition on the acquisition of shares > 20% of the voting shares in target company
• Implied in 20% threshold – exceed it > take control of a company;
• Note section 606(1)(c)
• Part 6.2 (sections 611-615) exceptions
Sections 670A – 670D – impose criminal & civil liability for false/misleading statements in connection with takeover bids
Exceptions to the blanket section 606 prohibition Section 611 • Takeover bid item 1
• ‘Creeping takeover’ - no more than 3% every 6 months item 9
• Approval by resolution of target Company’s GM item7
• An acquisition of shares (downstream acquisition) through the acquisition of a relevant interest in another company (upstream company) where the upstream company is listed on ASX or a foreign exchange approved by ASIC item 14
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Takeover bids
• Item 1 section 611 – exception – takeover bids • Bidder makes formal offer to purchase securities • Section 616 > 2 types: • On Market Bid; Bidder and target company must
follow procedure in sections 634-636 • Off Market Bid; Bidder and target company must
follow procedure in sections 632-633
Off Market Bid section 632 Steps involved in an off‑market bid. See also section 633
On Market Bid section 634 Steps that a bidder must take to make an effective market bid & steps that a target must take when a market bid is made See also section 635
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Compulsory Acquisition
• If bidder satisfies the requirements of section 661A the remaining 10% can be compulsory acquired
• 10% threshold may be varied by the court section 661A(3)
• Section 662A a bidder (including associates) with
90% of the shares must offer to buy out the remaining shareholders, to prevent minority shareholders being ‘locked in’
Dispute resolution in takeovers: TAKEOVERS PANEL Takeovers Panel = primary forum for resolving disputes about a takeover bid until the bid period has ended. Panel = peer review body, with part time members appointed from the active members of Australia's takeovers and business communities Established under section 171 ASIC Act Given various powers under Part 6.10 Corporations Act http://www.takeovers.gov.au
Takeover defences
Separation of ownership and control Defensive activity theories: • Passivity • Fiduciary • Auctioneering
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Types of defensive activity by target Long-term/anticipatory/pro-active eg: • Convertible securities –sections 617(2) & (3) • Golden parachutes –section 1325C • Share transfer restrictions/pre-emption clauses • Shark repellents –sections 648D-648H • Poison pills Short term/responsive/reactive eg: • Revised profit forecast/dividend policy • Crown jewels • White Knight • Litigation
Application of directors’ duties To act in good faith in ‘best interests of company’ Greenhalgh v Ardene Cinemas Ltd [1951] Ch 286 Darvall v North Sydney Brick & Tile Co Ltd (1988) 6 ACLC 154 • Takeover target > conflict of interest for directors • Directors may fear losing positions if control passes to
the bidder • how should the directors advise the shareholders? • should the directors encourage the shareholders
not to sell? • should the directors issue shares to “white knights”?
Takeover defensive strategies • May be held to be breach of fiduciary duties > declarations and orders by Takeovers Panel
• Takeovers Panel - Guidance Note 12 Frustrating Action - outlines that action taken by target company directors to frustrate a bid may give rise to a declaration of unacceptable circumstances section 657A & associated orders under section 657D
• Text [23.290] 10th ed p.712; 9th ed p.613 Guidance Note 12: Frustrating action
http://www.takeovers.gov.au/content/ DisplayDoc.aspx?doc=guidance_notes/current/ 012.htm&pageID=&Year=
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Substantial Shareholdings; Part 6C.1 Note the test as to determine who is a substantial shareholder is 5% of the voting power section 671B Share ownership tracing; Part 6C.2 • Section 627A listed company/ASIC may require a member to give full details of their relevant interests • Corporation may make a reasonable request that ASIC use its discretion to do a beneficial (equitable) share ownership trace under section 672A(2) • The information that MUST be given by a member in response to a direction under section 672A is contained in section 672B
Takeovers links • Takeovers Panel http://www.takeovers.gov.au • ASIC
http://asic.gov.au/regulatory-resources/takeovers/ • Guidance Notes:
http://www.takeovers.gov.au/content/ ListDocuments.aspx?Doctype=GN
• Resources: • http://www.takeovers.gov.au/content/resources/
default.aspx • Defensive schemes:
http://www.takeovers.gov.au/content/Resources/ national_companies_securities_commission/ defensive_schemes.aspx
Topic 7 Takeovers AIM: At the end of this topic you
should understand:
• Legal concept of ‘takeover’ • Ch 6 Corporations Act’s application to regulation of
takeovers • Takeover bids • Takeover defensive strategies • Role of Takeover Panel • Potential conflict with directors’ duties
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BONUS CONTENT
SAMPLE EXAM QUESTIONS
Topic 3 – key points
• Promoters and their duties • Pre-registration Contracts • Internal Rules (Purpose/ Role; RR &or
Constitution/ statutory contract • Altering the company’s constitution (statutory &
general law rules)
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Question styles & answer structures
Problem Style Q: I: Issue L: Law A: Apply to law to the facts C: Conclusion
Essay Style Q: Introduction Body Conclusion
Sample Exam – Q2 • Q2 is a problem style question and ILAC/HIRAC is the structure to use.
Your approach could be as follows: • What is specifically asked? • What is the issue? • What is the law? • Apply the law to the facts • Conclude on the likely outcome. Ensure your response answers the question asked.
Sample Exam – Q2. Samuel is a promoter of Edmanuals Pty and executed a contract on behalf of Edmanuals Pty before Edmanuals had been registered. Hence, there are two issues for discussion. 1. the pre-registration contract and 2. the duties of a promoter.
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Sample Exam – Q2.
Issue: Pre-registration contract The Law: Note that the common law relating to pre- registration contracts has been displaced by Part 2B.3 Corporations Act see section 133
Part 2B.3 Contracts before registration
The basic structure is: Section 131(1) company becomes bound Section 131(2) person entering the contract is liable Section 131(3) & (4) powers of the court Section 132 person released from liability by 3P Section 133 covers the field ** expand on the above.
Sample Exam – Q2. Pre-registration contract: Application • Under section 131(1) Edmauals may become liable for the pre-registration contract if, within a reasonable time, it ratifies the contract after registration. • Where Edmanuals fails to ratify the contract Samuel may be liable to pay damages to Samuel’s Cars Pty Ltd, the other party to the pre-registration contract; section 131(2)
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Sample Exam – Q2. Pre-registration contract: Application • If Samuel’s Cars Pty Ltd brings proceedings to recover damages against Edmanuals for failing to ratify the pre-registration contract the court has power to do anything it considers appropriate in the circumstances. • Here it is unlikely the court will order the Edmanuals to pay damages or any amount to a party to the contract.
Sample Exam – Q2. Pre-registration contract: Application • A promoter (Samuel) may be liable for pre-registration contracts. However section132 provides that a party to the contract (Samuel’s Cars Pty Ltd) may release the person (Samuel) from liability section 132(1). • Given the facts it is likely that Samuel’s Cars Pty will release Samuel from liability. However the person (Samuel) does not have a right of indemnity against the company (Edmanuels Pty) section 132(2) • Edmanuals should be advised not to ratify the pre- registration contract.
Sample Exam – Q2. Issue: Promoters duties The Law: • Start with a brief discussion on who are promoters.
• Promoters include persons involved in promoting a company and inactive persons who leave the promotion activities to others but who share in the profits stemming from the company’s creation Tracy v Mandalay .
• The facts are clear that Samuel is involved in the promotion activities and is a promoter.
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Sample Exam – Q2. Promoters duties • Discuss the promoter’s duties owed to the company • Promoters stand in a fiduciary relationship with the company and must act in the company’s best interests, act in good faith and the ‘utmost condour and honesty’, • Must not have a conflict of interest • Must not profit at the expense of the proposed company and must disclose all material facts (including the nature and extent of any interest thy may have in a transaction to an impartial board if possible or to all the shareholders
Sample Exam – Q2. Promoters duties • Where the promoter makes an indirect unauthorised (secret) profit by receiving a reward for arranging a 3rd party to contract with the company the promoter is liable to account to the company for the profit; • A contract by a promoter with the company will be voidable at the company’s option in the absence of sufficient disclosure Gluckstein v Barnes • In any event $10,000 per month for the hiring of a car is excessive and the company can avoid the contract due to the lack of disclosure regarding Samuel’s nature and extent of his involvement in Edmanuals Pty.
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Topic 2 – key points
• The relationship between s 51(xx) Australian Constitution & Corporations Act 2001 (Cth)
• Role of ASIC • The Separate Legal Entity Doctrine (& Salomon’s
Case • Corporate Veil
Sample Exam – Q3.
• This is an essay style question and ILAC/HIRAC is not the structure to use.
• What is specifically asked?
• Look at the statement and address the required discussion.
Sample Exam – Q3. The statement refers to the separate legal entity doctrine. Need to explain the doctrine and discuss the main legal consequences of the doctrine under both: • the common law; and • the Corporations Act 2001 (Cth).
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SLE under the Common Law • Students are expected to discuss Salomon and the
development of the separate legal entities doctrine through Lees Air Farming, and Macaura.
• The question invites a discussion on the development of the ‘separate legal entities doctrine’, ‘limited liability’ and the ‘veil of incorporation’. You could give some common law examples of lifting the veil.
SLE under the Corporations Act
• Corporations Act - discuss when a company comes into existence section 119 and the legal capacity and powers of a company (especially as an individual) as expressed in section 124.
• Develop answer to include areas such as perpetual succession and management structure; section198A (RR) and some statutory examples of lifting the veil.
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Topic 3 – key points
• Promoters and their duties • Pre-registration Contracts • Internal Rules (Purpose/ Role; RR &or Constitution/ statutory contract
• Altering the company’s constitution (statutory & general law rules)
Sample Exam – Q1.
• This is an essay style question and ILAC/ HIRAC is not the structure to use.
• What is specifically asked?
• Look at the statement and address the required discussion.
Sample Exam – Q1.
• What is the issue? Changing the company’s constitution.
• What is specifically asked?
Explain how a company may change its constitution. - Discuss the relevant provisions of the Corporations Act 2001 (Cth) AND - Discuss the relevant Case law.
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Sample Exam – Q1.
Corporations Act 2001 (Cth) • Section 136(2) – company can modify its constitution by special resolution • Section 136(3) – the company’s constitution can make provision for additional requirements to modify its constitution. If the company’s constitution provides for additional requirements to alter its constitution the specified requirements must be complied with.
Sample Exam – Q1. Corporations Act 2001 (Cth) • Section 140(2) CC is a statutory contract section 140(1) and changes that are more onerous to existing members regarding the requirement to take up additional shares, increase member’s liability or impose or increase restrictions on the right to transfer shares, will not bind existing members. • If the alteration to the constitution varies shareholder class rights note that the procedure in sections 246B- 246E must be followed
Sample Exam – Q1. In regard to the common law cases • Leading authority is Gambotto v WCP. • Give a brief discussion on Gambotto as it relates to the alteration of the constitution
• AND discuss the HCA test that alterations to the constitution are valid only if the changes are made for: a proper purpose; & fair in all the circumstances. Otherwise it will be a fraud on the minority and invalid.
