The High Court gives ASIC (and companies) some heart - a liberal reading of takeover rules.
While the decision of the High Court in Australian Securities and Investments Commission v D B Management Pty Ltd & Ors ((2000) 18 ACLC 166) might be regarded as a bit academic in the light of the changes to the Corporations Law contained in the CLERP Act (with enhanced rights for companies to obtain the outstanding shares of minority shareholders following a takeover or a scheme of arrangement), it is the way in which the High Court interpreted the relevant legislation (now amended as a result of the CLERP Act) rather than the actual interpretation itself that is encouraging. For, in this case, the High Court at last adopted a more policy oriented approach to the legislation, thus giving companies and their advisers greater hope that in future the High Court (at least) will be inclined to adopt a more policy-oriented approach to evaluating legislation. This may encourage lower courts to do the same. The decision itself is technical and it is unnecessary to delve into the facts. In essence the Full Federal Court, by a majority, had held that the Australian Securities and Investments Commission (ASIC) had no power under the terms of the then section 730 of the Corporations Law to modify the general rule relating to compulsory acquisition of shares (contained in the then section 701 of the Corporations Law) where those shares had been allotted to shareholders after the close of the offer period as a result of the exercise of certain options over shares. ASIC argued that the intention of the legislation was to enable it to modify the law (and allow the acquisition of the relevant shares) even though they had arisen as a result of the exercise of options. ASIC argued that the declaration was within the meaning of the terms of section 730 (as it then was) and that ASIC's power was validly exercised. The argument of the defendants was that the power of ASIC under the relevant section had been limited by the scope, context and purposes of the Corporations Law. As the Corporations Law did not provide a procedure whereby an offeror could compulsorily acquire shares issued after the offer period had ended, where those shares arose as a result of the exercise of options which converted rights into shares, it was argued that this was evidence of a policy in the relevant Law to "protect" from compulsory acquisition shares that were issued after the ending of a period especially if those shares arose on the exercise of options.
The High Court in a unanimous decision, held that a literal reading of the words of the then section 730 was wide enough to empower ASIC to modify section 701 to allow the compulsory acquisition of shares that had been allotted after the relevant period pursuant to the exercise of options. In reaching this view the court (consisting of five members of the court) embraced a forward-looking policy of interpretation of the Law, linked to policy issues, which will, as noted earlier, be particularly gratifying for companies and their advisers. The court also confirmed the view that it would normally adopt a literal interpretation of the statute. But, when it looked at the legislative purposes of the relevant legislation, even though such an interpretation led to the interference "with vested proprietary rights" (that is the purchase of someone's shares against their wish) it was clear that: "The object of the legislation is to provide a regulatory scheme which enables a takeover offeror, who has achieved the prescribed level of acceptances, to compel people who have not accepted the offer to transfer shares, subject to appropriate safeguards to protect their interests. It is of little assistance, in endeavouring to work out the meaning of parts of that scheme, to invoke a general presumption against the very thing which the legislation sets out to achieve. Furthermore, ... it does not help to say that the legislation enabling abrogation of property rights should be strictly confined according to its terms, when the legislation confers a power upon a regulatory authority (subject to procedures for review) to alter those terms." (See paragraph 43 of the High Court decision.)
Quite clearly the legislature had intended that ASIC would have the power to interfere with those rights in certain circumstances. If persons did not believe that ASIC was exercising its powers properly they could ask for a review of the exercise of the discretion by ASIC by the Administrative Appeals Tribunal. That body had the power to put itself in ASIC's place and make a different decision if appropriate. Nothing in the statute displaced the requirement that fairness had to be followed by ASIC (or by the Tribunal) and in that sense the rights of shareholders were clearly protected. In the view of the High Court there was nothing in the language of the relevant section to support the construction which was being put by the respondents in the appeal, D B Management. In any event, even if that view had been right, it is no longer relevant in the context of the new legislation. The High Court, however, suggested that the Eggleston principles, on which our takeover law is based, did not in fact cut across the exercise of the discretion which ASIC had exercised in this case. The court confirmed that giving the words of the relevant section a literal meaning did not in any way cut back on the wide discretionary powers which had been conferred on ASIC. Appropriate protection was available, as noted above, and in the circumstances the decision of the Full Court was overturned and ASIC was given the power to allow the compulsory acquisition of those shares. (ASIC still has wide powers under the new Takeover Code introduced by the CLERP Act – see section 673 of the Corporations Law.)
The decision will be welcomed by many in the community but it is the spirit of the decision that will be even more encouraging for the future history of our Corporations Law.
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