The Takeover Panel shows its strengths Law Reporter

Takeovers or mergers are now far less likely to be delayed unnecessarily by tactical litigation.

With the removal of the courts from the takeover arena and the replacement of the courts by the Corporations and Securities Panel (the Takeover Panel) there was expected to be some considerable frustration on the part of many professional people that important issues of principle (where legal rights were being tested) would not be adequately aired or canvassed by a body with appropriate authority. Since then, the courts have consistently rejected attempts to use them to consider (in somewhat artificial circumstances) questions that are more appropriate for the Takeover Panel. Some of these decisions have been discussed at previous issues of Law Reporter. In the matter of Pinnacle VRB Limited, the Takeover Panel (in fact a review panel), consisting of Justice Kim Santow (sitting president), Trevor Rowe and Dennis Byrne has provided some very important assurances to the professional community that the Takeover Panel will take into account important legal principles in carrying out its obligations. The Panel also indicated it would not behave as though it were a court in evaluating whether the particular activity did amount to behaviour that should be declared unacceptable. The facts in the matter are not particularly relevant for this report. In essence they involved the Takeover Panel evaluating a set of undertakings from a target company (Pinnacle) following undertakings given by a bidder (Reliable Power Inc) on the terms of waiving certain conditions in the takeover bid by Reliable for all the ordinary shares in Pinnacle. If it had not been for the undertakings provided by Pinnacle the Takeover Panel, taking into account the issues of public interest, would have declared unacceptable circumstances to exist and thus stopped the takeover. The public interest involved consideration of the Eggleston Principles.

These principles (as enunciated in the Corporations Act as it is now known) are:

1. That the acquisition of shares in a company (or similar body) takes place in an efficient, competitive and informed market.

2. That the holders of the shares (or other relevant interests) and the directors of the relevant company,

i) know the identity of any person who proposes to acquire a substantial interest in that body;

ii) have a reasonable time to consider the relevant proposal; and

iii) are given enough information to enable them to assess the merits of the proposal.

3. As far as practical the holders of the relevant shares the subject of the takeover offer all enjoy a reasonable and equal opportunity to participate in any benefits that might accrue to them under a proposal pursuant to which a takeover or other acquisition is made.

In the event of compulsory acquisition of shares the relevant principles require in addition that a proper procedure is followed in the acquisition of the shares (in addition to the matters set out above). The issues in this case, as noted earlier, concerned the inclusion of certain conditions in the takeover offer. They involved the ability (or inability) of members of the target company to review certain issues which had to be considered in the context of the takeover. It is relevant to consider the critical issues the Takeover Panel took into account in evaluating how it reviews the behaviour of directors of a target company in dealing with a takeover. (It is also interesting to note that a number of applications in relation to the Pinnacle takeover have been considered by the Takeover Panel.)

In the "decision" (in effect a review decision by a differently constituted group of members) the Panel made a number of observations. The most important is that where there is in effect a review of the decision of a Takeover Panel, the new Takeover Panel is empowered and required to consider the application de novo. It should look at all of the facts again fresh. It is not in effect a decision on the earlier decision. The matter the Takeover Panel was urged to deal with required it to consider the duties of directors or the policy which underlined that particular area of the law. It was submitted by one of the parties that it would be an improper use of the powers of directors to enter into transactions (or even to have them put to a meeting for consideration) for the purpose of causing an offer or a bid to be defeated. In relation to that submission, the Takeover Panel stated that its functions were limited to applying the principles enunciated by the Eggleston Committee set out in section 602 of the Corporations Law as part of a wider public interest evaluation that the Takeover Panel had to make (see above).

The Takeover Panel was not empowered to enforce compliance with the relevant law or to set aside contracts on the basis that the law was not complied with by the parties. It was noted: "We do not have the powers which a court of law has to perform any of those functions (including for example, the powers to order discovery between parties and to punish for contempt like a court)." The nature of the problem that the Takeover Panel faced in this matter was described by it as illustrated by the relevant submissions received. A short summary of the relevant issues (in the words of the Panel) is appropriate: "Reliable submitted that [the Takeover Panel] should infer from the circumstances of the transactions and from the different explanations given by [the target] concerning them that they had been entered into in order to defeat the [the takeover bid]. This is a very serious finding, and Reliable's evidence (which was mainly circumstantial) is insufficient to sustain it. There is as [the target] points out, no directive into this purpose, and a certain amount of evidence pointing to the directors having acted for quite different purposes."

It was noted that the relevant Panel should deploy its limited powers and resources to try to conduct an extensive investigation into the states of mind of different people - this could last for a week and involve very significant resources. Instead, what the community is looking for in the Takeover Panel is not a second rate court (which of course would be the result of the Takeover Panel following that procedure) but "a first rate commercial panel. It should not therefore fall between two stools in an attempt to replicate court processes, thereby unduly delaying fast moving transactions and the bid itself". If there were serious questions of law that were generated by the relevant facts then the Australian Securities and Investments Commission (ASIC) would be able to resort to a court once the takeover was completed.

The Panel concluded its views on these issues in the following words: "Our decision can only be based on the existence, prevention, removal and remediation of unacceptable circumstances which impact on the [takeover bid]. Legal consequences of people's behaviour can obviously [amount to circumstances]. But even assuming such consequences can be established fairly and reliably, they are only relevant insofar as they impact on the bid by creating unacceptable circumstances, or bear upon the public interest. Moreover, as [the target's] undertakings demonstrate the mode of remediation can, [although not completely] cater for the possibility of a particular legal consequence, namely possible improper purpose. If it be wrongly denied, this is at risk of subsequent ASIC prosecution for false or misleading statements and for breach of directors' duties. There is the alternative, available in the cases of doubt, of seeking ratification of any such breach, provided its possibility is fully and properly disclosed. The undertakings cater for this. If there is no likelihood of improper purpose, then ratification is unnecessary.

Whether these transactions led to unacceptable circumstances depends on their effects on the outcome of the bid but also on the other commercial interests of [the target] and its shareholders. With one exception ... [the state of mind of the Board of the target] was irrelevant to our consideration of the existence of unacceptable circumstances." (see paras 56-58 inclusive) The particular exception was not one that the Takeover Panel was able to form a definite view on, and therefore it ignored the issue. In the circumstances it was not prepared to conclude that there was an improper purpose in the behaviour of the board of directors of the target company. The Panel was, however, confident in concluding that the action taken would in fact tend to defeat the bid. As the action was capable of defeating the bid, in the circumstances the Takeover Panel accepted the proposal that approval of the transaction by the general meeting of the target company was necessary. If the meeting was not progressed and the undertakings not provided by the target company then the arrangements would probably have been declared unacceptable. The decision of the Panel is a most important one and will be generally welcomed by the professional community. It shows the flexibility which the Takeover Panel can provide for the business community.

Where a takeover or merger is in place it would be inappropriate, unless there are very extraordinary circumstances, for the particular transaction to be delayed unnecessarily by tactical litigation in the courts.

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The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.