"Unacceptability" is judged by reference to
the interests of shareholders, rather than strict compliance with
the letter of the law.
Reverse takeovers have been problematic since the Gloucester
Coal battle last year. The Panel has just released some guidance on
It will be remembered that the Panel twice ruled in favour of
Noble Group against the reverse takeover of Gloucester Coal that
would have resulted from Gloucester's bid for Whitehaven
On the first occasion, it ruled that the acquisition of 21% of
the nominal bidder without the approval of its shareholders was an
unacceptable change of control.
That decision went on review. The Review Panel ruled that, by
itself, a 21% acquisition was not a change of control. However, it
held that the takeover in question was unacceptable because it did
not allow the bidder's directors to consider a superior
competing takeover bid for the bidder.
These decisions caused considerable debate, with some
commentators expressing the view that they would cruel reverse
takeovers (which are allowable under section 611 of the
Corporations Act). There was, therefore, considerable interest when
the Panel announced that it was considering whether to include
reverse takeovers in a rewrite of its Guidance Note on unacceptable
That rewrite has now been published. The Guidance Note says
unacceptable circumstances may include "a change of
control, or a material effect on control by an issue of shares as
consideration for a bid, that either disenfranchises shareholders
or does not meet the policy of chapter 6 (even if strictly it
satisfies item 4 of section 611 - acquisitions that result from
acceptance of a bid)";
"A reverse takeover may also offend the principles in
sections 602(a) and (c). It may 'lock up' the bidder and
adversely affect competition. The Panel takes into account whether
the transaction is subject to the approval of bidder shareholders
(relief from section 629 can be sought from ASIC if necessary)
and/or is subject to a condition that allows a superior proposal to
be considered by those shareholders. A 'superior proposal'
condition, however, if it depends on the opinion of, or an event
controlled by, the bidder or an associate is void (section 629) so
should be drafted in objective terms."
The Guidance Note is a little cryptic, but these comments appear
to suggest that:
where the reverse takeover has a material effect on
"control" (however that's judged), shareholder
approval is necessary; and
where the reverse takeover effectively prevents rival bids for
the nominal bidder (even if there is no change of
"control"), the reverse takeover must be subject to
either the approval of the bidder's shareholders or a condition
that allows an objectively superior rival proposal to be put to
This is not a definitive template for the planners of future
reverse takeovers: the Panel rarely issues cut and dried sets of
guidelines. Nevertheless, it is a significant development, because
the Panel has sent a clear message that it will not back away from
its preparedness to intervene in reverse takeovers. In other words,
the fact that a reverse takeover complies with section 611 of the
Act does not mean that it will not be ruled to be unacceptable by
This will be particularly relevant to boards of companies which
make reverse takeover bids in an attempt to frustrate a potential
bidder for that company.
Looking more widely, it is yet another reminder to all M&A
players that the fact that something is allowed by Chapter 6 of the
Corporations Act doesn't put it beyond the power of the Panel.
This point was clear to all experienced M&A practitioners even
before the Gloucester Coal battle last year, and was emphasised by
both Panels' findings against Gloucester Coal:
"unacceptability" is judged by reference to the interests
of shareholders, rather than strict compliance with the letter of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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