oOh - ouch! Control Transactions and Option Agreements -

Introduction

The recent Takeovers Panel decision of oOh!media Group Limited [2011] ATP 9 (oOh!Media) highlights that market disclosure may still be required even where a "relevant interest" does not exist for an entity that takes a call option for listed shares with a third party.

Facts

The facts of oOh!Media are complex. In short, QMS Asia Pacific Outdoor Pte Ltd (QMS) entered into 2 deeds that gave it call options over ASX-listed shares (Shares) in oOh!media Group Limited (OOH)

The first option deed was first executed on 23 August 2010 with PFG Investments Pty Limited (PFG) (First Option). At that time, PFG did not hold all Shares the subject of the First Option (PFG Shares). Further, the terms of the First Option provided, among other things, for:

a call option covering 75,000,000 Shares;
a call option fee of $16,650,000 (i.e. 22.2 cents per Share) and an exercise fee of 7.8 cents per Share;
except for certain boilerplate and confidentiality clauses, no legally binding right or obligation on either party being created "until FIRB approval had been granted"¹; and
a break fee of $337,500 plus the call option fee and exercise fee, payable by PFG to QMS, if PFG failed to transfer to QMS a minimum of 67,500,000 Shares.

Between 13 August, 2010 and 21 January, 2011:

OOH made a placement to William Shaw Capital Pty Ltd (WSC) and certain other entities of 57,142,857 Shares; and
PFG increased its voting Shares from 5.75% to 16.12% through a combination of off and on-market purchases thereby enabling PFG to satisfy its obligations under the First Option, when and if exercised.

No disclosure was provided of the terms of the First Option until immediately after its exercise on 21 March 2011. On exercise, QMS increased its voting Shares to 15.12% and, from that date to 20 April 2011, further increased its voting Shares to 18.51% by additional on-market purchases.

The second option deed was executed on 21 April, 2011 with WSC and certain other entities (Second Option). The terms of the Second Option were substantially similar to those of the First Option, but additionally provided for:

an operative call option period of 13 months; and
except for certain boilerplate and confidentiality clauses, no legally binding right or obligation on either party being created until:
- FIRB approval had been granted; and
- OOH shareholder approval under section 611, item 7².

OOH Application

On 4 May, 2011, OOH sought a declaration of unacceptable circumstances arising from two sets of circumstances.

The first set of alleged unacceptable circumstances was the purchase, on and off market, by PFG of Shares at a time when the terms of the First Option were undisclosed. It was submitted that the failure to disclose the terms of the First Option by QMS and/or PFG meant that:

OOH made a placement at a materially lower price than it would have otherwise;
sellers of Shares to PFG did not:
- know that QMS held an option to acquire a number of voting Shares from PFG that was substantially in excess of the number of voting Shares held by PFG at the time of it granting the First Option; or
- have a reasonable and equal opportunity to participate in benefits that would arise under the terms of the First Option; and
- there was an inefficient, uncompetitive and uninformed market in Shares.

OOH further submitted that PFG and QMS became "associates" at the date of execution of the First Option because they were acting in concert in relation to either the ownership of Shares or the acquisition or disposal of Shares and, therefore, each had a "relevant interest" in the voting Shares held by the other.

The second set of alleged unacceptable circumstances was QMS's increase in voting Shares pursuant to the partial exercise of the Second Option, where:

the terms of the Second Option would not be expected between parties genuinely acting at arm's length; and
no efforts had been made to satsify the condition of OOH shareholder approval.

OOH submitted that by QMS not seeking OOH shareholder approval under section 611, item 7, among other requirements, it was effectively controlling a further 9% parcel of Shares (being the Shares the subject of the Second Option (WSC Shares)) and, as a result, was in contravention of the 20% threshold under section 606.

Takeovers Panel Decision

The Takeovers Panel decided that OOH's application related to "clear, serious and ongoing unacceptable circumstances." ³.

QMS submitted that it had disclosed its "relevant interest" in the PFG Shares as soon as that interest arose - namely on exercise of the First Option and not on execution, or during the term of the First Option. QMS further submitted that it did not have a "relevant interest" in the WSC Shares and that QMS was not obliged to seek OOH shareholder approval unless and until FIRB approval was first obtained.

The implications of QMS successfully arguing that a "relevant interest" in the PFG Shares did not exist at the time of execution of the First Option, included:

a substantial holding notice not being required to be provided by QMS to OOH and the ASX under section 671B; and
the restriction - unless one used an applicable gateway - from acquiring a "relevant interest" in Shares above a voting share of 20% was not applicable to QMS's holding of Shares.

The basis of QMS's submission was a technical reading of the Corporations Act, 2001. Under section 608(8), QMS would have a "relevant interest" in the PFG Shares where:

PFG has a relevant interest in PFG Shares;
PFG has given QMS an enforceable right in relation to the PFG Shares; and
QMS would have a "relevant interest" if the First Option was exercised. ⁴

In relation to the First Option, QMS submitted that, "no call option was granted and QMS did not acquire any interest in [Shares] until FIRB approval was obtained. FIRB approval was obtained on 18 March 2011.". In other words, QMS argued that the First Option fell outside the ambit of section 608(8) on the basis that it was neither an "enforceable right" nor an effective grant of an option until FIRB approval had been granted.

In the Takeovers Panel view, "some doubts" ⁵ existed as to whether a "relevant interest" was nevertheless created in favour of QMS by the terms of the First Option. The Takeovers Panel held that "the low exercise price option structure was a significant commercial indicator that effective control over underlying [Shares] existed." ⁶.

In relation to the Second Option, QMS argued that a "relevant interest" did not exist in the WSC Shares because:

FIRB approval had not been granted and, therefore, section 608(8) did not accelerate and create a "relevant interest" for QMS; and
the Second Option was conditional on OOH shareholder approval under section 611, item 7. It was noted that section 609(7) specifically exempts a person from acquiring a "relevant interest" merely because of an agreement, if the agreement is, inter alia, conditional on shareholder approval under section 611, item 7.

In the Takeovers Panel view, the legislative expression of policy accepted that three (3) months was a reasonable time to obtain any necessary OOH shareholder approval, irrespective of any agreed contractual condition precedent. However, given:

the Second Option had an operative call option period of 13 months; and
QMS had made no attempt to seek OOH shareholder approval prior to 4 May 2011 (i.e. the date of OOH's application to the Takeovers Panel),

the Takeovers Panel remained "concerned that the attempt to rely on [section 609(7)] would have amounted to unacceptable circumstances." ⁷.

The Takeovers Panels decision suggests that a genuine intention on the part of QMS to seek OOH shareholder approval within no more than three (3) months after entering into the Second Option was required in order to permit QMS to rely on section 609(7). Notably, this view goes further than the Takeovers Panel's policy on the subject provided in Guidance Note 1: Unacceptable Circumstances. ⁸

Accordingly, the Takeovers Panel considered that:

even if the technical arguments presented by QMS were effective, it was not precluded from making orders of unacceptable circumstances; ⁹ and
disclosure of the First Option was required on and from around 23 August, 2010. ¹⁰

Substantial undertakings were provided by QMS and WSC to remedy the potential unacceptable circumstances. In light of these, the Takeovers Panel did not make a further determination in relation to the Second Option but nonethless expressed concern that even if QMS was entitled to rely on section 609(7), the attempt to do so would have given rise to unacceptable circumstances.

Undertakings

As referred to above, undertakings were provided by QMS and WSC to remedy, as best as they could, the potential unacceptable circumstances arising from the implementation of the First Option and Second Option.

The undertakings included the:

rescission of the Second Option by QMS and WSC;
payment by QMS to OOH of $3,600,000 in partial compensation for having placed Shares at below 30 cents per Share, being QMS's aggregate acquisition price for the PFG Shares;
reduction of QMS's holdings in Shares to less than 15% within 6 months;
compensation by QMS to OOH shareholders who sold Shares on-market, that amount being determined by reference to the difference between the price per Share received by each OOH shareholder and 30 cents, multiplied by the number of Shares sold by that OOH Shareholder; and
payment by QMS to OOH of its legal fees.

Take-home Lessons

If an entity (Grantor) has a "relevant interest" in issued shares to which a call option is taken by another entity (Grantee), it is highly likely that a "relevant interest" in the underlying shares the subject of the call option will be deemed to have been created in favour of the Grantee, even where the Grantor does not own those shares at the time of granting the call option. Careful drafting is required if a Grantee intends on taking a call option (whether conditional, contingent or otherwise) in these circumstances without thereby creating a "relevant interest" in the shares the subject of the call option.

The Takeovers Panel has expressed a view that, whether or not the Grantee has a "relevant interest", it is not precluded from making orders of unacceptable circumstances.

In making a determination of unacceptable circumstances, key features the Takeovers Panel are likely to bear in mind include:

the level of association between the Grantor and Grantee. For instance:
- any funding arrangement between the Grantor and Grantee;
- whether any other arrangements existed that gave the Grantee a degree of control over the activities of the Grantor; and
- any arrangements which amounted to warehousing of shares by the Grantor on behalf of the Grantee;
whether the Grantor holds all the underlying shares the subject of the call option at the time of granting that option; and
the up-front premium, the exercise price for the option and any break-fee payments.

Please contact the Addisons' Corporate team if you would like to discuss any of the issues raised in this paper.

The assistance of Rahil Patel, Solicitor of Addisons in the preparation of this article is noted and greatly appreciated

1. First Option, clause 3(2)(b).

2. Second Option, clause 3.2.2(b). All references are to the Corporations Act, 2001, unless otherwise indicated.

3. At [25].

4. This position is further discussed in ASIC Regulatory Guide 48 at [48.11].

5. At [46].

6. At [46].

7. At [52].

8. See paragraph 32, example 11.

9. At [48].

10. At [53]. See also section 608(2).

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.

oOh - ouch! Control Transactions and Option Agreements

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