The collateral benefits prohibition in the Corporations Act plays a prominent role in regulating transactions and arrangements between bidders and target Shareholders.
Broadly speaking, the prohibition provides that a bidder must not give or agree to give a benefit to a target shareholder during the offer period if the benefit:
- is likely to induce that shareholder to accept the bid or sell their shares, and
- is not offered to all other target shareholders under the bid.
The rule is one of a number of provisions that are designed to ensure that all target shareholders have an equal opportunity to participate in any benefits available under a takeover bid.
Historically, the courts tended to take a fairly strict approach to the interpretation of the rule. The approach taken by the Takeovers Panel has tended to be more commercial.
In the recent PowerTel No 3 case, the Panel confirmed that it will continue to take a commercial view of any transaction with a target shareholder and that it will look at whether that shareholder is receiving a 'net' benefit, having regard to both the advantages and disadvantages of the transaction.
Background to PowerTel No 3
Earlier this year, two bidders, Roslyndale and TVG, vied to acquire control of PowerTel, a publicly listed telecommunications company.
PowerTel had two major shareholders, WilTel and DownTown Utilities. WilTel held around 47 per cent of PowerTel's shares on a fully diluted basis, and was owed about $24 million by PowerTel in loans and accrued interest. WilTel wished to sell its interest in PowerTel.
Roslyndale did not make a general bid to acquire all the shares in PowerTel. Instead it entered into an agreement to acquire, subject to PowerTel shareholder approval, WilTel's shares and debt for $14 million (of which $8.8 million was expressed to be for the debt) and to underwrite an equity issue by PowerTel to raise $16.3 million.
TVG then made a full takeover bid for PowerTel at 3 cents a share (which was later increased to 3.85 cents) and stated that it would underwrite a $50 million rights issue after the bid. The bid was subject to two key conditions: minimum acceptances of 47 per cent of the ordinary shares and WilTel selling the PowerTel debt to TVG for $1. It was intended that, following the bid, $10 million of the funds raised by the rights issue would be used by PowerTel to repay the debt, which would then be held by TVG.
The resolution to approve the Roslyndale acquisition was not passed by PowerTel shareholders. However, WilTel refused to accept the TVG bid on the basis that it was not prepared to sell its debt for $1.
Following a series of discussion and negotiations between WilTel and TVG, WilTel made an offer to PowerTel to forgive the debt in full for a payment of $10 million by PowerTel. The offer was irrevocable, but conditional on TVG waiving the debt sale condition of its bid. TVG then declared its bid free from the debt sale condition and PowerTel agreed to accept WilTel's irrevocable offer (subject to the TVG bid becoming unconditional).
The net effect of these changes was that WilTel would receive $10 million for the debt owed by PowerTel, rather than TVG acquiring the debt for $1 and then TVG receiving the $10 million.
Roslyndale's application to the Takeovers Panel
Roslyndale applied to the Takeovers Panel for a declaration that TVG's waiver of the debt condition of its bid was a prohibited collateral benefit. Specifically, Roslyndale argued that:
- by waiving the debt condition, TVG gave WilTel the benefit of being able to sell the debt for more than $1, and
- the benefit was likely to induce WilTel to accept the TVG bid, because it removed an adverse consequence of WilTel accepting the bid.
The Takeover Panel's decision
Section 623 collateral benefits
The Panel rejected Roslyndale's argument that by waiving the debt condition, TVG gave a benefit to WilTel which other PowerTel shareholders did not receive.
Specifically, the Panel disagreed with Roslyndale's argument that the existence of a benefit is determined by comparing the position of the relevant target shareholder before and immediately after the act characterised as the conferring benefit (in this case, WilTel's position before and after the waiver of the debt condition of TVG's bid). In contrast, the Panel interpreted section 623 as requiring a comparison of the benefits received by each target shareholder (in this case, comparing what WilTel was receiving with what other PowerTel shareholders were receiving in connection with the TVG bid).
The Panel found that the waiver of the debt condition advantaged all PowerTel shareholders, because it removed a possible impediment to the successful completion of the bid. Although the waiver of the debt condition did confer an advantage on WilTel (by allowing it to sell the debt for more than $1), that advantage was already available to all other PowerTel shareholders, who were free to deal with their other assets as they wished. The Panel said that section 623:
'… only prohibits a person from giving (or offering, or agreeing to give) a benefit to one offeree, if that benefit is not offered to all bid class holders. The benefit identified by Roslyndale (the ability to accept the bid without losing the freedom to deal with one's other assets) has already been extended to all other ordinary shareholders as an ordinary incident of the terms of the Bid when it was first made, but WilTel received it only when the Debt Condition was waived.'
The Panel also considered whether the state of affairs resulting from the waiver of the debt condition infringed the general equality of opportunity principle underlying Chapter 6.
Although there was no direct agreement between TVG and WilTel, the Panel treated:
- WilTel's offer to PowerTel to accept $10 million for repayment of the debt
- PowerTel's decision to accept the offer and pay $10 million to discharge the debt, and
- TVG's waiver of the debt condition of its bid,
as part of a single transaction. Effectively, the Panel analysed the consequences of TVG funding payment of $10 million to WilTel following the close of the bid to discharge the debt. The question was whether that transaction resulted in WilTel receiving a benefit, which would act as an inducement for it to accept TVG's bid, that was not offered to other PowerTel shareholders.
The Panel decided to take a 'net benefit' approach this question. In summary, the net benefit approach involves considering:
'… all advantages and disadvantages of the transaction for the shareholder to determine whether the advantages of the relevant transaction outweigh the detriments suffered in connection with the transaction so as to constitute a net benefit'.
On the basis of the net benefit approach, the Panel assessed advantages and disadvantages affecting WilTel under the proposal. This involved valuing the debt owed by PowerTel to WilTel and determining whether it was worth less than the $10 million WilTel would receive for it. Roslyndale, WilTel, TVG and an independent expert's report by PricewaterhouseCoopers all valued the debt at $10 million or more. The Panel therefore found that WilTel received no net benefit by receiving $10 million for the debt (irrespective of whether the $10 million was paid by PowerTel or directly by TVG). The issue of whether WilTel was likely to have received repayment of its loans in the absence of these arrangements does not appear to have been raised.
The PowerTel No 3 decision makes it clear that not every transaction between a bidder and a target shareholder that confers an advantage on the target shareholder will give rise to a collateral benefit or infringe the equality of opportunity principle. There are two important points that need to be considered:
- First, in considering whether there will be a prohibited collateral benefit, any advantage that is received by a particular target shareholder under a transaction with the bidder must be compared with what all other target shareholders are receiving in connection with the bid, rather than being analysed in isolation.
- Second, any advantage received by a shareholder under a transaction with the bidder must be compared to what the shareholder has given up to determine if the shareholder is receiving a net benefit. For example, if the bidder is acquiring an asset from the target shareholder, it seems that the Panel will consider this acceptable if the price the bidder is paying equals (or is less than) the value of the asset. Presumably, the same principle would apply if the target shareholder is acquiring an asset from the bidder.
A sensibly applied commercial approach to the collateral benefits prohibition is to be welcomed. Although the Panel's position seems straightforward, it remains to be seen how it will be applied in future cases. In the PowerTel No 3 decision, there was no dispute that the debt being sold by WilTel was worth at least $10 million.
But what will the Panel's approach be if there are conflicting opinions about the value of an asset being sold or acquired by a target shareholder? Who will bear the onus of establishing that a fair price is being paid for an asset—the parties to the transaction or the person challenging the transaction? What if a target shareholder is acquiring an asset that has particular strategic value to that shareholder—how is a fair price assessed in that context? These are questions that remain to be answered by the Panel.
Freehills acted for DownTown Utilities in this matter.
The above article has been published in the September 2003 issue of BNAI's journal 'World Corporate Finance Review'.
This article provides a summary only of the subject matter covered, without the assumption of a duty of care by Freehills. The summary is not intended to be nor should it be relied upon as a substitute for legal or other professional advice.