Shareholder activism has become a more common feature on the corporate landscape in recent years, particularly as an adjunct to conventional M&A strategies. However, pro-active moves by portfolio holders to effect board changes have been relatively rare. In this context, the recent events at St Barbara Mines Limited represent an interesting precedent.
Dissatisfied with its return on a 22.6 per cent shareholding in Western Australian based St Barbara Mines Limited, Denver based Resource Capital Fund II LP (RCF). sought the removal of two members of the board, including the executive Chairman, to be replaced by nominees of RCF. After a protracted proxy context, RCF ultimately prevailed, with the passing of all of proposed resolutions at a St Barbara general meeting on 20 July 2004.
Proxy contests always raise a range of troublesome legal issues, ranging across takeover issues, directors duties, misleading and deceptive conduct, defamation and the common law relating to meeting procedures. This article outlines a number of such issues which may be of more general application.
Avoidance of breaches of Chapter 6
Under the takeovers provisions in Chapter 6 of the Corporations Act 2001 (Act), a person will acquire a 'relevant interest' in shares where it can exercise, or control the exercise of, voting rights attaching to the shares. The control can be direct or indirect, and may be exercisable by formal or informal means. If that person thereby acquires 'voting power' of 20 per cent or more in a listed company, it will breach section 606 of the Act, unless the acquisition is through a permitted 'gateway'.
The breadth of the relevant interest concept can prove problematic in proxy contests, since it necessarily limits the nature of agreements or understandings which shareholders can reach on voting matters if they together account for more than 20 per cent of the register. As RCF already held more that 20 per cent of St Barbara, it was critical for it to be able to communicate its intentions to other St Barbara shareholders while stopping short of any arrangement which would breach section 606.
ASIC has provided relief to permit limited agreements on voting matters between 'institutional' shareholders. However, such relief is limited in scope and subject to conditions which may not always be practical.
The line between acceptable communications and unlawful voting agreements is not always a clear one. Protagonists in proxy contests therefore need to ensure that they adopt protocols for all communications with other shareholders to ensure that no guarantee (whether or not enforceable) is given or received as to how shareholders will vote on a resolution to be considered at the general meeting.
Despite some equivocal judicial authority, and subject to no contrary provisions in the constitution, it is open to the protagonists in a proxy contest to deliver pre-completed proxy forms to shareholders supporting their respective positions. All that is then left for the shareholder to do is sign and return the form to the company before the close of proxies.
However, different issues arise if a party other than the company solicits shareholders to return the signed proxy form to that party, on the basis that it will then deliver the proxies to the company. This tactic—colloquially referred to as 'proxy harvesting'—was employed by one of the incumbent directors in the St Barbara case.
Proxy harvesting is useful as it allows the harvester to gauge the level of support it is receiving in the contest. More importantly, it allows the harvester to 'cancel' any proxies previously delivered by shareholders to the company, by waiting until just before the proxy return date to effect the delivery. This is because, as a matter of law, where two proxies are received from the same shareholder, the one received by the company latest is deemed to prevail.
While the Act does not expressly state that the nomination of an intermediate recipient will render a proxy appointment invalid, the Federal Court has indicated that an election or other resolution on which such proxy votes were cast would be susceptible to challenge on the grounds that the integrity of the voting process required by the Act could not be assured (Bisan Ltd v Cellante (2002) 173 FLR 310).
Ultimately, the weight of proxies was such that this issue was not determinative in the St Barbara case. However, the Federal Court's caution needs to be borne in mind not just in relation to clear proxy harvesting conduct, but any activities which may cloud the proper functioning of the proxy process.
Two directors on the St Barbara board were nominees of RCF. In board contests, nominee directors of the agitating shareholder can often find themselves in an invidious position, wedged between potentially conflicting loyalties. However, in Australia, the law in such cases is clear: nominee directors owe their duties to the company on whose board they serve. An incident of this principle is that, even if it has a nominee on the board, a shareholder has no right to access company information through that nominee director other than information to which they are entitled as of right qua shareholder (although the position can be modified by appropriate constitutional provisions).
Nominee directors therefore need to exhibit particular care in contested situations. There are a number of steps which the nominating shareholder can take to protect its nominees in this respect, including 'ring fencing' the nominees from the shareholder's strategic planning. The prospect that this may be required should an investment turn sour in the future, also points to the need for shareholders to select their nominees carefully. Often, the natural response to an invitation to appoint a nominee is to select a person who is key to that shareholder's ongoing objectives. However, given the legal restrictions on the nominee's ability to utilise information for the shareholder's benefit, that sometimes may not be the optimal strategy.
Countering a defensive placement
RCF's battle with the St Barbara board intensified following the company's announcement to the market that it was close to finalising an equity placement that would have been completed prior to the general meeting.
A placement—if made to investors who are 'friendly' to the incumbent—can be a powerful defensive tactic. Of course, directors must use the share issue power, like all their powers, in a manner consistent with their fiduciary duties. If the 'predominant purpose' of an issue is 'improper', the issue may be impugned. Where the predominant purpose is entrenchment of the incumbents, this will almost always be the case.
Where a company is in a precarious financial position, as St Barbara was, it can be difficult for an opponent to contest a placement. In such cases, rather than protest against the placement, it can be prudent for the opponent to offer to participate on equal (or better) terms. This is not always possible, particularly if the opponent has voting power in excess of 20 per cent, in which case it may be restricted by its 'creep' percentage (ie an increase of three per cent in a six month period). But where it is possible, it does maximise the pressure on the company's board, and tends to focus the board's attention very sharply on directors' duty issues.
RCF had to consider a number of other interesting legal issues during the course of the matter, including:
- the defence of an application to the Takeovers Panel by Strata Mining Corporation Limited, a substantial shareholder of St Barbara and a company of which the executive chairman was a director (the application was dismissed without commencement of proceedings), and
- the nature and scope of indemnities offered to the RCF-nominated directors whose appointment to the board was sought (given that those directors were unable to undertake customary 'due diligence' prior to consenting to act in that capacity).
These, and all proxy contest issues, usually need to be addressed in the 'heat of the battle'. Accordingly, both careful planning and disciplined execution are necessary to ensure success.
Freehills, with a team lead by David Gray, acted for RCF in this matter.
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.