The recent decision of the Takeovers Panel in the Village Roadshow Limited 03 matter again demonstrates that the Takeovers Panel's jurisdiction extends well beyond the traditional 'disputed takeover'.
The decision represents the first foray by the Takeovers Panel into the area of share buy-backs. It also highlights the preparedness of the Takeovers Panel to intervene if it believes a shareholder may obtain, or consolidate, control via a corporate proposal where the fundamental principles underlying takeovers legislation in Australia may be subverted.
Share buy-back proposal
Village Roadshow Limited (VRL), having recently completed an on-market buy-back of 10 per cent of its ordinary shares, was seeking shareholder approval to conduct a further on-market buy-back of up to 20 per cent of its remaining ordinary shares within the next 12 months. As an ordinary resolution, VRL required the support of at least 50 per cent of all shares voted on the resolution, in order for the proposal to be validly approved.
Boswell Filmgesellschaft (Boswell), a small German-based VRL shareholder who earlier this year thwarted VRL's attempt to buy-back its entire class of preference shares via a scheme of arrangement, objected. On this occasion, Boswell made an application to the Takeovers Panel in respect of the buy-back proposal.
Takeovers Panel application
The application was made on the basis that the buy-back, if approved, could result in Village Roadshow Corporation Ltd (VRC) further consolidating its control of VRL without minority shareholders receiving adequate information or having an effective say in the matter. VRC controlled 56 per cent of the ordinary shares in VRL, and was itself controlled by three of the VRL directors.
Boswell submitted unacceptable circumstances existed due to the fact that VRC could vote in favour of the buy-back proposal, a proposal which could consolidate VRC's control of VRL to as high as 70 per cent, without affording any takeover premium.
The Takeovers Panel agreed with Boswell that this amounted to unacceptable circumstances.
The Panel required VRL to provide an undertaking that no shares be bought back if the resolution would only have been passed with the votes of VRC and its associates having been cast in favour of the buy-back resolution. This undertaking was required by the Panel to ensure the underlying policy of Chapter 6 of the Corporations Act was not subverted:
'a vote which decides whether or not a transaction proceeds should be passed only on the support of shareholders who will not gain any special benefit from any changes in control which the transaction might bring about'.
In effect, the Panel determined that, while VRL may be technically complying with the legislation in permitting VRC to vote in favour of the resolution, the result would be to allow the majority shareholder to cast a commanding vote on a resolution which could have the effect of materially consolidating that party's voting control. This was unacceptable.
Further lessons for those contemplating buy-backs
The Takeovers Panel also sounded clear words of warning for any other companies contemplating a buy-back where there is a large shareholder on the register:
'The Panel considers that it is unlikely that it will need to consider this issue frequently in the future given the clear indication of this decision for similar cases in future.'
What is unclear from the decision is at what point does a significant shareholder stand to attract such a benefit that its votes should be disallowed? It is unlikely to occur for a 10 per cent or 15 per cent holder, but would presumably apply to a 45 per cent holder who could move to majority control via an approved buy-back process. Where the line is drawn between these two positions is anyone's guess.
Any company contemplating a share buy-back, particularly where shareholder approval is required, should consider its shareholder profile in order to assess the 'unacceptable circumstances' risk on a case-by-case basis. Advisers should also have regard to the likelihood of a party doing a 'Boswell' and objecting to the proposal, as absent such an objection, the buy-back proposal is likely to proceed unhindered.
Furthermore, the Panel noted that the proposed buy-back resolution contemplated VRL having the right to conduct the buy-back at any time within the next 12 months.
In this respect, the Panel noted that, if the terms under which VRL were to buy-back the shares were to change materially from the indicative terms disclosed in the notice of meeting (for example, the VRL market price was to rise materially), at some point VRL would no longer be entitled to rely on the buy-back resolution as authorising the continued buying back of VRL shares. In effect, the member authorisation would have become stale.
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