Key points
- Demonstrates the need for more flexibility by ASIC in its approach to s609(7) of the Corporations Act.
- Takeovers Panel highlighted the 'potential issue' with a major shareholder being permitted to vote in favour of a buy-back which may result in a significant increase in its interest in the company.
Background
Lantern Hotel Group (Lantern) is an ASX listed stapled entity. Lantern stapled securities comprise one ordinary share in Lantern Hotel Group Limited and one unit in the Lantern Real Estate Trust.
Millinium Asset Services Pty Limited (as trustee for the Borg Fund) holds approximately 24.3% of Lantern's securities. Three Pillars Portfolio Managers Pty Limited (Three Pillars) is the investment manager of the Borg Fund. Torchlight GP Limited (Torchlight) holds approximately 30.2% of the Lantern securities.
On 4 February 2014, Three Pillars made an irrevocable offer to Lantern to sell to Lantern (via a buy-back) Millinium's 24.3% interest. The offer was open until 21 March 2014, and Lantern's acceptance was conditional upon "security holder approval and any necessary regulatory relief being obtained"1. If the buy-back was effected, Torchlight's relevant interest in Lantern securities would increase to approximately 40.3%.
On 28 February 2014, Millinium granted a call option to Totem Holdings Pty Limited (Totem) to acquire approximately half of Millinium's holding in Lantern. A separate call option in respect of the remainder of Millinium's holding in Lantern was granted by Millinium to CVC Limited. Lantern filed proceedings in the Supreme Court of NSW seeking orders to restrain Millinium from transferring its securities in Lantern under the call options.
On 11 March 2014, Totem sought a declaration of unacceptable circumstances from the Takeovers Panel. It submitted that, as a result of the buy-back offer, Lantern had acquired a relevant interest in Millinium's 24.3% interest in contravention of s606 of the Corporations Act. It sought orders that included Lantern being restrained from accepting the buy-back offer, and Torchlight being prevented from voting in favour of any resolution to approve the buy-back.
Relevant interest and s609(7)
Totem seemed to argue that the Millinium's irrevocable buy-back offer to Lantern was akin to the grant of an enforceable right by Millinium to Lantern to acquire a relevant interest in Millinium's 24.3% interest. As a result, Lantern acquired a relevant interest in these securities when the irrevocable offer was made by Millinium under s608(8).
Ultimately the Panel was of the view that, even if the buy-back offer attracted the operation of s608(8), it would be unlikely to be unacceptable because either the exception under s609(7) applied to prevent the acquisition of a relevant interest or the policy of that section meant that any breach was not unacceptable. Section 609(7) prevents a relevant interest from arising by reason of an agreement that is conditional on either shareholder approval under item 7 of s611 or ASIC relief, provided the agreement does not:
- confer any control or influence over voting rights attaching to the securities; and
- restrict the disposal of the securities for longer than 3 months.
It seems correct that the policy behind s609(7) should mean that any breach of s606 arising from the buy-back offer should not be unacceptable. However, ASIC (and the Panel) have taken a stringent approach to this section in recent times. For example, in Tigers Realm2 the Panel agreed with ASIC who submitted that to rely on s609(7) there needed to be certainty that such approval would be sought. ASIC also submitted that in order to rely on s609(7) the agreement needed to expressly provide that any disposal restrictions on the securities would fall away after 3 months3. The buy-back offer was not specific on the approvals required to implement the buy-back (noting that s609(7) would not commonly be relied on to effect a buy-back) and there was no express 3 month limitation on any disposal restrictions. Although the authors believe the Panel approach was correct in this instance, it may mean that ASIC needs to be a little more flexible on its approach to s609(7) to ensure that inconsistencies, and uncertainty around the application of that section, do not arise.
Voting by Torchlight
Totem sought orders that Torchlight be prevented from voting in favour of any resolution to approve the buy-back, which could see its relevant interest in Lantern securities increase from 30.2% to 40.3%. The Panel was of the view that it was premature to determine whether Torchlight should be prevented from voting in favour of the buy-back, given the uncertainty around whether the buy-back would actually proceed. It noted the 'potential issue' involved in permitting Torchlight to vote in favour of the buy-back and referred to the Panel's decision in Village Roadshow4. In that decision, the Panel considered that it would be unacceptable for a major shareholder to both vote in favour of a buy-back and have its interest in the company materially increase as a result.
The Panel noted that if the buy-back did proceed, it would be open to ASIC or another interested party to bring a fresh application before the Panel on this issue.
Voting on buy-back
If the buy-back were to proceed, there is some doubt over whether it would be approved even if Torchlight was permitted to vote in favour of it. As a selective buy-back, it would need to be approved by special resolution (ie. 75% or more), with no votes cast in favour of the resolution by Millinium. Although Millinium would be prevented from voting in favour of the resolution, it would not be prevented from voting against it. If Millinium voted against the resolution, it would be almost impossible for Lantern to achieve the required 75% approval to effect the buy-back.
It could be difficult for Lantern to argue against Millinium's entitlement to exercise its voting rights in this manner, as any control or influence over the voting rights attaching to Millinium's securities would be contrary to the provisions of, and policy behind, s609(7). Presumably, had the Panel been of the view there were any restrictions imposed on Millinium's voting rights, they would not have made the conclusions they did about Lantern's ability to rely on s609(7) or the policy behind it.
Footnotes
1Lantern Hotel Group [2014] ATP 6 at
[22]
2Tigers Realm Coal Limited [2014] ATP 2.
3Tigers Realm Coal Limited [2014] ATP 2 at 67.
4Village Roadshow Limited 03 [2004] ATP 22.
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