The potential control implications of rights issue underwriting arrangements have again been brought into focus. This time, a proposed rights issue by Rivkin Financial Services was successfully challenged before the Panel (Re Rivkin Financial Services Ltd 02—Panel media release, 20 January 2005).
The proposed rights issue in Rivkin came against the background of a number of board tussles, following which interests associated with Mr Farooq Khan achieved effective control. Board composition remains a live issue, with two major shareholders requisitioning shareholder meetings—expected to occur in February. In such uncertain circumstances, the Panel found that it was incumbent on the board of the issue to take 'all reasonable steps to structure any transaction which it undertook in such a way as not to have any material impact on the contest for control of RFS and, if it was unable or did not wish to do so, to obtain shareholder approval for the transaction'.
The Panel was also clearly concerned about the apparent lack of a need for funds on the part of the issuer. The Panel rejected suggestions that the raising would strengthen the position of the issuer as a listed investment vehicle, concluding on the strength of 'its collective experience and market knowledge' that the issue would make no material difference to such standing.
In this respect, the circumstances could be distinguished from those in the Emperor Mines Limited decisions. The existence of a demonstrated need for funds also influenced the outcome of the earlier decision in Re Lachlan Farming Ltd  ATP 31, in which the Panel refused to commence proceedings to investigate the circumstances of an underwritten 1 for 1.19 rights issue.
In terms of structure and pricing, although the Panel 'welcomed' the renounceable nature of the Rivkin offer, it noted disapprovingly that the discount to market at which it was proposed was at the 'bottom end' of the range necessary to encourage uptake, and that the issuer did not take advice as to the size of the discount. It was also concerned that the issue was timed to occur over the Christmas and New Year period, during which uptake could be expected to be lower, and that the offering of sub-underwriting to third parties was made on the condition that interests associated with the controlling parties must participate. In this last aspect the decision is consistent with the outcome in the Emperor Mines Limited decisions that shareholder or related party underwriters should rank behind non-associated shareholders for any shortfall.
The Panel accepted various undertakings to the effect that (in general terms) non-associated shareholder approval would be sought to potential rights issues under item 7 of section 611 of the Corporations Act.
It is possible to discern a developing policy stance of the Panel in relation to shareholder and control party underwritings, as the concept of 'genuine accessibility' is supplemented by that of an 'appropriate commercial context' (our words rather than the Panel's) for a rights issue.
The Panel now seems to be saying that issuers need to undertake a balancing of these factors: the more pressing the commercial case for a particular issue, the potentially greater leeway an issuer has in terms of accessibility.
In Rivkin, the commercial context did not support the need for a rights issue 'at that particular point in time'. Accordingly, the company needed either to go further than it did in terms of preserving 'genuine accessibility', or put the arrangement to non-associated shareholders for approval.
The Rivkin decision, while supportable on its facts, is likely to provide a further disincentive to shareholder and control party underwritings. Although in the past, the Panel would seem to have been prepared to rely on procedural safeguards such as renounceability and shortfall facilities as guarantees of the Eggleston Principle of equality of opportunity, the Panel in Rivkin was prepared to dig further beneath the surface. This is more in the nature of an inquiry into purpose—the kind typically undertaken by courts when considering directors' duty issues—than an investigation of the effects of conduct, with which it is said the Panel is primarily concerned.
In Rivkin, commercial context outweighed accessibility: the Panel's analysis was most heavily influenced by the recent contests for control and the lack of an apparent need for funds. The decision demonstrates the continued willingness of the Panel to inquire widely into aspects of commercial conduct which have only a 'second order' relevance to the Eggleston Principles. If this is a direction in which the Panel continues to go, it will need to ensure that there is clear guidance for market participants on the rules it is applying.
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