The Federal Court’s decision to overturn the findings of the Takeovers Panel (Panel) in the Austral Coal swaps matter is the first serious set back for the Panel since its celebrated reinvigoration in 2000. The decision will have a significant effect on the way the Panel conducts proceedings in the future. This article discusses the case and its implications.
The case arose after the Panel made a declaration that unacceptable circumstances existed because Glencore failed to disclose the existence of cash settled equity swaps in relation to shares in Austral Coal Limited at a time when it held physical shares which would have increased its combined holding (that is, equating the swap position with an actual holding) to approximately 12 per cent of the company. The decisions of the Panel have been discussed in previous articles.
Glencore sought judicial review of the decision by the Federal Court on essentially two grounds. The first was that the Panel’s declaration and orders were affected by jurisdictional errors; that is, the Panel failed to address the questions required under the law. The second was that the Panel itself was exercising judicial power in breach of the Commonwealth Constitution.
The jurisdictional error argument
The Corporations Act permits the Panel to make a declaration of unacceptable circumstances if it appears to the Panel that the circumstances:
- are unacceptable having regard to the effect of the circumstances on the control, or potential control, of a company or the acquisition, or proposed acquisition, of a substantial interest in the company, or
- are unacceptable because they constitute a contravention of the takeovers legislation.
The Federal Court held that limb (a), which the Panel relied on for its decision in this matter, required the Panel to make a finding that the circumstances will have an effect on the control, or potential control of, the company or on the acquisition or proposed acquisition of a substantial interest in the company.
In this case, the Panel had merely found that shareholders ‘may have made different decisions’ if Glencore’s combined position had been disclosed earlier and that this had had a relevant effect. This was not enough for the Federal Court. A positive determination of what was the actual effect was required. The court was also critical of the Panel’s decision regarding the orders it imposed, which required Glencore to offer to sell shares to anyone who had sold shares on the ASX during the period of non-disclosure, and for those sales to take place at the original prices.
The Corporations Act permits the Panel to make orders to promote certain objectives, which, relevantly for this case, include ‘protecting the rights and interests of any person affected by the unacceptable circumstances’. The Panel is also prohibited from making an order that would ‘unfairly prejudice’ any person.
The court held that these provisions required two things in this case: fi rst, a consideration of whether any right or interest of a person who sold shares on the ASX in the relevant period was, in fact, affected by the nondisclosure and, second, a consideration of any prejudice that Glencore may suffer under the order. These have to be balanced against each other.
The court found that the Panel had failed to consider whether there was unfair prejudice to Glencore, and therefore, that the balancing exercise could not have been undertaken. This failure represented jurisdictional error.
In relation to this part of the case, the court said that the effect of the orders was that any person who had sold shares during the relevant period had an option to require Glencore to sell shares to them at a price that may have no relationship to the market price when the option is exercised. This was said to expose Glencore ‘to expropriation of its property, acquired lawfully without any contravention of the Act, for the benefi t of unspecifi ed numbers of sellers, without any determination as to whether those sellers suffered any detriment by reason of the non-disclosure’.
The consequence of a finding of jurisdictional error was that the matter has now been remitted to the Panel for determination, taking into account the matters that should have been taken into account previously.
The judicial power argument
The court decided that the Panel was not exercising judicial power and was therefore not unconstitutional. This was essentially on the basis that the adjudication in this case was not a dispute about rights and obligations of the parties that had arisen from the operation of the law on past events or conduct. Instead, the Panel was determining what legal rights and obligations should be created. This fell within the principles accepted in the High Court’s 1991 decision in the Precision Data matter.
Implications of the case
The full implications of the decision will take some time to work through, but here are a few things that may be reasonable to expect:
- The first court challenge to the operation of the Panel means that the Panel is now likely to be more cautious about making its decisions, particularly those concerning activity which falls short of an actual breach of law. The Panel (and applicants) may need detailed evidence concerning the effect of the activity under challenge.
- This may mean that many Panel matters will take longer. It may also mean that some applications are not pursued due to the inability of the applicant to fi nd suitable evidence.
- Panel matters may start to focus more on whether there has been a contravention of the takeovers legislation, rather than whether an action has had an particular effect on the control of a company or the acquisition of a substantial interest. However, this may not always be so easy. First, many Panel matters do not involve contraventions of the takeovers legislation, but merely arguments of a breach of the legislative objectives. Even a matter about a misleading statement may not involve a breach of the takeovers legislation, as, unless the statement is in a document such as a bidder’s statement or target’s statement, the relevant prohibition is located elsewhere in the law. Second, focusing on whether there has been a contravention of law may create a greater argument that the Panel is improperly exercising judicial power.
- In assessing whether a particular tactic will survive the scrutiny of the Panel, participants and their advisers may feel more confi dent to advise on bid strategies that are untested where they feel that the strategy will not have an effect on the control of the company.
- We are likely to see more Panel decisions taken to court for further review, though the Federal Court did warn in its judgment that it would be slow to interfere with a decision of the Panel in circumstances where the market is volatile if a takeover bid is current. The Austral Coal matter was heard only after the relevant takeover bid had settled down.
- The release of the Panel’s proposed guidance note on the disclosure of equity swaps will no doubt be delayed. In the meantime, the cautious approach will be to disclose equity swaps which exceed fi ve per cent of issued shares, particularly if a takeover bid is current.
- In the bigger picture, the case underlines the often uneasy tension between a black letter set of rules and the fuzzy law policy-driven approach the Panel aims to achieve. It may now be time for the Panel to use its rule making powers to set rules about certain conduct in takeovers, rather than to rely on making decisions in actual cases to create new policy. The Corporations Act gives the Panel broad powers to make binding rules in order to clarify or supplement the takeovers legislation. This power could be used, for example, to make rules for the disclosure of equity swaps.
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.