The Toll/Patrick takeover bid shows that court litigation may still have a strategic role to play in takeovers. This is despite the intention of the CLERP reforms in 2000 which were meant to banish court litigation to the dustbin of takeovers history on the basis that litigation creates delays and uncertainty which are not conducive to the efficient conduct of takeover bids.
The Toll/Patrick Experience
In the Toll/Patrick takeover, there was various litigation:
- brought by Patrick to break up the Pacific National joint venture
- against Toll’s nominees on the Pacific National board claiming they had breached their directors’ duties
- brought by Toll to overturn the ACCC’s decision that a successful takeover would lead to a substantial lessening of competition in breach of the mergers rule
- by Toll against Patrick claiming it had breached a no-shop provision in the deed the two parties had signed when they reached agreement on the final bid terms
- by Toll against the chairman of Patrick, Mr Peter Scanlon, seeking to enforce a promise by Mr Scanlon to accept Toll’s bid on a particular date.
Section 659B of the Corporations Act 2001 prohibits a private party from commencing court proceedings ‘in relation to a takeover bid or proposed takeover bid’.
This is defined to cover any proceedings in relation to an action taken or to be taken as part of, or for the purposes of, the takeover bid or the target’s response or any document prepared for the purposes of the takeover provisions in Chapter 6 of the legislation.
The prohibition is cast widely and is expressed to apply not only to proceedings under the Corporations Act, but also to proceedings brought under any other Commonwealth or state laws, including the general law.
The only exception is where a party wishes to seek judicial review before the High Court. This was the route taken by Glencore when it challenged the Takeovers Panel’s (Panel) decision declaring the non-disclosure of equity swaps to be unacceptable.
Scope of The Prohibition
For some time, there has been uncertainty about the exact reach of the prohibition. For example, although it is clear that a target company could not litigate to prevent dispatch of a bidder’s statement for lack of detailed disclosure, would the prohibition prevent a target litigating to prevent dispatch if the bidder’s statement contained information obtained in confidence from the target? Does it prevent a target enforcing a standstill agreement or a bidder seeking to ensure a target complies with its constitution or the listing rules? If the prohibition is construed to capture a wide variety of possible claims, it will often result in parties being unable to enforce their rights merely because a takeover is on foot.
None of the court cases in the Toll/Patrick takeover, nor any of the handful of earlier decisions, have had to consider the scope of the prohibition in detail, so we do not have any real guidance on its limits. The point was raised by Justice Whelan in the Supreme Court of Victoria in Toll’s court action concerning the no-shop provision and Mr Scanlon’s alleged promise to accept Toll’s bid, but the case was discontinued before the point was argued.
In the Glencore decision, the Federal Court took a strict interpretation of the legislative provisions relating to the Panel’s jurisdiction. This may suggest that a similar strict approach would be taken to the provisions prohibiting court proceedings, which may confine their ambit. That would also be consistent with the generally assumed approach that a court will be unlikely to deny that it has jurisdiction, except where the legislation is explicit.
Lessons From the Toll Experience
Let’s take a look at the court actions during the period when Toll was bidding for Patrick to see if any conclusions can be drawn about the limits of the prohibition against litigation and whether anything else can be learnt. To what degree did the court actions have a relationship to Toll’s takeover bid? The underlying claims in litigation concerning the Pacific National joint venture were several steps removed from the takeover bid and it would be surprising if section 659B was intended to prevent those sort of actions being brought. The same applies to the court action to overturn the ACCC decision. Although it potentially affected the bid, the ACCC decision is not an action taken as part of the takeover bid procedures.
However, the court actions involving the no-shop provision and Mr Scanlon’s alleged promise to accept Toll’s bid relate to circumstances which are very much a part of normal activities in a takeover bid. On that basis, agreeing to a no-shop provision in return for a higher offer price is an action ‘taken as part of the bid or the target’s response to the bid’. It is also clearly arguable that an agreement to accept a takeover bid is an action which is ‘part of, or for the purposes of, the bid’, especially as one basis for the claim was the truth in takeovers policy. Indeed, no-shop provisions and truth in takeovers have been dealt with by the Panel on previous occasions, including the publication of a guidance note on no-shop provisions, and it can hardly be doubted that, given the opportunity, the Panel would have heard the dispute. On the other hand, on a narrow view, it can be argued that these items are outside the prohibition as they do not relate to the bid process itself, but are purely contractual matters.
As the outcome of the Toll/Patrick bid shows, it often turns out that running a case to a final decision is not crucial in getting a commercial result. Most court cases do not proceed to final hearing or judgment, but are settled by the parties. Litigation, with all of its processes, including the onerous and intrusive discovery of documents process, the high costs and time requirements, often forces parties to re-assess their conduct. Frequently, this means that merely commencing litigation can bring the parties together with a view to settling the dispute. This remains the case even if the litigation is arguably in breach of the section 659B prohibition.
This must mean that, in the right circumstances, we will see court litigation being used as a strategic weapon for bidders and target companies.
Coupled with the Glencore decision, the Toll/Patrick takeover will give takeover participants more heart in considering litigation in future takeovers.
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.