On 24 May 2007, the Corporations Legislation Amendment (Simpler Regulatory System) Bill 2007 was presented to Parliament for its Second Reading speech. The Bill is intended to simplify aspects of the current regulatory system but it is of note that the Bill itself exceeds 70 pages and the Explanatory Memorandum exceeds 180 pages.
The reforms follow the recommendations in the ‘Rethinking Regulation’ report of the Banks Taskforce on Reducing the Regulatory Burden on Business and the release of the Corporate and Financial Services Regulation Review Proposals Paper (Proposals Paper) in November 2006.
This update addresses the reforms specific to the takeover provisions of the Corporations Act 2001 (Cth). The reforms to Chapter 5 Fundraising Activities, Chapter 7 Financial Services and the general corporate governance and company reporting requirements are discussed in separate client updates.
Removal of telephone monitoring during takeover bids
Currently a bidder and a target in a takeover situation must record all telephone calls to discuss a takeover bid made to security holders (other than wholesale holders) during the bid. This controversial section of the Act was introduced by the Financial Services Reform Act 2001 and has been in force since 11 March 2002. The existing requirements impose requirements for the identification, indexing, storing, destruction, accessing and copying of recordings.
The telephone monitoring provisions were designed to increase protection for small shareholders from misleading or deceptive conduct where the bidder or takeover target contacted shareholders, for example, to determine the shareholders’ response to the bid.
In the five years that the existing provisions have been in force, there has been little evidence to suggest that the current requirements have increased shareholder protection. In fact since the introduction of these provisions, there have been few, if any, attempts to access recordings of telephone conversations in the course of litigation by retail shareholders.
While the provisions do not appear to have increased protection available to shareholders they have imposed significant costs on business. This was recognised in the Proposals Paper released by the Government last year. The Proposals Paper recommended the repeal of the provisions and the Bill reflects this. It is intended that the repeal take effect on the day of Royal Assent.
Removal of the 85% notice provisions
A person who holds 85% or more of the securities in a company must notify the company in writing of the fact within 14 days of acquiring the securities and then remind the company every year. The company must then inform its shareholders of this shareholding on the next occasion it sends them a notice or report under another provision of the Act.
These provisions were introduced in 2000 at the time of the CLERP amendments that introduced the ‘90 percent holder’ general right of compulsory acquisition. It was believed at the time that other shareholders should have advance warning when the majority holder approaches the 90% limit (which allows that shareholder to compulsorily acquire the shares of the minority shareholders).
These provisions have proved to be of little benefit to minority holders but have imposed significant costs on majority holders and companies. In most cases, minority shareholders are already aware of the majority holder’s position. In listed companies, the provisions are redundant, because the substantial shareholdings disclosure requirements achieve the same effect.
If notice is given, the minority shareholders may well receive the notice too late for it to be useful. For example, the next notice sent by the company to shareholders could be six months after the notice was given to the company by the majority shareholder. This renders the provision useless in situations where the majority holder rapidly moves from 85% to 90%, well before the company has passed the warning on to minority shareholders. In any event, it is unclear how receiving an early warning could or does actually help minority shareholders.
The Bill adopts the recommendation set out in the Proposals Paper and, if passed, the 85% notice requirements will be removed with effect from the day of Royal Assent.
What have the reforms left unresolved?
The Bill adopts all of the proposals set out in the Proposals Paper relating to the takeover provisions. However, a cloud of uncertainty looms over the Takeovers Panel following a recent Full Federal Court decision which has cast doubt over the power of the Takeovers Panel.
The Full Federal Court has recently ruled that the Takeovers Panel’s declaration of unacceptable circumstances in relation to Alinta’s on-market purchase of a 10.25% stake of Australian Pipeline Trust in August 2006 was invalid.
The Court found that the Takeovers Panel had neither the power to make such a declaration nor to make divestment orders. In essence, the Court has questioned the constitutional validity of the Takeovers Panel. Until this decision is overturned or legislation is passed to clarify the power, in practical terms the Takeovers Panel is prevented from making many decisions.
This all at a time when there is an extraordinarily high level of takeover activity.
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