Not Just Derivatives: The Proposed Amendments To The Takeovers Panel

• Proposed changes to the Takeovers Panel in the wake of the Glencore case may strengthen the Panel's ability to deal with more than just derivatives.

Newly-proposed changes to the Corporations Act would make it easier for the Takeovers Panel to make orders against the use of cash-settled equity swaps in takeovers. However, the changes would also have a far wider impact on the Panel's day-to-day activities.

Released for public comment on 7 September, the proposals would overcome most of the problems caused for the Panel by the Federal Court decision in the Glencore case.¹ Although that case was concerned with cash-settled equity swaps, the Court effectively laid down rules for Panel procedures that have adversely affected the Panel's ability to control unacceptable circumstances in takeovers generally.

The Court decision in Glencore revealed a major "problem" with section 657A (the provision which empowers the Panel to make declarations and orders).

Section 657A(2)(a) currently says that, before it makes a declaration of unacceptable circumstances, the Panel must have regard to the "effect" of those circumstances on the control of the company.² In Glencore, the Court said that the Panel must be able to identify that effect before it can make a declaration.

In order to do this, the Panel needs to state what the effect is in some concrete detail. Where the effect is, say, a change in target shareholder sentiment, finding objective evidence of that effect may be extremely difficult. This is compounded where the unacceptable circumstances consist of a failure to do something (such as a failure to disclose certain facts): how does one assess the objective effect of something which never existed?

The proposed amendments would water down the "effect" test. Instead, the Panel would be empowered to make a declaration or order where the Panel "is satisfied" that the impugned circumstances:

• had, have, will have or are likely to have an effect; and
• are unacceptable.

This appears to overcome the need for the Panel to find solid evidence of an actual effect. Instead, it would be able to say, for example, that the Panel members are satisfied as to a likely effect, without needing to prove that it actually exists.

Another major proposed change relates to the meaning of "substantial interest".

The Panel is currently empowered to make a declaration of unacceptable circumstances in relation to the acquisition of a "substantial interest" in a company. In the second Glencore swaps case,³ the Panel said that a "substantial interest" can be something less than a relevant interest (in other words, can be an interest that is something short of a power to control). The Federal Court completely ditched this interpretation:

"I do not consider that substantial interest should be construed as having some amorphous meaning, independent of terms that are defined with precision and care in Chapters 6, 6A, 6B and 6C for the purposes of those Chapters. It must be construed in its context in s 657A(2). ... I consider that the concept of substantial interest entails an interest that can be a relevant interest or a positive power or right in relation to voting shares."

The Government's proposed response is to insert a definition of "substantial interest" into the Act. This definition says that a substantial interest is a substantial interest even if it's not a relevant interest (or any other sort of power or right in relation to the company or its shares). This would presumably give the Panel the power to intervene in relation to cash-settled equity swaps, where the holder of the swaps has no control over the counterparty's decision to acquire, hold or dispose of hedge shares.

On previous occasions we have warned that the Glencore case was not a green light for the use of cash-settled equity swaps in a takeover bid. There is no guarantee that arrangements surrounding a swap will always be identical to those used in Glencore. That, in turn, can mean that other swap arrangements may not enjoy the same freedom from disclosure that was enjoyed by the swaps in Glencore (in particular, they may give a holder of swaps a relevant interest in hedge shares acquired by the counterparty).

The proposed amendments would further narrow the scope for the use of swaps. If enacted, the changes to the "effect" test would allow the Panel to declare that a failure to disclose swaps during a bid is unacceptable, without being required to prove what effect non-disclosure had on the bid. If the new definition of "substantial interest" is also enacted, the Panel would also be able to make declarations of unacceptable conduct directly against acquisitions of swaps.

Although prompted by the Glencore case, the changes to the effect test would affect many other "unacceptable circumstances" applications to the Panel. This could be relevant to situations such as arose in the recent Nexus Energy case.⁴

There, the parent company of a scrip bidder went into the market and began buying the bidder's scrip (while the bid was live). This was not disclosed to the market at the time.

The target company (advised by Clayton Utz) complained to the Panel that the on-market purchases had led to a false impression in the market as to the value or perceived value of the scrip consideration.

The Panel was clearly unhappy with what had happened:

"Overall, the Panel was concerned that the trading on those days had the appearance of being designed to support the [bidder's] share price... ."

Notwithstanding this and other statements of disapproval, the Panel did not make a declaration of unacceptable circumstances:

"[T]he Panel's conclusion is based on the lack of evidence presented to it of any significant effect of the circumstances, rather than any approval or acceptance by the Panel of those circumstances." (emphasis added)

Under the proposed amendments, the Panel would be able to act against circumstances of which it disapproved, without requiring conclusive evidence that those circumstances had had a specific effect.

The amendments have been issued in draft form for public consultation. At this stage the Government has not given a timetable for the implementation of the amendments. Based on past experience, it is unlikely that the amendments would be law before the end of this year.

There is, of course, no guarantee that the amendments will be passed in their current form. Nevertheless, by releasing the draft, the Government has signalled its intention to restore the powers which the Panel enjoyed before the Glencore case. For corporate advisers, that means that a more robust Panel is a factor that should be taken into account in current planning.

As this article was going to press, the Federal Court handed down its decision on Alinta's challenge to the Panel's divestiture order in relation to units in Australian Pipeline Trust (Australian Pipeline Limited (ACN 091 344 704) v Alinta Limited (ACN 087 857 001) [2006] FCA 1378). In that decision, Emmett J endorsed the Panel's reliance on its assessment of the likely effect of particular sets of circumstances. He also highlighted the Panel's ability to rely upon the expertise of its own members when identifying such an effect:

"As an expert tribunal, the Panel is entitled to make an evaluation based upon its experience and expertise as to the effect of particular circumstances. ...

The Panel must engage in speculation in so far as it is endeavouring to determine what would have happened if the relevant circumstances did not exist or occur. Having regard to the Panel's expertise, the making of a judgment as to whether potential bidders would be deterred, is not beyond the Panel's function as contemplated by s 657A(2)(a)."

This reasoning may suggest that some of the proposed amendments to the Panel's power are not now necessary.