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Australia – RHG, Cadence And Collateral Benefits.

4 November, 2013

 


WHAT YOU NEED TO KNOW

 

  • The Takeovers Panel has declined an application seeking to restrain the holder of 17.1% of RHG shares and a member of a bidding consortium from voting against a competing scheme proposal.
  • The Panel considered that it is a basic right of a shareholder to vote against a transaction that would result in the disposal of its shares, and that it is unlikely to be unacceptable to “lock-up” a transaction by securing the support of a shareholder that has less than 20% absent a breach of the takeover laws.

Facts


Briefly, the application arose out of competing proposals for the acquisition (in each case by scheme of arrangement) of RHG from:

 

  • the Resimac Syndicate (Resimac and Australian Mortgage Acquisition Company) – under which RHG shareholders would receive cash consideration (valued at 49.5 cents per RHG share); and
  • Pepper Australia and Cadence Capital (which holds 17.1% of RHG shares) – under which RHG shareholders, other than Cadence, would receive consideration comprising a combination of cash and Cadence shares (valued at 50.8 cents per RHG share), and Cadence (which could not acquire shares in itself) would receive cash only and also be paid a cash sum by Pepper for each Cadence share issued to other RHG shareholders under the transaction.

At the time that the Pepper/Cadence proposal was announced, Cadence stated that it intended to vote against the Resimac Syndicate’s proposal. Cadence had also stated that its board had approved a buy-back program for up to 10% of the Cadence shares on issue and might implement the buy-back should Cadence’s share price trade materially below net tangible assets.


The Resimac Syndicate applied to the Takeovers Panel for a declaration of unacceptable circumstances on the basis that Cadence would receive collateral benefits under the Pepper/Cadence proposal and that these benefits had induced Cadence to vote against the Resimac Syndicate’s proposal. The Resimac Syndicate also alleged that, as a result, RHG shareholders would be denied the opportunity to participate in the Resimac Syndicate’s proposal and the Resimac Syndicate would be denied the opportunity to compete for control of RHG.


Decision


Because the Court had not yet commenced scrutiny of the Resimac Syndicate’s scheme proposal, the Panel would not have declined to conduct proceedings in the matter merely because the proposal involved a scheme (following the approach of the Panel’s decision in Ross Human Directions [2010] ATP 8).


However, the Panel considered that the only impact of the Pepper/Cadence proposal on the Resimac Syndicate’s proposal is that Cadence could vote its 17.1% interest against the proposal which, as a practical matter, is likely to block approval of the Resimac Syndicate’s proposal. The Panel also considered that:

 

  • it is a basic right of a shareholder to vote against a transaction that would result in the disposal of its shares, if it wishes to do so, and that shareholder is generally free to take into account whatever factors it sees fit, including extraneous commercial interests, in deciding that a transaction is not in its interests and to vote against it. The Panel further noted that it is the nature of commercial transactions that one bidder’s transaction may be blocked by another bidder that holds or controls sufficient voting power, or can secure the support of a major shareholder;
  • it may be unacceptable to “lock-up” a transaction by securing the support of a shareholder that has a greater than 20% interest, but it is unlikely to be unacceptable to do so with a shareholder that has a less than 20% interest, as was the situation in this case. The Panel also stated that there was no breach of the Chapter 6 takeover laws in this case;
  • even if unacceptable circumstances were found to exist because of the collateral benefits proposed to be provided to Cadence, it would be very difficult to justify depriving Cadence of its right to vote in relation to the Resimac Syndicate’s scheme proposal. If the Resimac Syndicate’s proposal proceeds and Cadence is not permitted to vote due to a Panel order it could lead to a situation where Cadence’s RHG shares are compulsorily acquired in circumstances where it has not had an opportunity to vote on the proposal. The Panel did not consider this would be appropriate in the circumstances; and
  • in this matter, the Panel considered that there was no breach of Chapter 6 of the Corporations Act, no unacceptable circumstances surrounding Cadence’s acquisition of RHG shares, and that any benefits given to Cadence by Pepper would need to be approved by disinterested shareholders.

In relation to Cadence’s disclosure on the potential buy-back, the Panel noted that it was limited. The Panel said that while it is difficult to disclose details and terms of the buy-back which have not yet been finalised (as was the case here), it expected details to be fully disclosed to shareholders in the scheme documentation.


Comment


Since the decision was handed down, the Resimac Syndicate has increased the consideration under its proposal, which the RHG board has recommended, and Pepper/Cadence have announced the withdrawal of their joint proposal. Cadence has not stated whether it will support the Resimac Syndicate’s proposal.


With respect, the Panel’s decision makes sense. Cadence’s rights under the Resimac Syndicate’s scheme proposal appeared to be the same as all other RHG shareholders (eg they would receive the same consideration and be treated equally). Although (as the Panel noted) the Court could have been expected to place Cadence in a separate class for the purposes of voting on the Cadence/Pepper proposal (on the basis that their rights are so dissimilar as to make it impossible for them to consult together with a view as to their common interest), it should not follow that Cadence as a major shareholder should be disenfranchised from voting against a competing bidder’s proposal which could result in it being compelled to dispose of its target shares.

 

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For further information, please contact:

 

John Sartori, Partner, Ashurst
john.sartori@ashurst.com

 

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