Jurisdiction - Australia
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Australia – Unacceptable Proposals to Take a Company Outside Chapter 6.

9 May, 2012

 

In brief

 
A strategy designed to remove a company from the ambit of Chapter 6 may be unacceptable.
 
The takeovers regime in Chapter 6 of the Corporations Act only applies to an unlisted company if it has more than 50 members. If the number of members is only a little more than 50, a potential acquirer may be tempted to avoid the constraints and costs imposed by Chapter 6 by seeking to reduce the number of members. The Takeovers Panel's decision in Careers Australia Group Limited suggests that anyone taking that path will need to tread carefully.
 
Background
 
In July 2011, Cirrus Business Investments Limited entered into a convertible note deed with unlisted public company, Careers Australia Group Limited, pursuant to which Careers Australia agreed to issue convertible notes (with a face value of 66 cents each) that on conversion would give Cirrus up to 45.29% of the expanded voting shares in Careers Australia. Careers Australia obtained shareholder approval for the purposes of the 20% takeovers threshold to allow Cirrus to acquire a relevant interest of up to 45.29% in Careers Australia on conversion of the convertible notes. This was necessary because Careers Australia had more than 50 members (88 at the time of the application).
 
In November 2011, Cirrus offered an "exit opportunity" to certain Careers Australia shareholders at 66 cents per share, conditional on enough shareholders entering into option deeds to allow the total number of shareholders to be reduced below 50. Cirrus submitted that its purpose was to facilitate an exit for minor shareholders who had been unable to sell more shares under a buy-back (at 66 cents per share) in August 2011.
 
Decision
 
The Panel had concerns about Cirrus's proposal but declined to make a declaration of unacceptable circumstances after Cirrus undertook to limit the number of options it exercised so that Careers Australia would still have 62 shareholders (hence Chapter 6 would still apply).
 
The Panel considered that unacceptable circumstances may arise where there is a plan or proposal designed to cause a company to be taken outside the ambit of Chapter 6. However the Panel also accepted that there may be circumstances where the removal of a company from the ambit of Chapter 6 is not unacceptable, for example, where this is an ancillary or coincidental consequence of another act.
 
The Panel suggested it might not have had concerns if Cirrus's offer had been made to all shareholders. It was also inclined to think that the shareholder approval to exercise the convertible notes up to 45.29% (which was only required if Chapter 6 applied) gave shareholders a legitimate expectation that any further acquisition would occur pursuant to a takeover bid or as otherwise authorised under Chapter 6.
 
Discussion
 
It is unclear exactly when a proposal to take a company outside Chapter 6 will be unacceptable. A narrow reading of the Panel's reasons in Careers Australia suggests that may only be the case if the means used to disapply Chapter 6 are inconsistent with its purposes. The Panel's references to Cirrus's offer not being extended to all shareholders and being inconsistent with expectations generated by the shareholder approval support this interpretation. However, another reading might suggest that any plan designed to take a company out of Chapter 6 will be unacceptable. The Panel did not need to reach a final view since it accepted undertakings making it unnecessary to decide whether to make a declaration.
 
In our view, the narrow reading is a better approach. There should be no objection where an acquirer's only intention is to buy a stake below the 20% threshold. If those acquisitions reduce the number of members below 50, it is difficult to see why that result should be unacceptable if intended but not otherwise. The Panel usually focuses on the effect of action, rather than its purpose, and is not as well equipped as a court to determine purposes. 
 

 

For further information, please contact:

 

Garry Besson, Partner, Ashurst

garry.besson@ashurst.com

 

Megan Trethowan, Ashurst 

megan.trethowan@ashurst.com

 

Ashurst Corporate/M&A Practice Profile in Australia

 

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