Jurisdiction - Australia
Australia – Defensive Acts In A Rights Issue.

7 July, 2014



What You Need To Know


  • Removing objectionable elements from a rights issue contrary to Panel policy will not necessarily prevent the Panel intervening, even if the rights issue would not result in any person increasing above 20% 
  • In this case, defensive acts by target directors, falling short of frustrating action, appeared to be one of the factors leading the Panel to intervene 


On 15 April, Gondwana Resources announced a one-for-one non-renounceable rights issue at 3.2 cents per share, to be partially underwritten (up to 50%) by Bellatrix Pty Ltd, a company controlled by Gondwana’s chairman. Bellatrix held 11.84% of Gondwana at the time of announcement and could have increased its holding up to 43.75% through the underwriting.


A week later, Ochre Group Holdings gave a substantial holding notice disclosing an increase in its holding in Gondwana from 8.26% to close to 20% and made an offer to partially underwrite the rights issue. Ochre’s offer to underwrite was rejected. 

Gondwana subsequently gave notice of its AGM which included proposed resolutions to approve the issue of 15m shares and 15m options, and further resolutions to approve the issue of some of those shares and options to Gondwana’s directors. The Chairman selectively approached three or four option holders (including Bellatrix and option holders associated with two other Gondwana directors) to encourage them to exercise out of the money options in respect of shares in Gondwana held by them in order to participate in the rights issue. Those options were exercised at an 82% premium to the market price and the resulting shares were issued on or after the record date for the rights issue. 

Ochre applied to the Panel claiming that the underwriting agreement provided Bellatrix with an opportunity to substantially increase its existing substantial holding and that Gondwana had not taken reasonable steps to minimise the impact on control. In response, Gondwana and Bellatrix terminated the underwriting. Ochre later announced that it intended to make a conditional off-market cash takeover bid for Gondwana. 


Gondwana submitted that termination of the underwriting agreement meant that the Panel no longer had jurisdiction to conduct proceedings. The Panel disagreed, noting that the exercise of options had increased the Chairman’s voting power from 11.84% to 14.46%, and the rights issue (without the underwriting) could increase it to 18.5%. 

The Panel accepted that the exercise of options was not frustrating action, because it had occurred before a potential bid was communicated to Gondwana. However, the Panel considered that the exercise appeared to be a response to Ochre’s increase in voting power, and as a “defensive act” may have contributed to Ochre not proceeding to acquire a substantial interest. 

The Panel also considered that the prospectus did not adequately disclose the effect of the proposed issues of shares and options to be considered at the AGM and was also deficient in other respects. 

The Panel made a declaration of unacceptable circumstances and accepted undertakings in lieu of orders. These included undertakings by Gondwana to increase the minimum subscription to allow Ochre to subscribe for its full entitlement and to make further disclosure in a replacement prospectus. Ultimately the rights issue did not proceed.



Gondwana’s prompt termination of the underwriting – ensuring that Bellatrix could not increase above 20% under the rights issue – made this a much more difficult case for the Panel. The Panel’s policy on rights issues (GN 17) focusses largely on the effect on control, which is generally not in issue under 20%. The Panel identified signs of action by the Gondwana directors that appeared to be a “defensive” response to Ochre’s increasing voting power. However, that action occurred before any “potential bid” had been communicated to Gondwana, and consequently the Panel’s policy on frustrating action (GN 12) did not apply either. 

This decision does not appear to signal a significant extension to existing policy. Rather, it demonstrates that, where a rights issue is initially structured contrary to Panel policy, removing the most objectionable elements may not be enough to stop the Panel making a declaration. However, the decision does show that, in rare cases, the Panel can intervene where a rights issue will not result in anyone increasing above 20%. While the Panel’s policy is primarily concerned with rights issues affecting control, other factors, such as the creation of uncertainty in the market for corporate control and defensive conduct by directors, can still give rise to unacceptable circumstances.


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For further information, please contact:


David McManus, Partner, Ashurst 
[email protected]rst.com


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