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In two recent Takeovers Panel decisions relating to Yancoal’s US$2.5 billion capital raising, the Panel considered whether state owned enterprises of the same country are associates for the purposes of takeover and substantial holding rules. The Panel also considered whether a “heavy” rights issue will create unacceptable circumstances where minority shareholders have the ability to maintain or increase their voting power. Sensible and pragmatic conclusions were reached on both points. In this article we consider the key issues raised in the Panel’s reasons.


  • In Yancoal Australia Limited 02 & 03 and Yancoal Australia Limited 04R & 05R, the Panel declined to conduct proceedings on two applications brought by shareholders of Yancoal Australia Limited (Yancoal) objecting to Yancoal’s recent US$2.5 billion capital raising.
  • Although the Panel did not fully adjudicate on the applicants’ submissions, since it declined to conduct proceedings, the Panel’s discussion indicates that state owned enterprises (SOEs) of the same country will not necessarily be treated as associates, unless there is evidence of actual or contemplated “substantive” association in relation to the relevant Australian entity.
  • The decisions also suggest that the mere fact that there is the potential for substantial dilution of non-participating shareholders in a rights issue will generally not give rise to unacceptable circumstances so long as shareholders have the opportunity to maintain their voting power.
  • The decisions raise important considerations for transactions involving SOEs, and for listed companies conducting rights issues with a substantially dilutive effect on non-participating shareholders. Sensible conclusions were reached on both points.


On 1 August 2017, Yancoal announced a capital raising comprising:

  • a 23.6 for 1 renounceable pro-rata entitlement offer of new shares (carried out on a traditional non-accelerated timetable) at an issue price of US$0.10 per share to raise up to approximately US$2.35 billion; and
  • a placement of new shares to Shandong Taizhong Energy Co., Ltd and Evercharm International Investments Ltd at the same price to raise approximately US$150 million.

The capital raising was undertaken to provide funding for Yancoal’s acquisition of Coal & Allied Industries Limited (Coal & Allied) from wholly owned subsidiaries of Rio Tinto Limited for US$2.69 billion.

Relevant features of the entitlement offer included the following:

  • Yanzhou Coal Mining Company Limited (Yanzhou), Yancoal’s majority shareholder with voting power of approximately 78%, committed to take up US$1 billion of its entitlement (leaving the remaining US$830 million of its entitlement unexercised). The balance of the entitlement offer was underwritten, severally to the value of US$1.3 billion, by Glencore Coal Pty Ltd, entities associated with China Cinda Asset Management Co., Ltd (Cinda) and Shandong Lucion Investment Holdings Group Co., Ltd (Lucion). The entitlement offer was therefore underwritten or committed to an aggregate value of US$2.3 billion;
  • entitlements could be traded on ASX or sold privately;
  • entitlements not taken up or sold would be offered for sale through a bookbuild process, with any proceeds above the offer price remitted to the renouncing shareholders; and
  • shareholders taking up their entitlement in full could also apply for additional shares at the offer price, and were guaranteed to receive the number of new shares required to maintain their existing proportionate shareholding (and were also likely to receive any additional shares applied for above that level, subject to availability and unless the bookbuild cleared above the offer price).

Yanzhou also held subordinated capital notes (SCNs) convertible into Yancoal shares and made a commitment to convert as many SCNs as was permitted, having regard to a previous order made by the Panel restricting Yanzhou’s ability to convert SCNs without minority shareholder approval if its voting power would increase above 78%.1

The combined effect of the placement and the conversion of Yanzhou’s SCNs would reduce Yanzhou’s percentage holding in Yancoal to approximately 65% (assuming the capital raising was fully subscribed) and the holdings of existing shareholders would be diluted if they did not take up their full entitlements and apply for additional shares up to their “guaranteed allocation”.


On 8 August 2017 two Yancoal shareholders, Senrigan Capital Management Ltd and Mr Nicholas R. Taylor (Senrigan), applied to the Panel for a declaration of unacceptable circumstances. On 9 August 2017 two further Yancoal shareholders, Mt Vincent Holdings Pty Ltd and Osendo Pty Ltd (Noble), applied to the Panel for a declaration of unacceptable circumstances.

Although Senrigan and Noble made separate submissions to the Panel, their submissions both contained the following key allegations:

  • the entitlement offer was unacceptably dilutive, did not allow minority shareholders a reasonable and equal opportunity to participate and was prejudicial to the interests of minority shareholders; and
  • certain pre-existing relationships existed between Yanzhou, Yanzhou’s parent entity (Yankuang), and certain of the underwriters and placees that gave rise to a relationship of association, such that, instead of decreasing (having regard to the reduction in Yanzhou’s percentage holding to approximately 65%), the voting power of Yanzhou and its associates would increase following the capital raising. In particular, the applicants submitted that there were past dealings, joint investments, and common ownership or control by the same or connected Chinese government entities.2

On 14 August 2017, the initial Panel decided not to conduct proceedings in relation to Senrigan and Noble’s applications on the grounds that there was no reasonable prospect that the Panel would make a declaration of unacceptable circumstances. The reasons for the initial Panel’s decision were as follows:

  • the initial Panel accepted that Yancoal’s entitlement offer would be highly dilutive to non-participating shareholders and may have an effect on control, but determined that the dilution of the applicants’ interests through non-participation in the offer was not unacceptable;
  • even if the entitlement offer had a control effect, there was an adequate dispersion strategy since the offer was renounceable and included a bookbuild and shortfall facility, and included arrangements which allowed minority shareholders to maintain their existing percentage holding in Yancoal; and
  • the fact that certain persons have some affiliation in common (for example, as Chinese SOEs) or pre-existing working relationships is not sufficient to support an inference that they are acting in concert in the absence of additional evidence of agreement or dependency, or actual influence implying commonality of action in relation to the relevant Australian entity.


On 16 August 2017, Senrigan and Noble commenced review Panel proceedings seeking orders setting aside the initial Panel’s order on the basis that (among other submissions):

  • there was “compelling evidence” of acting in concert between Yanzhou (or Yankuang) and one or more of the underwriters or placees;
  • there was structural association between Yanzhou, Lucion and Cinda since they were under the common control of the Chinese State Council, resulting in a potential combined voting power of 89.15% following the capital raising; and
  • the entitlement offer disproportionately favoured Yanzhou over existing minority shareholders and the dispersion strategies provided were of no practical value to minority shareholders seeking to avoid dilution.

In a decision dated 21 August 2017, the review Panel declined to conduct proceedings on the grounds that there was no reasonable prospect it would make a finding of unacceptable circumstances, citing the following reasons:

  • the commercial relationships or agreements between Yanzhou (or Yankuang) and one or more of the underwriters or placees appeared to be arm’s length transactions where each party was acting in its own interests;
  • there was no evidence to suggest that there was any actual or contemplated exercise by the Chinese State Council of control over Yankuang or any of the underwriters or placees with respect to Yancoal; and
  • the applicants’ concerns relating to the dilution of their interest in Yancoal flowed from the inevitable consequences of Yancoal’s decision to acquire Coal & Allied and fund that decision by raising additional equity, rather than the structure or terms of the capital raising.3 Although the dispersion strategy may not have been attractive to the applicants, an adequate dispersion strategy was nevertheless in place and share ownership necessarily carries risks of dilution.


Since the Panel declined to conduct proceedings, they did not make a final adjudication on the applicants’ submissions. However, the Panel’s discussion in both decisions provides useful guidance on two important issues:

  • first, whether SOEs of the same country will automatically be treated as associates for the purposes of takeover and substantial holding rules; and
  • secondly, whether dilution of a minority shareholder’s interest through that shareholder’s non-participation in a capital raising, even where appropriate dispersion strategies are employed, can constitute unacceptable circumstances.

Association and SOEs

Although some specific statutes (for example the Foreign Acquisitions and Takeovers Act 1975 (Cth)) aggregate the interests of SOEs of the same country, it has been unclear whether SOEs of the same country will be considered “associates” for the purposes of the takeover and substantial holding rules contained in the Corporations Act 2001 (Cth) (Corporations Act), or whether this depends on the laws of the relevant country and the behaviour and arrangements of the parties. The Panel’s decisions make it clear that the latter is the correct position.

The review Panel framed the question as one of “whether common governmental ownership or control of SOEs makes them associates (or may otherwise give rise to unacceptable circumstances)”, although in fact submissions made by Yancoal and Yanzhou denied the existence of common governmental control, at least of Yankuang/Yanzhou and Cinda,4 on the basis that they were SOEs of different arms of Chinese government (provincial and central) without any common controller, as well as denying any substantive or practical association.

The two Panel decisions suggest that SOEs of the same country will not automatically be considered associates (or at least will not be automatically be considered associates in a sense giving rise to unacceptable circumstances) simply because a foreign government entity (such as the Chinese State Council) may theoretically be in a position to exert some level of control over those SOEs’ decisions.5 Although Senrigan submitted that the State Council had the capacity to control both Cinda and Yankuang/Yanzhou, and that this was sufficient to form an association, the review Panel stated that “[o]nly a court can conclusively determine” whether the State Council’s level of control gives rise to a breach of law, noting arguments that any control might be simply “the legislative or regulatory powers that any state has”.6 The review Panel further stated that “[o]ur concern is whether there are unacceptable circumstances in relation to the affairs of Yancoal, which may be the case whether or not there is a contravention of the [Corporations] Act”.7

The review Panel’s reasons indicate that in order to show unacceptable circumstances an applicant will need to show the following in relation to association:

  • first, that there is actual or contemplated exercise of control by a foreign government entity over the SOEs that are alleged associates; and
  • secondly, that the common control of the SOEs affects the Australian entity (in this case Yancoal).

Without such material, the review Panel stated that they would be “reluctant to find unacceptable circumstances solely on the basis of a notion or presumption of common control of SOEs at the highest levels of a foreign government”.8

It is not clear from the Panel’s reasons what level of material or evidence is required before the Panel will draw inferences to support a finding of association (although the Panel referred with approval to earlier decisions like Mt Gibson Iron Limited [2008] ATP 4 which required a “sufficient body of material” suggesting association before the Panel would make further enquiries). However, the Panel’s observations suggest that the simple fact that two entities are SOEs of the same country will be insufficient to make them associates for the purposes of the Corporations Act, and certainly that this will be insufficient of itself to establish unacceptable circumstances.

As noted above, the Panel’s decisions not to conduct proceedings do not constitute final adjudication of this issue, and in any case the Panel’s focus is on unacceptable circumstances, but they are useful reference points in focussing on substantive and practical control and in taking a sensible and pragmatic approach.

Minority shareholders and dilutive rights issues

The Panel’s decisions also contain several important observations regarding “heavy” rights issues, which provide helpful guidance to listed companies when structuring capital raisings.

In particular, the decisions indicate that:

  • a highly dilutive rights issue will not give rise to unacceptable circumstances where there is no effect on control of the issuer; and
  • even where the rights issue has a control effect, the rights issue will generally not be unacceptable where there is an adequate dispersion strategy.

Since Yancoal’s rights issue was renounceable and included a bookbuild and shortfall facility, and the ability for minority shareholders to receive additional shares up to a “guaranteed allocation” preventing dilution, minority shareholders had the opportunity to maintain their existing percentage interest in Yancoal. The Panel found that these features constituted an “adequate dispersion strategy” for minority shareholders. Importantly, the dispersion strategy does not need to be attractive to minority shareholders; instead, the Panel suggests that, in the absence of other unacceptable circumstances,9 a highly dilutive rights issue will not be unacceptable so long as such a strategy is made available.

The review Panel also emphasised that the dilutive effect of the rights issue was an inevitable consequence of Yancoal’s decision to acquire Coal & Allied and fund that acquisition by raising additional equity (rather than requiring lenders to write off debts owed to them or raising additional debt). “Writing off” existing debt is obviously not something that an issuing company has the power to do unilaterally,10 and it was also relatively clear that Yancoal’s high gearing levels made raising additional debt unsustainable. While not expressing an overriding principle, the review Panel noted that share ownership necessarily carries the benefits and burdens associated with capital raising events, and that minority shareholders had to accept the effect of such capital raisings even if they result in “severe” dilution and a “harsh” outcome.11

In Yancoal, the rights issue was intended to raise capital for the acquisition of Coal & Allied, and as the Panel noted, the applicants did not raise any serious objection to the acquisition itself and indeed one of the applicants confirmed its support for the acquisition (which was highly accretive from a business perspective). The Panel did not clarify whether serious objections to an acquisition to be funded by a rights issue would have produced a different outcome. Nevertheless, the decisions suggest that the Panel will be reluctant to make a finding of unacceptable circumstances where an issuer launches a rights issue for the purpose of funding properly considered capital expenditure, even if the rights issue is highly dilutive, provided that adequate dispersion strategies are in place. Although the Panel did not make a final adjudication on these issues, its observations are sensible, and important for Australian listed companies structuring rights issues.

*Herbert Smith Freehills acted for Yancoal in relation to the capital raising and related Panel proceedings discussed above.


  1. See Yancoal Australia Limited 01 [2017] ATP 24. In fact, the full US$2.5 billion sought under the capital raising was raised and this (together with the fact that Yanzhou only subscribed for US$1 billion of its US$1.83 billion entitlement) permitted conversion of all of Yanzhou’s SCNs without breach of the 78% limit.
  2. Although some of the allegations rested on factual misunderstandings.
  3. It is worth noting in this regard that Yancoal’s pre-offer capital structure was extremely highly geared, strengthening the case for equity funding.
  4. The focus of the decisions was on Yanzhou’s relationship with Cinda, rather than Lucion, since a possibility of association between Yanzhou and Lucion (which were both Shandong provincial government SOEs, while Cinda was a central government SOE) had been referred to (but not conceded) in Yancoal’s disclosure documents, and such an association would only have taken Yanzhou’s voting power to 71%, still well below its pre-entitlement offer voting power of 78%.
  5. Although, as noted above, the existence of common control was not conceded, and in particular it was denied that the Chinese State Council had any relevant control over Yankuang/Yanzhou.
  6. Yancoal Australia Limited 04R & 05R [2017] ATP 16 at [26].
  7. Yancoal Australia Limited 04R & 05R [2017] ATP 16 at [26].
  8. Yancoal Australia Limited 04R & 05R [2017] ATP 16 at [26].
  9. The applicants in the proceedings made numerous allegations regarding other unacceptable circumstances, but none were made out.
  10. The Panel confirmed that “[w]e do not think that the Panel’s guidance on rights issues, or the decision in Yancoal Australia Limited 01, required Yanzhou to write off SCNs or debt in order to make a rights issue attractive to minority shareholders.”
  11. Yancoal Australia Limited 04R & 05R [2017] ATP 16 at [34].

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