Considerations for bidders who dispose of target shares during a scheme

The application by ASIC to the Takeovers Panel in the recent Australian Unity Office Fund (AOF) trust scheme is a reminder that there are a number of important considerations that a bidder should keep front of mind if proposing to dispose of a pre-scheme stake during a scheme of arrangement.

Background to the AOF trust scheme

Events leading up to the sale by the bidder of target shares

On 4 June 2019, Charter Hall and Abacus Property Group (the Consortium) announced that they had acquired a 19.9% strategic stake in Australian Unity Office Fund (AOF), an ASX listed property fund. The units were acquired through a special purpose entity, CHAB Office Pty Ltd as trustee for the CHAB Office Trust (CHAB). In this same announcement, the Consortium announced their intention to initiate discussions with AOF’s responsible entity (RE) regarding a potential change of control transaction.

Later that day, AOF’s RE announced that it had received an unsolicited, non-binding proposal from the Consortium to acquire all the issued units in AOF that it did not already hold, by way of a trust scheme.

In July 2019, due diligence was granted to the Consortium, and on 2 September 2019, CHAB and AOF’s RE entered into a scheme implementation agreement under which it was proposed that CHAB would acquire all the AOF units on issue that it did not already hold at $3.04 per unit.

Over the course of October 2019, it was reported that Hume Partners, one of AOF’s substantial holders, was building up its stake in AOF.

Response to the increased Hume Partners stake by CHAB

On 31 October 2019, in response and as a potential counter against the threat of Hume Partners’ increased stake, the Consortium divested its entire 19.9% stake in AOF at a price of $2.95 per unit.

Importantly, this divestment took place through a broker to certain institutional investors at a 1.3% discount to the last traded price. The Charter Hall CEO commented in an ASX announcement that “the Consortium’s decision to sell AOF units prior to the scheme meeting, will provide the market the best opportunity to determine the outcome of the scheme”.

Also notably, the AOF RE mentioned in a separate ASX announcement that the AOF independent board committee was concerned to ensure that the purchasers of those units were not associates of CHAB and had sought and obtained confirmation from CHAB that it had not entered into any relevant agreement, arrangement or understanding with any of those parties in relation to how they would vote in respect of the scheme. CHAB instructed its broker to advise those parties that they would need to determine their eligibility to vote on the scheme and to make an independent assessment on whether to vote in favour or vote against the scheme.

Hume Partners continued, however, to increase its holdings in AOF and on 11 November 2019 it was announced that its voting power in AOF had increased to 11.4%.

ASIC’s application to the Takeovers Panel

On 14 November 2019, ASIC applied to the Takeovers Panel in relation to the AOF scheme, asserting among other things that:

• CHAB had intervened in the market for securities in AOF during the course of its proposed acquisition of AOF in a way that undermined the integrity of the trust scheme mechanism and the basis for the compulsory expropriation of interests in AOF that would result if the trust scheme was approved; and
• if the scheme was approved, not all unitholders in AOF would have had an equal opportunity to participate in the benefits offered under the scheme given the selective nature of the sale process undertaken to effect the divestment.

ASIC sought interim orders adjourning the scheme meeting. ASIC also sought final orders (in the alternative) that:

• in the event the trust scheme was approved by the requisite majorities, CHAB would give a cash payment to all AOF unitholders (other than those that acquired units from CHAB under the divestment) equivalent to the benefit; or
• AOF would determine whether the requisite majorities for the trust scheme resolutions are achieved by subtracting 19.9% of units from all votes cast in favour of the resolutions and treating those units as if they did not cast a vote.

On 15 November 2019, the AOF RE gave an undertaking to the Takeovers Panel that it would not cause the scheme to become effective until 3 business days after the Takeovers Panel made a determination on ASIC’s application. Accordingly, the interim orders sought were redundant and the Takeovers Panel declined to make these orders.

Takeovers Panel application withdrawn

Ultimately, the voting majority that was required to approve the relevant scheme resolution was not met, only a 62% vote in favour of the scheme was achieved – a 75% vote was required. Accordingly, the scheme did not proceed. As a result, ASIC’s application to the Takeovers Panel was withdrawn and the Takeovers Panel has indicated that it will not publish reasons in relation to this matter.

Parallels with the Amcom scheme

With some parallels in the facts of the matter, in a scheme of arrangement involving Amcom Telecommunications Ltd, the bidder disposed of a 10% interest in the target’s shares “in order to allow those shares to be voted on the scheme”. The circumstances were not too dissimilar to those in the AOF matter: there was a 19.9% shareholder that was objecting to the scheme of arrangement and, but for the divestiture of those shares, those shares could not otherwise have been voted on the scheme. The 19.9% shareholder submitted (similarly to the arguments made by ASIC to the Takeovers Panel in the AOF matter) that the purchasers of those shares should have their votes discounted or disregarded. At the final court hearing in the Amcom scheme the Court declined to discount or disregard the votes of the purchasers of the shares on the basis that there was no evidence and no properly available inference that there was any agreement, arrangement or understanding between the bidder and any purchaser of its shares with respect to voting or any other matter.

At the final hearing, the Court provided guidance that “a bidder which disposes of its pre-scheme stake in the target entity does not, ipso facto, contravene any legal rule or principle. However, the facts relating to the disposal can give rise to collateral problems of a kind that might cause the Court, in the exercise of its discretion, to discount or disregard votes at a scheme meeting.”

The Court also observed that there are principally two kinds of collateral problems that might arise in this scenario:

• where a bidder represents to target shareholders that it will retain and not dispose of its shares or misrepresents the nature of its divestment of its shares; and
• where the votes of associated persons of the bidder cannot be regarded as indicative of the wishes of the rest of the members.

However, it was noted in Amcom that full disclosure had been made about the relevant interests by the bidder and there were no misrepresentations made in the nature of its divestments of its shares. Significant detail was also provided in affidavit evidence on the process undertaken to divest the shares to arm’s length institutional investors effected by special crossings.

Additionally, a practical observation was made by the Court that it had not been possible to determine from the register which Amcom shareholders acquired the Amcom shares that were the subject of the divestment, nor to identify and ‘tag’ at the scheme meeting the votes of those shareholders who ultimately acquired any of the Amcom shares that were the subject of the divestment. This is, no doubt, why ASIC, in the AOF matter, sought a rather crude order to require the target to subtract 19.9% of the votes in favour from the voting result.

Commentary

Although ASIC’s application to the Takeovers Panel in relation to the AOF scheme was ultimately withdrawn, it is evident from the public announcements made that making full disclosures to unitholders was an important consideration for both the bidder and target. It does not appear that there were particular concerns relating to misleading conduct in relation to the divestment of CHAB's units in the target. Based on ASIC’s application to the Takeovers Panel, issues did arise (at least in ASIC's view), in relation to the way that CHAB sold its units in AOF, as well as the selective nature of the sale process.

In Amcom, the affidavit evidence showed that a precise checklist provided by the bidder’s solicitors had been followed by the board of directors of the bidder, to ensure an arm’s length sales process. The evidence also showed the rationale for the board’s decision to sell the shares in the target, and provided background on the intentions of the board to acquire the target as an “all or nothing” proposal additional to just being able to have these shares voted in the scheme. It is not clear how the process adopted by CHAB differed from this.

The AOF scheme is a helpful reminder that if a bidder is considering selling target shares during a scheme of arrangement, the two potential collateral problems articulated in Amcom should be carefully navigated.

As appears to have been the case in AOF, full disclosure should be made to shareholders in relation to the disposal. In addition, a well-considered process should be followed to ensure that the buyers of the shares are at arm’s length and there is no potential risk of this being perceived as a “selective sale process” and, just as importantly, that there is no agreement arrangement or understanding as to how the shares are to be voted on the scheme.