I’m an insider, I been burned by the fire*: the Australian Takeovers Panel’s Consultation Paper on insider participation

The Panel proposes to expand the definitions of:

• ‘insider’ to include persons with material non-public information in relation to the target or its business obtained through that person’s nominee (whether as director or observer) on the board of the target; and
• ‘participating insider’ to include an insider who is a bidder or potential bidder, or who has a relationship with a bidder or potential bidder, including:
  • through a significant economic interest in the bidder or as a controlling shareholder of the bidder;
  • as a nominee of the bidder (whether as a director or observer) on the board of the target or another company;
  • as an employee of the bidder;
  • as a relative of the bidder; or
  • as an adviser to the bidder.

Existing and past relationships with a bidder or potential bidder that are relevant in the context of the transaction are what the Panel is concerned with, although the Panel will have regard to the nature and materiality of the relevant relationship and how recently a past relationship ceased to exist.

The existing definition of ‘participating insider’ in Guidance Note 19 also captures insiders who are given an understanding by or enter (or proposed to enter) into agreements with a potential bidder that the insider will gain or benefit from the bidder making a successful bid, for example by:

• acquiring equity or interests in equity in the target, the bid vehicle, the bidder itself, another entity whose performance is related to the performance of the target or funds managed by the bidder; or 
• agreeing to enter into, or forming an understanding about entering into, employment or other agreements that will apply if the target is acquired by the bidder and are reasonably likely to cause a real or perceived conflict of interest for the insider because of their value.

These elements of the definition of ‘participating insiders’ are proposed to be substantively retained in the revised Guidance Note. The revised draft Guidance Note now also specifically provides that the list of ‘participating insiders’ set out in the Guidance Note is non-exhaustive, we assume to preserve flexibility for the Panel noting recent cases which have involved circumstances outside the strict ambit of the current Guidance Note 19.

The proposed changes follow a number of recent Panel cases where declarations of unacceptable circumstances were made, including:

• Keybridge Capital Limited 04, 05 & 06³ where the Keybridge Managing Director, who had a 54.5% economic interest in Aurora Funds Management Limited (which was the responsible entity of Aurora Dividend Income Trust (ADIT)), participated in Keybridge’s response to a bid from WAM Active Ltd bid (including making a recommendation to reject the WAM bid) after a competing bid from ADIT was announced;
• Realm Resources Limited⁴ where the Panel considered the actions taken by T2 Resources Fund Pty Limited (T2), the controlling shareholder of Realm, and its nominee directors on the Realm board, in connection with its re-listing in the context of a takeover bid by T2 for Realm had the potential to coerce other Realm shareholders into accepting T2’s takeover offer (amongst other things);
• Energy Resources of Australia Limited⁵ where the Managing Director and other senior executives of Energy Resources, who were seconded to Energy Resources from its controlling shareholder, Rio Tinto Limited (Rio Tinto), had been involved in the negotiation of an entitlement offer and the terms of an underwriting agreement between Energy Resources and Rio Tinto; and
• Bullseye Mining Limited 02⁶ where Bullseye’s executive director had been involved in Bullseye’s negotiation and decision-making in relation to a proposed capital raising, and its proposed entry into certain debt arrangements, with (or with entities associated with) the father of the executive director.

The revised draft of Guidance Note 19 clarifies that:

• where an insider is an adviser, the Panel generally expects only current advisers to inform the board or relevant sub-committee of the target of any approach that might lead to a control proposal;
• the likelihood of an underlying proposal being made is relevant in considering whether insiders should notify the board or relevant sub-committee of any approach that might lead to a control proposal;
• insiders should take reasonable steps to ensure that any real or perceived conflicts are avoided until appropriate disclosure to the board or relevant sub-committee has been made (e.g. by abstaining from attending relevant meetings); and
• insiders should inform the board or any relevant sub-committee of any approaches that might lead to a control proposal being made prior to entering or proposing to enter into any agreement, arrangement or understanding with the proponent of the potential control proposal, where such agreement, arrangement or understanding might curtail the board’s or any relevant sub-committee’s opportunity to consider the proposal or any competing proposal.

As noted above, the revised draft Guidance Note proposes that if all directors are participating insiders, companies should consider appointing at least one independent director to form an IBC. If no independent director is appointed, the Panel will have regard to the effect of the lack of independence in the circumstances and the extent to which any other measures have been adopted to address the effect.

The revised draft Guidance Note 19 provides that protocols adopted to manage conflicts of interest of participating insiders in relation to bidding and negotiation processes should seek to ensure that the appointment of any advisers and experts does not put at risk the actual or perceived integrity of the process, such as by participating insiders being involved in the appointment.

This follows the Panel’s decision in Strategic Minerals Corporation NL⁷ where the Panel considered the involvement of the Strategic Minerals Chairman, a nominee of Strategic Minerals’ controlling shareholder, QGold Pty Ltd (QGold), in directly engaging the independent expert and technical expert, and facilitating the provision of information to the independent expert in connection with QGold’s on-market takeover bid for Strategic Minerals “put at risk the (actual or perceived) integrity of that process and the conclusions reached”.⁸

The revised draft of Guidance Note 19 provides some limited additional guidance in relation to the disclosure that should be made to target shareholders in relation to insider participation. In particular, the Panel proposes that a bidder’s statement or target’s statement should include an explanation of any relationship between the participating insider (or persons connected to the participating insider) and the proponent of the control transaction.

As noted above, the Panel is concerned with existing and past relationships that are relevant in the context of the transaction, having regard to the nature and materiality of the relevant relationship and, in the case of a past relationship, how recently it ceased to exist.

Although the Panel will consider the circumstances as a whole, based on recent Panel cases, the Panel states in the Consultation Paper that the following factors, may, alone or together with other factors, give rise to unacceptable circumstances:

• whether sufficient measures are taken to ensure the integrity of the process;
• whether shareholders are provided with adequate disclosure in relation to a participating insider’s relationship with a bidder and any conflicts, and how these issues have been addressed;
• in relation to fundraisings with significant control effects, whether the involvement of insiders is likely to influence fundraising decisions in a manner which may not be in the best interests of shareholders and whether appropriate processes are implemented to consider alternatives;
• whether, as a result of an inadequate negotiation process, the terms of a transaction involving a participating insider are onerous to target shareholders or otherwise unacceptable and are not supported by ordinary commercial considerations;
• the timing, implementation and effectiveness of the protocols in place;
• competing bidders being given less information than that given to the bidder involving a participating insider, unless appropriate protocols are in place to ensure the consideration of competing bids is not influenced; and
• a participating insider providing material non-public information to a potential bidder without the consent of the IBC or board, or coming to an understanding with a potential bidder without first providing sufficient information to the IBC/board for it to consider the transaction.

The revised draft Guidance Note also provides specific examples of orders the Panel may make to address unacceptable participation by insiders in control transactions based on recent Panel cases. These include:

• requiring further disclosures;
• the commissioning of independent expert’s reports or revised independent expert’s reports;
• restricting participating insiders from exercising voting rights on future resolutions relating to control transactions;
• extending bid periods and requiring offers of withdrawal rights;
• cancelling acceptances; and
• restricting participating insiders from participating in benefits accruing to them through a transaction.