- Applications brought by small shareholders have become a common feature in Panel proceedings.
- A shareholder will have standing to bring an application to the Takeovers Panel only if it can show its ‘interests have been affected by the relevant circumstances’. Simply owning shares is not enough by itself.
- To minimise inconvenience and to deter officious bystanders, the Panel should test questions of standing when considering whether or not to entertain an application.
INCREASE IN SHAREHOLDER APPLICATIONS
There has been a steady increase over the last 10 years or so in the number of applications to the Takeovers Panel for declarations of unacceptable circumstances made by shareholders. The reasons are obvious.
First, making an application is easy and cheap. The application can be made by a shareholder following the precedent form published on the Panel’s website. There is no requirement to engage a lawyer and incur legal fees. The filing fees are only $2,400 and the risk of a costs order being made against the applicant is extremely low, even if they lose.
This compares very favourably with going to court. Filing in the Federal Court incurs a fee of $4,253 and is likely to require lawyers to be engaged to prepare evidence and make submissions in the correct style. The expense quickly builds up. While these costs might eventually be recovered if the applicant wins, equally, if the person loses the case in court, they may be faced with an order to pay the winner’s costs. That can be a major deterrent.
Second, proceeding in the Panel produces an immediate response. The Panel will publish a media release drawing attention to the alleged unacceptable circumstances. The Panel executive is then open to engaging with the applicant about progress of the application and the steps involved. The matter is typically then argued (at least on a preliminary basis) within a week or so. That may be contrasted with a court application where, except in the most urgent cases, the time frames are usually much longer. This may also be contrasted with a complaint to ASIC where there is no fixed time frame and much less transparency about what is happening with the complaint.
Therefore, it is reasonable to expect that many more applications will be made to the Panel by shareholders in future.
Is this a good thing?
Anything that identifies and prevents unacceptable circumstances occurring or continuing in the market must be good thing. A properly functioning, efficient market for corporate control is vital to our economy. Applications by shareholders support this goal.
On the other hand, if the application is motivated by a personal grievance held by the shareholder against the board or other shareholders or is motivated by some other collateral purpose, that is likely to be an abuse of process and should not be entertained.
The difficulty, of course, is working out in which category the application falls. This question is important because, despite the informality of Panel proceedings relative to court proceedings, they remain expensive for the parties responding to the application (who will typically engage a law firm) and time-consuming. Further, the Panel has limited resources which should not be used for minor or petty claims.
When the Panel was designed in the late 1990s, the intention was that the Panel should not be used for ‘tactical litigation’ that was common in the 1980s and 1990s. Accordingly, two features were included in the legislation to allow the Panel to reject or limit improper applications.
The first is the power the Panel has under section 658A to dismiss any application that it considers is ‘frivolous or vexatious’. I am not aware of any matter in which the Panel has used this power. The Panel’s general approach is to accept all matters and to dismiss a weak application on the grounds that it is not likely to result in a declaration of unacceptable circumstances, even though that requires some consideration of the merits of the application.
The second feature is the focus of this article. It is the rules about standing for bringing an application.
The general standing rule is set out in section 657C. It provides that an application can only be brought by ASIC, the bidder, the target or ‘any other person whose interests are affected by the relevant circumstances’.
Shareholders are not expressly included. Had the legislature regarded simply holding shares as conferring standing, it could have followed the equivalent drafting in section 1325A (relating to standing to bring a court action to enforce Ch 6 and related provisions) and included a reference to a ‘member’ or ‘former member’. The decision not to adopt that approach in section 657C indicates a different intention for standing in the Panel.
Based on these provisions and the general design intention of the Panel, it seems clear that simply being a shareholder is not sufficient to confer standing. A shareholder must have ‘interests that are affected by the relevant circumstances.’ This is consistent with the objective of reducing the scope for tactical litigation and is also consistent with the Panel’s power under section 657D to make orders which is focussed on ‘rights or interests being affected by the unacceptable circumstances’ and orders being made to ‘protect’ those rights or interests.
Two questions arise: is an interest in enforcing the law or Ch 6 principles enough to confer standing and what about small shareholdings?
ENFORCING THE LAW
The courts have long held in other contexts that a bare interest in enforcing a law is not enough to confer standing. In Australian Conservation Foundation Inc v Commonwealth (1980) 146 CLR 493 at 526, Sir Harry Gibbs J said:
“A person is not interested within the meaning of the rule, unless he is likely to gain some advantage, other than the satisfaction of righting a wrong, upholding a principle or winning a contest, if his action succeeds or to suffer some disadvantage, other than a sense of grievance or a debt for costs, if his action fails. A belief, however strongly felt, that the law generally, or a particular law, should be observed, or that conduct of a particular kind should be prevented, does not suffice to give its possessor locus standi.”
That approach seems applicable to Panel proceedings. The Panel should not be used as a vehicle for a person to agitate personal grievances or to allow such a person to appropriate to themselves ASIC’s responsibility to enforce the law. Something more needs to be shown. There needs to be impact on the person’s interests and, consistent with the policy objectives of Ch 6 and the Panel, that impact needs to be material.
So far, the Panel has not rejected applications on this ground. In Excelsior Capital Ltd  ATP 25, the main complaint was an allegation of insider trading. The Panel heard the matter (putting the company to considerable inconvenience and cost) but did not consider the standing issue and whether the interests of the applicant, who was not a party to the impugned transaction, had been affected. There must be a question whether that was the correct approach. The purchaser’s acquisitions had increased her shareholding from 48% to just over 50% (within the 3% creep) and had no impact whatsoever on control of the company. She controlled the company before and after the share acquisitions.
In Innate Immunotherapeutics Ltd  ATP 2, a person purchased shares after all material information about the circumstances the subject of the application were known in the market. It is hard to see how the applicant’s interest were affected and it appeared the applicant was motivated by political reasons and purchased shares in order to make the application. The Panel queried if the person had standing but decided the matter on different grounds.
This stands in contrast to the courts’ approach of denying standing where a person acquired shares after a breach of s 606 has occurred: Panfida Ltd v Hartogen Energy Ltd (1988) 14 ACLR 601; Niord Pty Ltd v Adelaide Petroleum NL (1990) 2 ACSR 347. Their interests are not affected.
The Exclesior and Innate Immunotherapeutics matters may be isolated examples where (unusually) the circumstances have no broader impact on control. In fact, it is more common that a shareholder applicant is making a complaint in the context of a current transaction which may affect control (such as a takeover bid or a rights issue) or is alleging that there is an undisclosed association between other shareholders that is affecting control (often in the context of an impending general meeting to consider a resolution to spill the board of directors). In those circumstances, it is more likely that the shareholder’s interests (and those of other shareholders) may be affected by non-compliance with the principles in Ch 6, in which case standing should be easier to establish.
From a general policy point of view, a low threshold may be understandable if the application highlights mischief in the market that affects all shareholders. In Austar United Communications Ltd  ATP 16, having learned that the application had been made in order to gather commercial information, the Panel said it had:
"seriously considered declining the Application ... However, as [the applicant] formally had standing, the Panel decided to consider whether the issues raised by the Application would properly be of concern to the market generally or to Austar shareholders in particular. The Panel decided that at least two of the issues raised were, of themselves, sufficiently material to the market for Austar shares to proceed with the Application, regardless of the concerns the Panel had in connection with the underlying motivation for [the] Application."
In that matter, the applicant had purchased shares in the target for $622, in order to acquire standing. The Panel ultimately declined to make a declaration or orders, because the applicant’s strongest points had been addressed by additional disclosures after the application was made. However, the Panel appears to have proceeded on the basis that holding the small number of shares gave it ‘formal standing’, though it did not discuss the issue in further detail.
WHAT ABOUT SMALL SHAREHOLDINGS?
If a person holds shares worth a very small amount, say less than $1,000 or even less than $100, how can that person establish that his or her interests are affected sufficiently to justify standing? The legislation does not shed any light on this issue, though it would be an odd result if a person could simply acquire a single share in each listed company and then assert their interests were affected by anything undertaken which allegedly breaches a Ch 6 principle.
The Panel has not tackled this issue. In Virgin Australia Ltd  ATP 15, the applicant (Mr Stephen Mayne) held just 29 shares worth $11. His application sought to impact the conduct of a significant capital raising. The Panel allowed it to proceed. In Qantas Airways Ltd 01  ATP 01, the Panel made a preliminary decision that an organisation of pilots employed by the target was a person whose interests were affected by the relevant circumstances and, therefore, had standing. The issue was not fully considered as the bidder volunteered to make additional disclosures to address the substantive issues.
Perhaps these matters can be explained on the same basis as the comment above in relation to Austar, namely a lower threshold may be appropriate if the issues raised have general application. But, despite that, it does strike me as odd that a tiny financial interest can legitimise an application. There is a temptation to view anyone making an application over a few dollars of value as merely a troublemaker who is likely to have an ulterior purpose.
Shareholder applications to the Panel are a significant component of the Panel’s activities. They are likely to increase as a proportion of the Panel’s work. This is because, with more and more takeover transactions being undertaken by recommended scheme of arrangement, there are fewer disputes between a target and a bidder come before the Panel.
All applications create a lot of work for the company and other participants. That work is time-consuming and expensive. An application may also impact the progress of an important transaction and, where made without substance, the immediate publication of the allegations can result in unwarranted adverse media attention.
The Panel needs to consider all aspects of the applications it receives. This includes the question of standing. I believe the standard form application should include a question requiring the applicant to address how its interests are affected. The applicant could be asked to quantify the materiality of the impact.
A stricter approach to standing would be consistent with the legislative mandate under which the Panel operates and would help to minimise inconvenience and deter officious bystanders. That should enhance the operation of the Panel and help to prevent it becoming a small claims tribunal.
This article is based on the discussion on the topic in the forthcoming edition of Takeovers Law & Strategy (6th edition), which is due out later in November.