The long-running Finders Resources saga, in which the application of the ASIC’s ‘truth in takeovers’ policy to shareholder intention statements has taken centre stage, is now the subject of a new review Panel decision in Finders Resources Limited 03R  ATP 11.
- The Takeovers Panel has issued reasons for the decision in Finders Resources Limited 03R  ATP 11. The review Panel unanimously affirmed the initial Panel’s findings and declaration of unacceptable circumstances (which related to acceptances of Eastern Resources’ bid for Finders by Taurus, an 11.31% shareholder, and two directors of Finders, contrary to endorsed non-acceptance statements). However, the orders made by the initial Panel have been largely replaced.
- Despite a more careful consideration of the impact of the non-acceptance statement, the review Panel, like the initial Panel, did not clearly articulate the cause of any detriment to participants.
- The review Panel decision is nonetheless a return to the status quo before the decision of a first instance Panel in Finders Resources Limited 02  ATP 9, namely that whether it is unacceptable to resile from a last and final statement depends on the circumstances and effects of the change of position, rather than an iron rule that a last and final statement is a promise to be kept, in accordance with its terms.
The Takeovers Panel has now issued the reasons for decision in Finders Resources Limited 03R  ATP 11. The name itself betokens confusion, as the matter is a review of the decision of a first instance Panel in Finders Resources Limited 02  ATP 9, and there was no Finders 03.
The decision is a curiosity, partly because one member of the review Panel dissented from the decision (and would simply have affirmed the decision at first instance in its entirety), partly because the majority upheld the findings of the initial Panel and retained its declaration of unacceptable circumstances while replacing most of its orders, and partly because of some gaps in the majority’s reasons about orders.
It is, however, a return to the status quo before Finders 02 - being that whether it is unacceptable to resile from a last and final statement depended on the circumstances and effects of the change of position, instead of an iron rule that a last and final statement is a promise to be kept, in accordance with its terms.
The matter concerned a cash bid by Eastern Field Developments Limited for all of the shares in Finders. The bid was initially conditional on Eastern (which already held 20% of Finders when it bid) obtaining acceptances to take it over 50%, and on other matters not now relevant. Eastern declared the bid free of the 50% condition on 13 December 2017, after Finders published the first non-acceptance statement. Eastern did not increase the bid price and on 12 March 2018 declared it final, although the Finders board said it was inadequate, and maintained that position throughout.
The board advised shareholders to reject the bid and marshalled holders of 38.21% of the shares to endorse an unqualified non-acceptance statement, versions of which were issued on 12, 13 and 15 December 2017. Although the board named the holders who endorsed the statement, it did not caution them that they might be held to the statement, leading the initial Panel to decide that holding most of them to the non-acceptance statement would constitute unfair prejudice.
The exception was Taurus Funds Management Pty Ltd (a funds manager associated with a third director), which held 11.31% of Finders. Taurus accepted the bid on 19 March 2018, after acceptances had taken Eastern’s holding to 48.5%.
Two Finders directors holding about 1.7% between them also accepted the bid. Shortly after Taurus’ acceptance increased Eastern’s holding over 60%, the directors in response reversed their recommendation, and advised shareholders to consider accepting the bid to avoid being locked in and stated that they now intended to accept the bid for their shares. The initial Panel did not, however, hold the two directors to their non-acceptance statements.
Initial panel decision
The initial Panel found that these events constituted unacceptable circumstances, inasmuch as Taurus and the directors had accepted the bid contrary to the non-acceptance statement which they had endorsed. Although that statement was specific to the terms of the bid as they stood on 15 December, it was not otherwise qualified. The Panel said that the truth in takeovers policy set out in ASIC’s Regulatory Guide 25, which requires some participants in takeovers who make “last and final” statements (being statements that the market participant will or will not do something during the course of the bid) to be held to those statements, “as with a promise” was a fundamental tenet of Australia’s takeovers regime, and had been regarded as such in a number of Panel decisions.
Although the initial Panel correctly said that whether the circumstances of a particular matter are unacceptable is something to be determined by the sitting Panel, their reasons are stated at a high level of generality and reveal no consideration of the effect (if any) of the reversals by the directors and Taurus on the progress of the bid or the fortunes of shareholders affected by it. They merely said that shareholders were entitled to assume that Taurus would not accept the bid, and that the bid had for 3 months proceeded in a market which was not efficient, competitive and informed, because that assumption “had the potential to affect assessment of whether to accept [Eastern’s bid] and decisions whether or not to acquire or dispose of Finders shares”. On that hypothetical basis, they made a declaration of unacceptable circumstances.
Pursuant to the declaration, the initial Panel made orders setting aside Taurus’ acceptance of Eastern’s bid, and requiring Eastern to give withdrawal rights to accepting shareholders. They did not set aside any other acceptances, though they clearly thought that the directors were as well aware as Taurus of the truth in takeovers policy, and gave limited reasons for allowing their acceptances to stand: the “unacceptable circumstances are not logically remedied” by cancelling their acceptances, which would be “more punitive than remedial”. They did not order Taurus or the directors to compensate people who dealt in Finders shares during the 3 months the non-acceptance statement stood, correctly observing that compensation orders are expensive to implement and ineffectual as compensation.
Review panel - dissentient
The Review Panel unanimously affirmed the findings of the first instance Panel, and the declaration they made. They were however divided on the orders to make. One of them would simply have affirmed the orders made at first instance, stressing three factors:
- Taurus’ knowledge of the situation and intention to prevent Eastern acquiring control of Finders;
- Taurus’ 11.31% holding was enough to block compulsory acquisition; and
- the benefits for market certainty of consistency between ASIC’s day-to-day administration of the truth in takeovers policy (being that market participants must not resile from unqualified non-acceptance statements) and the Panel’s application of it.
The first of these points is not an independent basis for making an order. It is relevant only to whether a proposed order, designed to protect people’s interests from the adverse effects of unacceptable circumstances, cannot be made because it would be unfairly prejudicial. It might be fair to impose a loss on someone who had contributed to unacceptable circumstances, but unfair to impose the same loss on a bystander or an offeree.
As regards the second point, the bid was not subject to 90% acceptances, and the majority reasonably concluded that the shareholders who had not accepted were better off if Eastern reached 90% voting power and was obliged to issue them buy-out notices.
The initial Panel and the majority of the review Panel in effect rejected the third point, when they correctly pointed out that the Panel must make up its own mind on the unacceptability of the circumstances to which a matter relates. For that reason, it cannot mechanically apply ASIC policy or mechanically accept ASIC’s assessment of a particular matter.
Review panel – majority
After adopting the initial Panel’s findings and declaration, the review Panel commenced its consideration of orders by rejecting the notion that Taurus’ resiling from the non-acceptance statement should be taken out of context, concluding that no order need be made to put the bid back on track, because if regard was had to all of the unacceptable circumstances affecting the bid, it was as likely as not that they made little difference to the ultimate outcome of the bid. In particular, they concluded that a number of ameliorating factors made it inappropriate to permanently cancel Taurus’ acceptance of the bid. Two of those factors were:
- no contemporaneous evidence was provided that Eastern or any other person had relied on Taurus’ intention statement; and
- it was “not surprising” that directors who recommended rejection of a bid would add that they did not intend to accept the bid for their own shares.
Review panel – protecting eastern’s interests
The majority accordingly asked themselves whether any order should be made to protect rights or interests affected by the unacceptable circumstances. They concluded that Eastern had been adversely affected and that an order should be made to protect its interests. The adverse effects on Eastern were that it had been caught out because it had not arranged funding to pay for the Taurus holding, and that it would be obliged to issue buy-out notices if acceptances reached 90%, which they had done, if Taurus’ acceptance stood. The majority was not convinced that Eastern was entitled to rely on receiving less than 90% acceptances, having declared the bid unconditional and thereby lost control over the level of acceptances, or that it would be appropriate to relieve Eastern from the consequences of those actions.
The Panel accordingly decided to protect Eastern’s interests to the extent of deferring its obligation to pay for the Taurus parcel, but not to the extent of cancelling Taurus’ acceptance outright or of relieving Eastern from its obligation to offer to buy out other continuing shareholders (by this time, about 3% of the register). They imposed a fairly elaborate arrangement, which preserved Eastern’s obligation to issue buy-out notices after the bid closes, but which gave it an additional 3 months before it must buy the Taurus parcel, at the bid price.
The reasons give no indication that anybody, even the Panel, took the point that Eastern had come to the Panel for relief against an embarrassment caused by its having failed to fund its bid fully. Eastern initially disclosed full funding for the bid, and seems to have relied on Taurus’ announcement to deliberately reduce its funding, contrary to ASIC and Panel policy (Panel Guidance Note 14, Funding Arrangements, ASIC Regulatory Guide 9 Takeover Bids at [9.360]-[9.388]). This policy is actually more stringent than the relevant section of the Corporations Act.
The Panel did mention, although only obliquely, that Eastern had come to it for what was in effect relief from the obligation of a bidder who acquires 90% of the shares to issue buy-out notices to the remaining minority, an old and fundamental requirement of the takeovers code. The Panel decided that it would be inappropriate, because it would be unfairly prejudicial, to deprive continuing holders of buy-out notices, the more so as some of them had not been able to accept the bid, because they held shares issued during the bid, and Eastern's bid did not extend to them.
Review panel – protecting shareholders’ interests
The review Panel were not satisfied that the non-acceptance statement had adversely affected the interests of people who had accepted Eastern’s bid: this no doubt reflects their finding that it had not been shown that the unacceptable circumstances had made much difference to the outcome of the bid. Although other factors had been relevant, the review Panel made a finding that the non-acceptance statement and unspecified actions of Finders were likely to have led some market participants to place a higher probability on Eastern increasing its offer, supporting acquisitions above Eastern’s bid price. To protect the interests of people affected in this way, they ordered Taurus to compensate people who had paid above the bid price for Finders shares during the three months between the making of the non-acceptance statement and Taurus’ acceptance of the bid. The amount of compensation is to be the difference between the price each person paid and the bid price.
Despite their retention of the initial Panel’s declaration of unacceptable circumstances, the majority decision of the review Panel is much less absolute and undiscriminating than that of the initial Panel. They clearly looked with some care at whether the non-acceptance statement had disrupted the course of the bid or injured any of the participants in it. They have rejected the blanket rule that any last and final statement must be performed, as a promise. In the disposition of this matter, however, their reasons indicate that they fell into the same trap as the initial Panel by not thinking through the cause of any detriment to participants.
When the review Panel insisted on taking in context Taurus’ conduct in making and resiling from the non-acceptance statement, required Eastern to buy Taurus’ shares at the bid price (albeit after an interval) and declined to make any orders against the directors for similar conduct, they effectively rejected the right which Eastern had asserted to underfund its bid. Unless Taurus was unconditionally and categorically forbidden to accept the bid, Eastern’s conduct was unacceptable for the reasons given in Austock Group Limited  ATP 12, and there was little justification for rescuing Eastern from the consequences.
The review Panel concluded that the non-acceptance statement contributed to a state of affairs in which some people bought shares at prices higher than Eastern’s bid price, in effect because they thought that Taurus and the other shareholders who had supported the statement might force Eastern to increase its bid price. The majority’s reasons do not explore whether or why the reasons for this expectation rose above speculation, or whether Taurus’ capitulation in any practical sense let those people down. The answers to both questions have to be no: once Eastern had dropped the 50% condition (which it did around the time of the first aggregated non-acceptance statement), the non-acceptors could not block the bid; and Taurus did not accept until the bid price was declared final, acceptances were reaching 50%, and the battle for control had been lost. Had the majority applied the reasonable reliance test to people who traded above the bid price, as they did to Eastern, one suspects they may have reached a different conclusion regarding whether Taurus’ conduct in acting contrary to its non-acceptance statement had affected the bid.
The matter underscores the duty of the Panel to carefully consider the circumstances of each situation before making a declaration of unacceptable circumstances. For the Panel, the truth in takeover ‘rule’ is not a rule, but a policy to be applied case by case. Some will find that appropriate, while others may consider that the market may be better served by the certainty that would come from the Panel prescribing a rule under its rule-making power in section 658C. That is a debate that we may see in the future given the importance of the truth in takeover policy to how our market operates.
The saga continues…
On 16 July 2018, Eastern lodged an application for judicial review of the review Panel’s decision with the Federal Court of Australia, seeking to set aside the orders made by the review Panel and restore the orders made by the initial Panel. By its application, Eastern contends (among other matters) that the review Panel failed to consider relevant matters and that certain parts of its decision were unreasonable, involved illogical or irrational reasoning and were of such an unreasonable character that no reasonable Panel could have made them.
Some 9 months have now passed since Eastern first announced its bid for Finders, which remains open as at the date of this article. Pending the outcome of Eastern’s judicial review application, we may yet see the saga continue on for a third round before the Panel.
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© Herbert Smith Freehills 2019