- The Takeovers Panel has given an insight into its future approach to the effects of buy-backs on corporate control.
- The Takeovers Panel may require that the issuer not count votes cast by a person whose voting power would be materially increased (above the 20% threshold) by a buy-back, even if that person is not associated with the person whose shares are being bought back.
Lantern Hotel Group (Lantern) is a listed stapled structure, operating hotels in Australia and New Zealand, and had two major holders, of which Millinium Asset Services Pty Ltd (Millinium) held 24.3% and Torchlight GP Ltd (Torchlight) held 30.2%.
On 4 February 2014, Millinium, through an investment manager, offered to sell back all of its 24.3% parcel to Lantern, subject to security-holder approval and any necessary regulatory relief. The offer was expressed to be irrevocable and to be open until 21 March. Lantern neither announced nor accepted the offer until 10 March.
On 28 February 2014 and on 5 March 2014, Millinium granted options to Totem Holdings Pty Ltd (Totem) and CVC Ltd (CVC) over two parcels which together made up the whole of its 24.3% parcel. Totem and CVC disclosed these options promptly in substantial holding notices. On 10 March 2014, Lantern announced that Millinium had offered to sell back a 24.3% parcel, that Lantern had accepted that offer, and that it had initiated proceedings in the Supreme Court of New South Wales to protect its rights under the offer. These proceedings have since been settled.
Totem applied to the Takeovers Panel for a declaration and orders with the effect of preventing Lantern from buying back the Millinium parcel, on two bases:
- Lantern had acquired a relevant interest in the Millinium parcel and contravened s 606 by receiving the buy-back offer, and
- It would be unacceptable for Torchlight to vote to approve the buy-back and also to benefit from its voting power being increased from 30.2% to 40.3%, without paying a control premium.
Acquiring the Millinium parcel
Section 606 limits changes in corporate control by prohibiting an acquisition of a relevant interest in shares which leads to an increase in voting power in the 20% to 90% range, subject to exceptions. It is not designed to control an increase in A’s voting power which result from buying back and cancelling B’s shares. In fact, it exempts an acquisition resulting from a buy-back (s 609(4) and item 19 of s 611).
Totem sought to show that s 606 applied to the proposed buy-back, however, because Lantern had acquired a relevant interest, the power to prevent Millinium from disposing of the buy-back parcel from the time Millinium offered it the securities until they were cancelled.
The Panel did not directly address whether by receiving or accepting the buy-back offer Lantern had acquired a relevant interest in the Millinium parcel, at all or in breach of s 606. Instead, it said that the buy-back offer was unlikely to be unacceptable, because it was expressed to be subject to any necessary approval by security-holders and regulatory authorities, which brought the offer within the policy of s 609(7) and item 7 of s 611 (acquisition subject to approval by non-associated shareholders).
The Panel’s decision on this point is a straightforward policy response, consistent with existing ASIC and Panel policy, based on the informed approval of holders of Lantern securities, to what might otherwise have been a difficult legal question.
Enhancing the Torchlight parcel
By relying on informed approval by security-holders of the buy-back, the Panel shifted the focus of the matter to Totem’s second issue, that Torchlight should not be allowed to vote on approval of the buy-back. Totem seems not to have suggested that Torchlight was associated with Millinium or otherwise involved in promoting the proposed buy-back. Instead, it relied on the Panel decision in Re Village Roadshow Ltd (No 3)  ATP 22, in which the Panel said it would be unacceptable for the holding company of Village Roadshow both to vote in favour of a buy-back and to have its voting power enhanced when Village Roadshow bought back and cancelled shares from other holders.
The issue whether Torchlight could vote on the buy-back issue was moot when the matter was before the Panel, so the Panel dismissed the matter without making any declaration or order and without setting out a definitive policy. It observed, however, that there would be time to raise that issue in a fresh application when and if the buy-back was to be submitted to a meeting of Lantern security-holders, implying that it was inclined to restrain Torchlight from voting. Obviously, it would have had to hear from Torchlight before making any order to that effect.
While this matter was disposed of at a preliminary stage, it indicates the policy the Panel may be inclined to adopt where an issuer agrees to buy securities back from one person, and another person’s voting power will be materially increased above the 20% threshold when it cancels them.
First, the Panel is unlikely to be swayed by technical arguments to the effect that the issuer acquires a relevant interest in the buy-back parcel, if the transaction is subject to approval by a vote of shareholders who are not involved in it. To comply with this policy, the buy-back should comply with s 609(7) and item 7 of s 611, as well as with s 256C, 257C or 257D, as appropriate for a reduction of capital or a buy-back.
Secondly, in applying this policy, the Panel may require that the issuer not count votes cast by a person whose voting power would be materially increased (above the 20% threshold) by the buy-back, even if that person is not associated with the person whose shares are being bought back.
Although it seems to have been arrived at independently, as a development of the policy applied in Re Village Roadshow Ltd (No 3), this policy is consistent with the approach taken to buy-backs under the London Takeover Code.
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© Herbert Smith Freehills 2020