The Takeovers Panel has heard a number of matters concerning a change of control by way of board spill in 2019. The Panel has taken a ‘hands-off’ approach in these matters.
A while back it was sometimes debated whether the Takeovers Panel should concern itself with a change of control to be effected via a board spill or whether the Panel should limit its attention to matters where a change of control would occur through the acquisition of shares, say under a takeover bid, which is the main focus on the takeovers legislation.
That debate has been effectively resolved in favour of the Panel reviewing certain aspects of board spills, but, as has become apparent recently, the impact of the Panel’s involvement will be very limited. So much so that it would now be rare that an application to the Panel will have any effect on a board spill.
Recent Panel matters
There has been a spate in 2019 of Panel matters concerning board spills and voting at general meetings. Six of the last 9 matters have been in this category. However, in none of them has the Panel made any orders that would affect the outcome of the shareholders vote, nor has the Panel even made orders that would enable the applicants to delay the vote while marshalling more support for one side or the other. In other words, no board spill matter has really been affected by the matter coming before the Panel.
The only applicant to have any success merely won an order requiring shareholders, who held about 12.5% between them, to disclose their association. Big deal. The board spill still succeeded.
I think the Panel has got this right. The Panel’s approach is informed by a recognition that the shareholders’ ability to hold directors accountable for performance is important and, just like the possibility of a takeover bid being made, this threat can enhance long-term performance.
Accordingly, where there are genuine concerns about corporate governance and the shareholders agitating for change do not have any longer term agreements that relate to the composition of the board, it is most unlikely the Panel will make any order (other than, perhaps, an order for disclosure of an association, if required).
That is consistent with the terms of the legislation, which is not intended to be used to stifle debate and entrench boards. It results from a combination of things.
First, where the shareholders involved have less than 20% of shares in the company, an accumulation of shares and formation of agreements between them is legitimate. The only consequences likely to follow might be the need to lodge a substantial holding notice when the aggregate shareholding exceeds 5%.
Secondly, even if the aggregate shareholding of the disgruntled shareholders exceeds 20%, that in itself may not be illegal, unless the shareholders have an agreement or understanding to each vote in a particular way. That part is tricky and it can often be a grey area as to whether or not shareholders have such an agreement.
However, even if there is a voting agreement in excess of 20%, an order can only be made by the Panel if that is in the public interest. If there are genuine corporate governance concerns and any agreement is only for one meeting, this is unlikely, especially where the shareholders are seeking to appoint directors who are independent from, or not aligned with, them.
When the Panel was set up originally, the idea was for a decision-making body that would let takeover bids continue according to market forces without any unnecessary interference (a bit like the role of umpires in a football match!).
In a way, the Panel’s hands-off attitude to board spill matters is a continuation of that theme, which is a good thing. The general welfare of Australian companies will be far better promoted by allowing shareholders to discuss views abut company performance and governance issues and, if necessary, seek to replace directors, rather than have those shareholders worry about committing technical breaches of legislation which have no ongoing effect for the company.
The fact that applicants who go to the Takeovers Panel seeking to trip up insurgent shareholders are unlikely to get much joy should give the rest of us joy.
This article was previously published in The Australian.
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© Herbert Smith Freehills 2021