The significant consequences of crossing the line as a major shareholder – Realm Resources

The Takeovers Panel has released the reasons for its decision in Realm Resources Limited,¹ in which the Panel made a declaration of unacceptable circumstances in relation to an off-market takeover bid made by T2 (an 85% shareholder) for 100% of the ordinary shares in Realm. The case considers the extent to which a major shareholder who is making a takeover bid can influence other shareholders under a takeover bid.

In brief

• The Panel ordered that the offer period for T2’s bid for Realm be extended to close one month later than the terms of the original offer and any shareholder who accepted the offer during the original offer period was given the right to withdraw their acceptance.
• The Panel considered that the continuing suspension of Realm from trading, the recognition by T2 of Realm’s improved financial and operational position, certain actions taken by T2 and its nominee directors (including T2 changing its position in relation to Realm’s proposed capital raising) and statements in the bidder’s statement had the potential to coerce Realm shareholders to accept the T2 bid.

Background

On 30 August 2016, Realm completed its acquisition of a 70% interest in the Foxleigh Coal Mine (Foxleigh Acquisition). Following this, Realm requested a voluntary suspension from trading and sought ASX's determination on the application of Chapter 11 of the Listing Rules to the acquisition. ASX decided that Realm was required to comply with Chapters 1 and 2 of the Listing Rules as if it were applying for admission to the official list and ASX included a requirement that Realm obtain shareholder approval and have a free float of not less than 20% of the shares on issue.

In order to satisfy the 20% free float requirement, Realm decided to undertake a capital raising in which T2 (a Taurus Funds Management entity) would not participate. On 8 June 2017, T2 signed a statement confirming its intention to support the capital raising which would dilute T2. At all relevant times, T2 held over 85% of Realm's ordinary shares and Messrs Gordon Galt and Michael Davies, nominees of T2, were directors of Realm.

Between 15 June 2017 and 13 July 2017, Realm shares were reinstated to trading. The shares were then suspended again (and remain suspended) pending compliance with Chapters 1 and 2 of the Listing Rules. The capital raising and Foxleigh Acquisition were approved by Realm shareholders on 14 July 2017. There were delays in undertaking the capital raising for various reasons. Realm updated the market from time to time on the status of the re-listing.

On 15 December 2017, T2 made a non-binding indicative proposal to acquire all the Realm shares it did not own for $0.90 per share. The following day, the Realm board established an independent subcommittee. On 9 February 2018, T2 announced its intention to make an offer to acquire shares in Realm for $0.90 per share. The offer was made on 14 March 2018 and subject to prescribed conditions. On 23 February 2018, T2 released its bidder's statement, which included statements to the effect that:

• there was no certainty when re-listing of Realm shares might occur and the offer provided shareholders with certainty by comparison;
• T2 intended to compulsorily acquire the outstanding Realm shares if it became entitled to and if not, would seek to replace some or all of the current directors with its nominees; and
• T2 did not support Realm's continued listing, would not support the capital raising, and would cause Realm to apply for de-listing.

In the letter to shareholders in T2's bidder's statement, Mr Martin Boland on behalf of T2 said:

"If you do not accept the Offer and the Bidder does not compulsorily acquire the Realm Shares which have not been accepted into the Offer, you will remain a minority shareholder in Realm. In that circumstance, given Realm's likely ongoing suspension from trading on the ASX and the Bidder's intention to cause Realm to apply for removal of Realm from the official list, you may not be able to readily sell your shareholding".

On 29 March 2018, Realm released its target's statement recommending rejection of the offer. The independent expert's report concluded that the offer was not fair or reasonable, and the estimated fair market value for Realm shares (on a control basis) was between $1.62 and $1.92 per share.

On 15 May 2018, T2 released a third supplementary bidder's statement increasing the offer price to $1.00 per share. On 21 May 2018, in the second supplementary target's statement, Realm's non-affiliated directors continued to recommend that shareholders reject the offer "for the reasons set out in section 1 of the Original Target's Statement". In the Original Target's Statement, the reasons included that there were other potential alternatives, including "a re-listing of Realm Shares on ASX".

At the AGM of Realm on 31 May 2018, two additional directors nominated by T2 were elected as directors of Realm.

The Panel’s decision

The Panel agreed with T2’s submission that the Panel’s decision in Strategic Minerals Corporation NL² does not stand for the ‘principal that any intention by a greater than 75% majority holder to delist a company following a takeover bid would be unacceptably coercive’, and that additional factors would need to be present.

The Panel considered that the question of whether the circumstances surrounding the offer are coercive depends primarily on the likely effect of those circumstances, rather than the actual effect.

In this instance, the Panel found that the circumstances surrounding the offer may amount to something ‘outside the normal incidence of a change of ownership that could reasonably be considered coercive such as to give rise to unacceptable circumstances’. The Panel determined that the following matters, in combination, had the potential to coerce Realm shareholders to accept the offer:

• the continuing suspension of Realm shares, which denied shareholders a market and a readily observable value for their shares in light of market developments. This makes the offer different from bids where a bidder discloses that it will seek de-listing if it is able to but shareholders have the option to sell their shares on market during the course of the bid;
• the recognition by T2 of the improved financial and operational position of Realm since the Foxleigh Acquisition which likely increased the value of Realm. Minority Realm shareholders had a limited opportunity to assess this improvement given their shares had been suspended from trading for most of this period;
• T2 changing its position from actively supporting the re-listing to actively opposing it;
• the intention of T2 to remove Realm from the official list whether or not the offer results in it reaching the threshold for achieving compulsory acquisition;
• active steps taken by the nominees of T2 on the Realm board to stop the re-listing;
• the statements in the bidder's statement and letter to shareholders described above; and
• the nomination of the additional directors of Realm which could ensure the intentions of T2 could be given effect to.

The Panel’s final orders and the undertakings received by the Panel, among other things, had the following effects:

• the closing date for the offer period for T2’s bid was extended by one month to 3 August 2018;
• any person who accepted T2’s offer before 2 July 2018 was given a withdrawal right;
• T2 agreed to raise the price for its offer by $0.35 (to a total of $1.35) and undertook not to make any follow-up offer during 2018 unless the total value per share offered was at least $1.35 per share;
• T2’s nominee directors undertook to not interfere with Realm’s independent subcommittee or the capital raising (including a requirement that they abstained from any vote in respect of the capital raising); and
• T2 was required to make corrective disclosures in a supplementary bidder’s statement.

Commentary - lessons learned

The Panel’s decision in Realm highlights the importance of taking into account all relevant factors when acting as a major shareholder and the significant consequences which might arise if, as a bidder, you fall foul of the line. It reinforces the need to not simply fall back to statements and positions which have been used in other takeovers and to carefully consider whether those statements or positions could be challenged in your case.

Endnotes

1. [2018] ATP 13.
2. [2018] ATP 2.