When on time is almost too late for an application to the Takeovers Panel

The Takeovers Panel considered that an application raising control and disclosure concerns in relation to a rights issue was premature in circumstances where the issuer had announced the pricing, structure, timetable, underwriting arrangements and majority shareholder participation for the rights issue but had not lodged its prospectus. 

Summary

• CuDeco Limited (CuDeco) proposed a rights issue underwritten by its major shareholders.
• In what would have been an interesting first, CuDeco said it intended to refer the rights issue to the Takeovers Panel for confirmation that the rights issue was not unacceptable.
• A shareholder applied to the Takeovers Panel submitting that the rights issue was unacceptable as it was structured to allow the major shareholders take control. CuDeco subsequently announced a revised rights issue.
• The Panel said the application was premature as CuDeco had not yet lodged its disclosure document. We presume the Panel is not now advocating the lodgement of a disclosure document as a pre-requisite to considering a challenge to a rights issue.

Background

CuDeco has the following substantial holders: Sinosteel (6.23%), New Apex (8.88%) and China Oceanwide (19.74%), (each a Major Shareholder).

On 23 July 2015, Sinosteel, New Apex and China Oceanwide lodged identical substantial holder notices in which they (somewhat curiously) voluntarily disclosed that they had been in discussions:

“in relation to mutual concerns about the financial performance of CuDeco Limited with the view to the relevant parties proposing to act in concert in relation to Cudeco Limited’s affairs (namely the provision of funding...)”.

In other words, they had admitted they were associates but they had not aggregated their voting power in the substantial holder notices.

On 17 September 2015, CuDeco announced a fully underwritten renounceable rights issue on the basis of one new fully paid ordinary share for every two shares held at an issue price of $0.60 per share (Proposed Rights Issue). CuDeco also announced that each of its Major Shareholders would participate for their full entitlement and that the Proposed Rights Issue was co-underwritten as to 33.3% by China Oceanwide, 33.3% by New Apex and 33.3% by Infinitus Limited. ASIC required CuDeco to provide a full prospectus for the Proposed Rights Issue. 

In what would have been a first, CuDeco announced that it intended to apply to the Takeovers Panel for a declaration that the circumstances were acceptable.  CuDeco later withdrew this intention after it was notified that an application would be made by a shareholder.

On 29 October 2015, CuDeco announced an 11.9% placement. This placement enabled CuDeco to proceed with a revised (smaller) one for four non-renounceable rights issue at an issue price of $0.80 per share (Revised Rights Issue). CuDeco also announced it proposed to involve independent underwriter(s).

The application

By application dated 23 October 2015, a shareholder of CuDeco (the Applicant) sought a declaration of unacceptable circumstances. The Applicant’s submissions included that:

• there had been breaches of the substantial holding provisions because the Major Shareholders had not included aggregated voting power or attached the terms of any underwriting agreement to their substantial holder notices,
• the rights issue was structured to allow the Major Shareholders to take control, and
• there was insufficient disclosure regarding the effects of the rights issue including the dispersion strategy, the intentions of the Major Shareholders if they achieved control and the underwriting arrangements.

The Applicant sought various orders including that the Major Shareholders make a takeover bid and that CuDeco only proceed with the rights issue subject to a number of conditions including shareholder approval, further disclosure and formulation of a dispersion strategy.

The Panel’s decision

The Panel noted that the withdrawal of the Proposed Rights Issue removed a key ground of the Applicant’s complaint and that the Applicant’s application was premature as CuDeco had not yet lodged a prospectus for the Revised Rights Issue. 

The Panel stated that the concerns in the application regarding the disclosure of material information, structure of the rights issue and underwriting arrangements would likely have been addressed in a prospectus.

In relation to the association disclosed in the Major Shareholders’ substantial holder notices, the Panel stated that the association was unclear as to its terms or when it arose and that it was a matter that ASIC may wish to take up with the Major Shareholders.

Commentary

The application in respect of the Proposed Rights Issue was, in many respects, superseded by the Revised Rights Issue and the disclosure issues may well have been satisfactorily dealt with in the prospectus. However, the Applicant’s concerns were not limited to disclosure – a number of them were structural. 

The Panel’s Guidance Note 17 in relation to rights issues does not refer to any requirement for there to be a disclosure document in existence before the Panel will consider the effect of a rights issue. Hopefully the Panel is not now advocating such a requirement.

In the usual case it will be more costly (and disruptive) for an issuer to have to deal with a rights issue challenge after a disclosure document has been issued than it would be to deal with the issues beforehand.

Nevertheless, the Panel’s decision serves as a reminder of the importance of having an appropriate dispersion strategy in place circumstances where a rights issue is underwritten by one or more major shareholders.

It is worth noting, in relation to CuDeco’s announcement that it intended to apply to the Panel for a declaration that the circumstances of the Proposed Rights Issue were acceptable, that there is no capacity under the Corporations Act to seek a declaration of acceptable circumstances. The Panel is permitted to declare circumstances to be unacceptable if it appears that the circumstances are unacceptable having regard to the effect that they will have or are likely to have. However, in two recent decisions,¹ which could be viewed as an attempt (albeit perhaps indirect) by an applicant to obtain a ruling from the Panel that a proposed course of action was not unacceptable, the Panel highlighted the hypothetical aspects of each application and declined to conduct proceedings in both cases. It remains to be seen whether, in a particular case in the future where the issues are not hypothetical, the Panel may be prepared to effectively give a transaction (or an aspect of a transaction) its regulatory imprimatur by declining to make a declaration of unacceptable circumstances. 

This article was written by Andrew Rich, Partner, Sydney and Nicole Pedler, Senior Associate, Sydney.

Endnotes

1. Re Envestra Limited [2014] ATP 13 and Re Alesco Corporation Limited (No 3) [2012] ATP 18.