The Australian Takeovers Panel Alan Shaw Counsel Takeovers

The Australian Takeovers Panel Alan Shaw Counsel Takeovers Panel AMEC seminar Sao Paulo Brazil 9 December 2009 Slide 1

Topics 1. Background on the Australian market 2. Takeovers Panel structure 3. Takeovers Panel powers 4. Takeovers Panel process 5. Takeovers Panel matters 6. Challenges to the Panel 7. International comparison Slide 2

Part 1 Background on the Australian market Slide 3

Market overview 1. 7 million registered companies Stock exchanges • ASX - Australian Securities Exchange 2, 198 listed companies A$1. 09 trillion (US$981 billion) market capitalisation • NSX - National Stock Exchange and Bendigo Stock Exchange 88 listed Small to Medium Enterprises • APX - Asia Pacific Exchange 1 listed company Slide 4

Degrees of control in Australian law 5% Substantial holder disclosure threshold 20% Takeover threshold 50. 1% of shares voted at general meeting 50. 1% 75% of shares voted at general meeting Practical ability to pass ordinary resolution (appoint board, subject to constitution) Certain ability to pass ordinary resolution Practical ability to amend constitution 75% Certain ability to amend constitution 90% Compulsory acquisition 100% Full control (no minorities) Source: Blake Dawson 2009 Slide 5

Ways to acquire control of a public company t ge Ta ke ov f eo er Item 7 of Section 611 al v o a Sh n rra A m he c S Chapter 6 er d l o reh n me pr p A TARGET Part 5. 1 of chapter 5 COMPANY Part 2 J. 1 of chapter 2 Se lec tiv of e R Ca ed pi uc tal tio n Source: Blake Dawson 2009 Slide 6

The Takeovers Code - overview Set out in Chapter 6 of the Corporations Act Prescriptive legal rules - acquisition of control of Australian public companies and listed managed investment schemes Rules are based on 5 principles – includes ‘Eggleston principles’ in s 602 Rules are tempered in two ways: 1. ASIC can modify the law (s 655 A) 2. The Panel can make declarations of “unacceptable circumstances” (s 657 A) ASIC and the Panel have regard to s 602 Slide 7

The Takeovers Code - prohibition CSLRC: “a suitable arbitrary level falling short of the likelihood of actual control” Not a threshold General prohibition on acquiring more than 20% of a company/ scheme (s 606) • The transaction is not invalid if breached (s 607) • The person who makes the acquisition commits an offence (s 1311) Penalty: 25 penalty units/ 6 months or both Specific gateways to increasing holdings above 20% Disclosure Notes 1: Section 9 defines company as meaning a company registered under this Act. 2: Section 608 and 609 deal with the meaning of relevant interest. 3. Section 610 deals with the calculation of a person’s voting power in a company. Slide 8

The Takeovers Code – the gateways Exceptions to the 20% prohibition (s 611) 1. Bids - market or off-market (item 1) 2. Schemes of arrangement (item 17) 3. Shareholder approved transactions (item 7) 4. 3% creep (item 9) 5. Other exceptions – rights issues, buy-backs, underwriting etc Slide 9

The Takeovers Code – disclosure Bidder’s statement (section 636) 1. Identity of bidder 2. Details of intentions for target (including future employment) 3. Funding of bid 4. Prospectus information if shares offered 5. Details of consideration paid in last 4 months 6. Any other information material to shareholder’s decision, unless unreasonable because previously disclosed Target’s statement (section 638) 1. All information shareholders and advisers reasonably require to make an informed assessment of the offer, to the extent it is known and expected to be found 2. Recommendation of each director Slide 10

Takeover or scheme? Takeover Scheme Control of process Offeror Target (Implementation Agreement) Target co-operation Not essential Essential Court approval No Yes. Order scheme meetings and approve scheme Pre-bid agreement Possible (up to 20%) Possible but may exclude shares from voting on scheme Threshold for 100% ownership 90% held and get 75% of those bid for 75% in each class of member Vulnerability to blocking stake High (90% minimum acceptance condition) Increases as bidder’s stake diminishes eligible voting pool Offer structure flexibility Limited – can only bid for securities Flexible – can include reduction/return of capital, demerger and asset acquisitions Tactical flexibility Yes. Can increase offer price and waive/modify conditions No Main dispute forum Takeovers Panel Court Payment of consideration Over time At one time Disclosure Reviewed by Panel if complaint Reviewed by ASIC Low (50% condition) Source: Blake Dawson 2009 Slide 11

Control transactions – this year to last year Source: Freehills 2009 Public Mergers & Acquisitions Report Slide 12

Control transactions in 2009 - industry type Source: Freehills 2009 Public Mergers & Acquisitions Report Slide 13

Market value of deals - 2009 Source: Freehills 2009 Public Mergers & Acquisitions Report Slide 14

Type of consideration - 2009 Cash Shares Cash/ Shares Source: Freehills 2009 Public Mergers & Acquisitions Report Slide 15

Indicative takeover timetable (1 month bid extended for 1 month) Preparation for bid DAY: Offer open for acceptance Give target’s statement to ASIC, bidder, ASX, shareholders 1 15 30 35 46 66 Bidder pays consideration 74 95 118 Announce Bid Give bidder’s statement to ASIC, target, ASX Dispatch bidder’s statement to shareholders Offer closes, unless extended Waive or satisfy bid conditions Offer closes, unless further extended Finish paying consideration Compulsory acquisition Pay consideration Source: Blake Dawson 2009 Slide 16

Time for completion of takeovers - 2009 Source: Freehills 2009 Public Mergers & Acquisitions Report Slide 17

Regulatory involvement - 2009 2008 – 12% Source: Freehills 2009 Public Mergers & Acquisitions Report Slide 18

Part 2 Takeovers Panel structure Slide 19

Panel philosophy Peer review body Regulator of takeovers and other control transactions Main forum for resolving disputes in takeovers Courts excluded during bid period “Sensible, highly qualified commercial people making commercial decisions in an atmosphere that calls for speedy resolution”: Alinta Slide 20

Pros and Cons Pros Commercial dispute resolution Principles based Informal process Enforceable in court Speedy hearings Not stop bid from proceeding Cons Acceptance of model Some limitations on investigations Extra-legal considerations Slide 21

Qualifications for Panel members Australian Securities and Investments Commission Act Section 172 • Not less than 5 members • One member to act as President • Appointed by Governor in Council for up to 5 years • May be full time or part time • Qualified by reason of experience in (a) business (b) administration of companies (c) financial markets (d) financial products and financial services (e) law (f) economics or (g) accounting Slide 22

Panel members – by profession Slide 23

Panel members – by location Slide 24

Panel organisation Treasury PANEL Counsel Alan Shaw President 51 members (part time ) Director Allan Bulman Manager Karolina Danger Legal Officer Nirangjan Nagarajah Change every 8 months Assistant Rebecca Banhelyi Secondee Marissa Bendyk Slide 25

The Executive’s role Does not Assist Panel members to make good (consistent and timely) decisions Make decisions on applications Exercise any formal powers Provide non-binding advice on applications Exercise any discretions Interfaces with the parties on applications Organises Panel days and other communications Draft policy as settled by wider Panel Slide 26

Part 3 Takeovers Panel powers Slide 27

Panel powers - overview ASIC review in relation to modifications/ exemptions from Chapter 6 (Section 656 A) Declaration of unacceptable circumstances (Section 657 A) Orders (Interim and Final) (Section 657 D) Referrals to and remittals from court (Sections 657 EB and 659 A) Rule making (Section 658 C) Policy development Procedural rules Guidance Notes Slide 28

Other powers Accept enforceable undertakings (ASIC Act section 201 A) Conduct conferences (ASIC regs 35 -41) At a conference - summons witnesses, take evidence on oath, subpoena documents (ASIC Act section 192) Contempt power (ASIC Act section 200) Dismiss frivolous & vexatious applications (Section 658 A) Also power not to conduct proceedings (ASIC reg 20) Slide 29

Main power – declarations Corporations Act Fuzzy law (vibe) Section 657 A(1) The Panel may declare circumstances in relation to the affairs of a company to be unacceptable circumstances. Without limiting this, the Panel may declare circumstances to be unacceptable circumstances whether or not the circumstances constitute a contravention of a provision of this Act. Principles based Slide 30

Main power – Bases for declaration Section 657 A(2) Appears to the Panel that circumstances are unacceptable • having regard to control effect ‘Eggleston principles’ • otherwise unacceptable having regard to section 602 • because they constitute a contravention Slide 31

Purposes of the takeovers code ‘Eggleston principles’ Section 602: Australian company - listed, unlisted with more than 50 members, managed investment scheme • acquisition of control of voting shares takes place in an efficient, competitive and informed market • holders of shares and directors: (i) know the identity of any person who proposes to acquire a substantial interest (ii) have a reasonable time to consider the proposal (iii) are given enough information to enable them to assess the merits of the proposal • holders of shares all have a reasonable and equal opportunity to participate in any benefits Slide 32

Chapter 6 policy in applications Slide 33

Panel orders Interim orders (section 657 E) Final orders (section 657 D) • Declaration of unacceptable circumstances • Not unfairly prejudice any person • Protect rights or interest of persons or group of persons • Ensure the takeover or proposal proceeds (as far as possible) as if the circumstances had not occurred Slide 34

Part 4 Takeovers Panel process Slide 35

Panel proceedings ASIC grants or refuses relief PANEL Appeal REVIEW PANEL Panel grants or refuses relief Judicial review Questions of law Remittals ASIC or any "person affected" COURTS Application Declare unacceptable circumstances Appeal Declare unacceptable circumstances Questions of law, judicial review "grounds" Source: Blake Dawson 2009 Slide 36

Panel process Procedural rules o Media canvassing and confidentiality o Legal representation Applications Choosing three Panel members for a matter – conflicts Process letter/ Declaration of interests Conduct proceedings? Brief, submission, rebuttals Conferences Decision, reasons and media releases Slide 37

Part 5 Takeovers Panel matters Slide 38

Panel matters s 657 A s 656 A Slide 39

Panel applicants Slide 40

Panel dealings Slide 41

Part 6 Challenges to the Panel Slide 42

Panel challenges Declaration power Section 657 A Glencore International AG v Takeovers Panel 1 Orders power Section 657 D CEMEX v Takeovers Panel 2 Existence of the Panel itself Precision Data v Wills 3 A-G (Cth) v Alinta 4 Judicial power Notes: 1. [2005] FCA 1290, [2006] FCA 274 2. [2008] FCA 1572, [2009] FCAFC 78 3. (1991) 173 CLR 167 4. [2008] HCA 2 Slide 43

Challenge to the declaration power First judicial review overturned decision effect on control • Power to make a declaration… o not predicated upon it appearing to the Panel that particular circumstances have an effect o predicated upon it appearing to the Panel that particular circumstances are unacceptable, having regard to the effect Second judicial review considered substantial interest Resulted in amendments: • • • Corporations Amendment (Takeovers) Bill 2007 Effect changed to - ‘appearing to the Panel’ New s 657 A(2)(b) - Eggleston principles “without having to also establish either a contravention of the Act or an effect on control” New definition of ‘substantial interest’ introduced (section 602 A) Order power improved - rights or interests of a group of persons Slide 44

Challenge to the order power First judicial review • • Dismissed review Section 657 D allows orders for a group: lost opportunity to trade in an efficient and informed market was sufficient nexus Second judicial review (appeal) • • • Dismissed review Orders are not concerned with damages by the conduct of another person “en globo’ assessment available – market misinformed is sufficient nexus “In Alinta … considerable emphasis on the specialist nature of the Panel and the public interest considerations which underpin its role”: per Full Court Slide 45

Challenges to the Panel itself Judicial power of the Commonwealth separation of powers is an implication from s 71 of Constitution • Principle 1 – Only Chap III courts can exercise judicial power of the Commonwealth • Principle 2 – Chapter III courts cannot exercise non-judicial power Pros Cons Ensures independence of judiciary from Creates inconvenience and cost (eg, cross-vesting) political interference Perhaps merely a drafting convenience Protects citizens Invites pragmatic exceptions (eg, persona Useful without Bill of Rights designata) Slide 46

Two Cases Precision Data v Wills • Not o o o judicial power because: Panel creates new rights and obligations Orders are not enforceable by the Panel Considerations of policy have an important part to play Bid Attorney-General (Cth) v Alinta 19. 98% Bid AGL 30% APT • Panel does not exercise judicial power because: o Panel does not enforce law or resolve disputes about existing rights - creates new rights and obligations taking policy into account o A finding whethere has been a contravention is not binding or determinative of any legal question since Panel must take other factors into account, including public interest (s 657 A(2)(b)) and factors in s 657 A(3) o Panel cannot compel compliance with its orders – done by a court independently o Limitation on commencement of court proceedings is temporary • Support for the view that the Panel’s orders override the Corporations Act Slide 47

Part 7 International comparison Slide 48

Development of regulation Increased takeover activity (including "first come first served" offers) in the late 1960's resulted in different regulatory responses: • US – Williams Act (1968) Legislative/ judicial • UK – City Panel and "Code" (1968) ‘Self-regulation’/ legislative - EU Directive • Australia – Eggleston committee reports (1969+) - state Act amendments (1971+) Legislative/ judicial - federal scheme, Companies (Acquisition of Shares) Codes (1981) - national scheme, Corporations Act (2001) Legislative/ peer review Slide 49

Comparison of jurisdictions 1 Australia UK US Type/source of rules Statute Ch 6 City Code (recent statutory backing) Fed / State statutes, case law Main regulator Panel, ASIC UK Panel (recent statutory backing) Courts, SEC Can controller commit to sell controlling stake Yes, up to 20% Yes, but 30% or more - mandatory offer to other shareholders Yes, offer to other shareholders not necessarily required Pre-bid acceptance commitments Up to 20% only ("public auction" principle? ) Allowed – no limit Allowed (case law limits on full lock-up of shareholder vote) Maximum offer/conditional offer period 12 months 60 days – minimum acceptance condition 81 days – other conditions Generally no (States have varying antitakeover laws) Source: Blake Dawson 2009 Slide 50

Comparison of jurisdictions 2 Australia UK US Mandatory minimum acceptance condition No Yes - 50% Generally no – 2 step offers common (State laws vary) Restrictions on further offers? No – subject to "truth in takeovers" Yes – Panel consent required within 12 months Some States require bidder to wait for a period or get shareholder approval Ability of Bidder to rely on conditions Unrestricted Limited (apart from certain conditions) Unrestricted Courts – rare Panel – common (rarely defeats bid) Courts – very common (often results in delay or a change in terms) Litigation forum and Courts – not frequency common Panel – common (rarely defeats bid) Source: Blake Dawson 2009 Slide 51

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