The Takeovers Panel (Panel) has recently made comprehensive orders to delay and restructure aspects of a rights issue and to prevent an underwriter acquiring any further voting power in the issuer. In doing so, the Panel confirmed its approach to rights issues that have a potential impact on control, particularly where the rights issues are underwritten by a major shareholder or related party.
"Companies are entitled to manage their capital however they see fit; however, if there is a potential for a rights issue to affect control the directors should carefully consider all reasonably available options to mitigate that effect. Companies in difficult financial circumstances may not have many options. Nevertheless, those options that are reasonably available should be fully explored." The Takeovers Panel.
Background
On 9 August 2013, Avalon Minerals Limited (Avalon) announced a 1 for 1 non-renounceable rights issue at $0.01 per share to raise approximately $5.9 million. The rights issue included a shortfall facility and was fully underwritten by Tan Sri Abu Sahid Mohammed (Tan Sri Abu) who was a former director and Chairman of Avalon and held approximately 19 per cent of the company. If no shareholders took up their rights, Tan Sri Abu's voting power would increase to approximately 61 per cent.
Separately, another shareholder Dato Lim Heng Suan (Dato Lim) held approximately 8.2 per cent of Avalon at the time of announcement of the rights issue.
The Panel made an interim order on 9 September 2013 that Avalon postpone commencement of deferred settlement trading of the rights issue shares, not issue any rights issue shares without the Panel's approval, and hold subscription monies on trust. The next day the Panel varied the interim order to provide Tan Sri Abu could not rely on any right he may have to terminate the underwriting agreement with Avalon as a consequence of the Panel application or interim orders. On 27 September 2013, the Panel further varied the interim orders at the request of Avalon. First, to enable Avalon to proceed with completion of the rights issue only in respect of shares subscribed for by Tan Sri Abu, Dato Lim and Data Siew Mun Chuan (subscription monies for all other shareholders were to be held on trust for those shareholders). Secondly, that Tan Sri Abu, Data Lim and Data Siew Mun Chuan must not acquire any shares in Avalon (other than under the rights issue), nor dispose of any Avalon shares acquired under the rights issue.
The Panel's findings
The Panel was highly critical of the rights issue, Avalon, Tan Sri Abu and Dato Lim.
- Avalon
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The Panel found that all reasonable steps to minimise the potential impact on the control of Avalon were not taken by Avalon's directors as other capital raising alternatives available to Avalon were not fully explored. These findings were made in accordance with the Panel'sGuidance Note 17: Rights Issues. Further, there were material information deficiencies in relation to Avalon's offer. These included inadequate disclosure concerning Tan Sri Abu, his intentions and, importantly, his association with Data Lim, as well as inadequate disclosure of Avalon's need for and use of the funds. The Panel also found the rights issue was contrary to section 602(c) Corporations Act 2001 (Act), which requires reasonable and equal opportunity to participate in any benefits accruing to the holders.
- Tan Sri Abu and Dato Lim
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In relation to Tan Sri Abu and Dato Lim, the Panel found the parties to be associates, noting, for instance, that, on 19 August 2013, Avalon placed $344,000 of shares to Dato Lim, increasing his stake in Avalon to 11.8 per cent. That placement was funded, at least initially, by Tan Sri Abu. The Panel concluded that Dato Lim took the placement at the request of Tan Sri Abu as he could not increase his stake in Avalon (already at 19.9 per cent). By finding that Tan Sri Abu and Dato Lim were associates, immediately after the placement, they had voting power in Avalon of 31.36 per cent in contravention of the takeovers provisions of the Act (i.e. the 20 per cent takeovers limit). By not disclosing the association, the parties also breached the requirement to lodge a substantial holder notice with ASX (which would be publically available).
Orders
In reaching its decision, the Panel had to balance two competing interests. On the one hand, that Avalon had legitimate reasons to raise funds and that it was necessary for it to do so. On the other hand, if the rights issue were to proceed unaltered and Tan Sri Abu were to be allocated shares as an underwriter, the voting power of Tan Sri Abu and Dato Lim would increase to 48.72 per cent, thus creating a control issue.
The Panel concluded that the circumstances arising in this situation are unacceptable and made the following orders:
- That Avalon re-open its rights issue and offer all shareholders (other than to Tan Sri Abu, Dato Lim and Avalon directors) the opportunity to take up their entitlement, apply under the shortfall or withdraw their original applications.
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This order was made by the Panel on the basis that it would rectify the majority of unacceptable circumstances that were created by Tan Sri Abu, Dato Lim and the Avalon directors.
- That additional disclosure be made to shareholders detailing Avalon's need for the funds and Tan Sri Abu's association with Dato Lim.
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ASIC submitted that Avalon's disclosure on funding "appears materially inconsistent" with Avalon's financial position. The Panel agreed with ASIC's submissions and took the view that it was misleading to Avalon shareholders:
- not to address the critical funding requirements of the company to remain solvent where such a failure could have a material impact on a shareholder's assessment of whether to participate in the rights issue; and
- that Avalon's disclosure contained very limited information about Tan Sri Abu, other than stating that he was the company's largest shareholder and was underwriting the rights issue.
The Panel argued that Tan Sri Abu's background and Avalon's choice to engage him should have been disclosed to shareholders. In particular, the Panel considered that, using the principles outlined in InvestorInfo Limited [2004] ATP 6 at [38], the rights issue and its potential benefits were not made genuinely accessible to shareholders.
- That Tan Sri Abu not underwrite the rights issue.
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In Coppermoly Limited [2013] ATP 8, an August 2013 decision of the Panel concerning similar circumstances, the underwriter was held to their underwriting commitments on the basis of a similar agreement to take the shortfall shares. However, here the Panel determined that based on the divestment and voting restriction orders made, it would not be appropriate for the underwriting to be completed. In making this order, the Panel was critical of the fact that Avalon proceeded to use Tan Sri Abu as an underwriter, in circumstances where conflicting legal advice existed. The Panel also considered that not all reasonable steps were taken to minimise the potential control impact of the rights issue.
- That after completion of the rights issue, any shares held by Tan Sri Abu or Dato Lim in excess of 19.9 per cent and 8.22 per cent respectively are sold by ASIC.
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The Panel ordered, by way of divestment, that Tan Sri Abu and Dato Lim be restored to their respective shareholding positions prior to the August 2013 placement. The Panel commented that this would be the most effective way of ensuring that shareholders were not able to benefit from unacceptable acquisitions.
- That, for a period of 18 months after the date of the Panel's order Tan Sri Abu cannot exercise voting rights in Avalon greater than 20 per cent less the voting power of Dato Lim. However, this is subject to a 3 per cent increase each six months and does not apply in respect of any shares after the date of the Panel's order which is acquired in compliance with the takeovers provisions of Chapter 6 of the Act.
Key Lessons
It is evident in the Panel's reasons for decision, published 11 November 2013, that where a company seeks to circumvent Chapter 6 of the Act by using the section 611 underwriting exception of the Act, the Panel is eager to ensure that its policies are complied with. This decision reinforces the implications of the Panel's Guidance Note 17 on rights issues with a potential effect on control and the importance of the structure of a rights issue. It also serves as a reminder that where the Panel's policies are breached, the Panel will act swiftly and robustly to rectify the breach. In 2013, this response has been consistent where the Panel has been confronted with questionable rights issues, underwriters and their associates.
The Panel's Reasons for Decision can be found here: Avalon Minerals Limited [2013] ATP 11.
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