Australia: Public M&A: When is an entitlement issue really a minorities take-out?

Last Updated: 6 July 2016
Article by John Elliott

On 27 June 2016, Sandon Capital Investments Limited commenced Takeovers Panel proceedings in relation to an entitlement offer announced by Warrnambool Cheese & Butter Factory Company Holdings Limited (WCB). These proceedings by a minority shareholder in the ASX-listed WCB have raised questions as to whether unacceptable circumstances exist with regards to an entitlement issue, notwithstanding compliance with Item 10 of Section 611 of the Corporations Act.


Saputo Dairy Australia Pty Limited (Saputo) holds 87.92% of WCB, acquired in early 2014 through a hotly contested competitive takeover bid process for WCB, which fell short of achieving the 90% ownership level necessary to enable Saputo to move to 100% ownership of WCB. Lion-Dairy & Drinks Pty Ltd's (Lion) shareholding at that time effectively blocked Saputo moving to 100% ownership of WCB. It now owns 10.22% of WCB and can continue to block Saputo from moving to 100% ownership of WCB. That is, unless the potential outcome of the WCB entitlements offer described below, of which Sandon Capital complains, eventuates.

Under the Corporations Act, if Saputo comes to own 90% of WCB, it will have an ability to compulsorily acquire all outstanding shares, even if it has not achieved that 90% ownership as a result of making a takeover offer available to all shareholders. The WCB entitlement issue announced on 10 June 2016 may result in Saputo owning 90% of WCB, an outcome which it was not able to achieve from its earlier takeover offer.

Saputo Inc (Saputo's holding company) has committed that Saputo will take up its full entitlement under the offer, thereby ensuring that it maintains a minimum 87.92% holding of WCB. However, if no other shareholders take up their entitlements under the offer, Saputo's ownership of WCB will move above the 90% threshold, thereby enabling it to take out all other shareholders.

When is an entitlement issue really a minorities take-out?

The primary question for the Takeovers Panel would seem to come down to whether WCB requires the funds being raised under the entitlement offer and is the true purpose behind the entitlements offer being made really to enable Saputo to compulsorily acquire the other WCB shareholdings.

In essence, this is the thrust of Sandon Capital's key submissions revealed in the Panel's media release announcing the application. Sandon Capital submits in its application that WCB does not require the funds being raised under the entitlement offer and there is no incentive for shareholders to participate in the offer. It is further submitted that the offer is being inappropriately used as a mechanism to enable Saputo to proceed to compulsory acquisition of the remaining WCB shares and is therefore an abuse of Item 10 of Section 611 of the Corporations Act. On the face of it, WCB's balance sheet and the existence of, one assumes, a supportive majority shareholder in Saputo, does not scream out the need for a WCB fundraising. WCB does however seem keen to repay debt, which is the principal reason given for the fundraising.

Item 10 of Section 611 of the Corporations Act provides an exemption to the prohibition which otherwise prevents shareholders of listed companies increasing their ownership interest when they already own more than 20% of the company. This exemption allows a company in the position of Saputo to increase its ownership interest, notwithstanding that interest is 87.92% of WCB, if it acquires more shares through an entitlement issue that satisfies a number of conditions listed in Item 10. Those conditions are met in the case of a WCB entitlement offer.

However, the Takeovers Panel's remit in this case is to decide if unacceptable circumstances exist, notwithstanding compliance with the law. The Panel has, on numerous occasions in the past, found fault with entitlement offers that, notwithstanding compliance with the Item 10 conditions, have an unacceptable effect on the control of a company. This is what Sandon Capital is asking the Panel to find in the case of the WCB entitlement offer. The key question which the Takeovers Panel will need to determine is whether or not the WCB entitlement offer is effectively a device to enable Saputo to move above the 90% ownership level, which would enable it to compulsorily acquire the remaining shareholdings in WCB.

The WCB entitlement offer does include features which the Panel has in the past indicated might mitigate against an entitlement offer being unacceptable, such as the availability of a top up facility under which shareholders can apply for additional new shares in excess of their entitlement (which Saputo itself will not take advantage of) and making the offer renounceable. However, the existence of such features does not ensure that the WCB entitlements offer will pass muster with the Takeovers Panel.

The WCB offer booklet states that Saputo Inc has advised WCB that it has not yet made a decision as to whether it would procure Saputo to proceed with compulsory acquisition of any WCB shares not owned by Saputo. The Takeovers Panel is likely to carefully investigate that statement. Bidders under takeover offers routinely disclose their intentions on whether they will proceed to compulsory acquisition if they achieve the threshold necessary to do so. It certainly challenges conventional logic that Saputo Inc has not yet determined whether Saputo would proceed to compulsory acquisition if able to do so, following the entitlement offer.

The role of the board

It should be noted that the WCB Board, not Saputo, must decide that the entitlement offer will proceed, as WCB is a separate legal entity remaining listed on the ASX and the WCB directors have obligations to all shareholders, not just to WCB's majority shareholder Saputo.

However, Saputo's representatives have a significant voice at the WCB Board table, with two Board seats out of five. The two Saputo representatives are not independent directors. While the entitlement offer booklet states that an independent Board committee reviewed and approved the terms and pricing of the entitlement offer, it is not clear from the offer booklet whether or not the Saputo representatives were involved in the WCB Board decision to proceed with the entitlement offer in the first place.

It is fair to assume that they were involved, given that the offer booklet does not disclose that they were not involved but it specifically does disclose that they were not involved in decisions about the terms and pricing. Certainly Lino A. Saputo, Jr, the WCB Chairman and a Saputo representative, signed the letter to WCB shareholders accompanying the entitlement offer booklet.


It will be very interesting to see whether the Takeovers Panel allows WCB to proceed with an entitlement issue, the result of which might be to enable its holding company Saputo to squeeze out all other shareholders, including Lion, when Lion has otherwise already made a sufficient investment to be able to prevent that occurring. Lion would only be able to continue to prevent that occurring if it were to take up the vast majority of its own entitlement. However, one has to question whether Lion should have to make a further significant investment into WCB to protect its position. The Panel will need to carefully consider this point.

If the Takeovers Panel does not make the orders sought by Sandon Capital to prevent the entitlement offer proceeding, Sandon Capital would still be able to commence Court proceedings seeking to prevent the shares being issued under the entitlement offer on an argument that the offer and consequent capital raising were being made for an improper purpose and constitute a breach of the WCB directors' duties. Such proceedings would inevitably see the directors of WCB enter the witness box and be cross examined individually on their personal motivations in proceeding with the entitlement offer.

While Court proceedings are a real possibility, the Australian market has come to expect commercial resolution in quick order to be achieved by the Takeovers Panel in circumstances such as these, so a prompt and well-reasoned response from the Panel may see an end to the matter.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions