The Federal Treasurer recently released draft legislation, the Corporations Amendment (Takeovers) Bill 2006, aimed at clarifying the powers of the Takeovers Panel. The draft Bill, however, may still suffer from weaknesses and could need further thought and fine-tuning.
Since the establishment of the Corporations and Securities Panel (“CSP”) in 1991 – the first non-judicial body designed to remove the courts from takeover disputes – the story has been one of constitutional challenge and attempts to overcome problems.
In this article Stephen Newman outlines the events leading up to the draft legislation and urges business leaders and their legal advisers to approach the draft Bill with caution.

Background

The first case referred to the CSP, a takeover by Precision Data Holdings Limited for Titan Hills Australia Limited, resulted in a constitutional challenge to the powers of the CSP in the High Court1. Although, the High Court upheld its constitutionality, the spate of further litigation initiated by Precision Data consigned the Panel in its initial form to the dustbin of legal history.

The CSP was eventually revived. After further fine tuning, it began life in its present form on 13 March 2000. The CSP was now the Takeovers Panel (“Panel”) with refined and broader powers. It had a new President and members. It also had the support of the takeovers community as the appropriate forum for the resolution of disputes, either between parties or with the Australian Securities and Investments Commission (ASIC).

While there was talk of a further constitutional challenge to the Panel, none eventuated. There was no court challenge to any of its declarations or orders.

All this changed in 2005 with the Centennial Coal Company Limited (“Centennial”) takeover of Austral Coal Limited (“Austral”).

The challenge to the Panel

The First Glencore challenge2

In June 2005, Centennial applied to the Panel for a declaration of unacceptable circumstances under section 657A Corporations Act 2001 (“Act”) and ancillary orders arising from the alleged failure by Glencore International AG to make a timely disclosure to the market that it held more than five percent of the issued capital in Austral and it had increased its shareholding above that percentage before it informed the market.

Glencore had built up its stake partially by entering into cash-settled equity-swap agreements with two swap counterparties.
The Panel found these circumstances unacceptable. The Panel held that Glencore’s direct holding and the equity swaps gave it a substantial interest in Austral and this substantial interest was relevant information for the market. The Panel ordered:

• immediate disclosure of the essential terms of the swap arrangements, and

• Glencore to offer to sell the same number of shares to shareholders who sold their shares in Austral during the period

• Glencore first obtained its five percent stake in Austral and made its first announcement to the market at the same price they sold on market.

The Panel’s decision, with modifications to the orders, was affirmed on appeal to the Review Panel although the Review Panel’s reasoning for maintaining the declaration of unacceptable circumstances was different.

Glencore challenged the Panel’s ruling in the Federal Court. The Federal Court upheld the challenge but held, importantly for the future of the Panel, that the powers exercised by the Panel under section 657D of the Act to make orders consequent upon a declaration of unacceptable circumstances did not involve the exercise of judicial power.

The Federal Court held that the Review Panel made two jurisdictional errors. First, the Review Panel did not say what effect Glencore’s announcement to the market would have had on either control of or the acquisition of a substantial interest in Austral, as it was required to do by section 657A (2) of the Act. Secondly, the Review Panel in fashioning its orders, did not take into account whether those orders would unfairly prejudice Glencore (this possibility existed), as it was required to do under section 657D(1) of the Act and therefore failed to balance the interests of Glencore against the interests of persons affected by the unacceptable circumstances as required by section 657D of the Act.

The Second Glencore challenge3

The Federal Court returned the matter to the Panel to be dealt with according to law.

In October 2005, the Panel made a further declaration of unacceptable circumstances and orders for Glencore to pay a sum of money to ASIC to be held on trust for the benefit of Austral shareholders who may have sold their shares during a specified period up to the date of Glencore’s first announcement of its holding in Austral.

Glencore again challenged the Panel’s ruling in the Federal Court. The Federal Court also upheld this challenge principally on two grounds. First, that the Panel made an error of law in finding that Glencore had a substantial interest in the Austral shares held by the swap counterparties despite finding Glencore had no relevant interest in those shares. Secondly, it made an error of law in finding Glencore’s involvement in the swap arrangements had an effect on control or potential control of Austral or on the acquisition by Centennial of a substantial interest in Austral.

The Panel did not appeal this decision.

Remedial Legislation

The Glencore decisions raised concerns that the powers and jurisdiction of the Panel had been narrowed and it would be unable to perform its functions.
To overcome this prospect, the Federal Treasurer released new draft legislation.
The main features include:

• The definition of substantial interest will be broadened to make it clear it is not tied to the concept of relevant interest, legal or equitable interest in securities or powers or rights in an entity or securities in it. The term substantial interest is however not positively defined.
  
• The Panel will be empowered to take account of past, present or likely future effects of circumstances; it will not be required to wait for the “effects” to occur.
  
• The Panel will be allowed to declare circumstances unacceptable under the purposes of the takeovers provisions of the Act. This is a new factor for the Panel to take into account.
  
• The Panel will be given broader powers to make orders to redress any harm caused by unacceptable circumstances.

The draft Bill although clearly directed at overcoming the key findings of the Glencore decisions may still suffer from weaknesses; substantial interest is not defined, it remains uncertain that an equity derivative arrangement will constitute a substantial interest and there is no requirement to disclose equity derivatives under Chapter 6C of the Act.

Since the draft Bill was released, the Federal Court has delivered its decision in the challenge by Alinta Limited to a declaration of unacceptable circumstances and divesture orders the Panel made regarding its acquisition of certain relevant interests in units in the Australian Pipeline Trust4. While the Federal Court found that the Panel was wrong in concluding that Alinta Limited had breached the takeover threshold provision of the Corporations Act (section 606) in making the acquisition, it was satisfied that the declaration and orders made were not wrongly made by the Panel and again rejected the argument that the Panel was exercising judicial power and therefore unconstitutional. Interestingly, Alinta Limited relied on several successful arguments made in the Glencore decisions to challenge the Panel’s findings but on this occasion they did not find favour with the Court.

Alinta Limited intends to appeal the Court’s finding that the declaration of unacceptable circumstances should stand.

For further information, please contact Stephen Newman on +61 3 9608 2219 or s.newman@cornwalls.com.au