Attacking a placement in the face of a bid proposal – the Panel decision in MacarthurCook

MacarthurCook, in receipt of a proposal to make a takeover offer by AMP, had proceeded to place, without shareholder approval,13 per cent of its issued share capital with IOOF Holdings Limited (IOOF).

Following MacarthurCook appealing the ASX’s decision that the placement was in breach of the three month post-bid proposal restriction on share issues (in Listing Rule 7.9), AMP decided proactively to go to the Panel for remedies, and succeeded in attaining orders for a shareholder meeting to approve the IOOF placement and, failing the approval, cancellation of the share placement.

The Panel has shown in MacarthurCook a willingness to offer a quick and responsive route for a bidder seeking remedies, by comparison with the well trodden and arduous route of attacking defensive placements in court proceedings for breach of directors’ duties.

AMP’s approach and MacarthurCook’s response Takeover offer and pre-bid agreement

On 6 June 2008, AMP proposed a ‘non binding, indicative and incomplete’ takeover offer of MacarthurCook at an offer price of $1.35 per share and entering into a pre-bid acceptance agreement with Ascalon Capital Managers Limited (Ascalon) in relation to its 18.4 per cent shareholding in MacarthurCook.

On 11 June 2008, MacarthurCook confirmed receipt of an ‘incomplete and highly conditional proposal’ from AMP. The following week it announced their negative response to that proposal. MacarthurCook indicated that they
considered the offer not to be in the interests of MacarthurCook and its shareholders.

Issue of securities

On 13 June 2008, MacarthurCook disclosed its entry into a strategic investment management and distribution alliance with IOOF.

These arrangements included the private placement of 13 per cent of its fully diluted share capital with IOOF at $1.15 per share—a price substantially less than AMP’s indicative offer made just seven days earlier. The terms of the placement contained a contractual restriction that IOOF not dispose of the shares for 24 months, except where a takeover or scheme attains the approval of the MacarthurCook board, or where a third party acquires more than 50 per cent of MacarthurCook.

IOOF was also given the option to underwrite MacarthurCook’s dividend reinvestment plan until 31 December 2009.

Listing Rule 7.9 requires that an entity must not issue new securities without shareholder approval for the period of three months after it receives written notice that a person is making, or proposes to make, a takeover for securities in it. The ASX ruled that the issue of shares to IOOF was a breach of Listing Rule 7.9. On 24 June 2008, MacarthurCook announced that it disagreed with the ASX’s decision and would appeal.

Application to the Panel

AMP turned to the Panel to get remedies on 25 June 2008. AMP submitted that the placement to IOOF constituted a frustrating action and unacceptable circumstances.

The Panel decision

The Panel made a declaration of unacceptable circumstances and final orders on 10 July 2008 and has since released its reasons for the decision.

The indicative AMP proposal

The Panel looked at the proposal by AMP in its entirety and considered it to be a genuine potential offer, despite being couched in terms designed to fall within the exception to Listing Rule 3.1 by being an ’incomplete proposal’ and also to avoid triggering section 631 of the Corporations Act 2001 (Cth) (Corporations Act), which would require a formal takeover bid to be made within two months.

The Panel felt that AMP had sufficient resources to comply with its obligations under the offer and had set out the proposal in sufficient detail. After receipt of AMP’s letter offer, MacarthurCook ought not to have taken any action to frustrate the AMP offer without shareholder approval.

A frustrating action?

The Panel considered the following particulars of the strategic alliance between MacarthurCook and IOOF (as they operate together) as constituting a frustrating action in relation to the AMP offer:

• the issue of shares to IOOF (Placement)
• the contractual restriction on disposal of MacarthurCook shares by IOOF for 24 months (IOOF Undertaking), and
• the option for IOOF to underwrite MacarthurCook’s dividend reinvestment plan (DRP Underwriting Option)

(together with the transaction, each of the above an element of the transaction).

In Guidance Note 12 on frustrating actions, the Panel states that an action will not usually constitute unacceptable circumstances where there is a commercial imperative for that action. MacarthurCook submitted that the transaction was not reactive to the AMP offer but instead provided essential funding. The Panel took a different view. They found that the Placement was a reactive and voluntary action. The Panel considered the need for short term capital not to be so urgent that MacarthurCook had ‘a commercial imperative to justify undertaking the Placement without seeking shareholder approval’.

The decision

The Panel found that:

• AMP had made a genuine offer
• the transaction constituted a frustrating action
• shareholder approval ought to have been obtained for the transaction, and
• the absence of shareholder approval gave rise to unacceptable circumstances.

Declaration

Under section 657A of the Corporations Act, the Panel declared that ‘the circumstances constituted unacceptable circumstances in relation to the affairs of MacarthurCook’.

The Panel had regard to:

• the likely effect of the transaction on the control or potential control of MacarthurCook, or the acquisition or proposed acquisition of a substantial interest in MacarthurCook, and
• the purposes of Chapter 6 of the Corporations Act, being to ensure that the acquisition of control over shares takes place in an efficient, competitive and informed market.

Orders

The Panel ordered (as varied on 23 July 2008) that MacarthurCook obtain shareholder approval for each of the elements of the transaction by 1 September 2008 and that any votes cast on an element of the transaction by MacarthurCook’s substantial shareholder, IOOF, be disregarded.

The Panel’s orders anticipated that shareholder approval for the Placement may not be obtained, stating that in those circumstances:

• ‘all agreements that form part of the transaction are cancelled, and
• shares issued under the Placement are cancelled with subscription moneys repaid to IOOF.’

If the shareholders approve the Placement but not the IOOF Undertaking or DRP Underwriting Option, then the ‘unapproved’ element(s) of the transaction will fall away.

What does this mean for MacarthurCook and for a future bidder responding to a target’s apparently defensive placement?

MacarthurCook has moved on (to recook its cake)1, having announced that it was ‘disappointed’ with the Panel’s decision, but that it would hold an extraordinary general meeting to seek the required shareholder approvals. It has told the Panel that it will not proceed to appeal the ASX decision that it was in breach of Listing Rule 7.9.

For bidders, the Panel decision means that it is clearly possible to structure a bid proposal which is neither required (by Listing Rule 3.1) to be announced by the target nor commits the bidder (under section 631) to proceed with the bid, yet still paralyses a target from proceeding with an unannounced share issue.

However to attract the Panel to grant remedies for a share issue in the face of a bid proposal, the bidder will have to establish that its offer—even if confidential and non-binding—is indeed a genuine potential offer and the target share issue in response has elements which establish that it is an action which is in frustration of that offer. By contrast, the target may be in breach of ASX Listing Rule 7.9 irrespective of whether the placement is in frustration of the offer.

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