Splitting (s)hares: prevention is the best cure

The desirability of making sure the terms of a proportional takeover bid are drafted to prevent abuse by share splitting is the lesson from the latest episode of the GoldLink IncomePlus Limited (GLI) tale that has been chronicled by multiple shareholder requisitioned meetings and Takeovers Panel (Panel) actions.

The recent Panel declaration of unacceptable circumstances with respect to the affairs of GLI found that share splitting by a GLI shareholder constituted unacceptable circumstances in taking improper advantage of the requirement under section 618(2) of the Corporations Act 2001 (Cth) (Act) that a bidder acquire all of an investor’s shares if the investor would otherwise be left with less than a marketable parcel. The decision continues the largely unsuccessful endeavours of share splitters in Australian M&A deals.

It is interesting to note that the Panel decision was made despite evidence presented that the bidder was very much aware of the risk of share splitting but chose not to address the risk in the terms of the offer—in fact removing the required language from the bidder’s statement in a replacement bidder’s statement—and possibly even encouraging such share splitting.

The facts

ASX-listed GLI has been the subject of a control tussle played out over six shareholder instigated general meetings and a proportional takeover offer in the past 12 months, causing one commentator to remark that investors in GLI ‘have possibly seen one another more times than members of their own families over the past year’.

The six general meetings (on top of the annual general meeting held in December 2008) were held between April and December 2008 as a result of requisitions by one or both of Emerald Capital Limited (formerly New Opportunity Limited) (Emerald) and Bell IXL Limited (Bell IXL), in each case to seek to appoint one or both of the requisitioning shareholders’ opposing nominees to the board and to remove all other directors. Several capital reductions have also been proposed.

A proportional off-market takeover was made by Emerald in July 2008 to acquire 45 per cent of each GLI shareholder’s shares. The takeover was first bought to the attention of the Panel by GLI in two applications regarding the minimum bid price rule and the adequacy of disclosure in the bidder’s statement issued by Emerald. No declarations were made by the Panel in these instances (in the case of the disclosure issue, given the inclusion of further information in a replacement bidder’s statement).

The application The recent Takeovers Panel decision of GoldLink IncomePlus Limited [2009] ATP 2, confirmed by the review panel in GoldLink IncomePlus Limited [2009] ATP 3, arose out of an application by Emerald to thePanel seeking a declaration of unacceptable circumstances on the basis of Emerald’s allegations that certain GLI shareholder had:

• purchased GLI shares in numerous separate entities or separate parcels inthe same name, or
• split their holdings into smaller parcels.

In particular, Emerald alleged that on 21 December 2008 Fortina Pty Limited (Fortina), a company associated with Bell IXL, split its substantial holding of 22,944,000 GLI shares into parcels of 12,000 shares each in the names of 1,912 separate trusts. On 2 January 2009, Fortina then lodged 1,912 forms accepting the Emerald offer in respect of each parcel held by each trust, with the result that the shares remaining in each of the trusts after its acceptance of the Emerald offer would be a less than marketable parcel (that is, worth less than A$500).

Under section 618(2) of the Act, the acceptance of a takeover offer resulting in an unmarketable parcel requires the offer to be extended to the whole of that shareholder’s parcel of shares. In addition, section 653B of the Act provides that a person who holds one or more parcels of shares as a trustee for another person may accept as if a separate offer has been made in relation to each of those parcels. As a result, by the combined operation of these provisions, Emerald was required to purchase 100 per cent (rather than 45 per cent as proposed by the proportional offer) of the 22,944,000 Fortina shares.

Emerald submitted to the panel that the wording of section 618(2) required that any GLI shareholder who split a holding or bought multiple small parcels (in the same name or controlled entities) nevertheless be treated as the one ‘person’ and the holdings aggregated for the purpose of section 618(2). A similar submission was also made by ASIC.

Emerald therefore sought final orders that it be entitled to aggregate the holdings of GLI shareholders who engaged in share splitting so as to only be required to process acceptances from those shareholders in respect of 45 per cent of the aggregated shareholding.

The opposing submissions

GLI made an opposing submission to the Panel, asserting that, while the use of section 618(2) to convert a proportional bid into a full bid may be unfair to a bidder, this is no greater than the unfairness inherent in a proportional bid under which a bidder can obtain control without offering an adequate control premium for all shares.

Fortina submitted that there was no policy reason to support a finding of unacceptable circumstances because:

• a proportional bid was defined in terms of an offer, not the outcome of the offer (which could in any case vary depending on the level of acceptances by small shareholders), and
• all shareholders had an equal opportunity to split their holdings to take advantage of section 618(2) and indeed in this case all shareholders had been notified of that opportunity by a reference in GLI’s
  target statement to the potential ability for shareholders to be able to ‘split’ their shareholdings into multiple parcels so as to become a ‘Non-marketable Parcel Shareholder’ in respect of some or all of their shares.

The Panel’s decision

The Panel made a declaration of unacceptable circumstances in relation to the share splitting carried out by Fortina, citing the following reasons:

• Sections 618(2) and 653B of the Act are not intended to be used to allow a shareholder to choose between accepting for the proportion offered by the bidder or some higher proportion and thereby undermining the proportional bid.
• Share splitting is unacceptable having regard to the purposes of the Act takeovers regime captured in section 602, in particular because it breaches both the efficient market and equal treatment principles.

Avoiding share splitting

It was submitted by GLI and Fortina that Emerald could have avoided the alleged unacceptable circumstances in formulating its proportional takeover offer in a number of ways, including applying to ASIC for a modification of sections 618(2) and 653B of the Act to address the possibility of share splitting or the acquisition of small parcels of GLI shares designed to take advantage of the section 618(2) mechanism. This option was also confirmed by ASIC as likely to have been available to Emerald and noted by the Panel to be the better course of action for any bidder making a proportional bid.

Nevertheless, it was the Panel’s view that the fact that Emerald failed to adequately protect against the risk of share splitting giving rise to unacceptable circumstances did not affect the Panel’s consideration of whether unacceptable circumstances in fact now existed. The Review Panel agreed on this point and, in the face of further submissions made by Fortina alleging that Emerald had in fact encouraged share
splitting (in the belief that it would enhance the likelihood of Emerald’s bid succeeding), went further and asserted that the same reasoning applied even if Emerald had so encouraged share splitting by GLI shareholders.

The GLI saga continues …

As indicated above, the Panel’s orders related only to the share splitting of Fortina, so as to allow Emerald to treat the aggregate Fortina shares as one parcel. The Panel indicated this was because there was insufficient information to arrive at the conclusion that other shareholders had similarly created multiple parcels.

However on 18 February 2009, GLI announced to the market that its share registry had received a share transfer from Emerald by which Emerald is seeking (according to the information released by GLI) to return shares to former shareholders where Emerald has formed the view that share splitting was conducted by that shareholder, so that the shareholder has multiple parcels to be aggregated. GLI’s announcement asserts that Emerald has only paid the bid consideration to these shareholders for 45 per cent of its aggregate shares. GLI directors have refused to register the transfer on the basis that Emerald has no authority to execute the transfer as transferee on behalf of the former shareholders concerned. The directors have also concluded that, although they intended to transition control of the board to Emerald upon it securing a controlling stake in GLI, these events represent a material change in circumstance so that for the directors to step down would not be in the best interest of GLI. Emerald has consequently requisitioned a further general meeting of GLI, which is scheduled for 27 March 2009, to remove the existing directors of GLI and replace them with Emerald’s nominees.

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