Frustrating the credit crunch

A bidder suffers credit crunch frustrations – the Panel will not imperil Perilya

The Takeovers Panel’s recent decision in Perilya Limited (No 2) marks the first time the Panel has recognised, and declined to conduct proceedings on the basis of, the financial pressures of a takeover target arising from current market turmoil. The Panel’s unwillingness to place the target in a precarious financial position was a key consideration in the Panel’s decision to decline to proceed in relation to the target’s alleged frustrating actions.

In declining to conduct proceedings in relation to the purported frustrating actions of the target in placing shares, taking a deposit and granting a related call option over a significant target asset, the Panel placed greater emphasis on the target’s urgent need for funds than the fact that the placement was subject to shareholder approval.

This is the first time that the Panel has recognised an imminent funding requirement as a basis for declining to commence proceedings, or not making a finding of unacceptable circumstances, in respect of an issue of shares by a target that triggers a bid condition. Last year, the Panel rejected an argument of an imminent funding requirement in MacarthurCook Limited, and said the placement by the target company was a frustrating action.

The Perilya – Shenzhen transaction

Perilya Limited is a base metal mining and exploration company with operations in Broken Hill, the Flinders Ranges and Mount Isa. While subject to an off-market scrip takeover by a subsidiary of CBH Resources Limited, Perilya entered into a Subscription Agreement with Shenzhen Zhongjin Lingnan Nonfemet Co. Ltd. Shenzhen is a Chinese base metal mining and smelting company.

The Subscription Agreement provided for Perilya to issue to Shenzhen shares amounting to 50.1 per cent of its ordinary shares on a fully diluted basis. Shenzhen agreed to pay a $10 million deposit in advance of the share issue. The Subscription Agreement also contemplated the issue of a call option to Shenzhen, allowing it to acquire Perilya’s Mt Oxide exploration operation in Mount Isa. If the placement was not approved by Perilya’s shareholders and the deposit was not repaid, Shenzhen could exercise the option and acquire that asset for an arm’s length price. Perilya subsequently entered into a corresponding Call Option Deed and commenced taking the required steps to seek shareholder approval for the placement and the issue of the option (even though the Call Option Deed was not subject to the approval of Perilya’s shareholders).

Panel application

CBH’s subsidiary applied to the Panel for a declaration of unacceptable circumstances in relation to the placement and the option, on the basis that:

1. Perilya’s agreement to the placement constituted frustrating action since shareholder approval was being sought in the context of information deficiencies
2. Perilya’s entry into the option without it being subject to shareholder approval constituted frustrating action, and
3. the placement, in combination with the option, was an anti-competitive and coercive lock-up device.

CBH’s subsidiary also argued that unacceptable circumstances arose from specified deficiencies in Perilya’s notice of meeting in respect of the Shenzhen transaction.

The Panel’s response

The Panel declined to conduct proceedings.

It decided that information deficiencies did not give rise to unacceptable circumstances since the key information argued to be lacking (audited financial statements for Perilya and CBH to 31 December 2008) was not available. The Panel concluded that Perilya shareholders had been given sufficient information, noting the independent expert’s report commissioned by Perilya.

In deciding whether the option alone (or the Shenzhen transaction as a whole) gave rise to unacceptable circumstances, the Panel noted that a refundable deposit coupled with a call option over an asset could act as a coercive financial penalty or amount to a frustrating asset sale. However, the Panel accepted Perilya’s submission that it was commercially imperative that the deposit be received before the shareholder meeting to approve the Shenzhen transaction. The Panel also accepted Shenzhen’s proposition that the call option was required to secure the repayment of the deposit and that the deposit was conditional on the call option being granted. The Panel noted the current turmoil in credit and share markets and the corresponding commodity price and exchange rate volatility. In this context, the Panel accepted Perilya’s submissions that the deposit was required urgently to ensure funding availability and the company’s status as a going concern. The Panel noted that it had to be mindful that its orders not place the company in a precarious financial position, and noted that the outcome in this application may not be applicable to other cases.

Frustrating action and commercial imperatives

Following the Panel’s decision, CBH’s subsidiary did not proceed with its takeover of Perilya and the Shenzhen transaction was approved and implemented.

Perilya Limited (No 2) represents the first time during the current market crisis that the Panel has accepted an argument that action by a target that frustrates a takeover bid does not give rise to unacceptable circumstances on the basis that the target taking that frustrating action is commercially imperative. While this principle has been recognised in Guidance Note 12: Frustrating Action since 2003 and other targets have unsuccessfully sought to rely on it, this may not be the last time in this credit crunch that the Panel considers action to source funding is commercially imperative and not a frustrating action.

More information

For information regarding possible implications for your business, contact