Back to the bad old days? Federal Court rules Panel power invalid

In a split decision, the Full Federal Court has struck down one of the Takeover Panel’s key grounds of power and doubted the validity of the other, on constitutional grounds.

The latest round in the Alinta/APT dispute was an appeal by APT to the Federal Court. As part of its response, Alinta challenged the constitutional validity of the Takeovers Panel (Panel). Alinta argued that the Panel exercises ‘judicial power’, contrary to the Constitution of Australia which only permits judicial power to be exercised by a court.

The Corporations Act includes two separate triggers of the Panel’s power to make a declaration of unacceptable circumstances: the Panel can only make a declaration if it appears that the circumstances are unacceptable having regard to either:

• their effect on the control, or potential control, of a company, or the acquisition or proposed acquisition by a person of a substantial interest in, a company (control/substantial interest power), or
• breach of the takeovers provisions or compulsory acquisition provisions of the Corporations Act (breach power).

A week ago, the Federal Court held that the breach power is constitutionally invalid, and doubted whether the control/substantial interest power is valid—although the court did not reach a conclusion on this point.

The majority judges, Justices Gyles and Lander, effectively said that the Panel looks like a court and acts like a court, so it must be exercising judicial power. They pointed to various features of the work done by the Panel which they considered comparable to a court.

These included:

• the Panel decides, between contending parties, whether there has been a contravention of the Corporations Act, by applying legal principles to past events
• the Panel’s orders are binding by force of statute, and the court cannot enquire into the correctness (within certain limits) of the Panel’s decisions
• the Panel is required to act with procedural fairness and to give written reasons
• the Panel has power to dismiss frivolous/vexatious proceedings
• the Panel’s rule making powers
• the fact that a Panel finding of fact is proof of the fact in absence of contrary evidence
• the fact that the Panel can make remedial orders and costs orders, and
• the Panel’s immunity from suit.

The court also considered it significant that the Corporations Act prevents parties taking their disputes to the court during a takeover bid and restricts the forms of order they can get in later litigation, leaving the Panel as effectively the sole decision-maker.

The court rejected arguments that the fact that the Panel can take into account the public interest and policy does not save it from exercising judicial power.

This characterisation—of the Panel as acting like a court—may seem slightly surprising to takeovers practitioners who have had close involvement with the Panel over the past few years. The Panel’s approach has been to require compliance with the spirit of the law and the Eggleston Principles rather than the letter of the law, and has encouraged submissions with a focus on policy—far removed from the technical legal submissions which were being made in takeovers disputes before the courts in the late 1990s. Decisions such as Centro v AMP Shopping Centre Trust, where the Panel was prepared to override contractual rights left us in no doubt that the Panel would make new rights where it considered this desirable from a policy viewpoint.

The dissenting judge, Justice Finkelstein, noted that the Panel does not determine whether there has been a contravention of the Corporations Act and impose penalties to punish for contraventions. He pointed out that there is a wide range of matters apart from any breach which the Panel is entitled to take into account in deciding whether to make a declaration, and is entitled to make subjective value judgements rather than just apply legal principles.

A High Court appeal by the Panel must be inevitable, and many takeovers practitioners will be hoping that the High Court supports the minority view of Justice Finkelstein and overturns the majority decision. Otherwise, we may well be heading back to the bad old days of tactical and delaying litigation.

By 2000, the courts were conscious of the fact that many takeover court disputes were tactical, and did what they could to prevent tactical delay, but the court did not have the broad mandate to enforce the spirit of the law as well as the letter of the law. Only the Panel has had that power, and there is no doubt it has changed the way that takeovers are run and defended. Takeovers are dynamic and the technology involved develops quickly (eg the recent swaps developments) that the black letter of the law cannot be expected to legislate for them comprehensively.

In the meantime, the Panel has indicated that it will decline to accept applications which seek a declaration of unacceptable circumstances based on the breach power, but will continue to consider applications based on the control/substantial interest power. The position in relation to breaches of Chapter 6 remains uncertain, with the Corporations Act saying that you can’t go to court during a takeover bid because only the Panel has power to hear certain disputes, and the majority of the Full Federal Court saying the Panel does not have power to hear them. 

This article was written by Rebecca Maslen-Stannage, Partner.

For more information please contact

Name : Rebecca Maslen-Stannage
Title : Partner
Office : Sydney
Phone : +61 2 9225 5500
Fax : +61 2 9322 4000
Email : rebecca.maslen-stannage@freehills.com