Lionsgate v Macquarie: enforcing pre-bid agreements in the courts (…and in a speedy manner!)
18 May 2007A recent decision by the New South Wales Supreme Court in Lionsgate v Macquarie shows that the courts are increasingly open to accepting jurisdiction to hear cases relating to takeovers.
This is despite the intention of the Corporate Law Economic Reform Program (CLERP) reforms in 2000 to limit court litigation by private parties during a takeover bid.
In Lionsgate, the court ordered specific performance of the pre-bid agreement on the basis that a scheme of arrangement at a higher price did not amount to a ‘higher offer’ which would have allowed the shareholder to get out of its agreement to accept the bid. Notwithstanding the time spent arguing about the court’s jurisdiction, the order was made in less than three weeks from Lionsgate first applying to the court. This shows that the courts may be well placed to resolve some takeover related matters quickly and efficiently.
Facts of the case
In February 2007, prior to making a takeover offer for Magna Pacific (Holdings) Ltd (Magna Pacific) of 32 cents per share, Lionsgate Australia Pty Ltd (Lionsgate) entered into a deed of irrevocable undertaking (deed) with Macquarie Private Portfolio Management Ltd (Macquarie), an 11.2 per cent shareholder in Magna Pacific.
Pursuant to the deed, Macquarie undertook to accept the Lionsgate offer for all Magna Pacific shares no later than five business days after Lionsgate sent its bidder’s statement to target shareholders. The undertaking would lapse if a ‘higher offer’ for all Magna Pacific shares was made by a third party.
Shortly after Lionsgate sent its bidder’s statement to shareholders, destra Corporation (destra) and Magna Pacific jointly announced their intention to implement a scheme of arrangement, under which destra would acquire Magna Pacific for a consideration of 38 cents per share (with a cash/scrip alternative).
Macquarie considered that the destra offer was a ‘higher offer’ under the deed and therefore its undertaking to Lionsgate lapsed so that it was not obliged to accept Lionsgate’s takeover offer. Lionsgate disagreed and applied to the New South Wales Supreme Court for specific performance of the deed.
Macquarie objected to the court having jurisdiction to hear the matter, arguing that the court proceedings were in relation to a takeover bid or a proposed takeover bid and therefore section 659B of the Corporations Act applied to prohibit Lionsgate from commencing court proceedings.
The first decision
Justice Austin considered the ability of the court to determine the matter. He held that section 659B did not apply to oust the jurisdiction of the court in this case. In coming to this conclusion, Justice Austin considered various matters including:
- the policy underlying section 659B, and
- whether the proceeding constituted a proceeding in relation to a takeover bid or a proposed takeover bid.
The underlying policy of section 659B
Justice Austin was of the view that the circumstances of Lionsgate’s case fell outside conduct that section 659B was intended to address. One of the section’s main purposes was to do away with the tactical takeover litigation of the 1980s and 1990s which sought to disrupt and delay takeover bids. Lionsgate’s case only dealt with the meaning, and enforceability, of a private contract and not whether a takeover should be disrupted or allowed to proceed. In this case, the takeover bid would still proceed even if Macquarie was not required to sell into Lionsgate’s bid.
Justice Austin also made the point that a court could decide matters such as the proper construction of a contract as quickly and efficiently as could be expected to be achieved by any other tribunal.
Did the proceeding constitute a proceeding in relation to a takeover bid or a proposed takeover bid?
The court held that the proceedings did not fall within the terms of section 659B(4), as it was not in relation to a document or notice prepared, or given, under Chapter 6 of the Corporations Act nor was it a proceeding in relation to an action taken, or proposed to be taken as part of, or for the purposes of, a takeover bid.
The proceeding was properly characterised as one in relation to the deed between Lionsgate and Macquarie and in relation to the enforcement of Macquarie’s contractual obligations in the deed. Although the deed contemplated that a takeover bid would subsequently be made, that a bidder’s statement would be subsequently issued by Lionsgate, and that the time limits for the contractual obligations undertaken in the deed were set by reference to the bid period, these factors were not enough to render the proceeding to be one in relation to a document or notice prepared or given under Chapter 6.
Importantly, the fact Macquarie’s obligation to sell into Lionsgate’s bid was triggered by the dispatch of the bidder’s statement did not serve to make the proceeding one in relation to that document, but ‘merely accidental’ to it.
The second decision
Following on from the court’s decision that its jurisdiction to hear the matter was not ousted, Justice Barrett considered the merits of the case. This turned on whether or not the announcement of a proposed scheme of arrangement was the making of a ‘higher offer’ for Magna Pacific which would cause Macquarie’s undertaking under the terms of the deed to lapse.
The court decided that the announcement of a scheme was not a ‘higher offer’ for the purposes of the deed and granted an order of specific performance requiring Macquarie to accept into Lionsgate’s takeover offer.
In coming to this decision, the difference between schemes and takeover offers was discussed with the judge noting that under a scheme there was no offer to accept but rather a choice whether to vote for or against a proposal. The decision makes clear that if a pre-bid agreement is to lapse on the announcing of a scheme at a higher price then the drafting should specifically cover this situation.
Closing comments
Three points of interest come out of these decisions:
Firstly, for a number of years, parties to takeover bids respected the intention behind the CLERP reforms and took their disputes and claims to the Takeovers Panel. Now, parties are increasingly looking to the courts to uphold their rights in takeover related matters (also note the various court decisions in the Toll/Patrick bid and the challenges to the Panel’s jurisdiction and validity in Glencore and in Australian Pipeline v Alinta—see separate article in this newsletter), and the courts are more than willing to take up such a role. In this respect, court litigation has a continuing role to play for participants in takeover bids.
Secondly, the courts took less than three weeks from the date of Magna Pacific’s application to make an order for specific performance (and much of this time was taken up with the first hearing about jurisdiction). This relatively quick time frame illustrates that there are some takeover related matters (eg questions of contract construction) which the courts are well-suited to determine in a timely manner. It would be interesting to debate the time in which the Takeovers Panel could have decided the matter.
Thirdly, the decision is a reminder that care needs to be taken in drafting pre-bid acceptance agreements. An announcement of a scheme of arrangement is not an offer. Given the popularity of schemes these days, shareholders who agree to give a pre-bid acceptance agreement on the condition it falls away if a higher bid arises should ensure the drafting covers announcements of schemes at a higher price.
This article was written by Neil Pathak, Partner, and Sheena Loi, Solicitor.
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