Takeovers Panel spotlight on proper conflict management

In Energy Resources of Australia Limited [2019] ATP 25, the Panel considered an entitlement offer to be undertaken by ERA and underwritten by a wholly owned subsidiary of Rio Tinto.  The offer terms (which included a dispersion strategy) technically complied with the Panel’s guidance and ASIC had granted relief from Chapter 6 of the Corporations Act 2001 (Cth) to enable ERA shareholders to participate in the shortfall facility even if by doing so the number of shares issued to them would result in the takeovers threshold under section 606 being exceeded. 

Nevertheless, the Panel considered a declaration of unacceptable circumstances was appropriate because:

• it could be inferred that Rio Tinto, with voting power in ERA of 68.39%, sought to consolidate control and acquire ERA without undertaking a formal takeover bid;
• ERA failed to manage conflicts of interest when considering the offer and underwriting agreement (ERA’s senior executives were Rio Tinto employees), with this failure compounded by the highly dilutive effect of the offer and Rio Tinto’s intention to proceed to compulsory acquisition; 
• the terms of the underwriting agreement fettered the ERA board by prohibiting it from changing its funding strategy; 
• ERA’s need for funds was less clear than in other entitlement offers where the Panel has allowed a highly dilutive entitlement offer with a control effect to proceed; and 
• the level of disclosure should have more closely reflected that required for a control transaction regulated by Chapter 6 of the Corporations Act.

It is worth noting that while the review Panel has since affirmed the initial Panel’s decision, it removed orders which prohibited Rio Tinto from proceeding to compulsorily acquisition of shares as a result of the entitlement offer and underwriting agreement without shareholder approval, on the basis that it would be unfairly prejudicial to Rio Tinto to do so. Rather, following its finding that Rio Tinto should have formed its intentions on the question of compulsory acquisition and there should have been disclosure of those intentions in the Entitlement Offer Information Booklet, the review Panel made orders requiring Rio Tinto to form such intentions and provide further disclosure of those intentions to shareholders.

The Panel’s decision is yet another reminder of the need for directors and senior management to implement robust conflict management protocols where a participating insider is in a position of influence when negotiating a transaction.

Director’s material personal interest in a vote to remove them

Most directors of public companies will be familiar with the operation of section 195 of the Corporations Act 2001 (Cth), which generally requires them to abstain from board deliberations on matters in which they have a material personal interest..

In Anglo Australian Resources N.L. v Bloom Financial Advice Pty Ltd [2019] WASC 470 Justice Hill of the WA Supreme Court held that such matters include a decision to challenge a notice convening a general meeting of shareholders to consider their removal.  In so finding, the Court found that the directors had a material personal interest in:

• resisting their removal and accordingly in the holding of the general meeting to seek their removal; and

• the commencement of any proceedings which seek to delay or prevent the general meeting from going ahead,

and therefore could not participate in any decision concerning the general meeting.

Directors in similar situations should exclude themselves from the board meeting, or if possible, request that the uninterested directors pass a resolution allowing them to be present and vote in accordance with section 195(2).