Who are my Australian associates?
June 2014 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2014 Issue
Overseas investors into Australia often have difficulty coming to grips with our ‘association’ rules.
Broadly speaking, these rules effectively aggregate the shareholdings of separate shareholders who fall within the Corporations Act’s definition of ‘associates’. Once aggregated, those shareholdings may be sufficient to breach either the controls on acquiring more than 20 percent of a listed company or the requirement to publicly disclose holdings of more than 5 percent in listed companies.
Before taking a stake in a listed Australian corporation or even discussing such a possibility with another businessperson, therefore, an investor needs both to understand the association rules and how they impact the proposed investment. This may even necessitate a review of the investor’s existing business relationships.
The association rules in brief
The most important of the association rules is section 12(2) of the Act. Broadly speaking, this defines three different types of ‘associates’: (i) a person who controls another person, or two persons who are controlled by the same third person; (ii) two persons who have a current or proposed ‘relevant agreement’ to control the board or affairs of the relevant corporation; and (iii) two persons who are acting (or proposing to act) in concert in relation to the corporation’s affairs.
The breadth of this definition is evident in three facts: (i) a person ‘controls’ an entity by being in a position to determine its financial and operating policies, regardless of the formal business or legal relationship between the person and the entity; (ii) ‘relevant agreement’ is not confined to legally-binding contracts – it extends as far as informal oral ‘understandings’; and (iii) there is no statutory definition of ‘acting in concert’ – thus leaving the meaning open to be decided by the Courts or, more usually, the Takeovers Panel, Australia’s specialist takeovers tribunal.
If one were looking for a one-line summary of the association rules, it is probably to be found in a 1988 court case, where the judge said that they could catch “arrangements and understandings … formed in very simple ways, with nods, winks, smiles, roundabout and evasive language and non-verbal sounds” (ICAL Ltd v County Natwest Securities Australia Ltd & Transfield (Shipbuilding) Pty Ltd (1988) 6 ACLC 467 at 493).
As a result, it is possible to determine whether an association exists where the parties are clearly contractually bound to act together or where they are clearly complete strangers to each other. In between those two extremes, however, making the call about whether there is an association is often a matter of fine judgement rather than applying a brightline test.
It is, therefore, instructive to see how this issue has been dealt with by the Takeovers Panel. The Panel is a specialist statutory tribunal which rules on disputes arising in relation to the control of listed corporations and unlisted corporations with more than 50 members. In practice, it has largely displaced the Courts as the forum for such disputes.
The Panel and evidence
The Panel is empowered to rule on whether ‘unacceptable circumstances’ have occurred in relation to the control of a listed corporation or an unlisted corporation that has more than 50 members.
Strictly speaking, ‘unacceptable circumstances’ is not limited to non-compliance with the takeover provisions of the Corporations Act: the Panel can declare that unacceptable circumstances have occurred even if the ‘guilty party’ has not breached the Act. Nevertheless, the Panel regularly deals with allegations that two or more parties are associates in relation to a corporation and that, as a result: (i) their aggregated voting power has gone over the 20 percent voting threshold in breach of the statutory requirement that someone can only move above that threshold by making a formal takeover bid (or by complying with one of a limited set of statutory exceptions to the bid requirement); and (ii) their aggregated voting power has gone over the 5 percent voting threshold without their having made the mandatory public disclosure of that fact.
The first hurdle which any complainant has to cross (and which, conversely, is a comfort to the alleged associates) is the evidentiary one. Although the Panel has the power to compel the production of evidence, it is unwilling to use that power in aid of what are essentially fishing exercises. In other words, a person who alleges that there is an association must rely on more than just that allegation: “Allegations of association will, by their very nature, usually be very difficult to prove and it is very difficult to provide direct evidence of the existence of association or agreements. On that basis, the Panel will frequently be required to draw inferences from patterns of behaviour, commercial logic and other evidence suggestive of association. However, until there is a body of such material, the onus will normally remain on the person alleging the association.” (In the matter of Winepros Limited [2002] ATP 18 at [27], emphasis added)
This is well-illustrated by a 2005 decision by the Panel, in the matter of Pacific Magnesium Corporation Ltd [2005] ATP 12. The complainant was a director of the company. He alleged that a number of shareholders were “acting in concert” to remove him from the board.
The Panel’s first rejoinder was that a mere common intention to vote in favour of a particular resolution at a general meeting of a company does not cause persons to become associates of each other. “Association”, it said, “would require an added factual element evidencing a relevant agreement or an acting in concert so as come within the definition of associate”.
It then said that the other arguments put forward by the director were either “speculative assertions” which were not substantiated by factual matters, or factual submissions which were categorically denied by the other side.
The director complained that he was unable to ascertain specific factual matters to further support his arguments and that the Panel should require the company to provide the requested information. The Panel, however, did not consider that it should require the company to produce information which would assist in making out the director’s claim, when he had not made out a sufficient case to justify the Panel’s commencing proceedings in the first place.
This evidentiary burden on applicants was recently affirmed by the Panel at the beginning of 2014: “It is a well-established principle of the Panel that before it will conduct proceedings on the issue of association, there must be a sufficient body of material demonstrated by the applicant, which together with inferences (for example from partial evidence, patterns of behaviour and a lack of a commercially viable explanation) support the Panel conducting proceedings.” (Dragon Mining Limited [2014] ATP 5 and Agricultural Land Trust [2014] ATP 4)
Despite this, it would be a mistake to think that the Panel’s approach to forensic issues in associations has not evolved.
The Panel and Tinkerbell
As noted above, the Panel is a specialist tribunal, made up of industry experts, rather than judges. The concept behind that membership and the fact that the Panel rules on ‘unacceptable conduct’ rather than legalities is that its members will make decisions based on their understanding of market practice.
However, when it comes to associations, there is a considerable overlap between legalities (in the form of the statutory test) and practical experience (given that the statutory test is deliberately broad and non-specific).
It was often thought that this overlap created tension for the Panel: to what extent could Panel members apply their own experience when evaluating evidence and to what extent should they evaluate evidence in a curial fashion?
This question was definitively answered in Tinkerbell Enterprises Pty Limited as Trustee for The Leanne Catelan Trust v Takeovers Panel [2012] FCA 1272.
Two people who had been held to be associates by the Panel appealed that finding to the Federal Court of Australia. Among other things, they argued that the Panel members should not have relied on their own professional experience when concluding that there was enough evidence to show an association.
The Court said: “it is appropriate, in light of the nature of the Panel, that the Panel be entitled to draw on those factors in assessing evidence and drawing inferences... . To accept the applicant’s submission that the Panel should not be so entitled would be to strip the Panel in large part of its effectiveness as a specialist body established to resolve takeover disputes, as mandated by the legislation.”
The Panel was clearly heartened by this endorsement. Shortly after the Tinkerbell case, it found the existence of an association in World Oil Resources Limited [2013] ATP 1. In the course of reaching that conclusion, it made the following comment which, although not referring directly to Tinkerbell, appears to be strongly influenced by it: “The Panel is a specialist, peer review tribunal. When making an assessment of all the material in this matter, we have relied on our skills and experience as practitioners (which has been made known to the parties) and as members of the sitting panel.”
The Mount Gibson test
So much for the procedural issues; how does the Panel actually evaluate the evidence that it receives in relation to an alleged association?
It goes without saying that every association case is different, and turns largely on the facts. Despite this, and despite the vagueness of the statutory test, the Panel has identified and now consistently employs a set of factors against which it evaluates the evidence: (i) a shared goal or purpose; (ii) prior collaborative conduct; (iii) structural links (e.g., family links or commonality of directors, company secretaries and shareholders); (iv) common investments and dealings; (v) common knowledge of relevant facts; and (vi) actions which are uncommercial.
These factors were first applied in Mount Gibson Iron Limited [2008] ATP 4. However, they were not reduced to their current list form until Viento Group Limited [2011] ATP 1.
It is important to note that this is a non-exhaustive list of the type of things that the Panel thinks are indicative of an association. It isn’t a checklist – you don’t automatically become associates by ticking all or a majority of the factors. Conversely, the fact that none of the factors is present doesn’t automatically mean that you’re not an associate.
Being an associate not against the law
This introduction has, of necessity, focused on the association test. However, it must always be remembered that there is nothing inherently unacceptable or illegal about being an associate. As noted above, being an associate within the meaning of the Corporations Act only becomes problematic if it means that your deemed voting power in the corporation is above the 5 percent or 20 percent thresholds. Should that happen, the Panel has a range of remedies available to it.
Where an association is found to have resulted in a person’s going above 20 percent, the typical Panel remedy is to order divestment of any shares above the 20 percent. Divestment is normally carried out by the Australian Securities & Investments Commission, using the services of a broker. The proceeds of sale are remitted to the associate whose shares were sold. It is also common practice to freeze the ability of associates to vote more than 20 percent of the shares in the company pending the carrying out of the divestment.
Where an association is found to have resulted in a person’s going over the 5 percent threshold without making the required public disclosure, the Panel can be more flexible. It can order that the required disclosure be made. However, where the non-disclosure has subsequently been overtaken by events (e.g., the fact that the associates are over 5 percent has already become known to the market), the Panel may take the view that there is no need to order disclosure. Despite this, it should be noted that non-disclosure of voting power over 5 percent caused by an association is both a strict liability criminal offence and grounds for a civil damages action by anyone who has suffered loss as a result of the non-disclosure. A decision by the Panel not to take any action on the non-disclosure would not be a defence to either proceeding.
John Elliott is a partner at Clayton Utz. He can be contacted on +612 9353 4172 or by email: jelliott@claytonutz.com.
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