Takeovers Update - 4 February 2008

On 31 January 2008 the High Court handed down its reasons for decision in the matter of Attorney-General (Cth) v Alinta Limited [2008] HCA 2.  In essence, the Court found section 657A(2)(b)¹ of the Corporations Act (Cth) 2001 (the Act) to be constitutionally valid.

The significance of the section is that it empowers the Takeovers Panel (the Panel) to declare unacceptable circumstances in relation to the affairs of a company because they constitute, or give rise to a contravention of a provision of chapters 6, 6A, 6B or 6C of the Act.
 
While the unanimous sanction is a strong endorsement, the High Court's decision is confined to the validity of the 'contravention' limb of the Panel's powers (rather than the more general declaration of validity in relation to section 657A sought by the Attorney-General).  Arguably then, the possibility of future constitutional challenges to the Panel has not been ruled out, and a degree of uncertainty remains.

Background

The Panel is the main forum for resolving disputes about a takeover bid until the bid period has ended².  Comprising expert members³  (any three of which make up a sitting Panel for a particular matter), the Panel has the power to declare circumstances in relation to the affairs of a company to be unacceptable.  Under the Act as amended by the Corporations Amendment (Takeovers) Act 2007, the Panel may only make such a declaration if it appears to the Panel that the circumstances are:

(a) Unacceptable due to their effect (or likely effect) on either the control or potential control of the company, or the acquisition, or proposed acquisition, of a substantial interest in the company or another company.

(b) Otherwise unacceptable having regard to the purposes of chapter 6 of the Act as set out in section 602.⁴  

(c) Unacceptable because they constitute (or are likely to give rise to) a contravention of a provision of chapter 6, 6A, 6B or 6C of the Act.

If the Panel declares unacceptable circumstances to exist in respect of the affairs of a company, it can proceed (subject to unfair prejudice and natural justice considerations) to make any order it considers appropriate to either:

• protect rights or interests of any person or group of persons affected (or likely to be affected) by the circumstances, or
• ensure that a takeover bid (or proposed takeover bid) proceeds (as far as possible) in a way that it would have proceeded if the circumstances had not occurred.

Uncertainty as to the Panel's power

In Australian Pipeline Limited v Alinta Limited [2007] FCA FC 55, the full Federal Court cast significant doubt over the Panel's powers.  By a two to one majority, the court distinguished the decision in Precision Data Holdings Limited v Wills [1991] HCA 58; 173 CLR 167 (upholding the constitutional validity of the former Corporations and Securities Panel), and held that in permitting the Panel to decide disputes about the application of the law to the facts and then make remedial orders, section 657A(2)(b)⁵ of the Act purports to confer judicial power⁶ (and is accordingly invalid).
 
The Court also called into question the validity of the other limb of the Panel's power (section 657A(2)(a)),⁷  with the majority commenting that they found it difficult to see how a sitting Panel could consider the issue of whether circumstances relating to a takeover are unacceptable without a finding as to whether the conduct in question was lawful or not.  In other words, they considered it unlikely that the Panel could base a declaration solely on s657A(2)(a). 

In order to resolve the resulting uncertainty surrounding the Panel and its powers, the Attorney General sought special leave to appeal to the High Court, seeking a declaration that section 657A is valid in its entirety.  As noted above, the High Court upheld the appeal, confirming the validity of the Panel's power to base a declaration on a contravention of the law.

High Court reasons

It is beyond the scope of this article to analyse the High Court's reason for decision in detail.  It is sufficient to note that the decision was unanimous, and strongly endorses the Panel's continued existence as the primary body for resolving takeover disputes during the bid period. In particular, the Court considered that:

The consideration which the Takeovers Panel may now give to the fact that a contravention of the provisions of chapters 6, 6A, 6B and 6C has occurred does not mean that its function is a judicial one.  The making of a declaration of unacceptable circumstances does not involve the resolution of a controversy about an existing legal obligation.  It represents a conclusion reached by the Panel that the circumstances are such as to require orders and directions to be made by it.  It reaches that conclusion by reference to the circumstances arriving from the contravention and wider considerations, referable to the public interest.  The orders it makes reflect the Panel's view about the process which should be undertaken with respect of the takeover and what the rights of the parties should be.  So understood, the function of the panel under section 657A(2)(b) does not involve the exercise of judicial power.'⁸
 

Conclusion

Ideally, the High Court would have declared section 657A to be valid in its entirety.  In confining the decision to the "contravention" limb of the Panel's power, the door has arguably been left ajar for future challenges to the Panel and its powers.  Accordingly, constitutional issues are likely to be a feature of future judicial review of Panel declarations and orders, and the matter of Rinker Group Limited 02R [2007] ATP 19⁹ (due to be heard later this year) may provide a further chapter in the Panel's continued development. 

However, for the time being, the uncertainty surrounding the Panel and its powers has been put to rest, and the Panel remains the primary forum for resolving takeover disputes during the bid period.

For further information, please contact:

Andrew Crean, Senior Associate
+61 3 9274 5024
andrew.crean@dlaphillipsfox.com

Mark Burger, Partner
+61 3 9274 5586
mark.burger@dlaphillipsfox.com

*Andrew Crean has recently returned from a secondment with the Takeovers Panel.

¹Now section 657A(2)(c) of the Act, following amendments made by the Corporations Amendment (Takeovers) Act 2007.

²Under section 659B of the Act there is a prohibition on commencing Court proceedings in relation to a takeover bid, or proposed takeover bid, before the end of the bid period.

³Members are appointed by the Governor-General, and qualify for appointment by virtue of their knowledge of (or experience in) one or more of the fields of business, administration of companies, financial markets, financial products and financial services, law, economics, or accounting - s172 Australian Securities & Investments Commission Act (Cth) 2001.

⁴Colloquially known as the Eggleston principles, these policy principles include:

(a)   That the acquisition of control takes place in an efficient, competitive and informed market;

(b)   The holders of the shares and directors of the company know the identity of any person who proposes to acquire a substantial interest in the company, have a reasonable time to consider the proposal and are given enough information to enable them to assess the merits of the proposal; and

(c)   As far as practicable, the holders of the relevant class of voting shares all have a reasonable and equal opportunity to participate in the benefits accruing to the holders through any proposal under which a person would acquire a substantial interest in the company.

⁵Now section 657A(2)(c).

⁶Such conferral of power is not authorised under Chapter III of the Constitution.

⁷Subsequent amendments were made to the provision by the Corporations Amendment (Takeovers) Act 2007.

⁸Crennan & Kiefel JJ, at para [176].
 
⁹In relation to the takeover of Rinker Group Limited by Cemex Australia Pty Ltd.