GN 17 Rights Issues - Public Consultation Response Statement [27/06/2018] The Takeovers Panel

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27 June 2018

GN 17 Rights Issues - Public Consultation Response Statement

Introduction

On 23 February 2018, the Takeovers Panel released a Consultation Paper seeking public comments on proposed amendments to Guidance Note 17: Rights issues.
Comments on the Consultation Paper were due by 6 April 2018. The Panel received submissions from ASIC, Gilbert + Tobin, Herbert Smith Freehills and Johnson Winter & Slattery and the Law Council1 (Annexure A). The Panel thanks the respondents for their comments. Consistent with the Panel's published policy on responding to submissions, this statement sets out the Panel's response to the public consultation.

Attached are copies of the final GN 17, in clean (Annexure B2) and in mark-up (Annexure C) to show the changes from the draft circulated with the Consultation Paper.

Material comments received and Panel's conclusions

Are proposed new paragraphs 7 to 10 useful?

Comments

A majority of respondents considered that the proposed new paragraphs 7 to 10 were useful. One respondent submitted that while the proposed amendments to the guidance note were useful, the Panel should avoid being too prescriptive in its policy and (among other things) if "a company has a genuine need for funds (and the Panel should not second guess the genuine and reasonable views of the board of the company) there should be a high threshold before the Panel should intervene at all". ASIC submitted on the other hand that it was concerned that these paragraphs may be perceived as a safe harbour and that it was important that Panel retain flexibility to find unacceptable circumstances.

Another respondent agreed that the proposed amendments were useful but submitted that the proposed amendments should be revisited to provide a more certain safe harbour and, if that is not possible, alternatively "provide a more detailed list of all the factors the Panel has considered as relevant to date in the context of rights issues, with a cross reference to the relevant paragraphs of the decisions concerning each factor".

Panel response

Most of the rights issue applications made to the Panel would not have resulted in unacceptable circumstances if the issuer concerned had followed one or more of the dispersion strategies elaborated in proposed paragraph 7. Therefore the Panel has decided to insert paragraphs 7-10 into GN 17, noting that (in paragraph 10 as amended, footnotes omitted):

In the Panel's experience, where there is a clear need for funds that has not been contrived, a rights issue resulting in a control effect will generally not be unacceptable (in the absence of other issues) provided the rights issue is structured appropriately and an appropriate dispersion strategy has been put in place.

Shortfall applications

Comments

Two respondents submitted that proposed paragraph 7(b)(ii) should be amended to (i) make it clear that allocation in proportion to shareholdings is not required (i.e. it is merely one acceptance measure among others) and (ii) a cap may be appropriate for other reasons, for example breach of other legislation such as the Foreign Acquisitions and Takeovers Act 1975 (Cth). ASIC submitted that proposed paragraph 7(b)(ii) should be amended to make it clear that an allocation policy should not intervene to deny certain applicants some or all of their subscription with the result that a shortfall is created that flows through to the underwriter or major shareholder.3 ASIC also submitted that in view of the extremely limited circumstances in which it is likely that caps and other restrictions on participation could be said not to unnecessarily undermine the effectiveness of a shortfall facility, it would be preferable to clearly state that caps and other restrictions are problematic and should be avoided. Another respondent submitted that it would be useful to differentiate between the unacceptable cap on the shortfall facility in Dromana Estate Ltd 01R [2006] ATP 8 and the acceptable cap in Virgin Australia Holdings Limited [2013] ATP 15.

Panel Response

In response to respondents' comments on paragraph 7(b)(ii) – it is clear from paragraph 10 (as amended) that, while following the guidance on shortfall facilities will make a rights issue less likely to be unacceptable, it does not follow that non-compliance with paragraph 7(b)(ii) will necessarily result in unacceptable circumstances. On the question of caps to shortfall applications, the Panel accepts the respondent's submission (see footnote 16).

Guidance regarding underwriters

Comments

The consultation paper proposed the following footnote:

Unacceptable circumstances may arise if an underwriter is interested in control, rather than merely laying off the risk of holding shares. See paragraph 25 and DataDot Technology Limited [2009] ATP 13 at [35]

ASIC and another respondent agreed with the proposed footnote while the other respondents disagreed with the footnote. Two respondents submitted that the footnote did not adequately take into account the precarious position in which some companies find themselves, where the only person who is willing to underwrite is interested in control.

Panel Response

The Panel accepts that in difficult financial circumstances an issuer may have little choice other than to accept an underwriter who is interested in control (noting the Panel's existing guidance in paragraphs 24 and 25 of GN 17). Therefore the footnote has been amended to only refer to DataDot Technology Limited [2009] ATP 13. The Panel also considers that it should recognise that an issuer's financial position or performance will affect shareholders' decision whether to take up a rights offer (see footnote 28).

Other comments

The Panel has accepted the following other comments:

  • Clarifying that the option of seeking informed approval of non-associated shareholders of a rights issue is an alternative to relying on items 10, 10A and 13 of s611 (see paragraph 3).
  • Clarifying the meaning of non-associated sub-underwriters in paragraph 8(a).
  • Inserting a reference to ASIC RG 6 at [6.101]-[6.109] (see footnote 21).
  • Making minor amendments to paragraphs 22(a) and 22(c).

 

27 June 2018


Annexure A: Submissions

Download the submissions [PDF 724KB]

Submissions were received by the following

  • ASIC
  • Gilbert + Tobin
  • Herbert Smith Freehills
  • Johnson Winter & Slattery
  • Law Council of Australia

Annexure B: Clean version of GN 17

Please refer to the downloadable RTF version [RTF 221KB] of the clean version of Guidance note 17 while the page is being constructed.


Annexure C: Mark-up of GN 17

Please refer to the downloadable RTF version [RTF 230KB] of the marked-up version of Guidance note 17 while the page is being constructed.


1 - The Corporations Law Committee of the Business Law Section of the Law Council of Australia

2 - All references to the Guidance Note are to the final version in Annexure B

3 - The Panel considers this issue is already covered by the reference to Powerlan Limited [2010] ATP 2 and paragraph 8(b)