TP04/103
The Panel announces that it today has declined to declare that unacceptable circumstances exist in relation to the affairs of Emperor Mines Limited (Emperor). The decision was made in response to an application by Durban Roodeport Deep, Limited (DRD) for review of the decision made by the Initial Panel made in response to an application by Power Treasure Limited, Phoenix Gold Fund Limited or Floreat Fund Limited (the Original Applicants in the initial Emperor Mines 01 proceedings).
The Panel considering the review application (Review Panel) advised that it had come to a different conclusion from that of the sitting Panel in the Emperor Mines 01 proceedings (Initial Panel). In reaching this conclusion, the Review Panel took into account additional information received in the Emperor Mines 01 Review proceedings.
The initial application related to a 4-for-10 pro-rata, non-renounceable rights issue (Rights Issue) by Emperor and an associated shortfall facility (Shortfall Facility) and underwriting arrangements (Underwriting).
The decision in Emperor Mines 01 was announced on 18 October 2004 by Panel media release TP04/94. A copy of that media release is available from the Panel's website at: Media Releases.
Review Application
DRD requested that the Review Panel change the declaration of unacceptable circumstances made by the Initial Panel and, failing that, undertake a fresh consideration of the orders that might need to be made. However, DRD did not seek to challenge the Initial Panel’s order modifying the shortfall facility. That order is discussed in the Media Release referred to above.
Additional Information
The Review Panel commenced its proceedings with the body of information which had been submitted to the Initial Panel. However, Panel review proceedings are a fresh hearing of an application i.e. the original application in the Emperor Mines 01 proceedings by the Original Applicants, rather than an appeal from the previous decision. Therefore, a review Panel takes into account all of the circumstances which were before the first Panel and any subsequent changes or new information.
The Review Panel considered the information before it and sought additional submissions on a number of issues in light of the submissions made to the Initial Panel. The Review Panel received submissions primarily on two additional areas. They were:
- Emperor’s actual financial position (the Initial Panel having accepted Emperor’s submissions as to its financial need); and
- Developments since the Initial Panel’s proceedings and decision.
Emperor’s Financial Position
The submissions received supported Emperor’s initial submissions that Emperor is currently in need of a significant cash inflow due, amongst other things, to lower ore grades, higher fuel costs, funding requirements for its Phase 2 expansion and repayment of short term facilities. The Review Panel considered that this supported the Initial Panel’s decision to proceed on the basis of that Emperor’s original submissions as to its current need for funds were true.
Developments
In their submissions to the Review Panel, the Original Applicants advised that they were each now considering whether or not to take up their rights in respect of the Rights Issue in light of the orders made by the Initial Panel and, in the case of one of the Original Applicants, whether it might participate in any shortfall. The Original Applicants then went on to explain part of their reasons being that if Emperor was not likely to become a 60% subsidiary of DRD trading in its shares would be likely to be more liquid. In the Emperor Mines 01 proceedings, the Original Applicants had advised the Initial Panel that neither Phoenix Fund nor Floreat Fund would be able to take up their entitlement without exceeding the investment restrictions in the rules of the Phoenix Fund and the Floreat Fund respectively.
After the initial submissions to it, the Review Panel wrote back to the Original Applicants asking what their positions might be if the Review Panel did not make any or all of the orders of the Initial Panel. The Original Applicants responded that none of them had made a final decision, nor intended to do so until a later time. They said that the key factors in any reconsideration would be the level of shareholding and control of DRD, the voting freeze, the sell-down, and the terms of the Rights Issue including renounceability.
Consideration of the Issues
The Review Panel considered that the fact of the Original Applicants being prepared to reconsider their participation in the Rights Issue meant that one aspect of a lack of equality of opportunity which may have constituted unacceptable circumstances had been removed. If the Original Applicants advised that they were no longer prevented from participating in the Rights Issue because of their investment mandates, as they had advised the Initial Panel, then the case for a lack of equality of opportunity was reduced.
The Review Panel also considered that undertakings offered by Emperor and DRD in the Emperor Mines 01 proceedings relating to the Shortfall Facility, when combined with the new position of the Original Applicants as to subscription for their rights, meant that the Original Applicants now had it within their power to manage the level of control which DRD would have after the Rights Issue. This was especially so given the submission that one of the Original Applicants would reconsider its position on participating in the Shortfall Facility.
In the Initial Panel proceedings, Emperor had offered to undertake to change the Shortfall Facility so that DRD would not participate in the Shortfall Facility until all other Emperor shareholders who wished to participate in the Shortfall Facility had had their subscriptions filled in full. Emperor and DRD renewed that offer in the Review Panel proceedings. The Review Panel considered that it would be possible, if the Original Applicants wished to invest in Emperor to the necessary level, for them to subscribe for sufficient shares in Emperor to keep DRD below 50% of the voting power in Emperor. Indeed, between them, they might keep DRD to its current voting power of 45.3%.
InvestorInfo Decision
Both the Initial Panel and the Review Panel considered the list of factors relating to the acceptability or otherwise of rights issues set out in the InvestorInfo decision. In InvestorInfo the Panel considered a range of factors which might be relevant to a decision by the Panel in considering whether or not the circumstances surrounding a rights issue constituted unacceptable circumstances. The Panel in InvestorInfo said that:
“None of these factors is decisive on its own; a decision whether any particular rights issue complies with the policy underlying the Rights Issue Exception and each of the Underwriting Exceptions as they relate to rights issues will depend on assessing each of these factors, as relevant in the particular circumstances, and any other factor which bears on a consideration of whether participation in that rights issue has been made genuinely accessible to shareholders in general, within the limits of the particular company’s position and the constraints set by Chapter 6D. That is, the list is not exhaustive, and the importance of the different factors will alter from rights issue to rights issue (even for the same issuer). “
Both the Initial Panel and the Review Panel looked at the facts before them, applied the factors set out in InvestorInfo, and any other relevant factors, to those facts and came to their decisions consistent with the Panel’s principles, which are discussed in the InvestorInfo decision. The facts before the Review Panel were different to those before the Initial Panel and , applying the same principles, the Review Panel has now come to a different decision.
Renounceability
One of the factors discussed in InvestorInfo was renounceability. When discussing renounceability the InvestorInfo Panel said:
"whether the rights issue is renounceable – renounceability, especially when combined with an attractive issue price, indicates that the issuer wants the rights exercised and that, given that there is no relevant exception from section 606 for the buyers of rights who then exercise them, that the exercise of rights should have the least effect possible on proportionate interests of existing shareholders;"
The significance of non-renounceability involves weighing up the non-renounceability factor with the other factors, including pricing, the financial situation of the company, the shareholder structure and the response of the substantial shareholders to the rights issue.
The fact that the Rights Issue is non-renounceable was a significant issue to the Initial Panel. However, the Original Applicants advised the Review Panel that they were now prepared to reconsider their position as to subscribing for their entitlements under the Rights Issue i.e. taking away the proposition that some shareholders were precluded from participating in the Rights Issue. On that basis, the Review Panel considered that any argument of lack of reasonable and equal opportunity for the Original Applicants, relating to dilution or effect on control or otherwise, was eliminated.
Discount
Another effect of the change in the Original Applicants’ position on subscribing, related to the discount of the Rights Issue. Financial theory has it that a deep discount in the Rights Issue compared to the current price of Emperor shares would cause a diminution of the value of the Original Applicants’ current shares in Emperor. Being unable to participate in the Rights Issue would mean that the Original Applicants would not be able to recoup that value if the Rights Issue was non-renounceable, but could have potentially recouped that value if the Rights Issue had been renounceable and the rights tradeable. Being able to participate in the Rights Issue now means that the Original Applicants have the opportunity, if they wish, to recoup some of that diminution in value, and may, if they choose, look to sell their shares to persons other than DRD if DRD’s level of control of Emperor is an issue for them.
Given that the Original Applicants are now able to participate, and the modifications to the Shortfall Facility, the deep discount can be viewed more in the light of an encouragement to Emperor shareholders to participate in the Rights Issue rather than an added detriment to the Original Applicants and other Emperor shareholders in passing control of Emperor to DRD at a discount. It is therefore a fact which militated against intervention by the Review Panel.
Underwriting
The fact of DRD, being the largest shareholder in Emperor at 45.3% voting power, underwriting the Rights Issue had been viewed by the Initial Panel as one of the factors which cumulatively caused it to consider that unacceptable circumstances existed in relation to the Rights Issue. The Review Panel considered this issue in light of the Original Applicants’ advice that they were prepared to reconsider their position as to participating in the Rights Issue and the Shortfall Facility. The Review Panel considered the various percentage levels of voting power which DRD would achieve with different levels of participation in the Rights Issue and Shortfall Facility by Emperor’s other major shareholders, including the Original Applicants. The Review Panel considered that the level of any increase in voting power by DRD as a result of underwriting the Rights Issue was in the hands of those other shareholders, to the extent they were financially willing to do so.
The Review Panel accepted Emperor’s submissions that there was no other obvious alternative to Emperor’s funding needs than to obtain it via a rights issue underwritten by DRD. This is consistent with the view of the Panel in InvestorInfo which acknowledged that in some cases a rights issue underwritten by a related underwriter may be the only rational means by which necessary funds may be raised.
The Review Panel recognised that in cases where a smaller company is in urgent need of funds there is often likely some form of trade-off between certainty of funding and issues of concentration of control.
Changes to the original Shortfall Facility
The Review Panel was also influenced by the statements from Emperor and DRD that Emperor would maintain the changes to the Shortfall Facility which were offered in the Initial Panel proceedings and incorporated in the Initial Panel’s orders. Those changes were that all Emperor shareholders who applied for shares under the Shortfall Facility would receive their applications in full before any application for shares by DRD under the Shortfall Facility was considered.
Foreign ineligible shareholders
Under the Rights Issue, Emperor shareholders with registered addresses in various jurisdictions are ineligible to participate in the Rights Issue (they amounted to approximately 1.5% of the shares in Emperor). Emperor and DRD confirmed to the Review Panel that the terms of DRD’s subscription entitlements had been varied to ensure that DRD’s percentage voting power would not be increased beyond its current level due to the fact of those shareholders not being entitled to subscribe for the Rights Issue. The Review Panel was reassured that Emperor offered to undertake to the Review Panel to maintain the variation if the Review Panel did not make orders similar to the Initial Panel’s.
Extension of time for Rights Issue
The Review Panel was concerned that Emperor shareholders may have insufficient time to consider any new information, given that the Rights Issue is currently due to close on Wednesday 3 November 2004 and that the last information given to Emperor shareholders was a supplementary prospectus setting out the decision and orders of the Initial Panel. However, Emperor has advised that it would be prepared to undertake to send a further supplementary prospectus to Emperor shareholders setting out the effects of the Review Panel’s decision and extending the closing date of the Rights Issue to a date not earlier than Thursday 11 November 2004. Emperor also advised that it would be prepared to undertake to send the supplementary prospectus by post and, in the case of an eligible Emperor shareholder with a registered address outside Australia, airmail and, to the extent Emperor is aware of a fax or email contact address for any such shareholder, by fax or email.
DRD also proposed that Emperor could place an advertisement in an appropriate newspaper, such as The Australian Financial Review advertising the Review Panel’s decision and notifying of the extended closing date.
Conclusion
The Review Panel considered that it was understandable, that in the absence of the additional information that was before it, that the Initial Panel would come to a different decision to that of the Review Panel.
However, given the additional information before it, and in considering the factors which weighed on the consideration of the sitting Panel in InvestorInfo and the Initial Panel, the Review Panel does not consider that those factors, considered severally and together, have the significance which now requires a declaration of unacceptable circumstances and orders.
Therefore the Review Panel substitutes the decision of the Initial Panel to make a declaration of unacceptable circumstances and subsequent orders, with a decision to decline the application by the Original Applicants for such a declaration and orders.
The President of the Panel appointed Justice Robert Austin (sitting President), Les Taylor and Irene Lee as the sitting Review Panel.
The Panel will publish its reasons in due course on its website.
Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501
nigel.morris@takeovers.gov.au
