The Takeovers Panel (Panel) advises that it has declined to commence proceedings in response to an application dated 22 December 2004 from Lenvat Pty Ltd (Lenvat), a major shareholder of Lachlan Farming Limited (LFL), in relation to the affairs of LFL.
Lenvat alleged that unacceptable circumstances existed in relation to control of LFL, caused by the 1 for 1.19 rights issue (Rights Issue) currently being conducted by LFL, the terms of which were set out in a prospectus dated 17 September 2004 (Rights Issue Prospectus).
The Rights Issue is partially underwritten by Rural Funds Management Limited (RFM) as responsible entity of the RFM Australian Cotton Fund (ACF). RFM also provides management services to LFL. Under the terms of the Rights Issue, LFL shareholders may apply to subscribe for any shares not taken up by other shareholders in the initial offer.
The Panel accepted a range of Lenvat's submissions that the information in the Rights Issue Prospectus could have been clearer and more accurate in terms of presentation, factual accuracy and perspective. However, the Panel did not think that the imperfections of the Rights Issue Prospectus, or of the underlying structure of the Rights Issue, were such that the Rights Issue was not genuinely accessible to LFL shareholders or that LFL shareholders were likely to have been materially mislead by the deficiencies in the Rights Issue Prospectus.
In coming to this decision, the Panel considered a number of issues including:
- the Panel's reading of the Rights Issue Prospectus and its related documents, and the application and its supporting documents;
- the lack of support by LFL shareholders for the previous rights issue offered in 2003; and
- the approval by LFL shareholders not associated with RFM of the issue and conversion of an issue of convertible notes in November 2003 (Convertible Notes) and the explanatory memorandum for the resolution to approve the issue of the Convertible Notes which stated that the Board currently proposed to have a rights issue in July 2004.
In coming to its decision, the Panel also took into account the actions of Lenvat and the director of LFL who is also a director of, and controls, Lenvat (Mr T Allen).
The Panel considered that it is significant that Lenvat advises that Mr Allen disagreed with various issues in relation to the size and structure of the Rights Issue, but that neither he nor Lenvat has advised the Panel of any other action that he or Lenvat has taken in the three months since Mr Allen voted against various board resolutions relating to those aspects of the Rights Issue.
The Panel considers that this is particularly significant given that Mr Allen is one of only two directors of LFL who are independent of RFM and ACF. In such a position, the Panel considers that the onus was on Mr Allen to put his views to the board of LFL and to advise the shareholders of LFL of his and Lenvat's concerns (for example by requesting that his dissent, and reasons for it, be recorded in the minutes of the board of LFL and in the Rights Issue Prospectus).
The Panel considers that the delay of Lenvat in bringing the application, and Mr Allen and Lenvat's apparent inaction in reaction to the Rights Issue after Mr Allen consented to the lodgement of the Rights Issue Prospectus, are material in its reasoning for not commencing proceedings. However, the Panel wishes to note that had the issues of concern raised by Lenvat in relation to the Rights Issue Prospectus and the structure of the Rights Issue been of sufficient seriousness, it would have commenced proceedings in relation to the application, regardless of any delay by Lenvat or inaction by Mr Allen or Lenvat.
LFL directors’ discretion over allocation of shares under the Rights Issue
The Panel has noted above some residual concerns regarding the structure of the Rights Issue. A specific concern of the Panel is the lack of certainty in the Rights Issue Prospectus over which aspects of allocation the directors are retaining discretion and how the LFL directors intend to exercise the discretion that they have retained. The Panel considers that exercise of such a discretion in a manner which went against the principles set out in section 602 of the Corporations Act could well constitute unacceptable circumstances.
Intentions of RFM not to subscribe for additional shares over the underwriting
The Panel notes in the material before it that RFM has advised that it will not be applying for any of the 4 million shares above the 14 million which it may be obligated to subscribe for under the underwriting agreement between RFM and LFL to the extent there is a shortfall. The Panel considers that this may be information for LFL shareholders that the board of LFL should give serious consideration to advising to the shareholders of LFL prior to the rights issue closing.
The President of the Panel appointed Simon Mordant (sitting President), Karen Wood and Robyn Pak-Poy as the sitting Panel in these proceedings.
The Panel will publish its reasons for its decision in these proceedings on its website.
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501