Austral Coal Limited 02 - Decision and Review Application

TP05/049

The Takeovers Panel announces that it has made a declaration of unacceptable circumstances and orders in relation to the application received by it on 3 June 2005 from Centennial Coal Limited (Centennial), in relation to the affairs of Austral Coal Limited (Austral Coal), which is currently the subject of a takeover offer by Centennial (see Media Releases TP05/47 and TP05/48).

The Panel also announces that it received an application yesterday (Review Application) from Glencore International AG (Glencore1) for review of the decision made by the sitting Panel in the Austral Coal 02 proceedings (Initial Panel).

The Initial Panel has made substantive orders to remedy the unacceptable circumstances which it found to exist. However, given the making of the Review Application, the Initial Panel has stayed the operational parts of its orders until 8 July 2005, to allow consideration of the Review Application by the review Panel (Review Panel). The President of the Panel is currently appointing a Review Panel.

Austral Coal 02 – Panel Decision - Summary

In mid to late March 2005, Glencore entered into cash settled equity swaps with two investment banks (Banks) over Austral Coal shares (Glencore Swaps). On entering into the Glencore Swaps, the Banks purchased shares in Austral Coal on-market (Hedge Shares) to hedge the Glencore Swaps. The Banks are Credit Suisse First Boston and ABN AMRO Bank NV, Australia Branch. Glencore advised each Bank at the time that it was considering a takeover bid for Austral Coal.

Glencore and CSFB entered into the CSFB Swap on 21 March, 2005. At that time, Glencore owned 4.9% of Austral Coal. CSFB commenced acquiring Austral Coal shares as Hedge Shares later the same day. CSFB's acquisitions on 21 March amounted to 0.2% and took the combination of Glencore's direct holdings and the Banks' Hedge Shares (Combined Holding) to 5.1% of the voting shares in Austral Coal. Between 21 and 30 March 2005, CSFB acquired approximately 4.6% of Austral Coal on-market as Hedge Shares. CSFB's acquisitions of Austral Coal shares as Hedge Shares took the Combined Holding to 9.5%.

On 29 March 2005, Glencore approached ABN AMRO requesting that ABN AMRO enter into a similar cash settled swap over up to 5% of Austral Coal shares. ABN AMRO acquired 2.8% of Austral Coal on-market between 31 March and 4 April 2005, as Hedge Shares to hedge its exposure under the ABN AMRO Swap. ABN AMRO's acquisitions of Austral Coal shares as Hedge Shares took the Combined Holding to 12.3%.2

Glencore made no disclosures to the market until late on 4 April, and to ASX on 5 April, by which time Glencore's direct holding in Austral Coal was 4.6% and the Hedge Shares constituted 6.5% of Austral Coal3.

The Panel has decided that unacceptable circumstances have existed from the time at which the Combined Holding increased beyond 5% of the issued voting shares in Austral Coal and Glencore did not make disclosure to the market of the Combined Holding before 9.30 a.m. on the next trading day of ASX.

The Panel decided that Glencore had, at the least, a real degree of effective negative control over the disposal of the Hedge Shares. The Panel found in essence that the Banks needed to retain the Hedge Shares for the life of the Glencore Swaps in order to hedge their exposure adequately to price movements in Austral Coal Shares.

The Panel therefore considers that the existence of the Glencore Swaps, once the Combined Holding passed 5%, was material information which the market for control of Austral Coal shares required to be efficient competitive and informed.

Application

Centennial alleged in its application that unacceptable circumstances existed in relation to the failure by Glencore to make timely disclosure of the combination of Glencore's direct holdings in Austral Coal shares and Austral Coal Hedge Shares held by the Banks to hedge the Glencore Swaps, increasing beyond 5% of the issued voting shares in Austral Coal.

Centennial sought a declaration of unacceptable circumstances and interim and final orders, including orders that the Glencore Swaps be unwound and the shares held by the swap counterparties to hedge their exposure under the swaps be tendered into Centennial's bid or disposed of on-market to persons other than Glencore.

Decision, Declaration and Orders

The Panel has decided that unacceptable circumstances existed:

  1. from the time at which the Combined Holding increased beyond 5% of the issued voting shares in Austral Coal (21 March 2005) and Glencore did not make disclosure to the market of the Combined Holding before 9.30 a.m. on the next trading day of ASX, until the evening of 4 April 2005; and
  2. from 4 April 2005 until the present, because of the continued failure of Glencore to disclose adequate information about the Glencore Swaps to the market.

Glencore made no disclosure of the Combined Holding or the Glencore Swaps until the afternoon of 4 April, by which stage the Combined Holding was 11.1%4 of Austral Coal shares. Glencore then owned 4.6% of Austral Coal shares and the Glencore Swaps related to 6.5% of Austral Coal shares.

The acquisitions of Austral Coal shares by Glencore and the Banks took place during a takeover bid for Austral Coal by Centennial, a period when enhanced, rather than impaired disclosure is appropriate.

The Panel has ordered that:

  1. Glencore make immediate disclosure to the market of the essential terms of the Glencore Swaps (Disclosure Order);
  2. Glencore offer, for a period of one month from the date the offer is announced, to sell to any person who sold Austral Coal shares in a transaction reported to ASX which was entered into during the period from 9.30 am on 22 March 2005 (the next trading day on ASX after Glencore's Combined Holding exceeded 5%) until the opening of trading on 5 April 2005 (the Non Disclosure Period), the same number of Austral Coal shares as the person sold in that transaction, at the same price that the person sold those shares (Restoration Order);
  3. if Glencore does not own enough Austral Coal shares to meet requests under the Restoration Order, Glencore may require CSFB or ABN AMRO to sell sufficient Hedge Shares to Glencore at the initial price of the relevant swap, the swap shall be terminated in relation to those shares and Glencore will use those shares to fulfil its obligations under the Restoration Order.

However, as noted above, the Panel has stayed the operation of these orders until 8 July to allow the Review Panel to commence its consideration of the Review Application.

Unacceptable circumstances

The Panel considered that Glencore entered into a strategy, which it communicated to each of the Banks, to accumulate a strategic stake of at least 10% of Austral Coal without disclosing the existence of the stake. The market normally expects a strategic stake, in a takeover situation, to be disclosed the day after a person acquires 5% or more of a company.

The Panel has assessed whether or not unacceptable circumstances exist in relation to these proceedings against the policy and legislative provisions of the Corporations Act. The Panel considers that Glencore's strategy goes directly against the policy and objectives of the substantial holding provisions of the Corporations Act.

The Panel considers that the evidence is clear that Glencore had a plan and an intention to accumulate its physical holdings and for each of the Banks to accumulate the Hedge Shares, together constituting well over 5% of Austral Coal, without disclosing its interests above 5% to the market, and that Glencore worked diligently to avoid this disclosure. Glencore communicated its strategy to the Banks and each of the Banks carried out the transactions to give effect to Glencore's strategy with knowledge of that strategy. The Panel considers that Glencore intended the Banks to acquire Hedge Shares to match the Glencore Swaps, and that Glencore had reasonable certainty that the Banks would do so.

Relevant interest

Glencore submitted that the Glencore Swaps did not give Glencore a relevant interest in the Hedge Shares. The Panel did not consider it necessary to determine whether or not the control which Glencore exercised over the Hedge Shares met the legal test of being a relevant interest. However, the Panel considered that there was an economic incentive for the Banks to hold the Hedge Shares to hedge their exposure under the Glencore Swaps which the Panel finds gave Glencore a real degree of effective negative control, at least over the disposal of the Hedge Shares, from the time the Hedge Shares were acquired by the Banks. The bases for the Panel forming this view included: the size of the Glencore Swaps, the market for Austral Coal shares, the nature of Austral Coal5, the relationship between Glencore and the Banks, the existence of the Centennial takeover bid and the fact that the Banks were aware of the real potential for a rival takeover bid by Glencore6.

Importance of disclosure for the market

Disclosure notices from Glencore would have shown the market, and Centennial inter alia, the pace and prices of Glencore's acquisition. The Panel also considers that subsequent notices would have inclined the market more towards the belief that Glencore was considering making a rival takeover bid, for cash, and would have shown the acquisition of a 10% blocking stake in terms of compulsory acquisition by Centennial in its bid for Austral Coal.

Instead, for the period 22 March 2005 to 5 April 2005, the market traded, Centennial declared its bid unconditional and many Austral Coal shareholders accepted the Centennial bid without such knowledge. Although the Panel cannot predict how the market for shares in Austral Coal or particular buyers, sellers and holders of Austral Coal shares would have responded to such notices, the Panel finds that the notices would have been material to decisions whether to accept the Centennial bid, or to buy, sell or hold shares in Austral Coal.

Background

The application related to the acquisition by Glencore of 4.9% of the voting shares of Austral Coal, and the acquisition and holding by the Banks of 7.4% of Austral Coal as Hedge Shares to hedge the Glencore Swaps.

Glencore's initial acquisition of Austral Coal shares

Glencore's initial discussions with CSFB appear to have intended a direct purchase of up to 10% of the shares in Austral Coal. However, Glencore's strategy changed part way through the acquisition and Glencore purchased only 4.9% of Austral Coal shares in the period between 7 and 17 March 2005. Glencore acquired its shares through Shaw Stockbroking Ltd (Shaw) and CSFB. Glencore advised CSFB that it was considering making a takeover bid for Austral Coal.

CSFB Swap

Some time on 10 March 2005, it appears that Glencore decided that rather than purchasing 10% of Austral Coal shares directly, it would acquire less than 5% directly, and in addition, acquire cash settled equity swaps over up to a further 10% of Austral Coal.

On March 10 Glencore commenced its discussions with CSFB to enter into a cash settled swap over Austral Coal shares (CSFB Swap). The CSFB Swap was to be over fewer than 5% of Austral Coal shares.

By 21 March 2005, Glencore had stopped buying Austral Coal shares (owning 4.9%) and entered into the CSFB Swap with CSFB. From 21 March, until 30 March, CSFB progressively acquired Austral Coal shares to hedge its exposure under the CSFB Swap and as it did so increased the size of the CSFB Swap in direct relation to the number and price of Austral Coal shares it acquired as Hedge Shares. Between 21 and 30 March 2005, CSFB acquired 4.6% of Austral Coal as Hedge Shares.

ABN AMRO Swap

On 29 March 2005, Glencore approached ABN AMRO requesting that ABN AMRO enter into a similar cash settled swap over up to 5% of Austral Coal shares. At that time, Glencore advised ABN AMRO that it:

  1. had bought just under 5% of Austral Coal shares;
  2. had already entered into a swap with CSFB;
  3. was considering making a takeover bid for Austral Coal; and
  4. wished to stop the Centennial bid for Austral Coal from proceeding.

ABN AMRO acquired 2.5% of Austral Coal on-market between 31 March and 4 April 2005, as Hedge Shares to hedge its exposure under the ABN AMRO Swap. As it progressively acquired the Hedge Shares, ABN AMRO advised Glencore of the increasing size of swap exposure over Austral Coal shares which it was prepared to give to Glencore.

Centennial bid unconditional

Centennial had announced a recommended takeover bid for Austral Coal on 23 February 2005 and had dispatched its bidder's statement on 21 March.

Centennial freed its bid from all defeating conditions on 23 March. At that stage Centennial had interests in 9.6% of Austral Coal shares, none of which had come through acceptances of its bid. However, Centennial was reasonably confident of the prospects for its bid, and by 7 April had acquired 67% of Austral Coal.

Centennial's complaints in these proceedings included that it had made its decision to declare its bid free from defeating conditions while Glencore had concealed the fact that the Combined Holding was more than 5% of Austral Coal. Centennial acknowledged that it could not now say what its decision might have been on 23 March, had it known that Glencore had recently acquired interests in over 5% of Austral Coal. However, Centennial said, and the Panel agrees, it should have been given that information at the time, and Glencore's failure to do so caused the market for control over shares in Austral Coal to be not efficient informed and competitive, and for unacceptable circumstances to exist.

Glencore disclosures

On 4 April 2005, Glencore acquired further shares through Shaw, increasing its physical holding to 4.6% (after having its holding diluted by the issue of new Austral Coal shares on conversion of some pre-existing Austral Coal convertible notes)7. The following day, 5 April 2005, Glencore acquired an additional physical holding of 1.8%, taking its direct holding to 6.4%.

In the late afternoon of 4 April 2005, Glencore published a release to the media announcing that

  1. it had acquired approximately 5% of the shares in Austral Coal;
  2. although it had "no legal obligation to disclose" them, it had entered into cash-settled equity swap agreements with a number of well regarded investment banks which correlated to approximately 7.4% of shares in Austral Coal; and
  3. it was considering its position in relation to Austral Coal and the takeover bid for Austral Coal made by Centennial. Glencore announced that its options included, but were not limited to "the possibility of a cash takeover bid being made for Austral Coal by a party other than Centennial".

Prior to the commencement of trading on 5 April 2005, Austral Coal published a copy of the Glencore release on ASX.

Based on Glencore's acquisition of Austral Coal shares on 5 April, Glencore was required to issue a substantial holder notice by 9.30 a.m. on 6 April 2005, and Glencore did so. Glencore's 6 April Substantial Holder notice disclosed Glencore's, by then, 6.4% holding in Austral Coal and also noted Glencore's swap exposure in relation to 6.49% of the Austral Coal shares.8

Association

It appeared to the Panel from the facts before it that each of the Banks may well have become an associate of Glencore prior to 5 April 20059. Each of the Banks knew that the Glencore Swaps and connected transactions were designed to avoid disclosure of the Combined Holding and in this knowledge proceeded to carry out the transactions required to give effect to Glencore's strategy. However, as the Panel found unacceptable circumstances to exist regardless of any potential breach of the provisions of Chapter 6C, it did not need to make a determination on this question.

Unwinding of Swaps

The Panel did not consider that the circumstances warranted orders in the form of those requested by Centennial – namely, orders requiring the Swaps to be unwound and the Hedge Shares to be disposed of (either on-market or by acceptance of the Centennial offer). The Panel considered that Centennial accepted that it might not achieve the compulsory acquisition threshold when it waived the 90% minimum acceptance condition on 23 March 2005 and that Centennial's own interests were not sufficiently harmed as a result of the unacceptable circumstances to justify such orders.

Disclosure of cash settled equity swaps in Australian takeovers

The question of whether a person with a combined physical and derivative position under cash settled equity swaps in excess of 5% should disclose that position to the market, particularly in the context of a takeover for the company, is not a new one in Australia.

The issue came before the Panel (as it was previously constituted) in 1997 in relation to the acquisition by Brierley Investments of shares in Fairfax Ltd. There the Panel declined to make a declaration of unacceptable circumstances in the circumstances of that particular matter, without deciding whether the relevant swaps gave rise to a relevant interest in the hedge shares. In its decision, the Panel then said market knowledge of swap agreements could have an impact on an efficient, competitive and informed market. It went on to say "Desirably, in a fully informed market, swap agreements should be disclosed."

The Panel notes that in the Fairfax case the issue before the Panel was that of the unwinding of cash settled swaps through the market where the taker of the swap acquired an essentially identical amount of target company shares as the writer disposed of on the day that the swap was unwound. Because of the delay in lodging the application, the Panel did not consider that it could "look back" to the entry into the derivative arrangements.

The issue resurfaced this year in relation to Cleveland Cliffs bid for Portman Ltd and in relation to BHP Billiton Ltd's bid for WMC Resources Limited. At the time, there was considerable media commentary on whether cash settled equity swaps were being used to circumvent the spirit of the substantial holding provisions.

Therefore, the Panel believed that Glencore and its advisers would have been aware of the market concerns in relation to this issue at the time Glencore entered into the CSFB Swap and the ABN AMRO Swap.

Panel Guidance Note

The Panel acknowledges that Glencore's entry into the Glencore Swaps and non-disclosure of its 5% Combined Holdings was made in the absence of a Panel Guidance Note on equity derivatives, published as either draft or final. To that extent, the Panel recognises that Glencore was not acting in contravention or against any published statement or provision concerning equity derivatives. However, the mere absence of a Panel Guidance Note, or even the preparations for publication of a draft, do not affect whether or not unacceptable circumstances existed or whether or not Austral Coal shareholders were adversely affected by the lack of disclosure of information which the Panel considers material.

Compliance with Black Letter law

Since its expanded role in 2000 the Panel has publicly stated many times that the existence of unacceptable circumstances does not require breach of the black letter law10 and that technical compliance with the black letter law is no guarantee that circumstances will not constitute unacceptable circumstances.

The Panel considers that it is arguable that Glencore did indeed breach the substantial holding notice provisions, but that that is not a necessary prerequisite for a finding of unacceptable circumstances or a declaration of unacceptable circumstances, and the Panel did not need to make any such finding.

Effect on equity derivative market in Austral Coal

The Panel considered the potential effect of its decision on the market for equity derivatives in Australia. The Panel does not consider that its decision or orders will inhibit the legitimate use of equity derivatives in the Australian market.

Proceedings

The sitting Panel in the Austral Coal 02 Proceedings were Guy Alexander, Hamish Douglass, Meredith Hellicar (sitting President).

The Panel will publish its reasons for the Austral Coal 02 decision in due course.

Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501

Annexure A

Corporations Act
Section 657A
Declaration of Unacceptable Circumstances

In the matter of Austral Coal Limited 02

Whereas

  1. At all relevant times, Austral Coal Limited (Austral Coal) was subject to the takeover offer from Centennial Coal Company Limited (Centennial) announced on 23 February 2005 (Centennial Offer).
  2. Between March 2005 and early April 2005, Glencore International AG and its subsidiaries and their respective nominees (collectively Glencore) was considering acquiring a strategic stake in Austral Coal with a view to either launching its own takeover offer for Austral Coal or otherwise preventing Centennial from achieving the 90% compulsory acquisition threshold prior to close of the Centennial Offer.
  3. Prior to 21 March 2005, Glencore acquired 12,865,881 voting shares in Austral Coal (Austral Coal Shares) representing (at that time) approximately 4.9% of Austral Coal Shares.
  4. On 21 March 2005, Glencore entered into a cash-settled equity swap arrangement (CSFB Swap) with Credit Suisse First Boston International (CSFB) (with CSFB as the equity amount payer) in respect of Austral Coal Shares.
  5. Given the circumstances surrounding Austral Coal at the time CSFB entered into the CSFB Swap, there was a strong economic incentive for CSFB to hedge its exposure under the Swap by purchasing Austral Coal Shares (CSFB Hedge Shares) (which CSFB did) and retaining them for the term of the Swap, giving Glencore a significant level of control over the disposal of the CSFB Hedge Shares.
  6. Glencore knew and intended this outcome.
  7. On 21 March 2005, CSFB acquired 651,195 Austral Coal Shares representing approximately 0.2% of Austral Coal Shares, as CSFB Hedge Shares. This acquisition caused the aggregate of the Austral Coal Shares held by Glencore and the CSFB Hedge Shares acquired by CSFB to exceed 5% of Austral Coal Shares.
  8. Between 22 March 2005 and 30 March 2005, CSFB acquired a further 11,448,865 Austral Coal Shares as CSFB Hedge Shares, approximately 4.6% of Austral Coal Shares (at that time).
  9. Between 22 March and 4 April 2005, Glencore did not make disclosure of any interest in the CSFB Hedge Shares acquired by CSFB during the period from 21 March 2005 to 30 March 2005.
  10. On 31 March 2005, Glencore entered into a cash-settled equity swap arrangement (ABN AMRO Swap) with ABN AMRO Bank NV (ABN AMRO) (with ABN AMRO as the equity amount payer) in respect of Austral Coal Shares.
  11. Given the circumstances surrounding Austral Coal at the time ABN AMRO entered into the ABN AMRO Swap, there was a strong economic incentive for ABN AMRO to hedge its exposure under the Swap by purchasing Austral Coal Shares (ABN AMRO Hedge Shares) (which ABN AMRO did) and retaining them for the term of the Swap, giving Glencore a significant level of control over the disposal of the ABN Hedge Shares.
  12. Glencore knew and intended this outcome.
  13. Between 31 March 2005 and 4 April 2005, ABN AMRO acquired 7,407,302 Austral Coal Shares as ABN AMRO Hedge Shares, representing approximately 2.5% of Austral Coal Shares.
  14. Between 31 March 2005 and 4 April 2005, Glencore did not make any disclosure of any interest in the ABN AMRO Hedge Shares acquired by ABN AMRO during this period.
  15. On 5 April 2005, Glencore disclosed that it held approximately 5% of Austral Coal Shares and, in addition, had entered into cash-settled equity swap arrangements in regard to 7.4% of Austral Coal Shares.

Under section 657A of the Corporations Act, the Takeovers Panel declares that the circumstances relating to:

  1. The failure of Glencore to disclose promptly and publicly the following matters in regard to Glencore's own holding of Austral Coal Shares, and the CSFB Swap or ABN AMRO Swap (each a Swap), as applicable, when the aggregate of Glencore's holding of Austral Coal Shares, CSFB's holding of CSFB Hedge Shares and ABN AMRO's holding of ABN AMRO Hedge Shares (Combined Holding) exceeded 5% of Austral Coal and following each subsequent 1% increment in the Combined Holding since the previously disclosed level:
    1. the parties to the Swap;
    2. the number of Austral Coal Shares to which the Swap relates;
    3. the date the Swap was entered into;
    4. whether the Glencore position was long or short;
    5. the reference/initial price; and
    6. the duration of the Swap (including any provisions for extension) and the circumstances in which the Swap must or may be closed out (including when and whether compulsorily or voluntarily or by agreement only, and in each case by whom, including the effect of Centennial or any other party achieving any given percentage level of control of Austral Coal or the effect of a de-listing of Austral Coal).
  2. In the absence of disclosure of Glencore's direct holdings, the Glencore Swaps, the Banks' holding of Hedge Shares, or the Combined Holding, each purchase of Hedge Shares by either CSFB or ABN AMRO (each a Bank) on ASX between 22 March and 4 April 2005 (inclusive) in circumstances where, after Glencore had acquired its initial 4.9% shareholding, and Glencore and the Banks had entered into the Swaps;

constitute unacceptable circumstances.

Meredith Hellicar
President of the Sitting President
Austral Coal 02 Proceedings
28 June 2005

Annexure B

Corporations Act 2001 (Cth)
Section 657D
Orders

In the matter of Austral Coal Limited 02

Pursuant to:

  1. section 657D of the Corporations Act 2001 (Cth) (the Act); and
  2. a declaration of unacceptable circumstances in relation to the affairs of Austral Coal Limited (Austral Coal) made by the Takeovers Panel on 28 June 2005,

the Takeovers Panel hereby makes the following orders:

Disclosure order

  1. Within one business day of the date of this order Glencore International AG (Glencore) will announce to Australian Stock Exchange Limited (ASX) following information concerning each of the cash-settled equity swap agreements relating to ordinary shares in Austral Coal (Austral Coal Shares) dated 4 April 2005 (each a Swap), one between Glencore and Credit Suisse First Boston International (a Bank) and the other between Glencore and ABN AMRO Bank NV (also a Bank):
    1. the parties to the Swap;
    2. the number of Austral Coal shares to which the Swap relates;
    3. the date the Swap was entered into;
    4. whether the Glencore position was long or short;
    5. the reference/initial price;
    6. the duration of the Swap, including any provisions for extension; and
    7. the circumstances in which the Swap must or may be closed out.

    If the Swap is governed by standard International Swaps and Derivatives Association documentation which provides that a swap may be closed out on the occurrence of a merger, tender offer or delisting event or by mutual agreement of the parties to the Swap, the announcement complies with paragraph (g) if it includes a statement to that effect.

Restoration order

  1. Glencore will make an offer to the following effect (Restoration Offer) to each person who sold Austral Coal Shares in a transaction (the Transaction) which was reported to ASX and which was entered into at or after the opening of trading on 22 March 2005 and before the opening of trading on 5 April 2005 (Seller) in respect of the Austral Coal Shares to which the Transaction related (Sold Shares):
    1. Glencore will offer to sell to the Seller a number of Austral Coal Shares (Restoration Shares) equal in number to the Sold Shares, at a price equal to the price for which the Seller sold the Sold Shares, not adjusting either price for commission or other costs of sale;
    2. Glencore must publish the Restoration Offer by announcement to ASX and by newspaper advertisements. Each announcement or advertisement must contain the particulars mentioned in paragraph (a), including an address to which an Acceptance Notice (defined below) may be sent and a date by which it must be received, which must be not less than one month after the announcement is made;
    3. A Seller may accept the Restoration Offer by sending to Glencore at the address and by the time mentioned in paragraph (b) a written notice (Acceptance Notice) setting out the number and price of its Sold Shares and identifying the Transaction, together with a certified copy of a contract note or other evidence of the Transaction, a cheque for the price, made payable to Glencore and transfer details for the Restoration Shares.
    4. Glencore must transfer the Seller's Restoration Shares to the Seller within 5 business days of receipt of the Seller's Acceptance Notice.

    Glencore may cause Fornax Investments Limited to make the Restoration Offers, in which case all references to Glencore in these orders include references to Fornax Investments Limited.

  2. To facilitate Glencore being able to perform its obligations under the Restoration Offer, Glencore and each Bank will implement the following procedure in regard to close out of the Swaps, and amend the Swaps as necessary to achieve this outcome:
    1. If at any time the total number of Restoration Shares in respect of Acceptance Notices which have been received by Glencore but which remain to be processed in accordance with Order 2(d) exceeds the sum of:
      1. the number of Austral Coal Shares then held by Glencore and any of its subsidiaries and their respective nominees; and
      2. the number of Close-out Shares in respect of any previous Close-out Notices which remain to be processed in accordance with this Order 3,

      (the difference being defined as the Excess), Glencore may give a notice (Close-out Notice) to either Bank from time to time until 5 business days after the last date for acceptance of the Restoration Offer that it wishes to close out its Swap in respect of a specified number of reference shares (Close-out Shares) not exceeding the lesser of the Excess and the total number of reference shares under the Swap and to purchase from the Bank a corresponding number of ordinary shares in Austral Coal.

    2. On the business day following the Bank's receipt of a Close-out Notice the Bank will sell to Glencore and Glencore will buy from the Bank a number of Austral Coal shares equal to the number of Close-out Shares at the Initial Price under the Swap, and Glencore will pay to the Bank an agreed proportion of any termination fee under the Swap. The equity notional amount, the number of reference shares and the termination fee under the Swap will be reduced accordingly.

Ancillary orders

  1. Centennial and Austral Coal will use their best endeavours to procure that Austral Coal remains included in the Official List of ASX until at least 10 business days after the last date for acceptance of the Restoration Offer.
  2. In regard to Glencore's obligation to publish the Restoration Offer under Order 2(b) above:
    1. Glencore must submit to the Panel a draft of the announcement or advertisement (and the proposed placement, layout and size of the advertisement) at least one business day before the announcement is made or copy of the advertisement must be lodged;
    2. The Panel must have approved the draft of the announcement or advertisement (and the proposed placement, layout and size of the advertisement) by the day before the announcement is made or the advertisement is published; and
    3. Austral Coal must facilitate the making to ASX of any announcement.
  3. To facilitate the performance of Order 3 above, until the period for Glencore to give a Close-out Notice under Order 3 has expired, neither Glencore nor a Bank will (other than under a Close-out Notice,):
    1. agree to early termination of any of the Glencore Swaps, or
    2. dispose of any Austral Coal Shares (other than Austral Coal Shares held by a Bank for a reason other than to hedge its exposure under a Swap).
  4. Orders 1, 2, 3 and 5 are stayed until 8 July 2005, or earlier order of the Panel.

Meredith Hellicar
President of the Sitting Panel
Austral Coal 02 Proceedings
1 July 2005

1 In this document, Glencore includes Glencore International AG and its subsidiaries and their nominees.

2 This Combined Holding was diluted to 10.9% upon the issue of Austral Coal shares on 1 April 2005.

3 Having been 4.9% and 7.5% prior to dilution.

4 Austral Coal issued 37,143,281 new shares on conversion of a series of convertible notes on 1 April,(but announced on 4 April 2005). At the date of these proceedings Austral Coal had on issue 304,631,895, at the time of the Glencore Swaps Austral Coal had 263,463,465 shares on issue. Glencore's announcement on 4 and 5 April was based on the number of Austral Coal shares on issue prior to 1 April. By the morning of 5 April, Glencore owned 4.6% and the Glencore Swaps related to 6.5% having previously been 5.2% and 7.4% respectively.

5 Austral Coal was a company for which good substitute hedges (e.g. entities from the same industry, indices, exchange traded derivatives) were not readily available. It was a single, product, single mine company, over which there were no exchange traded equity derivatives. It had been through material financial and technical difficulties recently, and it was the subject of a takeover bid by Centennial.

6 A rival bid for Austral Coal from Glencore was likely to have increased the price volatility of Austral Coal shares materially, increasing the need for the Banks to hold matching hedges and increasing the economic incentive to hold the Hedge Shares through the life of the Glencore Swaps.

7 The percentages in Glencore's announcement were based on the number of Austral Coal shares on issue before Austral Coal disclosed in an Appendix 3B Notice dated 4 April 2005 that it had issued 37,143,281 new shares on the conversion of Austral Coal Convertible Notes. On 5 April the actual percentages were 4.6% shares and 6.5% swaps respectively.

8 On a diluted basis.

9 However, the Panel does not infer that the Banks became associates of each other.

10 Indeed, the Panel in its previous form, and the NCSC prior to that, had similarly stated that the related concepts of unacceptable conduct and unacceptable acquisitions did not require a breach of the law to be triggered.

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