TP05/012
The Takeovers Panel (Panel) advises that it has made a decision in relation to the application dated 13 January 2005 from Lenvat Pty Limited (Lenvat), a major shareholder1 of Lachlan Farming Limited (LFL), in relation to the 1 for 1.19 rights issue (Rights Issue) recently conducted by LFL, the terms of which were set out in a prospectus dated 17 September 2004 (Rights Issue Prospectus).
The Panel has made a declaration of unacceptable circumstances and orders in relation to an application for shares made by Lenvat under the Rights Issue (Lenvat Subscription). Lenvat applied for the shares it was entitled to under the Rights Issue and also for the shares not taken up by other shareholders in LFL. Lenvat's voting power in LFL would have increased from 21.4% to 55.4%. It had been a term of the Rights Issue (Shortfall Facility) that shareholders could apply for shares not taken up by other shareholders, and the excess shares would be allotted to shareholders who wished to take them up, in proportion to those shareholders' shareholding in LFL at the date of the Rights Issue Prospectus.
The terms of the Rights Issue were cast to raise $9 million by the issue of 18 million LFL shares at $0.50 each. Of the 18 million shares on offer, the RFM Australian Cotton Fund, a shareholder in LFL, had underwritten 14 million. The Rights Issue Prospectus mentioned that ACF would be able to subscribe for the 4 million shares not underwritten.
The Panel considers that the proposed acquisition under the Lenvat Subscription constitutes unacceptable circumstances in relation to the affairs of LFL because:
- of the effect the acquisition would have on the control of LFL; and
- it would give rise to a contravention of section 606 in that Lenvat's voting power in LFL would increase from 21.4% to 55.4% in circumstances other than those contemplated by a statutory exception to the limit set out in section 606.
The Reasons
Item 10 Underwriting exception
Lenvat submitted that its acquisition for all of its entitlement, and all of the shortfall shares would not constitute unacceptable circumstances or a contravention of the Corporations Act because it would come within the exception for underwriting or sub-underwriting a rights issue in item 10 of section 611 (item 10). The Panel considers that the Lenvat Subscription would not attract the item 10 underwriting exception.
The Panel considers that Lenvat's knowledge of the level of subscriptions under the Rights Issue at the time of making its application for shares under the Shortfall Facility meant that Lenvat's application lacked a central element of underwriting, in that Lenvat effectively bore no risk as to the number of shares it would be required to subscribe for.
The Rights Issue was scheduled to close at 5.00 p.m. on Friday 10 January 2005. Lenvat made its application under the Lenvat Subscription at 4.30 p.m. that day. A director of Lenvat, who was also a director of LFL, attended the offices of LFL personally, with a partially completed cheque and only made out the cheque in full and lodged the application after he became aware of the number of applications, the number of shares applied for, and the identity of the applicants, under the Rights Issue. Whether Lenvat obtained that knowledge by enquiry or voluntary disclosure by LFL officers is apparently in dispute, but is not relevant to the Panel's consideration of the issue. Lenvat made its application at a time when it was virtually certain that the final number of shares applied for, other than under its own application, had been settled, and it was aware of that information.
On that basis, the Lenvat Subscription cannot be characterised as underwriting and would not attract the underwriting exception in item 10. Rather, it is better characterised as a deliberate and informed acquisition of the relevant shares and as such constituted unacceptable circumstances and a contravention of section 606 of the Corporations Act.
In the circumstances, it is not necessary for the Panel to make any determination as to whether an application under the Shortfall Facility in other circumstances could, or could not, be made in reliance on the underwriting exception in item 10. The Panel has not made any such determination.
Non-underwritten 4 million shares under the Rights Issue
The board of LFL wrote to LFL shareholders on 29 December 2004 advising that ACF would not, as shareholder under the Rights Issue, under the Shortfall Facility or as underwriter, be seeking to subscribe for any of the four million shares under the Rights Issue which it had not underwritten. ACF did not apply for these shares prior to the closure of the Rights Issue.
Other issues
Various issues of disclosure were raised in the proceedings. The Panel considers that if the Lenvat Subscription had proceeded to increase Lenvat's voting power from 21.4% to 55.4%, those disclosure issues would have been material. However, given the Panel's decision that the Lenvat Subscription should not proceed in its current form, and the outcome of the Rights Issue, most of the disclosure issues become either not relevant or were sufficiently immaterial as not to warrant any further action.
The orders
The Panel has ordered that LFL not allot shares to Lenvat under the Lenvat Subscription which would increase Lenvat's voting power above that allowed under item 9 of section 611. This allows Lenvat to subscribe for its full entitlement under the Rights Issue and to "creep" by up to 3% under the Shortfall Facility (if Lenvat is entitled to rely on the creep provisions), but not to subscribe for any greater number of shares under the Shortfall Facility. The Panel understands from the submissions in these proceedings that the maximum number of shares which Lenvat would be entitled to subscribe for under this order to be 5,041,688. Lenvat's voting power in LFL after acquiring those shares would be 24.4%.
The Panel has also ordered that Lenvat have the right to withdraw all of its application or to subscribe for any number of shares between zero and 5,041,688.
The Panel has ordered that LFL refund to Lenvat any excess subscription monies in the manner set out in the Rights Issue Prospectus.
The Panel has ordered that Lenvat give its decision to LFL as to the number of shares it now wishes to subscribe for by 5.00 p.m. AEDT on Tuesday 25 January 2005. If Lenvat does not advise LFL as to its preference, LFL must allot 5,041,688 shares in response to the Lenvat Subscription i.e. Lenvat's Rights Issue entitlement and a "creep" entitlement of 3% and refund the balance of the Lenvat Subscription monies.
The Panel has not ordered that the Rights Issue be re-opened, nor that LFL or Lenvat make any further disclosure.
Balance
The Panel considers that its orders strike the most appropriate balance between remedying the unacceptable circumstances that it considers exist and minimising any prejudice which its orders might cause.
Lenvat is prevented from acquiring the full 17,247,159 shares which it contends it is entitled to because to do so would constitute unacceptable circumstances. Those unacceptable circumstances were brought about in this instance by Lenvat's timing of its application for the Lenvat Subscription with knowledge of the status of other applications prior to making its own application.
However, the Panel believes it is appropriate to give Lenvat the option of subscribing for all or part of the shares which the Panel believes it is entitled to acquire, because it appears that Lenvat was acting on the basis of advice it received as to the operation of section 611. Having said that, the Panel considers that Lenvat should also have been put on notice by that advice that the use of the underwriting exception is subject to review on the grounds of unacceptable circumstances and that the results that would have occurred under the Lenvat Subscription were susceptible to such review.
Any of the outcomes that the other shareholders of LFL (whether they subscribed for shares or not) may be faced with under the Panel's proposed orders are outcomes which they should reasonably have expected to be possible under the terms and disclosure of the Rights Issue Prospectus.
LFL will also only be faced with outcomes which could be reasonably expected to be possible on the basis of the Rights Issue Prospectus and the Shortfall Facility as proposed by LFL. If Lenvat withdraws its application in full LFL will still raise the minimum amount it could have expected to raise. If Lenvat chooses to subscribe for its maximum permissible number of shares under the Rights Issue and the Shortfall Facility, LFL will raise the maximum amount of money it could have expected under the Rights Issue and underwriting arrangements that it had put in place.
The Panel considers that ACF is also unlikely to be unfairly prejudiced, for the same reasons as for LFL. ACF has been exposed to the commercial risks of LFL as a debtor for a long period. The Panel's orders do not materially affect LFL's business or its ability to raise the funds proposed under the Rights Issue.
Underwriting agreement
ACF has advised that Panel that it does not wish to withdraw from the underwriting agreement with LFL in relation to the Rights Issue as a consequence, direct or indirect, of the Panel's proposed orders.
Underwriting and shortfall facilities in general
The Panel notes that it has not been necessary, given the specific circumstances of these proceedings, to make any general decision in relation to whether or not an application under a shortfall facility would generally attract the underwriting or sub-underwriting exceptions in item 10 of section 611. The Panel in these proceedings considers that as the wider Panel has not published any guidance on the issue, it would be preferable for this Panel not to make comment or decide on the issue while the wider Panel's views on the matter are not clear.
However, the Panel considers it undesirable for the type of uncertainty which the Lenvat Subscription suggests may be in the market to continue. Therefore, this sitting Panel will be recommending to the wider Panel that it commence a project to provide guidance on rights issues in general, and which will cover the use of the underwriting exception in rights issues.
The Panel will publish its reasons on its website www.takeovers.gov.au.
The President of the Panel appointed Simon Mordant, Karen Wood and Robyn Pak-Poy as the sitting Panel to consider the application.
Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501
Corporations Act
Section 657D
Orders
In the matter of Lachlan Farming Limited 02
Pursuant to:
- section 657D of the Corporations Act 2001 (Cth) (the Act); and
- a declaration of unacceptable circumstances in relation to the affairs of Lachlan Farming Limited (LFL) made by the Sitting Panel on 25 January 2005,
the Takeovers Panel HEREBY ORDERS:
- LFL not to allot shares to Lenvat Pty Limited (Lenvat) under the shortfall facility (Shortfall Facility) set out in the prospectus dated 17 September 2004 (Rights Issue Prospectus) related to a 1:1.19 rights issue (Rights Issue), which would increase Lenvat's voting power in LFL above that allowed under the exceptions in item 9 of section 611 and item 10 of section 611 of the Act (but not that part of the exception which relates to underwriting or sub-underwriting);
- LFL to allow Lenvat to withdraw part or all of its application for shares under the Rights Issue and the Shortfall Facility, made on 10 January 2005 (Lenvat Subscription), so that Lenvat's application is reduced to an application for any number of shares in LFL between zero and 5,041,688 (that being the maximum amount which would comply with the restriction in (i) above);
- LFL to allot to Lenvat 5,041,688 shares in LFL if Lenvat has not advised LFL, by 5.00 p.m. AEDT on Tuesday 25 January 2005, of the number of shares Lenvat wishes to subscribe for under (or withdraw from) the Lenvat Subscription; and
- LFL to refund to Lenvat, in the manner set out in the Rights Issue Prospectus, any excess monies subscribed by Lenvat for shares under the Rights Issue and the Shortfall Facility.
Simon Mordant
President of the Sitting Panel
Dated 25 January 2005
Corporations Act
Section 657A
Declaration of Unacceptable Circumstances
In the matter of Lachlan Farming Limited 02
Whereas
- Lachlan Farming Limited (LFL) has offered a 1:1.19 rights issue (Rights Issue) to its shareholders under a prospectus dated 17 September 2004 (Rights Issue Prospectus). The Rights Issue was to raise up to $9 million to repay a series of previously shareholder approved convertible notes, repay an unsecured loan and for working capital. The maximum number of shares to be issued under the Rights Issue was 18 million, of which the issue of 14 million was underwritten by a trust associated with Rural Funds Management Limited (RFM), the company which provides management services to LFL. LFL had previously conducted a rights issue in 2003 which had failed to meet the minimum subscription;
- Lenvat Pty Limited (Lenvat) is the largest shareholder in LFL, holding 21.4% of the voting power at the date of the Rights Issue Prospectus. Lenvat has nominated one director to the board of LFL (Mr T Allen);
- It was a term of the Rights Issue that shareholders of LFL could apply for shares not taken up by other shareholders (Shortfall Facility) and that they would be allotted shares under the Shortfall Facility in proportion to the shares they held at the date of the Rights Issue Prospectus if more shares were subscribed for under the Shortfall Facility than were available;
- The Rights Issue Prospectus stated that the directors of LFL retained unfettered discretion on the allocation of shares under the Rights Issue where a shareholder applied for more than their entitlement. The Rights Issue Prospectus stated that the directors intended to allocate any entitlements not subscribed for by shareholders to other shareholders who may have applied for more than their entitlement, and to the underwriter pursuant to the underwriting agreement between LFL and the underwriter, in accordance with the terms of the Rights Issue Prospectus (see C above) and subject to the restrictions imposed by the Corporations Act;
- On 29 December 2004, the directors of LFL wrote to shareholders:
- reaffirming that the offer period of the Rights Issue had been extended until 10 January 2005;
- advising that the take-up levels by shareholders under the Rights Issue and Shortfall Facility was, at that stage, very low; and
- setting out the underwriter's intention not to subscribe for the 4 million non-underwritten shares under the Rights Issue;
- Prior to 4.30 p.m. on 10 January 2005, the last day of the extended Rights Issue, subscriptions remained very small (constituting approximately 4.2% of the maximum issue);
- At about 4.30 p.m. on the last day of the Rights Issue, the director of LFL nominated by Lenvat (Mr T Allen) attended the offices of LFL. He became aware of information on the then low level of acceptances under the Rights Issue and applications under the Shortfall Facility. He then made application, on behalf of Lenvat (Lenvat Subscription), for all 18 million shares, made up of 3,856,803 shares as Lenvat's entitlement under the Rights Issue and 14,143,197 shares under the Shortfall Facility (although this would be reduced according to the number of shares applied for by LFL shareholders under their entitlements and under the Shortfall Facility); and
- If Lenvat acquired all of the shares it applied for under the Lenvat Subscription, taking into account the other applications for shares and the provisions of the Rights Issue Prospectus, Lenvat would have acquired 17,247,159 shares under the Lenvat Subscription. Lenvat's voting power in LFL would have been increased from 21.4% to 55.4%.
Under section 657A of the Corporations Act, the Takeovers Panel declares that the combination of the circumstances set out in recitals A to H constitute unacceptable circumstances in relation to the affairs of LFL.
Simon Mordant
President of the Sitting Panel
Dated 25 January 2005
1 At the time of the application, Lenvat was the largest single shareholder in LFL.
