TP03/102
The Panel advises that it has concluded the proceeding (the Proceeding) arising from the application (the Application) made by Visy Industrial Packaging Holdings Pty Ltd (VIPH) on 19 September 2003 in relation to the affairs of National Can Industries Limited (NCI). The Proceeding concluded following acceptance by the Panel of undertakings provided by NCI and ESK Holdings Pty Ltd (ESK).
VIPH, a substantial shareholder in NCI alleged that unacceptable circumstances arose from the implementation agreement and other agreements in relation to a proposal under which ESK would acquire control of NCI under private agreements with Tyrrell family members and companies and a scheme of arrangement with other shareholders. It sought a declaration of unacceptable circumstances, orders to set aside the agreements and repayment of a break fee and variation of a modification provided by ASIC.
Break Fees
VIPH alleged that unacceptable circumstances arose as a result of NCI's entry into an agreement to pay ESK a reimbursement fee of $1 million (First Break Fee) in the event that any of the independent directors withdrew their support for a proposed scheme of arrangement (the First Scheme).
The Break Fee was paid by NCI to ESK upon the independent directors of NCI withdrawing their recommendation for the First Scheme after receiving the report of an independent expert that the First Scheme was not in the best interests of shareholders and the market price of NCI shares had substantially exceeded the offer price.
ESK then proposed a further scheme (the Current Scheme) on the same terms as the First Scheme, but at a higher price. The independent directors recommended this Current Scheme and agreed to the payment of a further fee of $100,000 if they withdrew their support for the Current Scheme (Second Break Fee).
The Application contended that the payment of the First Break Fee tended to inhibit an efficient, competitive and informed market in shares in NCI.
Any break fee may inhibit an efficient market in shares in the relevant company, depending on its impact on declared and prospective bidders for the company. The Panel's Guidance Note on Lock-Up Devices (GN7) deals with when break fees are unacceptable because of their adverse effect on market efficiency.
Any adverse effect of this fee on the efficiency of the market in shares in NCI is marginal. The fee was 1% of the value of the company, an amount specified in GN7 as immaterial to competition for control. The Panel rejected submissions that the 1% benchmark was inapplicable in these circumstances because the ESK proposal related to a scheme of arrangement, or because the Tyrrell family interests already hold over half of the shares in NCI.
The First Break Fee corresponded to amounts actually and not unreasonably paid as the costs of putting a corporate opportunity before shareholders. The fact that the Tyrrell family hold over 50% of the shares in NCI and favour the ESK proposal does not mean that the ESK proposal will succeed, but it makes it difficult for any rival proposal to succeed.
Although the effect of payment of the First Break Fee on market efficiency was marginal, the Panel found that the payment of the fee in these circumstances was unacceptable because it affected a proposed acquisition of a substantial interest and resulted from a decision of the Board of NCI which in the Panel's view was not appropriate in the circumstances of the ESK proposal. The agreement to pay the First Break Fee was inappropriate because:
(a) ESK was a related party of the Tyrrell family, who have a controlling interest in NCI,
(b) the initiative for the ESK proposal lay with ESK, not with NCI, and it does not appear that there was any urgency about the proposal from NCI's point of view,
(c) the independent directors agreed to pay the fee before they had full information,
(d) the payment of the fee tended to inhibit competition in the market for control of shares in NCI; and
(e) the obligation to pay the fee was not triggered by rejection of the ESK proposal by shareholders, but by a decision of any one of the independent directors to withdraw their initial recommendation of the proposal. This trigger tends to fetter the ability of the directors to carry out their duties.
VIPH alleged that the payment contravened Chapter 2E of the Corporations Act 2001 (related party transactions).
The Panel does not suggest that there was any want of good faith on the part of the independent directors, and notes that they in fact withdrew their recommendation of the original ESK proposal, when the independent expert reported that it was not in the interests of shareholders other than the Tyrrell family interests.
The Panel dealt with these issues by:
(a) obtained an undertaking from ESK to increase the consideration payable under the Current Scheme to give effect to the ESK proposal by 1.5 cents/share, which is the amount by which the payment of the First Break Fee depleted the assets of NCI. This ensures that shareholders are not adversely affected by the payment of the First Break Fee, if they approve the Current Scheme. In the experience of the Panel, shareholders in general prefer that an issue of this kind be resolved by increasing the bid rather than by restitution to the company, and
(b) obtaining an undertaking from ESK to repay the First Break Fee if a rival bid is announced before the Current Scheme meeting and is eventually successful. This ensures that if a rival bid succeeds, NCI's assets will not have been depleted by the payment of the First Break Fee, overcoming any adverse effect of the fee on that rival bid. If shareholders do not approve the Current Scheme, ESK is not required to repay the First Break Fee.
Given the related party aspect of the fee, it is appropriate for this outcome to be decided by the shareholders, not the Board. Had the fee been above the 1% threshold in GN7 or had it in any other way been excessive or materially affected the market in shares in NCI, it would clearly have required separate ratification by shareholders. As the fee is immaterial under that guideline, it is appropriate for approval to take the form of making it depend on the outcome of the scheme meeting.
The Panel also accepted an undertaking from ESK that it would not accept payment from NCI of the Second Break Fee and an undertaking from NCI that it would not pay all or any part of the Second Break Fee.
The Panel is concerned that the payment of break fees, such as the First Break Fee, does not adversely affect the efficiency of the Australian market in shares in companies subject to Chapter 6 generally, not just NCI. That market would be adversely affected by a perception that break fees could be paid in inappropriate circumstances and not be required to be re-paid, provided the fee was paid before there was any intervention. Fees paid in privatisation transactions, while not objectionable per se, are of particular concern in this regard.
This decision sets a precedent in enforcement of standards in transactions related to bids, in that transactions which are immaterial as to amount may nonetheless be found to be unacceptable because of the circumstances in which they are entered into, and in requiring a break fee to depend on a shareholder vote.
These undertakings have overcome the adverse effects of the payment of the First Break Fee on competition and efficiency in the market for shares in NCI and generally. In the Panel's view, that is as far as a Takeovers Panel should take this particular matter. If the Board's decision to agree to the fee, or to pay the fee, is open to challenge in the Courts, the interaction between this decision and section 659C of the Act will not prevent an action being brought to recover back the amount of the fee.
Disclosure of substantial holdings/association
In its Application, VIPH alleged breach of section 606 (the 20% threshold) resulting from dealings between the Tyrrell family interests and breaches of the substantial holder notice provisions of the Act due to a discrepancy in the disclosure of voting power in NCI disclosed in two substantial holder notices lodged on behalf of Tyrrell Investments Pty Limited (TI). VIPH further alleged that the relationship and dealings between the Tyrrell family interests suggest an association amounting to unacceptable circumstances.
The Panel considered the substantial holding notices lodged with NCI and ASX by TI on its own behalf and, apparently, on behalf of various other Tyrrell companies and family members both in November 2000 and in July and September this year. It obtained a detailed and helpful witness statement from Mr Michael Tyrrell describing the Tyrrell family shareholding structure as it related to NCI. As a result of this, the Panel indicated to Mr Tyrrell that it was concerned that the existing substantial holding notices did not accurately indicate the persons who are substantial holders in NCI in relation to the Tyrrell family shareholding or the reason that those persons have voting power in NCI. Following this, TI lodged, on 15 October substantial holding notices correcting and replacing those lodged in July and September. In the Panel's opinion and on the basis of the material available to it, these replacement notices appear to describe the relevant position more accurately.
This information also overcame VIPH's concern that the consolidation of the Tyrrell family interests which is foreshadowed in the July and September notices (or related agreements) would lead (or had already led) to contraventions of section 606 of the Act. This concern in essence arose from the failure to disclose in the original July and September notices certain associations between Tyrrell family members and companies. The November 2000 notice disclosed that the Tyrrell family members and companies were then associated. The 15 October 2003 notices disclosed that they were associated because they had entered into agreements to implement the Tyrrell consolidation, which were attached to the notices and which were entered into after ASIC granted a modification of subsection 609(7), which is discussed below. Since no shares were acquired by negotiating or making those agreements, under subsection 609(7) or the ASIC modification, the Panel was satisfied that the Tyrrell consolidation did not contravene section 606.
The Panel also formed the view that, notwithstanding the previous deficiencies in disclosure of substantial holdings in relation to the Tyrrell family shareholdings, not only in substantial holding notices but also, for example, in annual reports, the market had not at any time been significantly misled -- at all times, the market appears to have taken the same view of the Tyrrell family shareholding as was disclosed in the November 2000 notice and as the Panel formed following its review of the position; that is, that the Tyrrell family shareholders were associated and their shareholding was effectively a "block". As a result of this and of the improved disclosure created by the lodging of the replacement substantial holding notices, the Panel considered that no unacceptable circumstances warranting its intervention remained in relation to the substantial holding disclosures or the association of the Tyrrell family interests.
ASIC Modification
The Application sought an order that ASIC's decision on 21 July 2003 to grant an ASIC modification (ASIC Modification) to vary subsection 609(7) of the Act to disregard the relevant interests in shares which arose from agreements for the Tyrrell consolidation, conditional on approval of the scheme of arrangement proposed by ESK, be set aside or be varied to impose a condition similar to the conditions referred to in ASIC's policy on joint bids.
The Panel formed the view that the ASIC Modification was soundly based in policy. The ASIC Modification made exemptions to allow the Tyrrell consolidation conditional on the outcome of the vote on the scheme of arrangement. Where otherwise prohibited transactions are permitted subject to shareholder consent, whether as a result of ASIC relief or otherwise, the Panel considers that it is essential that shareholders receive complete disclosure about the exempt transactions to ensure that shareholders are fully aware of the consequences of their vote.
In the case of a scheme of arrangement, this disclosure will typically be in the explanatory statement in relation to the scheme issued by the relevant company (here, NCI). That document is lodged with and reviewed by ASIC and is then the subject of further scrutiny by the Court. The Panel was concerned not to trespass on areas of responsibility of ASIC and the Court. Accordingly, the Panel indicated to the parties that it considered that the terms of the Tyrrell consolidation should be the subject of disclosure to the scheme meeting, commensurate with the requirements of the item 7 of section 611 (acquisitions approved by shareholders). The Panel obtained assurances by NCI that appropriate disclosure would be made of those matters in the explanatory statement and that it would be reviewed and commented upon by the independent expert and by ASIC that it would conduct its review of the documents bearing in mind the Panel's observations. On this basis, the Panel considered that no unacceptable circumstances had arisen or were threatened which necessitated its intervention.
Concluding remarks
The sitting Panel comprised Andrew Lumsden (sitting President), Anthony Burgess and Denis Byrne.
The Panel will post its reasons for this decision on its website when they have been settled.
George Durbridge,
Director, Takeovers Panel
Level 47 Nauru House,
80 Collins Street, Melbourne VIC 3000
Ph: +61 3 9655 3553 Fax: +61 3 9655 3511
george.durbridge@takeovers.gov.au
