Skywest Limited 04 - Panel Makes Declaration of Unacceptable Circumstances and Orders

TP04/101

Wednesday, 27 October 2004

The Panel in the Skywest Limited 04 proceeding has made a declaration of unacceptable circumstances and final orders in relation to the off-market takeover bid (the Bid) by CaptiveVision Capital Limited (CaptiveVision) for all of the issued shares in Skywest Limited (Skywest). The proceeding related to an application (the Application) made by Skywest dated 11 October¹ in relation to the Bid.

Background

Parties

CaptiveVision is an unlisted public company incorporated in Singapore. CaptiveVision’s business is investing, financing and investment holding. CaptiveVision’s Australian corporate adviser in relation to the Bid is Marshall Michael Corporate Consultants. Mr Stefan Saw (Mr Saw) is an account director with Marshall Michael.

Skywest is an unlisted Australian public company with approximately 240 shareholders. Skywest operates in the regional aviation industry in Western Australia.

Skywest securities

In addition to ordinary shares, Skywest also has convertible notes and options over unissued shares on issue. The terms of the options currently on issue are:

Options exercisable for 1 share at 30 cents expiring on 30 June 2005 (2005Options); and
Options exercisable for 1 share at 20 cents expiring on 31 January 2006 (2006Options).

As at 13 September, Skywest had the following options on issue²:

Ordinary Shares: 56,231,864
Convertible Notes: 25,074,843
2005 Options: 11,612,500
2006 Options: 27,798,343

In addition to the above securities, Skywest is undertaking a rights issue which it expects will result in the issue of an additional 18.744 million shares and 27.493 million 2006 Options.

As at 11 October there were 25 registered holders of the 2005 Options.

Terms of the Bid and disclosure regarding option offers

The consideration under the Bid was initially 20 cents for each Skywest share. On 7 October, CaptiveVision increased the consideration offered under the Bid from 20 cents to 23 cents.

The Bid consists of offers to acquire Skywest shares that were on issue on 27 April. CaptiveVision did not make any corresponding bids for any other Skywest securities. In its supplementary bidder’s statement dated 20 September, under the heading “Post-Bid Intentions of CVC”, CaptiveVision stated:

CVC [ i.e. CaptiveVision] reserves its rights to consider a further bid or other form of offer for Options and/or other convertible securities. CVC’s present intention is to make an offer (but not a takeover bid) for the [2006 Options] currently on issue in Skywest. … CVC’s immediate intention is to make an offer (but not a takeover bid) to Skywest options holders to acquire the [2006 Options] for 2 cents per Option.

No mention was made of an intention to make offers for 2005 Options in CaptiveVision’s supplementary bidder’s statement. Based on the material provided to the Panel, CaptiveVision had discussions with several holders of 2005 Options regarding the acquisition of their options prior to the lodgement of its supplementary bidder’s statement on 20 September. The Panel is concerned that CaptiveVision’s failure to disclose in its supplementary bidder’s statement that it was contemplating making offers for 2005 Options as well as 2006 Options was misleading.

Offers by CaptiveVision for 2005 Options

Based on the material provided to the Panel by CaptiveVision, CaptiveVision, either directly or through Mr Saw acting on CaptiveVision’s instructions, made offers to acquire 2005 Options from the following parties (the 2005 Option Offerees):

2005 Option Offeree	Number of 2005 Options	Consideration offered
Savant Pty Ltd	833,333	$133,000 (or 16 cents per option)
Savant Pty Ltd as Trustee for Gray Family Super Account	833,333	$133,000 (or 16 cents per option)
Fedas Pty Ltd	1,666,667	2 cents per option
Rojex Mining Services Pty Ltd	104,166	2 cents per option
Maranka Pty Ltd	291,667	2 cents per option
Tabland Pty Ltd	104,167	4 cents per option
Ron Guest	208,333	4 cents per option
FHC Wilson Pty Ltd	125,000	4 cents per option
Mark Nuitta Family Account	375,000	4 cents per option
	TOTAL: 4,541,666

In relation to offers made to Savant Pty Ltd for a total of 1.66 million 2005 Options, the Panel received materials that were inconsistent as to the consideration offered: CaptiveVision’s submissions and a statement by Mr Saw indicated that $200,000 was being offered for a parcel of 833,333 2005 Options (or 24 cents an option). However, attached as annexures to Mr Saw’s statement was a memorandum of understanding and two transfer forms stating the consideration as $266,666 for the 1.66 million 2005 Options (or 16 cents an option) (each document dated 5 October and executed, with the transfer forms marked “void”).

In its submissions to the Panel, CaptiveVision asserted that it intended to enter into the 2005 Option transactions with Savant on the mistaken basis that Savant held 15% of all Skywest options, rather than 15% of the 2005 Options. CaptiveVision asserted that it would not have completed the transaction with Savant on this (mistaken) basis. As CaptiveVision’s original bidder’s statement contained details regarding the total number of Skywest options on issue, the Panel found the alleged mistaken basis for the transaction difficult to understand. However, if it was accepted that the offer of $266,666 was for 15% of all Skywest options on issue (approximately 5.91 million options), the consideration offered would have been approximately 4.5 cents per option.

Each of the 2005 Option Offerees, except for Fedas Pty Ltd, Rojex Mining Services Pty Ltd and Mr Mark Nuitta, also held substantial parcels of Skywest shares.

The Panel understands that Fedas is a company owned by Mr Miles Cattle. Fedas only held 10 Skywest shares. However, Mr Miles Cattle has a brother, Mr Godwin Cattle, who held 1 million ordinary shares prior to the Bid. Mr Godwin Cattle resides in Belgium and CaptiveVision advised that at the time it was making offers for Mr Miles Cattle’s options, Mr Miles Cattle was the only point of contact that CaptiveVision had with Mr Godwin Cattle. Mr Saw had conversations concerning CaptiveVision’s offer for Mr Godwin Cattle’s Skywest shares with Mr Miles Cattle in Australia who relayed those conversations to Mr Godwin Cattle and Mr Godwin Cattle’s responses back.

The Panel received a document from CaptiveVision indicating that Mr Miles Cattle was given limited authority on 3 October to act on behalf of Mr Godwin Cattle in relation to the sale of Mr Godwin Cattle’s 1 million shares. Additional evidence provided with CaptiveVision’s submissions indicates that Mr Saw dealt solely with Mr Miles Cattle in relation to the purchase of Mr Godwin Cattle’s 1million shares. Mr Saw stated that he understood that Mr Miles Cattle was “merely a go-between” for CaptiveVision and Mr Godwin Cattle. The Panel considered that this was inconsistent with the limited authority dated 3 October given to Mr Godwin Cattle.

Based on the materials provided to the Panel, Rojex Mining Services Pty Ltd appeared to have previously owned 208,333 Skywest shares, in respect of which it accepted the Bid prior to receiving an offer to buy its 2005 Options.

Based on the materials provided to the Panel, Mr Mark Nuitta acted as broker for a number of Skywest shareholders, including Savant and Maranka.

These offers were made by private communication, either by telephone or written correspondence. The period of the offers appears to have commenced as early as June, and continued up to shortly before Skywest’s application to the Panel.

In addition to offers regarding the 2005 Options, CaptiveVision also made several offers to acquire 2006 Options. At least 3 of these offers resulted in completed transactions. The materials provided to the Panel also indicated that CaptiveVision notified individual Skywest security holders that it was prepared to acquire convertible notes.

The Panel considered that it was impossible for it to be satisfied that the evidence provided by CaptiveVision included details of all offers made by or on behalf of CaptiveVision to acquire 2005 Options. The Panel’s concerns arose primarily due to a statement provided by Mr Saw, which indicated that:

during the course of the Bid, Mr Saw had spoken with at least 70 Skywest shareholders (in over 200 phone calls);
although mindful of the Corporations Act 2001 (Cth) (the Act) requirements to record telephone calls made during a bid period and having a preferred practice of ringing shareholders from an office phone with a recording function, Mr Saw made telephone calls to Skywest shareholders from his home and mobile telephones which were not recorded;
Mr Saw did not make written notes of conversations with Skywest security holders;
the volume of calls made to Skywest shareholders, the passage of time, the absence of any written notes and the “gap” in the recording of conversations meant that Mr Saw was unable to provide the Panel with all relevant information regarding the offers made for 2005 Options.

CaptiveVision was asked to provide recordings of any discussions relating to an offer by or on behalf of CaptiveVision to acquire Skywest options. The Panel had an opportunity to review recordings of conversations between Mr Saw and several of the 2005 Option Offerees, as well as other Skywest security holders. One of the recordings provided to the Panel of a conversation between Mr Saw and a person involved in transactions occurred after the Application had been made by Skywest. This conversation appeared somewhat contrived in terms of the content and timing. However, other recordings provided appeared genuine, insofar as they did not appear to have been conducted and recorded in order to be provided to the Panel.

Application

In the Application, Skywest alleged that unacceptable circumstances arise in relation to offers by CaptiveVision to acquire Skywest options over unissued shares in Skywest made to certain Skywest shareholders. Skywest alleged that these offers were made by CaptiveVision for consideration in excess of the “fair value” of the options, and that those offers constituted an inducement to those Skywest shareholder to accept the Bid, which inducement was not offered to all Skywest shareholders.

Skywest sought a declaration of unacceptable circumstances and interim orders requiring CaptiveVision to revoke any unaccepted offers for Skywest options and preventing CaptiveVision from processing any outstanding acceptances of such offers for Skywest options or any outstanding acceptances of the Bid from any Skywest shareholder who received an offer in respect of their options.

Skywest also sought the following final orders:

that the consideration payable by CaptiveVision under the Bid be increased to reflect the maximum excess in value offered over the “fair value” of the Skywest options to certain Skywest shareholders; or
in the alternative, all contracts for the acquisition by CaptiveVision of Skywest options for a value in excess of “fair value” be cancelled and reversed, with each vendor of such options to be given a right to withdraw any acceptance of the Bid.

The declaration and orders sought under the Application did not differentiate between 2005 Options and 2006 Options. However, the supporting material provided by Skywest with the Applications and in its subsequent submissions to the Panel focused largely on transactions and valuation issues relating to the 2005 Options.

Interim Orders

The Panel considered the interim orders requested in the Application. On 13 October, CaptiveVision gave an undertaking to the Panel that it would do the following:

extend the offer period under the Bid until 1 November;
revoke any outstanding or unaccepted offers for any Skywest options (both 2005 and 2006 Options); and
not process any outstanding acceptances of any offers for any Skywest options.

The Panel accepted these undertakings from CaptiveVision. In addition, the Panel made interim orders directing CaptiveVision not to process any outstanding acceptances under the Bid from Skywest shareholders who, or whose known associates, received offers from CaptiveVision or its agents to acquire Skywest options.

Action by Captivevision following Application

In its submissions to the Panel, CaptiveVision stated all offers by or on behalf of it to acquire 2005 Options and 2006 Options had been revoked. CaptiveVision stated that this was done by letter to all recipients sent on 13 October and 14 October – i.e. after CaptiveVision had been made aware of the Panel’s decision to conduct proceedings on the Application. CaptiveVision stated that this action was taken to remedy any concerns that Skywest or the Panel may have had with the transactions. CaptiveVision stated that all of the offers made to the 2005 Option Offerees were included in the revoked offers, and that therefore there had been no resulting transactions in respect of 2005 Options.

Decision

After consideration of the materials provided to the Panel by the parties, the Panel decided that circumstances relating to the affairs of Skywest were unacceptable and that it was in the public interest to make a declaration of unacceptable circumstances.

The Panel considered that the offers made by CaptiveVision to the 2005 Option Offerees constituted benefits which were not offered to all Skywest shareholders and which were likely to induce the 2005 Option Offerees or their associates to accept CaptiveVision’s offer under the Bid. The Panel considered that these offers by CaptiveVision were unacceptable because they:

were inconsistent with the policy of subsection 602(c) of the Act, which requires that as far as practicable, target shareholders all have a reasonable and equal opportunity to participate in any benefits accruing to target shareholders through a takeover proposal; and
constituted a breach of section 623 of the Act,

both of which are matters that the Panel considers to be extremely serious.

The unacceptable circumstances resulting from those offers were not remedied by CaptiveVision’s subsequent actions in seeking to revoke the relevant offers. There remained on foot potential transactions tainted by the activity undertaken in breach of the Act (specifically, acceptances of the Bid by 2005 Option Offerees or their associates).

Collateral benefits

Value of 2005 Options

In considering whether unacceptable circumstances had arisen due to the offers for 2005 Options made by CaptiveVision, the Panel noted the decision in PowerTel Limited 03³, in which the Panel supported a “net benefits” approach to looking at the commercial balance of advantages flowing to or from the non-bidder from a transaction which is sought to be impugned.

Applied to the circumstances of CaptiveVision’s bid, for the 2005 Option Offerees to have received a net benefit, the consideration offered by CaptiveVision for those 2005 Options must have exceeded the fair value of the 2005 Options.

As indicated above, the material provided to the Panel regarding the terms of the offers made to 2005 Option Offerees, including the offered consideration, is unclear or incomplete, due in part to failures by Mr Saw to comply with telephone monitoring requirements under the Act and in part to uncertainties as to the details of some transactions such as the Savant Pty Ltd transactions. On the basis of the material provided, consideration offered by CaptiveVision for 2005 Options ranged from 2 cents to 4 cents per option, with one set of transactions (with Savant) appearing to involve an offer of at least 16 cents per option.

In the parties’ submissions to the Panel, a range of evidence was presented regarding the “fair” value of the 2005 Options. The Application attached an indicative valuation report by PricewaterhouseCoopers (PWC) which valued the 2005 Options at 0.54 cents each, at the likely upper end of the range of fair market values. To counter arguments made by CaptiveVision regarding the market price for Skywest shares used in PWC’s valuation, Skywest provided a revised report to reflect the increased market price for Skywest shares. In its revised valuation, PWC assessed the upper bound of its range of indicative values for 2005 Options to be 0.75 cents each.

With its submissions, CaptiveVision provided a report prepared by Mr Julian Sandt, described as CaptiveVision’s external adviser, which stated the fair value for 2005 Options was 5.11 cents each (although the calculations provided with Mr Sandt’s report appear to present the fair value at 5.51 cents each). The Panel noted that limited information was contained in Mr Sandt’s report regarding the assumptions and calculations used. The Panel also noted Skywest’s assertion that Mr Sandt is a shareholder of Advent Television Ltd, CaptiveVision’s parent company: this assertion was not denied by CaptiveVision.

CaptiveVision also provided a valuation from another corporate advisory firm, PKF for the 2005 Options. The PKF report presented a theoretical value for the 2005 options to be 1.59 cents each, which was adjusted to 1.27 cents each to take account of the non-marketability of the options.

The Panel recognises the difficulties inherent in valuing thinly traded options over unissued shares in an unlisted company. These difficulties are exacerbated during the presence of an ongoing takeover bid for the underlying shares.

Having considered the relevant materials provided to it through submissions, the Panel did feel sufficiently comfortable to determine that the fair value for the 2005 Options was exceeded by the minimum consideration offered by CaptiveVision (i.e. 2 cents) to the 2005 Option Offerees.

On that basis, the Panel determined that CaptiveVision had offered a net benefit to the 2005 Option Offerees. The quantum of that benefit varied according to the consideration offered by CaptiveVision in each instance.

2006 Options

The Panel did not consider that the materials provided in Skywest's application and the submissions received allowed it to determine that the offers by CaptiveVision in relation to 2006 Options constituted unacceptable circumstances. No evidence was provided as to the “fair” value of those 2006 Options, nor was there any clear assertion made that the offers in relation to 2006 Options were collateral benefits. However, given the fact that the revised offer price of 23 cents per share under the Bid was higher than the strike price and the 2006 options had a longer life than the 2005 Options, the Panel did not have any material concerns that the 2 to 3 cents per option offered for the 2006 Options was obviously more than any reasonable fair value.

Inducement

The Panel considered that the net benefit inherent in the offers made by CaptiveVision for the 2005 Options were likely to induce the 2005 Option Offerees, or their associates, to accept the Bid in respect of any Skywest shares also held by them.

In its submissions, CaptiveVision repeatedly stated that it was made clear in all their dealings with Skywest security holders that any offers made in respect of Skywest options or convertible notes were unrelated to, and independent of, CaptiveVision’s separate offer for Skywest shares under the Bid. These assertions were supported, to some degree, by the recorded conversations provided to the Panel, in which Mr Saw can be heard explaining that offers made in respect of options had to be “treated as entirely separate to the Bid”. The Panel could not be certain that these recorded conversations provided an accurate and complete picture of all communications with Skywest shareholders however, due to the failures to comply with telephone monitoring provisions of the Act (described above).

These assertions are also inconsistent with some elements of the material provided with CaptiveVision’s submissions. For example, both Ms Soibhn Cool’s (CaptiveVision’s company secretary) and Mr Saw’s statements indicate that in dealings with a holder of Skywest shares, options and convertible notes, Mr Saw gave the security holder the impression that in order to acquire that holder’s options and convertible notes, CaptiveVision “needed the shares as well”. Although Ms Cool went on to state that she corrected the holder’s misapprehension, it is clear that Mr Saw’s initial communication indicated an inter-relation between the two transactions.

In any event, the inter-conditionality between the offer of a benefit and acceptance of a bid is not required in order for there to be a contravention of section 623 of the Act.

All that is necessary is that the net benefit is likely to induce an acceptance. The Panel considered that the nature of the net benefit offered (in most cases, several times the likely fair value for 2005 Options) was sufficient to induce the 2005 Option Offerees to also deal with CaptiveVision in relation to their Skywest Shares, by accepting under the Bid.

In coming to this conclusion, the Panel also took into account the manner in which the offers to acquire options were made. The recorded conversations reviewed by the Panel showed, in several instances (but not all), that the issue of a potential offer for options was raised by Mr Saw following discussions in which the relevant Skywest security holder expressed some reluctance or uncertainty to accept the Bid at the current offer price (at the time of most of the conversations provided, the price under the Bid was still 20 cents per share). This approach is also apparent in Mr Saw’s statement: after relaying the fact that Savant was willing to sell all its shares to CaptiveVision but that it considered the Bid price too low to CaptiveVision’s managing director, Mr Jeff Chatfield, Mr Saw was authorised to offer to acquire Savant’s options. Mr Saw then advised Savant that the offer under the Bid could not be increased but that CaptiveVision would, as a separate transaction be prepared to purchase Savant’s options as well as their shares.

The Panel considered that presenting the option offers to Skywest security holders in such a manner maximised the likelihood that such an offer would also induce those holders to accept the Bid.

The Panel considered that the offers regarding the 2005 Options were also likely to be seen as more attractive than offers for other Skywest securities, because unlike the 2006 Options, Skywest has no intention to seek listing for the 2005 Options should its rights issue capital raising be successful.

Declaration and Orders

The declaration and orders made by the Panel are set out in the Annexure. In general terms, the Panel has ordered that:

all offers made by CaptiveVision during the Bid period to acquire 2005 Options be revoked;
all contracts under which CaptiveVision has acquired 2005 Options during the Bid period are avoided;
all contracts arising from acceptances of the Bid by 2005 Option Offerees are avoided, and that any relevant Skywest shares be re-vested in the 2005 Option Offerees and that those offerees return any consideration received to CaptiveVision;
CaptiveVision not be entitled to participate in Skywest’s Rights Issue in respect of any shares which are the subject of a void transaction;
both CaptiveVision and Skywest take any further action necessary to give effect to the above orders including rectification of the share and option registers of Skywest;
Skywest notify in writing each of the 2005 Option Offerees and their associates of the Panel’s decision and the orders made;
CaptiveVision must not enter into, or discuss, any relevant agreements in relation to, any offers to acquire or any tenders to sell 2005 Options, during the remainder of the Bid period and for a period of four months after the close of the Bid without the prior written approval of the Panel;
CaptiveVision extend the Bid until at least 15 November, so that 2005 Option Offerees have sufficient time to consider whether or not to accept the Bid after receiving notification of the Panel’s decision and the voiding of their acceptances under the Bid;
CaptiveVision, and its associates and agents, refrain from entering into any communications with Skywest security holders in relation to the Bid or offers for any other Skywest securities unless such communications are in writing; and
CaptiveVision pay Skywest’s costs in the Skywest 04 proceedings (including the costs of PWC’s advices).

Voiding transactions rather than withdrawal right

The Panel considered offering the 2005 Option Offerees and their associates withdrawal rights regarding any Bid acceptances, rather than having any contracts arising from such acceptances avoided. However, in the Panel’s view, any such acceptances are so tainted by the activities undertaken in apparent breach of section 623 that the appropriate course is to void those transactions. The Panel has taken the additional step of requiring CaptiveVision to extend its Bid, in order to ensure that any of the 2005 Option Offerees or their associates who still wish to accept the Bid are able to re-submit an acceptance form or alternatively provide notification of their wish to affirm their previous acceptance transaction.

On the basis of the materials provided to the Panel, it appears that two of the 2005 Option Offerees, Rojex and Marenka, sold some or all of their Skywest shares into the Bid prior to receiving offers from CaptiveVision in respect of their options. However, for the reasons outlined above, the Panel is not satisfied that it has a clear and complete understanding of all communications made by CaptiveVision to Skywest security holders. For this reason, it cannot be certain that CaptiveVision did not have any discussions with Rojex and Maranka regarding the possibility of acquiring options before those parties accepted the Bid. What the Panel can be certain of is that offers were made to those parties to acquire their options during the Bid period. In the circumstances, the Panel considers that it is appropriate to include those parties in its orders voiding contracts arising from 2005 Option Offerees accepting the Bid. As with the other 2005 Option Offerees, the Panel has ordered an extension of the Bid to ensure that those parties have the opportunity to re-accept the Bid if they choose.

Associates

The Panel considered that CaptiveVision’s offers for 2005 Options at well in excess of fair value were made, by and large, only to persons who owned, or might be considered to be associated with persons who owned, significant parcels of Skywest shares. As discussed above, the Panel considered that these offers were inconsistent with the policy set out in section 602(c) and were likely to be in breach of section 623 of the Act. To remedy the unacceptability of these offers, the Panel determined that transactions arising from acceptances of the Bid by not only the 2005 Option Offerees, but also their associates, should be voided.

After considering submissions from parties on the issue, the Panel decided that for the purposes of its orders, Mr Godwin Cattle should be considered an associate of Fedas Pty Ltd (the company owned by his brother, Mr Miles Cattle). As discussed above, Mr Miles Cattle was given authority on 3 October to act on behalf of Mr Godwin Cattle in relation to the sale of Mr Godwin Cattle’s 1 million shares. In addition, Mr Saw dealt solely with Mr Miles Cattle in relation to the purchase of Mr Godwin Cattle’s 1million shares.

In light of this, and despite arguments by CaptiveVision that the brothers should not be treated as associates (based largely on recordings of conversations between Mr Miles Cattle and Mr Saw), the Panel was satisfied that CaptiveVision’s offer for Mr Miles Cattle’s 1.6million 2005 Options was likely to (and possibly intended to) induce an acceptance in respect of Mr Godwin Cattle’s 1 million Skywest shares. Therefore, in order to remedy the unacceptability inherent in the offer, the Panel decided that the transaction arising from Mr Godwin Cattle’s acceptance of the Bid should be avoided. Any prejudice to Mr Godwin Cattle (or any other associate) arising from this decision is minimised by the fact that he is able to give notification of his intention that the transaction be affirmed.

There was a similar issue as to whether Savant and Maranka should be considered “associates” of Mr Mark Niutta for the purpose of the Panel’s decision, on the basis that Mr Niutta acted as broker for these entities. As both Savant and Maranka were themselves identified as 2005 Option Offerees, and would therefore be treated the same as Mr Niutta under the Panel’s orders, the Panel decided it was not necessary to make a final determination regarding the nature of their relationship.

Voiding transactions rather than increasing Bid consideration

The Panel considered Skywest’s request for alternative orders that the consideration under the Bid be increased by the amount of the collateral benefit offered to the 2005 Option Offerees. Given the difficulties inherent in trying to pinpoint the fair value of the 2005 Options in order to calculate:

the exact amount of the collateral benefit offered in each case;
the amount by which the revised consideration offered under the Bid to each 2005 Option Offeree should be reduced to take account of the 2005 Option offers made to them,

the Panel determined that the more appropriate means of remedying the unacceptable circumstances was to cancel the offending offers and avoid any transactions arising from, or likely to have arisen from, the offending offers.

Voiding transactions rather than requiring a bid for all 2005 Options

As another means of remedying the unacceptable circumstances arising from CaptiveVision’s offers for 2005 Options, the Panel considered making orders requiring CaptiveVision to make a formal takeover bid for all the 2005 Options on issue. Such orders would have been made on the basis that the recipients of the offer be notified that the offer was entirely separate from, and could be accepted independently of, the Bid for Skywest shares.

In its submissions, CaptiveVision asserted that such orders would not be appropriate, as CaptiveVision would be prevented from exercising a significant proportion of the options under the Act, due to its present voting power in Skywest. The Panel found CaptiveVision’s argument difficult to reconcile with CaptiveVision’s purported rationale for making the offers to the 2005 Option Offerees, namely that it was concerned to minimise any impending dilution of its voting power by the issue of new Skywest securities under the announced rights issue or the exercise of convertible securities by other holders. In presenting this commercial rationale, CaptiveVision acknowledged that it was subject to the same prohibitions under the Act against exercising those options as it would have been if it made a bid for all 2005 Options.

On balance, the Panel did not consider that such an order would be appropriate in the circumstances, due to:

the difficulties inherent in determining the appropriate consideration to be offered by CaptiveVision under any such option bid (given the variation in consideration offered to the 2005 Option Offerees); and
the fact that if such consideration still represented an over-value, then there may be a residual concern that it was likely to also induce an acceptance under the Bid (notwithstanding any disclosure regarding the independence of the offers) and that any Skywest shareholder who did not hold 2005 Options would not have an equal opportunity to participate in the benefits under the Bid.

CaptiveVision required to communicate with Skywest shareholders in writing

The Panel has ordered that CaptiveVision only communicate with Skywest shareholders in writing for the remainder of the Bid period. The Panel considers that the evidence so far before it indicates that it cannot be confident that CaptiveVision and its agents will comply with the Act, and, if there are any future proceedings, that a future Panel will receive accurate and complete disclosure about the content of communications between CaptiveVision and Skywest shareholders. The Panel takes this view in part because: CaptiveVision's agent has made oral statements to Skywest shareholders that appear reasonably likely to have breached section 623, CaptiveVision's agent appears to have consistently contravened the telephone taping requirements of the Act and CaptiveVision has failed to exercise adequate control over its agent. Therefore, the Panel feels it is important to minimise as much as possible any future oral communication of CaptiveVision with the 2005 Option Offerees, given the nature of the unacceptable circumstances.

In addition, to ensure that Skywest shareholders receive the information required by the Panel, the Panel has required Skywest to inform the 2005 Option Offerees of its decision, rather than CaptiveVision.

No Dealing in 2005 Options until four months after the close of the CaptiveVision Bid

The Panel is concerned with statements made by Mr Saw in his evidence that, in order to convince one Skywest shareholder that they could accept the CaptiveVision offer for their shares and also be paid for their Options, he advised that CaptiveVision would offer for options after the Bid and would acquire any options offered to CaptiveVision in the period immediately after the close of the bid. The Panel is concerned that such statements about standing to deal after the Bid period was a clear attempt and intention, at least on Mr Saw's behalf, to avoid the provisions of section 623. A prohibition on dealing is the only way the Panel has of ensuring future compliance with the principles of section 602 that all Skywest shareholders have a reasonable and equal opportunity to benefit from CaptiveVision's proposals to acquire a substantial interest in Skywest. The period of four months is taken as most suitable by analogy with the period chosen by the legislature in section 621. In that section, the legislature has set a period of four months to provide a period after which it may be commercially reasonable to believe that transactions prior to a takeover bid are not connected with a future takeover.

Costs

The Panel has ordered that CaptiveVision pay Skywest’s costs in these proceedings on a party-party basis (i.e. the costs actually, necessarily, properly and reasonably incurred in the course of the proceedings before the Panel). Those costs should include the costs incurred by Skywest in retaining PriceWaterhouseCoopers to provide its independent advices in relation to the value of the 2005 Options.

The Panel has again reviewed the Panel’s Guidance Note 9 “Costs Orders” in considering Skywest’s application for costs in proceedings at first instance. The Panel considers that the facts of the current proceedings warrant an order for costs at first instance, even though these orders are uncommon practice for the Panel. The facts before the Panel lead it to the view that CaptiveVision, through both its agent in Mr Saw, and its senior officers on whose instructions Mr Saw was acting, appears to have intentionally gone about a course of behaviour which constituted unacceptable circumstances.

Despite having had four decisions of the Panel find fault or problem with circumstances brought about by CaptiveVision’s actions, CaptiveVision proceeded on a course of action which the Panel considers that even ordinary business people should have been able to see went against the principles of equality of opportunity under subsection 602(c) of the Act. CaptiveVision and its adviser Mr Saw cannot have been blind to the overvalue which CaptiveVision was offering for the 2005 Options. The Panel does not consider that the valuation material provided by CaptiveVision is sufficient to provide any retrospective justification for CaptiveVision’s activity. CaptiveVision provided two reports regarding the valuation of the 2005 Options, discussed in more detail above. PKF valued the 2005 Options at 1.27 cents each, and the Panel believed the valuation prepared by Mr Sandt (who valued the 2005 Options at 5.11 cents) to be flawed in methodology and likely to have been prepared intentionally to serve CaptiveVision’s interests.

According to its submissions, CaptiveVision proceeded without taking external Australian legal advice about a very significant step in offering to acquire options from selected Skywest shareholders. CaptiveVision has previously been criticised by another Panel for acting without taking appropriate Australian legal advice.

The evidence before the Panel leaves little scope for it to view CaptiveVision’s actions as being other than reckless or deliberately in breach of the policy and the provisions of the takeovers chapter of the Corporations Act.

On that basis, the costs orders made by the Panel are warranted.

Telephone Monitoring - Referral toASIC

As is apparent from the order made requiring all future communications between CaptiveVision and Skywest security holders to be conducted by written correspondence only for the remainder of the offer period, the Panel is extremely concerned about the apparent breaches of section 648J of the Act (which requires all telephone conversations a bidder initiates, or invites, with target shareholders about a bid) referred to in Mr Saw’s statement. Having listened to the recorded conversations provided, the Panel is also concerned that none of the target shareholders were notified by Mr Saw that the call was being recorded in accordance with section 648K of the Act. Mr Saw appears to have breached the requirements of the Act with every conversation: some conversations he didn't tape, and in those conversations which he did tape he appears to have failed to advise the other party that he was taping the conversations.

The Panel intends to refer these matters, and other aspects of conduct in these proceedings, to ASIC for further investigation and, if appropriate, enforcement action.

The sitting Panel was Braddon Jolley (Sitting President), Carol Buys (Sitting Deputy President) and Brett Heading.

A copy of the declaration and orders will be available on the Panel’s website, attached to this media release.

Nigel Morris
Director, Takeovers Panel
Level 47 Nauru House
80 Collins Street
Melbourne VIC 3000,
Ph: +61 3 9655 3501
nigel.morris@takeovers.gov.au

Annexure

Declaration and Orders
Takeovers Panel

Corporations Act 2001
Sections 657A and 657C
Declaration and Orders

In the matter of Skywest Limited 04:

WHEREAS:

CaptiveVision Capital Ltd (CaptiveVision) (a company incorporated in Singapore) has made a takeover bid (the Bid) for all of the ordinary shares (Skywest Shares) in Skywest Limited (Skywest), an unlisted public company with more than 50 shareholders;
in addition to Skywest Shares, Skywest’s issued securities include options over unissued Skywest Shares which are exercisable at 30 cents and expire on 30 June 2005 (2005 Options);
during the Bid, CaptiveVision made offers (the 2005 Option Offers) to acquire 2005 Options from each of the persons listed in Schedule A (the 2005 Option Offerees); and
the consideration offered by CaptiveVision in relation to the 2005 Option Offers was a net benefit which was likely to induce the 2005 Option Offerees, or their associates, to accept an offer under the Bid in respect of Skywest Shares held by them;

PURSUANT to section 657A of the Corporations Act, the Takeovers Panel HEREBY DECLARES that the circumstances described above are unacceptable circumstances in relation to the affairs of Skywest because of the effect of those circumstances on the Bid.

AND PURSUANT to section 657D of the Corporations Act, the Panel HEREBY ORDERS that:

Subject to Order 2:
1. CaptiveVision must extend the offer period under the Bid until at least 15 November 2004;
2. All outstanding and unaccepted 2005 Option Offers are cancelled and revoked, if such offers have not already been effectively revoked as at the date of these orders;
3. All transactions arising from 2005 Option Offers are void and of no effect and without any need for a transfer, the legal title to and beneficial ownership in the relevant 2005 Options re-vest in the relevant 2005 Option Offeree, and to give effect to this order;
  1. Each 2005 Option Offeree who has received consideration from CaptiveVision for the sale of its 2005 Options must send CaptiveVision a cheque for the amount of the consideration received not later than 5 business days after receiving notice of these Orders and CaptiveVision must immediately notify Skywest once this cheque has been received;
  2. Skywest must register a transmission of the relevant 2005 Options to the relevant 2005 Option Offeree within 1 business day of receiving notification from CaptiveVision of the receipt of the cheque in accordance with sub-paragraph (i);
4. subject to paragraph (e) below, all acceptances and purported acceptances of the Bid by each 2005 Option Offeree or its associates (together the Accepting Offerees) are void and of no effect and without any need for a transfer, the legal title to and beneficial ownership in the relevant Skywest Shares re-vest in the relevant Accepting Offeree, and to give effect to this order;
  1. Each Accepting Offeree who has received consideration from CaptiveVision for the sale of its Skywest Shares under the Bid must send CaptiveVision a cheque for the amount of the consideration received not later than 5 business days after receiving notice of these Orders and CaptiveVision must immediately notify Skywest once this cheque has been received;
  2. Skywest must register a transmission of the relevant Skywest Shares to the relevant Accepting Offeree within 1 business day of receiving notification from CaptiveVision of the receipt of the cheque in accordance with sub-paragraph (i);
5. an acceptance or purported acceptance of the Bid by an Accepting Offeree is not void, or voided, by these orders (and paragraph (d) above does not apply) if, by no later than 5 business days after notice of these orders is received by the 2005 Option Offerees in accordance with Order (f) (Last Affirmation Date), the Accepting Offeree affirms in writing, by a signed and dated instrument, that the Accepting Offeree does not wish their acceptance or purported acceptance to be voided by these Orders, and the Accepting Offeree gives that instrument of affirmation to Skywest within 2 business days of making it. Skywest must notify CaptiveVision within one business day of the receipt of such an affirmation. CaptiveVision need not give a notice under section 654C, in respect of its voting power in Skywest during the period from the date of these orders until the Last Affirmation Date, until two business days after the end of that period;
6. CaptiveVision must not participate in the rights offer set out in Skywest’s prospectus dated 30 September 2004 (Rights Issue) in respect of any Skywest Shares which are the subject of a voided acceptance in accordance with Order (d) above. To give effect to this order, Skywest must not process any application by CaptiveVision under the Rights Issue in respect of such Skywest Shares unless and until Skywest receives a notice of affirmation in respect of those Skywest Shares in accordance with Order (e) above.
7. Skywest must, on or before 29 October 2004, send each 2005 Option Offeree written notification advising of the Panel’s decision and informing them of the manner in which these Orders effect each of them. Skywest must submit a draft of this notification to the Panel for approval no less than 2 days prior to its intended dispatch date. Each notification must attach a copy of the Panel’s media release dated 27 October 2004 regarding its decision;
8. CaptiveVision must not enter into, or discuss, any relevant agreements, making any offers or accepting any tenders in relation to 2005 Options, during the remainder of the Bid period and for a period of four months after the close of the Bid without the prior written approval of the Panel;
9. CaptiveVision refrain from entering into any communications regarding the Bid or offers for any other Skywest securities with persons who hold Skywest securities unless such communications are in writing;
10. CaptiveVision must:
  1. pay the reasonable costs and expenses of Skywest arising out of, or connected with, these proceedings as agreed between CaptiveVision and Skywest; or
  2. failing such agreement, pay the party-party costs of Skywest in relation to this proceeding using the Federal Court scale, and the costs incurred by Skywest in engaging PricewaterhouseCoopers in relation to these proceedings to provide advice on the value of options issued by Skywest with an exercise price of $0.30 and expire on 30 June 2005, using the following procedure:
    1. Skywest must provide CaptiveVision with an itemised bill of costs in relation to this proceeding;
    2. if CaptiveVision objects to the amount claimed by Skywest, Skywest must provide either:
      1. a bill of costs in taxable form, or
      2. the itemised bill of costs and to make their file available,
        to an independent cost consultant, approved by the Panel Executive;
    3. the independent cost consultant will then assess the costs to be paid by CaptiveVision in respect of Skywest;
    4. if the independent cost consultant determines that the costs proposed by Skywest are to be reduced by 10% or more, the costs of employing the independent cost consultant to assess costs are deducted from the costs payable to Skywest. Otherwise, those costs are to be part of the costs paid by CaptiveVision; and
    5. CaptiveVision must not transfer or dispose of any shares (or any unit of them) which it holds in Skywest and Skywest must not register a transfer of those shares until the Panel receives confirmation from Skywest that it has received payment of its costs from CVC (with such confirmation to be provided by Skywest to the Panel immediately after it has received payment of its costs).
the sitting Panel may (either on its own motion or following a request from one of the parties (in which case Rules 8 and 9.5 of the Panel’s Rules for Proceedings apply to the making of the request)) by notice to the parties vary the operation of Order 1 or any part of Order 1.
in these Orders, the term “associate”, when used in reference to the 2005 Option Offeree named Fedas Pty Ltd, includes Mr Godwin Cattle.
Schedule A

(1) Savant Pty Ltd

(2) Savant Pty Ltd as Trustee for Gray Family Super Account

(3) Fedas Pty Ltd

(4) Rojex Mining Services Pty Ltd

(5) Maranka Pty Ltd

(6) Tabland Pty Ltd

(7) Ron Guest

(8) FHC Wilson Pty Ltd

(9) Mark Nuitta Family Account

Braddon Jolley
President of the sitting Panel
Dated 27 October 2004

¹ All dates referred to in this release are dates in 2004, unless otherwise specified.

² Source: Skywest Rights Issue prospectus dated 30 September.

³ [2003] ATP 28, at 31 to 51.