Glencore International AG v Takeovers Panel

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FEDERAL COURT OF AUSTRALIA

Glencore International AG (ACN 114 271 055) v Takeovers Panel
[2006] FCA 274

JUDICIAL REVIEW – review of Panel’s declarations that non-disclosure of acquisition of shares in circumstances of a declared takeover bid for a company were unacceptable circumstances

CORPORATIONS – meaning of phrase ‘substantial interest’- exercise of powers of Takeovers Panel – applicant did not disclose share acquisitions in the company over a period of time and was not required to do so by the Act – applicant also party to an agreement with banks as to cash settled equity swaps which the banks hedged by acquiring shares in the same company – whether applicant’s relationship with the banks was to be characterised as an association – whether hedge shares to be included in considering whether applicant had a ‘substantial interest’ – whether applicant’s non-disclosure effected the rate, extent and level of consideration of the takeover bid

Corporations Act 2001 (Cth) 9, 12, 602, 606, 608, 657A, 657C, 657D, 657EA, 657F, 661, 662A, 670A, 671B
Administrative Decisions (Judicial Review) Act 1977 (Cth)
Judiciary Act 1903 (Cth) s39B
Australian Securities and Investments Commission Act 1989 (Cth) s 171
Financial Services Reform Act 2001 (Cth), sch 3
Companies (Acquisition of Shares) Act 1980 (Cth)
Companies (Acquisition of Shares) (New South Wales) Code

Glencore International AG v Takeovers Panel [2005] FCA 1290- referred to
R v Australian Broadcasting Tribunal; Ex parte Hardiman (1980) 144 CLR 13- referred to
Brierly Investments Ltd v Australian Securities Commission (1997) 78 FCR 255- referred to

GLENCORE INTERNATIONAL AG (ACN 114 271 055) & ANOR v TAKEOVERS PANEL (Constituted by its members KATHLEEN FARRELL, PETER SCOTT and DENIS BYRNE) & ORS

NSD2265 OF 2005

EMMETT J
22 MARCH 2006
SYDNEY


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD2265 OF 2005

BETWEEN:

GLENCORE INTERNATIONAL AG (ACN 114 271 055)
FIRST APPLICANT

FORNAX INVESTMENTS LIMITED
SECOND APPLICANT

AND:

TAKEOVERS PANEL (constituted by its members KATHLEEN FARRELL, PETER SCOTT and DENIS BYRNE)
FIRST RESPONDENT

CENTENNIAL COAL COMPANY LIMITED
(ACN 003 714 538)
SECOND RESPONDENT

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
THIRD RESPONDENT

AUSTRAL COAL LIMITED (ACN 069 071 816)
FOURTH RESPONDENT

CREDIT SUISSE FIRST BOSTON INTERNATIONAL
(ACN 062 787 106)
FIFTH RESPONDENT

ABN AMRO BANK NV (ACN 079 478 612)
SIXTH RESPONDENT

JUDGE:

EMMETT J

DATE:

22 MARCH 2006

PLACE:

SYDNEY

REASONS FOR JUDGMENT

INTRODUCTION

BACKGROUND
PRIOR PROCEEDINGS
THIS PROCEEDING
THE RELEVANT PROVISIONS OF THE ACT
THE PANEL’S REASONING
THE GROUNDS OF REVIEW

THE CONCEPT OF SUBSTANTIAL INTEREST
GROUND 1:  GLENCORE’S SUBSTANTIAL INTEREST
GROUND 2:  EFFECT ON CENTENNIAL’S BID

Successful Sooner
Successful to a Greater Extent
Successful at a Lower Consideration
Conclusion as to Effect on Centennial’s Bid

GROUND 3:  THE ORDERS
GROUND 4:  PERSONS TO WHOM THE ORDERS RELATE
GROUND 5:  MARKET PRACTICE AS TO SWAPS

CONCLUSION

INTRODUCTION

  1. This proceeding raises questions as to the meaning of the phrase ‘substantial interest’ as used in Chapter 6 of the Corporations Act 2001 (Cth) (‘the Act’), as well as…

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Details
Case
[2006] FCA 274
Decision Date

CaseChat Overview and Summary

The case of Glencore International AG v Takeovers Panel involved a dispute over the effect of certain transactions, specifically cash settled equity swaps, on a takeover bid by Centennial Coal Company Limited for Austral Coal Limited. The dispute raised questions about the role of Glencore International AG in the takeover process and whether its non-disclosure of its interest in Austral Coal Limited had any impact on the outcome of Centennial's bid. The Takeovers Panel concluded that Glencore's non-disclosure may have influenced the speed of acceptances for Centennial's bid and possibly resulted in Centennial's bid being successful at a lower consideration than it would have been if Glencore had disclosed its position. Glencore challenged the Panel's conclusions, arguing that the findings were speculative and not supported by evidence. The central legal issues revolved around the extent to which Glencore's actions influenced the outcome of Centennial's bid and whether the Panel's reasoning was sound.

The court examined the Panel's conclusions and found that while the Panel speculated that Glencore's non-disclosure may have caused shareholders to hold back on accepting Centennial's bid in anticipation of a competing bid, this did not necessarily mean that Centennial would have had to increase its bid price. The court noted that the Panel's findings were tentative, as evidenced by the use of the word "possibly." The court also highlighted that the Panel's reasoning was based on an exercise in hypothesising, which, while not inherently flawed, did not provide a definitive conclusion about the impact of Glencore's non-disclosure. The court concluded that the Panel's findings lacked sufficient reasoning and evidence to support the claim that Centennial's bid was successful at a lower consideration due to Glencore's actions.

Ultimately, the court found in favour of Glencore, determining that the Panel's conclusions were not well-founded and that Glencore's non-disclosure did not have the effect suggested by the Panel. The court's decision emphasised the need for clear reasoning and evidence when determining the impact of non-disclosure in takeover scenarios. The case underscores the importance of thorough analysis and sound reasoning in regulatory decisions affecting significant corporate transactions.

Orders

Orders of the court

Full text does not contain this section.

Background

Background to the litigation

The questions in the proceeding depend upon the effect of certain transactions described as ‘cash settled equity swaps’. A cash settled equity swap is an arrangement between an investor and a bank whereby the bank agrees to pay the investor an amount equal to the difference between the value of a given number of equity securities at the time of the closing out of the swap and the value of those equity securities at the time when the arrangement was entered into. Under such an arrangement the investor does not acquire any interest in any equity securities and the investor has no right to call for delivery of equity securities or to require the bank to undertake any action involving the acquisition, holding or disposal of equity securities. Closing out of, and settlement under, such a swap will, depending on the terms of the arrangement, be either at the option of one party or be automatic. Of course, it would always be open to the parties to close out a swap by mutual agreement at any time. In order to hedge its risk under such an arrangement, a bank might buy the relevant equity securities.BACKGROUND The fourth respondent, Austral Coal Limited (‘the Company’), is a miner of coking coal in southern New South Wales. It sells coking coal both domestically and internationally. The second respondent, Centennial Coal Company Limited (‘Centennial’), is also a miner and marketer of coal. At relevant times, shares in the Company and Centennial were listed for quotation on Australian Stock Exchange Limited (‘ASX’). On 23 February 2005, Centennial and the Company jointly announced a takeover bid by Centennial for the Company on the basis of 10 shares in Centennial for every 37 shares in the Company. At that time, there were 263,463,465 issued shares in the Company, together with 40 million convertible notes. The consideration offered by Centennial effectively valued shares in the Company at $1.30 per share, although that value would vary with the market price of shares in Centennial. The bid was subject to a number of conditions, including acceptances being received in respect of 90% of the issued shares in the Company. The bid was unanimously recommended by the directors of the Company. On 23 February 2005, the Company also announced that its convertible notes could be converted into ordinary shares once Centennial’s offers became unconditional. On 4 March 2005, Centennial announced that, on 2 March 2005, it had become a substantial holder in the Company with a relevant interest in 9.6% of the Company’s shares. On 9 March 2005, Centennial served on the Company its bidders statement under s 636 of the Act. On 21 March 2005, the Company lodged its target’s statement under s 638 of the Act, recommending acceptance of Centennial’s bid. Centennial’s offers and the Company’s target’s statement were dispatched to the Company’s shareholders between 21 and 23 March 2005. On 23 March 2005, Centennial declared its bid unconditional and announced that, if a shareholder of the Company accepted no later than 7 April 2005, the shareholder would participate in a Centennial unfranked dividend of 6 cents per Centennial share. The value of the unfranked dividend was approximately 1.6 cents per share in the Company.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

EMMETT J
However, those conclusions say nothing about why Centennial would have had to increase its bid in order to acquire control of, or a substantial interest in, the Company. The tentative nature of the Panel’s finding is emphasised by the use of the word ‘possibly’. No reasoning is advanced by the Panel for its tentative observation that Centennial might have had to increase its bid price. Conclusion as to Effect on Centennial’s Bid The timing and prices at which shares in the Company were sold during the Non-disclosure Period are interrelated. The fact that the Panel has speculated as to an effect is not, of itself, a basis for impugning the Panel’s reasoning. Of necessity, the Panel is endeavouring to determine what would have happened had there been disclosure of Glencore’s position. That involves an exercise in hypothesising. The reasoning of the Panel began with the proposition that a consistent reaction of the market to speculation that there would be a competing bid is to hold back target stock from acceptance while awaiting developments, slowing acceptances for the existing bid, increasing the market price and putting pressure on the existing bidder to increase its bid price. The Panel considered that that may result in the price of the target shares exceeding the value of the current bid. The Panel observed that, even after 23 March 2005, when Centennial declared its bid free of conditions and announced that it would accelerate processing acceptances, the inducement of the dividend was worth only about 1.6% of the value of the bid. The Panel considered that many shareholders may have thought it worth giving up that benefit to keep open the option of accepting a higher bid, if one was likely to emerge. The Panel considered that Glencore’s non-disclosure of its interest in the Company contributed to the speed at which Centennial gained acceptances for its bid. Thus, during the Non-disclosure Period, Centennial received acceptances for over 25 per cent of the shares in the Company, taking its relevant interest from under 10 per cent to 35 per cent. However, within two and a half days after Glencore’s announcement, Centennial had acquired a majority of the shares in the Company. The Panel appears to have concluded, therefore, that, if Glencore had disclosed its position on 22 March 2005 and thereafter as the Banks acquired shares in the Company, that would have had an affect on the rate of acceptances of the Centennial bid. The Panel considered that, in that case, many of the acceptances would not have been sent as earlier as they were and that some may not have been sent at all. That is to say, the Panel concluded that the flow of acceptances of Centennial’s bid is likely to have been slower if Glencore had showed its hand earlier. It is difficult to follow the reasoning of the Panel. During the Non-disclosure Period of some 14 days, Centennial received acceptances in respect of 25 per cent of the shares in the Company. Within 2 and a half days after Glencore’s announcement, Centennial had acquired a further 15 per cent. It is not clear why, therefore, the Panel concluded that the flow of acceptances is likely to have been slower if Glencore had showed its hand earlier.

Ratio Decidendi

Legal Principle Established

Established by: EMMETT J

It may be that the flow of acceptances of Centennial’s bid may have slowed because of speculation about a rival takeover bid by Glencore, had there been disclosure of Glencore’s position. However, that says nothing about whether, once it became clear that Glencore would not make a bid, there was a basis for concluding that shareholders would not have then accepted Centennial’s bid, whether they were shareholders who held shares at the time or shareholders who acquired on the market prior to the end of Centennial’s bid period.Successful at a Lower Consideration In relation to the Panel’s conclusion that Centennial’s bid was possibly successful at a lower consideration than if there had been disclosure by Glencore of its position, Glencore says that the Panel failed to ask itself the right question, namely, what actual effect did non-disclosure have upon the consideration paid by Centennial. Glencore says that the conclusion amounts to no more than speculation and cannot aid in the finding of an effect in order to invoke the Panel’s jurisdiction. Glencore says, in addition, that there was no probative material before the Panel to justify the conclusion that, had there been disclosure of its position by Glencore, Centennial’s bid would have had to proceed at a higher price. The Panel found that shareholders in the Company who sold their shares in the market during the Non-disclosure Period received lower prices than they would have received had Glencore disclosed its position. It also found that it was possible that the sale of shares in the Company at higher prices during the Non-disclosure Period may have affected the price and level of acceptances of Centennial’s bid. However, those conclusions say nothing about why Centennial would have had to increase its bid in order to acquire control of, or a substantial interest in, the Company. The tentative nature of the Panel’s finding is emphasised by the use of the word ‘possibly’. No reasoning is advanced by the Panel for its tentative observation that Centennial might have had to increase its bid price. Conclusion as to Effect on Centennial’s Bid The timing and prices at which shares in the Company were sold during the Non-disclosure Period are interrelated. The fact that the Panel has speculated as to an effect is not, of itself, a basis for impugning the Panel’s reasoning. Of necessity, the Panel is endeavouring to determine what would have happened had there been disclosure of Glencore’s position. That involves an exercise in hypothesising. The reasoning of the Panel began with the proposition that a consistent reaction of the market to speculation that there would be a competing bid is to hold back target stock from acceptance while awaiting developments, slowing acceptances for the existing bid, increasing the market price and putting pressure on the existing bidder to increase its bid price. The Panel considered that that may result in the price of the target shares exceeding the value of the current bid.