Mind the gap – Australian takeovers legislation does not apply to foreign – incorporated ASX-listed companies
A recent bunfight between ASX-listed manganese miner OM Holdings (OMH) and its shareholder Consolidated Minerals highlights a loophole in the Corporations Act takeover provisions.
OMH is incorporated in Bermuda and accordingly is not subject to the Corporations Act takeovers regime. On 15 January 2009, OMH introduced a “takeovers code” into its bye-laws apparently aimed at incorporating ”principles broadly similar to those which underpin the takeover provisions in the Australian Corporations Act”.
While OMH’s explanatory statement to its shareholders echoed the ‘Eggleston principles’ which underpin the Australian regime, the devil is in the detail. There are some significant differences between OMH’s new rules and Chapter 6 of the Corporations Act, which regulates takeovers of Australian companies, including the following:
- There is no compulsory acquisition regime.
- It is possible for a shareholder to acquire more than 20% of the company’s shares without making a formal takeover bid if it has the prior approval of the board. There is scope for the board to side-step the protection mechanisms set out in the new code.
- Shareholders cannot apply to the Takeovers Panel for a declaration of unacceptable circumstances, as it has no jurisdiction.
- The OMH board may divest a shareholder of its shares, or voting or dividend rights, provided the company has first obtain a judgment from a Western Australian court that there is a continuing breach of the code. These are significant powers which are not ordinarily exercised by a corporate board and may enable OMH to use the court system to delay or frustrate a takeover.
OMH’s overnight embrace of the Eggleston principles appears to have been prompted by Consolidated Minerals’ acquisition of a significant stake in the company. Consolidated Minerals was understandably less than enamoured with the initiative. In a letter to OM H shareholders, Consolidated Minerals stated that the proposed amendments were “potentially destructive to shareholder value”, claiming that the provisions “cherry-picked” the Australian takeovers provisions, as they “selectively introduce Australian takeovers laws to certain parties’ advantage and fail to import key provisions designed to protect minority interests”.
If OMH genuinely wanted shareholders to have the benefit of the protections of Chapter 6 of the Corporations Act, Consolidated Minerals argued, it could have introduced provisions adhering more closely to the Corporations Act, rather than “broadly modelled” on it. When OMH indicated that it was not possible or practicable for all aspects of the Corporations Act to be imported, Consolidated Minerals called for it to be re-domiciled in order to be subject to the Corporations Act in full.
While the press has focused on the potential drawbacks to shareholders of the OMH code, the dispute also serves as a reminder that the takeovers provisions of Corporations Act only apply to companies incorporated in Australia. ASX’s policy is that takeovers of foreign companies should be regulated by the company’s domestic law and that this protects security holders against the entrenchment of management – OMH was able to introduce its takeover provisions as a result of a conditional waiver from ASX.
The ASX waiver was granted in this case because OMH could exercise sanctions for breach of the code only with the approval of a competent court and accordingly, in ASX’s view, the policy that security holders are protected against the entrenchment of management would not be infringed. In fact, that may not be the case, as takeovers made with the approval of the OMH Board are not subject to the sanction of a court – the court is only involved in the case of the Board taking action against a hostile suitor.
There is also the broader issue as to whether it is appropriate that foreign companies should be subject to the regulation of their own domestic law on takeovers, however remote their connection may be to their place of incorporation.
Understandably, shareholders may erroneously assume that the Australian takeovers regime applies uniformly to ASX-listed corporations. In fact, the position for shareholders of foreign-domiciled listed companies may be that they have no protection from unregulated takeovers, that foreign takeovers laws apply or that they are subject to a modified version of the Corporations Act provisions which may have been introduced with a waiver from ASX.
Accordingly, shareholders of foreign-domiciled companies listed on AS X are exposed to considerable uncertainty with respect to the application of takeovers protections. It may be time to consider whether all AS X-listed companies should be subject to the Australian takeover regime as a requirement of listing.