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ASIC’s review of creep provisions puts corporate raiders on notice

James Packer’s raid on Echo Entertainment has put Australia’s takeover laws under the spotlight. AAP

It’s been an interesting time for Australia’s corporate watchdog. Financial manoeuvres by Gina Rinehart and James Packer, which saw them increase their holdings in Fairfax Media and Echo Entertainment respectively, have thrust the issue of creep provisions into the spotlight. There was also the failed takeover bid of David Jones - now the subject of an ASIC investigation surrounding continuous disclosure - which descended quickly into farce.

It’s unsurprising, then, that ASIC has now flagged a sweeping review of Australia’s takeover laws in its submission to Treasury. Michael Quilter, senior lecturer in accounting and corporate governance at Macquarie University, explains the significance of ASIC’s proposals to Australia’s takeover laws.

What do you think has prompted ASIC’s rethink of Australia’s takeover laws?

I think the recent issues surrounding Fairfax and Echo have to have something to do with it, although the ASIC chairman avoided pointing fingers.

The recent David Jones issue, where the share price spiked quickly due to a proposed takeover, has also raised ASIC’s interest.

The purpose of the takeover provisions is the protection of investors, and ensuring confidence in the market. We have a lot of mum-and-dad investors, and there’s an increasing requirement for ASIC to think about their protection, particularly in an unpredictable market,. All of these things would have added together to give ASIC an incentive to revise the takeover provisions.

National takeover law has existed for just over 30 years. The issues arising out of the Fairfax etc matters have obviously brought Item 9 of s 611 (the creep provision) into focus. Laws change because regulators perceive that community or equity issues should be addressed. It should be noted though that ASIC’s proposals in this regard will not necessarily translate into amendments to the Corporations Act. The process of reform has many stages and the raising of issues about the creep provisions by ASIC is merely the beginning.

The mention of those three companies highlight two prominent issues in takeover law: creep provisions and continuous disclosure. Let’s start with creep provisions. How effective are they in securing control? Aside from Kerry Stokes and SevenWest, have there been many instances in Australian corporate history where they have been used to acquire control?

There probably hasn’t. In most cases, the creep provisions have been sneaking under the radar. When they are taught in company law courses at universities, they are referred to as slow ways of edging towards control; ways in which large shareholders can gradually increase - in small increments - their holdings.

You wouldn’t often expect that bidders would creep 3% at a time. In most large public listed companies, 3% of the shares requires a fair bit of money. There is creeping going on, where shareholders who have exceeded the threshold increase their holding, but this does not necessarily involve the overt challenges to the board as has occurred in relation to Fairfax and Echo.

Certainly the ability to creep by 3% each 6 months can provide a useful base to a bidder, to either initiate a takeover bid or to accumulate a holding sufficient to significantly influence the election, or removal, of directors. In instances when the person/company seeking control has the ability to acquire a full 3% it may only take a few years before a commanding holding is achieved. All the while pressure may be increasing on the existing board, as in the Rinehart/Fairfax matter.

One of the proposals calls for lowering the creep to 1% and capping that provision at 30%. Do you think that will have any significant implications on takeovers, and will it affect some companies more than others?

Although the creep provisions are relevant to control they normally wouldn’t be seen as a method of acquiring control; they are currently viewed that way because they have been associated with pressure on boards, and particularly the conflicts widely reported upon at both Fairfax and Echo.

Normally, creeping upwards puts you in a better position, perhaps, to make a jump to control. Statistics suggest that most large listed companies don’t get anywhere near their total number of shareholders voting in relation to directors. At AGMs you have directors elected by a proportion of investors - usually the institutional investors hold the biggest sway. Holding 30% may be relevant in this regard. Yet, in situations where control is sought by creeping upwards a 1% limit will make a difference.

Another contentious proposal is the “put-up, shut up” rule, which is already in place in the United Kingdom. Essentially, this requires bidders to make a formal offer within 28 days of the approach or withdraw. The David Jones farce seems relevant here. Is the move a significant departure from our current laws?

Rule 2.6 of the Takeover Code in the UK has this 28 day provision. It’s not dissimilar in Australia: section 631 of the Corporations Act sets out that you have to come up with a takeover bid within 2 months after the proposal.

I suppose the worry from a David Jones type situation is that the market can be manipulated when the indication of offers and approaches are made. In a sense, this is all connected to the issues arising from continuous disclosure. Continuous disclosure has been dealt with in a number of big cases: a recent one was the Fortescue Metals matter. As was seen the approach to David Jones made the market move. Certain investors may well benefit from these situations and this is why ASIC will likely look into the matter.

If investors do not have equal access to levels of information confidence is affected. Continuous disclosure issues are going to dominate legislative measures now and into the future. I would presume that any referral that is made by ASIC to the government to consider issues relating to takeovers and the creep provisions in particular would include matters concerning continuous disclosure.

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