Takeovers are about control. Gina Rinehart’s acquisition of Fairfax Media Limited shares] - and increased stake in the company - has raised several questions about the nature of control in listed companies.
For most investors, control (or the provisions of the Corporations Act 2001 regulating takeovers) are never relevant, as they simply don’t have the finances to trigger either media interest or threshold prohibitions.
There are a number of implications in relation to Rinehart’s acquisitions. Depending on how she proceeds with her acquisitions in Fairfax in the future, the provisions relating to takeovers (and acquisitions generally) in chapter 6 of the Corporations Act may be relevant.
Secondly, as a substantial holding shareholder in (together with Hancock Prospecting Pty Ltd and subsidiaries), and a director of, Ten Network Holdings Ltd (Channel 10), there may possibly be issues regarding the convergence of her media interests.
Potentially relevant here are the Broadcasting Services Act 1992 as amended; the Competition and Consumer Act 2010; and the federal government’s recent Convergence Review Final Report of March 2012.
Rinehart, through Hancock Prospecting, is the major shareholder in Fairfax. However, she was overlooked when a recent board retirement created the opportunity for appointment.
In these circumstances, and unless the Fairfax board reconsiders its options, it seems election to the board will require Rinehart to turn to the support of the company’s retail and institutional shareholders. Of course, she could acquire the shares herself – in other words, make a takeover bid.
At present, the level of Rinehart’s shareholding does not exceed the threshold in s 606 of the Corporations Act, which sets out that a person must not acquire a relevant interest in issued voting shares in a company if to do so would take that person’s voting power from 20% or below to more than 20%, or from a starting point that is above 20% and below 90%.
However, if she did decide to make a move, then she would be required to choose between a market bid (announced on the stock exchange), which must be in cash and for all the remaining voting shares in the bid class, or an off-market bid (a private offer) that is more flexible, allowing the offer to include cash and/or securities in the bidder. Sections 618 to 623 of the Corporations Act set out the requirements for both types of bids.
Alternatively, Rinehart may choose not to enter a fully blown takeover situation, but instead opt to continue to edge forward with regular acquisitions. This may result in her increased holding bringing renewed pressure to bear on the board (securing a seat and minimising upheaval), or increasing her presence may provide a launching pad for a bid in the future. Of course, once the 20% threshold is exceeded her hand will be forced and a formal bid process commenced.
However, there is still the availability in the Corporations Act for acquisitions above the threshold without the need to undertake one of the permitted means of acquisition; that is, without the need for a market or off-market bid. This is by way of the creep provision in s 611. As it sounds, this does not deliver immediate control. However, it does allow a potential bidder who is about to exceed (or has exceeded) 20% to edge closer to the perimeter of control and thereby make the jump to the desired level of control less severe.
Section 611 sets out that in the six months prior to an acquisition, if a person has had voting power in the company of at least 19% and as a result of the acquisition the person would have voting power in the company to a level of not more than 3% higher than they had six months before the acquisition, then such acquisition is exempt from the prohibitions.
Accordingly, a person with at least 19% voting power for a continuous period of six months can acquire up to a further 3% in the six-month period immediately following.
The other matter relevant to achieving control is recognising exactly what that word means in each particular situation. Rinehart, it seems, wants a seat on the board of Fairfax. Directors are elected by way of an ordinary resolution requiring a simple majority (50%).
However, it is rare for all of a listed company’s shareholders to participate in electing directors. In most cases, the board is elected by majorities that are drawn not from all shareholders (because all do not attend), but from those attending the meeting at which the vote is held, or those who have given proxies. Convincing those most likely to vote thereby becomes an important strategy.
Control comes in many forms. But as far as companies are concerned, control cannot resist growing shareholder presence indefinitely.