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| Takeovers Panel Doesn't Swallow Poison Pill |
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Contact: Braddon Jolley, Rodd Levy, Justin Mannolini and Rebecca Maslen-Stannage
of
Freehills
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In a landmark decision, the Takeovers Panel found that pre-emptive rights that could force the sale of key trust properties were unacceptable. The decision demonstrates the wide powers of the Panel and serves as an important warning to listed managed investment schemes and their responsible entities.
Background
In April 2003, the responsible entity for Centro Property Trust (Centro), applied to the Takeovers Panel in relation to its takeover bid for AMP Shopping Centre Trust (ART). ART's responsible entity was AMP Henderson Global Investors Limited (AMPH).
Centro had announced its bid for ART on 18 March. Eight days later, on 26 March, AMPH announced that pre-emptive rights in five of ART's co-owned super-regional centre properties would likely be triggered if Centro was successful in its bid and sought to change the responsible entity of ART. Centro applied to the Panel for a declaration of unacceptable circumstances and consequential orders to neutralise any adverse effect on its bid of the pre-emptive rights and the AMPH announcement.
After extensive inquiry, the Panel declared that the possible existence of these rights constituted unacceptable circumstances and ordered that the co-owners of the five co-owned properties could not exercise the pre-emptive rights on a change in responsible entity resulting from Centro's takeover bid.
ART and AMP Life's position
In late 1997, before ART was floated, AMPH entered into agreements with AMP Life governing the management of five co-owned properties. Each of these agreements contained pre-emptive rights that were triggered on a 'dealing' in interests in the properties. The disclosure of the pre-emptive rights in the IPO prospectus was consistent with classic pre-emptive rights triggered on a sale—under which, if ART wished to sell its interest in one of the properties, it would have to offer the interest to its co-owner. The disclosure did not make it clear that the pre-emptive rights may have a wider effect than that.
Following Centro's bid, AMPH contended that a change in the legal ownership of one of the co-owned properties (the form of ownership interest held by a responsible entity) would trigger the pre-emptive rights. If that contention was correct, AMP Life and the other co-owners had the right, on a change in responsible entity in ART, to purchase ART's interest in the five co-owned properties. These interests were worth approximately $1 billion and comprised approximately 63 per cent of the gross assets of ART.
AMP Life submitted that the Panel did not have the power to make orders affecting third party contractual rights, was not the appropriate forum to consider the legal issues raised, and that the interests of their life insurance policyholders would be unfairly prejudiced if AMP Life was not permitted to rely on the pre-emptive rights. The Panel disagreed with these submissions.
Centro's position
Centro argued that the pre-emptive rights were not triggered by a change in responsible entity, in which case AMPH's disclosure after the bid was launched was misleading and prevented the market from being properly informed. However, Centro also maintained that if the pre-emptive rights were triggered, their existence without clear prior disclosure was unacceptable.
The Panel's decision
The Panel did not consider it necessary to form a concluded view on whether the pre-emptive rights would be triggered on a change in responsible entity. The Panel agreed with Centro's contention that, whatever the correct legal interpretation of the pre-emptive rights, there were unacceptable circumstances. If the pre-emptive rights would be triggered by a change of responsible entity, then this constituted unacceptable circumstances given the lack of prior disclosure and unitholder approval. On the other hand, if the pre-emptive rights would not be triggered, the uncertainty in the market regarding the effect of the pre-emptive rights (which had emerged since AMPH's announcement of 26 March) was unacceptable.
The Panel determined that the:
absence of adequate disclosure of the pre-emptive rights operating on a change of responsible entity;
absence of ART unitholder approval of the pre-emptive rights
uncertainty in the marketplace, and
possible effect of the pre-emptive rights entrenching AMPH as responsible entity of ART,
constituted unacceptable circumstances and ordered that the co-owners (including AMP Life) of the relevant properties not exercise, nor purport to exercise, the pre-emptive rights on any change in responsible entity following Centro's takeover bid.
This allowed Centro to proceed with its bid in the knowledge that if its bid was successful and it replaced AMPH as responsible entity, this would not trigger the pre-emptive rights.
The precedent value of the Panel's decision
The Panel considered that its order would not have a wider effect on the managed investment industry primarily because:
the order did not affect the application of the pre-emptive rights to sales of interests in the co-owned properties (which had been fully disclosed in the prospectus), and
the pre-emptive rights in question tended to entrench the responsible entity and to discourage competition for control of ART, but had not been adequately disclosed nor approved by ART unitholders.
Therefore, similar pre-emptive rights that have been fully disclosed or approved by unitholders may not constitute unacceptable circumstances.
However, the Panel issued an important warning to responsible entities of managed investment schemes to review urgently their constitutions and other material contracts to assess whether they are parties to contracts with rights similar to those that the Panel found to be unacceptable. The Panel said that those responsible entities were now on notice that they risk a future declaration of unacceptable circumstances unless they have made clear and full disclosure and obtained the informed consent of unitholders for those rights.
The ASX has already reacted to the issues raised in the bid by requiring all listed property trusts to disclose pre-emptive rights that may be triggered by a change of responsible entity.
Lessons to be learnt
This decision shows that the Panel will be prepared to make orders affecting third party rights where those rights create unacceptable circumstances. It is a reminder of the scope of the Panel's power to create new rights and obligations where required to redress unacceptable circumstances.
The Panel's warning signalled that it is willing to scrutinise measures that tend to act as poison pills in the managed investment scheme context to ensure that unitholders are not unfairly deprived of the opportunity for a takeover premium.
Appeal
AMP Life appealed the decision of the Panel. On 3 June 2003, the Review Panel upheld the initial decision of the Panel.
Freehills acted for Centro in this transaction.
Contact details:
Braddon Jolley, 02 9225 5273 or email braddon.jolley@freehills.com
Rebecca Maslen-Stannage, 02 9225 5500 or email
rebecca.maslen-stannage@freehills.com
Rodd Levy, 03 9288 1518 or email rodd.levy@freehils.com
Justin Mannolini, 08 9211 7616 or justin.mannolini@freehills.com
July, 2003
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