Takeover Panel Reasons for Decision
MEC Resources Limited 02
[2019] ATP 26
Catchwords:
Decline to make a declaration - rights issue – shortfall shares – need for funds – association – referral to ASIC
Corporations Act 2001 (Cth), sections 173, 177
Corporations Regulations 2001 (Cth), regulation 2C.1.03
Australian Securities and Investments Commission Regulations 2001 (Cth), regulation 18
Guidance Note 17 – Rights Issues
Scantech Limited [2014] ATP 20
Ford, Austin & Ramsay’s Principles of Corporations Law, LexisNexis, paragraph [21.030]
Interim order IO undertaking Conduct Declaration Final order Undertaking
Intrem Order -NO , IO Undertaking - NO , Conduct – YES, Declaration - NO, Final Order – NO, Undertaking – NO
INTRODUCTION
1. The Panel, Chelsey Drake (sitting President), Marissa Freund and Philippa Stone,
declined to make a declaration of unacceptable circumstances on an application by a
group of shareholders in MEC Resources Ltd in relation to its affairs. The
application concerned the placement of shortfall shares following a rights issue and
whether there had been a change of control in unacceptable circumstances. The
Panel considered that there was insufficient material to establish a control effect in
relation to MEC’s fundraising, but had a number of concerns that led it to refer the
matter to ASIC.
2. In these reasons, the following definitions apply.
Applicants Anstey Super Fund (Harry Anstey), Davenport Family Trust
(Roger & Frances Davenport), Durnin Family Super (Valentine
& Pauline Durnin), Andrew Wilson, and David & Tracy Booth
MEC MEC Resources Limited
Here Capital Here Capital Pty Ltd (formerly MVP Capital Pty Ltd)
Here Group (a) MVP Financial Pty Ltd as trustee for MVP Unit Trust
(trading as Here Business and Wealth)
(b) Here Capital Pty Ltd (formerly MVP Capital Pty Ltd),
wholly owned by MVP Unit Trust
(c) Here Accountants & Advisors Pty Ltd (formerly MVP
Accountants & Advisors Pty Ltd), wholly owned by MVP
Unit Trust and
Takeovers Panel
Reasons – MEC Resources Limited 02
[2019] ATP 2
(d) Here Wealth Pty Ltd (formerly MVP Wealth Pty Ltd),
wholly owned by MVP Unit Trust
Term Sheet The rights issue shortfall capital raising indicative term sheet
issued by Here Capital for sophisticated and professional
investors
Placees The persons to whom Shortfall Shares were issued
rights issue The rights issue referred to in paragraph 4
Shortfall Shares 224,680,600 MEC shares issued, out of the 269,157,716 shares
left, after the close of the rights issue
Subsequent Shares 15,792,200 MEC shares issued on 4 October 2019
FACTS
3. MEC is an ASX listed company (ASX code: MMR). It is a pooled development fund,
invested primarily in the energy and mineral resources sector.
4. On 9 April 2019, MEC announced a 1:1 pro rata non-renounceable rights issue to
raise up to $1,709,340 by the issue of up to 341,868,046 shares. The offer price was 0.5
cents per share against a last trade price of 0.9 cents per share. The prospectus for the
rights issue was dated 9 April 2019.
5. The prospectus stated that the funds raised “may be used primarily:
• to expand and diversify the Company’s asset base in accordance with its approved
investment mandate, and/or as modified from time to time following any
necessary approval from AusIndustry, ASX or Shareholders
• to support MEC investee, Advent Energy, in any additional costs it may incur
toward planned exploration works within its petroleum titles; and
• for working capital purposes.”
6. The offer closed on 3 May 2019. There was a shortfall of applications for shares of
269,157,716 shares.
7. On or about 8 May 2019, Here Capital (formerly MVP Capital Pty Ltd) acting as a
placement agent for MEC Resources, sought to place the shortfall and issued the
Term Sheet seeking to raise up to $1,345,789 by the issue of up to 269,157,716 shares
for 0.5 cents per share. The Term Sheet sought “indicative bids of interest” from
sophisticated and professional investors.
8. The Term Sheet stated (among other things):
“MEC will be looking to divest its oil and gas assets,recapitalise the share register and
start investing in exciting up and coming companies thatare looking to list….” and
“MEC will be looking to maximise the potential of its oiland gas assets to make way for
new investments.”
9. Below is a list of share issues since the announcement of the rights issue in April
2019 .(1)
Event Date Shortfall Share issues Diluted capital
Pre rights issue 341,868,046
Acceptances 10/05/2019 65,592,243
Shortfall subscriptions 10/05/2019 7,118,087
Shares issued 14/05/2019 72,710,330
Post rights issue 414,578,376
Shortfall left 269,157,716
Placement of shortfall 22/07/2019 160,000,000
Shortfall left 109,157,716 574,578,376
Placement of shortfall 6/08/2019 43,660,640
Shortfall left 65,497,076 618,239,016
Placement of shortfall 14/08/2019 21,019,960
Shortfall left 44,477,116 (not issued) 639,258,976
Total Shortfall Shares issued 224,680,600
Subsequent Shares issued 4/10/2019 15,792,200 (escrowed)
655,051,176
Total number of shares issued since RI 313,183,130
% Change in capital from pre-RI position 91.61
% change in capital on fully diluted 34.30
10. MEC’s annual general meeting was held on 25 November 2019. The notice of
meeting proposed a resolution (resolution 3) to ratify the prior issue of the Shortfall
Shares. On 25 November 2015, MEC issued an announcement on ASX that it had
withdrawn resolution 3.
11. On a number of occasions since at least June 2018, shareholders have sought access
to, and a copy of, MEC’s register.
12. By letter dated 20 September 2019 addressed to one of the Applicants,(2)
MEC advised, in response to a request for a copy of the register, that it was available for inspection.
This letter was not received.
13. By letter dated 25 November 2019, after the date of the application, the letter dated 20
September 2019 was resent to that Applicant under cover of a letter that stated that
he needed to comply with section 173 of the Corporations Act 2001 if he was to be
given a copy of the register.
APPLICATION
Declaration sought
14. By application dated 21 November 2019 (received on 22 November 2019), the
Applicants sought a declaration of unacceptable circumstances. They submitted that
“an alleged takeover occurred following the placement of shortfall of the Prospectus issue… to
parties associated with MVP and/or its Director(s)”.
15. They submitted, in effect, that there was no requirement or urgency to raise funds,
shareholders had shown that they did not support the rights issue (by their lack of
take up) and the structure of the issue of Shortfall Shares was unacceptable and
“intended as an opportunity to change control”.
16. They submitted that “the structure of the rights issue was unacceptable – clearly intended
as an opportunity to change control etc. at the expense of existing shareholders.”
17. They also submitted that they had been denied access to a copy of the share register
of MEC, despite having paid a fee as requested. This, they submitted, prevented
assessment of the placement of shortfall shares and communication with
shareholders.
Interim and final orders sought
18. The Applicants sought a number of interim orders and final orders including orders
to the effect that:
(a) MEC’s annual general meeting to be held on 25 November 2019 be adjourned
until the Panel completed its investigations
(b) the Here Group, MEC directors and their associates and any persons who
received Shortfall Shares be restrained from voting at the annual general
meeting or their votes be disregarded at the annual general meeting and
subsequent meetings
(c) shares issued after 13 May 2019 be prevented from participating in the in-specie
distribution of shares to be completed by MEC
(d) associated parties:
(i) be restrained from acquiring further securities in MEC
(ii) reduce their joint interest in MEC to 19%
(iii) pay all profits on such sales to the Applicants or ASIC
(e) alternatively, such shares be vested in ASIC
(f) associated parties give the names of beneficial owners of all their securities and
(g) MEC be restrained from issuing any securities to associated parties.
Takeovers Panel
DISCUSSION
Interim order on holding of the AGM
19. The application was made only one business day before the annual general meeting.
The substantive President considered the request for an interim order. He
considered that any unacceptable circumstances could be adequately remedied by
final orders. In relation to the request for an interim order to adjourn MEC’s annual
general meeting, the relevant resolution was to ratify the issue of the Shortfall Shares,
the majority of which were issued in late July 2019. The President considered it was
not necessary to adjourn the annual general meeting because if necessary the Panel
could conceivably make a final order requiring further ratification of the Shortfall
Shares.
20. We did not think the question of interim orders needed to be considered again.
21. The annual general meeting was held on 25 November 2019.
Extension of time
22. The application was made regarding circumstances that first arose on 22 July 2019
with the first placement of Shortfall Shares after the rights issue. The application did
not address whether it was made out of time and did not request an extension of
time. Nor was this addressed in the Applicant’s response to the brief, although the
Applicants were asked - “if the Panel determines that theapplication was made out of time
do you seek an extension of time?”
23. In its preliminary submissions, MEC submitted that the last of the Shortfall Shares
were issued on 6 August 2019 and additional shares on the same terms as the
Shortfall Shares were issued on 14 August 2019 so the Applicants “have had an
opportunity to make an application to the Panel regardingthe Offer since at least 9 April
2019 and regarding the placement of shortfall sharessince at least 6 August 2019, but did not
do so until 21 November 2019”. It submitted that the Applicants were making the
application well in excess of two months after the relevant circumstances occurred
without providing any justification for doing so.
24. As we concluded that there was no control effect, and so declined to make a
declaration of unacceptable circumstances, we did not need to consider this question
further.
25. However we point out that, while the application suggests a concern about the
structure of the rights issue itself, the real issue raised appears to be the placement of
Shortfall Shares and Subsequent Shares, so it is too strong to submit that the
application could have been made as early as 9 April 2019. While that was the date
of the prospectus for the rights issue, the outcome was not known until later (and
indeed the Applicants submit is still not clearly disclosed) and steps in relation to the
shortfall, which underpinned many of the Applicants’ objections, were also not taken
until later.
Unacceptable circumstances?
26. The Applicants became concerned after seeing a very significant number of shares
being issued without much, if any, information being made available. Combined
with an apparent blocking of attempts to secure a copy of MEC’s register, and
following a series of legal disputes between MEC and its former managing director,
the Applicants became sufficiently concerned to make this application. The
Applicants had also been in correspondence with ASIC.
27. We decided to conduct proceedings to establish if the issues of Shortfall Shares and
Subsequent Shares had a control effect on the company, and if so whether there was
anything unacceptable.
28. The Applicants submitted that no clear, pressing requirement or urgency for funds
had been demonstrated. MEC submitted that it did need funds. It submitted that
“y the time that MEC proceeded with the rights issuein April 2019, it had less than six
months of forecast funds available.” It also submitted that an application to wind it up
had been made.
29. We are satisfied that in April 2019, when it launched its rights issue, MEC did need
funds. While there appeared to be a need for funds, the fundraising was significantly
dilutive, evidenced by limited take up of rights or shortfall shares by shareholders
and the consequent significant shortfall. And, as Guidance Note 17 points out, need
for funds is not a safe harbour.(3)
30. The Applicants also submitted that shareholders did not support the rights issue and
that the “structure of the issue of the shortfall shareswas unacceptable - clearly intended as
an opportunity to change control, etc. at the expense ofexisting shareholders.”
31. Guidance Note 17 addresses potential control effect, suggesting that ways to mitigate
it include:
(a) if a market is likely, making the rights issue renounceable. The offer was nonrenounceable.
(b) offering a shortfall facility (which was done here) and
(c) underwriting, and using several sub-underwriters.(4)The rights issue was not
underwritten.
32. In this case, shareholders could apply to take extra shares, although not many did.
MEC submitted that all the shareholders who applied for Shortfall Shares had their
applications filled.
33. MEC submitted that Shortfall Shares were issued to 40 investors, 10% of whom were
existing shareholders of MEC.
34. It submitted that it did not refuse any application for Shortfall Shares or seek to place
Shortfall Shares in a manner that would cause a person to have a substantial holding
and that “there were no significant individualapplications that would have any control
impact, noting in this context that no one person, as aresult of the rights issue or the issue of
the Shortfall shares and Subsequent shares, increasedtheir shareholding in MEC to above 5%
of the total shareholding (nor did any person who had asubstantial holding before the rights
issue increase their voting power).”
35. As explained in paragraph 58 and following, this does not appear to be quite right.
36. MEC also submitted in rebuttals that “… the rights issue, as well as the issue of Shortfall
shares, did not result in a person acquiring a relevant interest in MEC greater than the
threshold set out in section 606…” and the Applicants “have still not identified any
circumstances that effect [sic] the control, or potential control, of MEC, nor … identified a
contravention of a provision of Chapter 6….”
37. The Applicants were also concerned about the withdrawal of the proposed
resolution (resolution 3) to ratify the issue of Shortfall Shares from the annual general
meeting.
38. MEC, by ASX announcement dated 25 November 2019, withdrew the resolution.
This was the same day as the meeting was to be held. We asked MEC to inform us of
the proxy position on the resolution. It submitted that 76.05% of votes were in
favour of ratifying the issues, although the Applicants queried in rebuttal whether
the number of shares voted in favour included any that should have been excluded
according to the voting exclusion statement.
39. MEC submitted that “the resolution was only withdrawnbecause MEC was made aware
that it did not need to obtain ratification for the issueof the shares for the purposes of ASX
listing rule 7.4 as the issue of shares was alreadycovered by exception 3 of ASX listing rule
7.2.”
40. ASIC pointed to a number of curiosities in relation to applications for Shortfall
Shares including:
(a) applicants who appeared to be employed or associated with the Here Group
(b) an applicant, whose address corresponded with that of shareholders connected
to Here Business & Wealth (suggesting a family connection), who received 22
million shares on an application for 4 million shares and
(c) another applicant, whose address corresponds with that of other shareholders
(suggesting a family connection).
41. After considering the parties' submissions we had a number of concerns in relation
to:
(a) transparency of the fundraising
(b) transparency of MEC’s ownership
(c) transparency of the placement of Shortfall Shares and Subsequent Shares and
(d) some of the statements made to potential placees.
42. However, while we had a number of concerns, there was not sufficient material to
establish that there was a control effect in relation to MEC’s fundraising and any
unacceptable circumstances.
Transparency of the fundraising
43. In our view, the transparency of the fundraising was less than ideal. There were
potential inconsistencies in some of the details regarding MEC’s need for funds, use
of funds, future capital requirements and future direction.
44. For example, the prospectus stated that the funds may be used primarily to expand
and diversify MEC’s asset base, to support MEC’s interest in energy explorer Advent
Energy Ltd and for working capital, but the Term Sheet stated that MEC would be
looking to divest its oil and gas assets, recapitalise the share register and start
investing in exciting up and coming companies that were looking to list. It also
stated that MEC will be looking to maximise the potential of its oil and gas assets to
make way for new investments.
45. MEC submitted that it had stated in the prospectus that its listed use of funds (see
paragraph 5) “is indicative only and is subject to change by the Directors in their
discretion” having regard to how the funds will best be applied for MEC’s business.
46. MEC also submitted that it did not consider that the statements were inconsistent,
and that its future investment strategy included a partial divestment of its oil and gas
interests, which had been disclosed to the market.
47. There was, however a reasonably significant typographical error in the Term Sheet.
Here Capital submitted that:
“On subsequent review of the "Key Highlights" section [of the Term Sheet] Here Capital
notes a minor typographical error in the statement that reads "MEC will be looking to
maximise the potential of its oil & gas assets to make way for new investments" which should
have read "MEC will be looking to maximise the potential of its oil & gas assets and make
way for new investments” (original emphasis).
Transparency of the company’s ownership
48. In our view, the transparency of the company’s ownership was also less than ideal.
There was considerable difficulty experienced by at least one of the Applicants
obtaining a copy of the company's register of members.
49. The Corporations Act(5) sets out clearly the rights of shareholders to access a
company’s register. Section 173 allows inspection without charge, and provides that
on application in proper form and payment of the fee a member is entitled to be
given a copy of the register. The allowable uses of the register are set out(6) and the
purpose for obtaining a copy cannot be a purpose prescribed in the regulations.(7)
50. One of the Applicants made an application on 5 September 2019 using the form
provided by MEC’s registry and paid the requested fee. While the purpose does not
appear to have been stated in the request, the Applicants submitted that MEC had
withheld releasing a copy of the share register to shareholders, preventing
assessment of the placement of the shortfall and communication with shareholders.
Given the history, it seems likely that MEC knew why the Applicants had made their
request.
51. MEC wrote to that Applicant on 20 September 2019 advising that the register could
be inspected. The letter was not received until it was resent on 25 November 2019.(8)
52. MEC submitted that the letter was sent to the relevant address listed in the register
and that, following receipt of the Panel application, it became aware that the letter
may not have been received so resent it.
53. MEC also submitted that the Applicant was provided guidance on how he could
make application for a copy of MEC’s register but, other than saying “the company has
not received a request … that complies with section 173…”, in our view no useful
assistance was given as to what more was required to comply with section 173.
54. As stated in Ford et al “…access by members to theregister of members is thought to
facilitate good corporate governance through member engagementand participation.”(9)
55. We agree with ASIC’s rebuttal submission that companies should make all
reasonable efforts to assist their shareholders with respect to register inquiries
without unreasonable delay or procedural complication, and further:
“In circumstances where MEC (and/or its agents):
(a) were likely aware, or should have been aware, thatthe request was for a copy of
the register;
(b) appears to charge the Applicant likely for this samereason; and
(c) provided the Applicant with the incorrect form tocomplete,
ASIC submits MEC’s claims maybe of significantlydiminished force.”
56. MEC submitted that:
The Applicants seek an order directing the “AssociatedParties” to give the names and
beneficial owners of all their securities in MEC Resources.Given that such information could
be obtained by the Applicants through mechanisms in theCorporations Act, namely by
requesting a copy of the register of members and byrequesting that ASIC provide beneficial
tracing notices to particular shareholders, theApplicants should not seek this information
from the Panel.
57. In light of the above, we have sympathy with the Applicant’s request for the names
and beneficial owners of those shareholders which the Applicants’ were concerned
were associated, given the difficulty experienced in obtaining a copy of the MEC
register. In the circumstances we consider MEC’s submission above to be
disingenuous.
The placement of Shortfall Shares and Subsequent Shares
58. In our view, the placement of Shortfall Shares and Subsequent Shares lacked
transparency. This included what appear to be failings in lodging substantial
shareholder notices.
59. In relation to the Subsequent Shares, MEC submitted that they were issued to Here
Capital (previously MVP Capital Pty Ltd), the placement agent for the Shortfall
Shares, “in payment for company secretarial, accountingand office services provided to
MEC.”
60. Here Capital, in its submission on the brief, identified that the Here Group and
persons connected to it held in aggregate 41,792,200 shares (or just over 5.75% of
MEC).
61. MEC acknowledged that a substantial holder notice needed to be lodged. It
submitted that:
“Here Capital, to whom the Subsequent shares were issued,held 5,000,000 Shortfall shares at
the time that the Subsequent shares were issued. HereCapital’s voting power before the issue
of Subsequent shares was 3.44% (which includes 2,000,000shares held by Douglas Verley
and 15,000,000 shares held by Marusco Investments Pty Ltdas trustee for the Marusco
Superannuation Fund(10) and its voting power afterthe issue of the Subsequent shares was
5.77% (currently 5.52%). Whilst this is a substantialholing [sic] within the meaning of the
Act and a substantial shareholding notice needs to belodged by Here Capital, the substantial
holding does not confer control.”
62. However, if additional shares identified by ASIC as potentially also connected to the
Here Group are added (see paragraph 40), the percentage increases to approximately
11%.
63. It appears that, to date, no substantial holder notice has been lodged by the Here
Group. Given the size of the holdings, and the fact that the nature of any links with
the holders of the additional shares identified by ASIC remained unclear, this lack of
disclosure did not have a sufficient control impact to be unacceptable in the
circumstances.
Statements to placees
64. Statements made to potential placees remain unexplained and the nature of the
relationships of the placement agent to the company and to the placees is of potential
concern.
65. In an email to one potential applicant for Shortfall Shares, Mr Verley, a director of
Here Business & Wealth which is the parent company of the Here Group, said:
“We are in the process of potentially securing asignificant interest in ASX listed company
(MEC), which will then invest in underlying privatehigh-growth opportunities that are
brought to us, and like those that we are currentlypromoting. Most of our future capital
raisings for private companies will take place via thisASX listed entity”
66. Perhaps more significantly, the email went on:
“There is a strong possibility that we (MVP) will have amaterial influence on the future
direction of MEC.”
67. The Here Group was invited to make submissions in response to the brief. It was
asked about the statements. Here Capital submitted that this was a reference to its
shortfall mandate, and was “a general statement made inthe context and with the knowledge
that MEC had an expanded approved PDF mandate which wouldallow the company to explore
new investment opportunities over and above its currentoil & gas investment.”
68. However, Here Capital did not address adequately (or at all) what was meant by the
statement “a strong possibility that we (MVP) will have a material influence on the future
direction of MEC.” We are left uncomfortable by the non-response to this part of the
question, and this is one of the reasons for our referral to ASIC.
Conclusion
69. We do not think that there is a control effect evident in the material before us.
70. However, because of the above concerns, we will refer the matter to ASIC(11) for ASIC
to make such inquiries as it considers fit and to consider whether to make a further
application to the Panel. As noted in Scantech Limited:
“In part, this will help resolve the difficulty that theapplicant faces, namely that it has a
limited ability to obtain further evidence.”(12)
DECISION
71. For the reasons above, we declined to make a declaration of unacceptable
circumstances. We consider that it is not against the public interest to decline to
make a declaration and we had regard to the matters in section 657A(3).
72. Given that we made no declaration of unacceptable circumstances, we make no final
orders, including as to costs.
Chelsey Drake
President of the sitting Panel
Decision dated 13 December 2019
Reasons given to parties 17 January 2020
Reasons published 22 January 2020
11
Regulation 18 of the Australian Securities and Investments Commission Regulations 2001 (Cth) provides:
(1) The Panel may refer a matter to the Commission for the Commission to consider with a view to making an
application.
(2) If the Panel refers a matter to the Commission, the reference must be made:
(a) in writing; and
(b) in sufficient detail to allow the Commission to make a decision about the matter.
12 [2014] ATP 20 at [40]
1 Excluding 29,400,000 shares issued on 27 November 2019after MEC’s annual general meeting
2 The letters dated 20 September 2019 and 25 November2019 (described in paragraph 13) were provided by
3 Guidance Note 17 – Rights Issues at [12]
4 Guidance Note 17 – Rights Issues at [7] and [8]
5 Unless otherwiseindicated, all statutory references are to the Corporations Act 2001 (Cth), andall terms
used in Chapter 6 or 6C have the meaning given in therelevant Chapter (as modified by ASIC)
6 Section 177prohibits (among other things) using the register to send material to a personbut not if the
material is relevant to the holding or is approved by thecompany
7 See Corporations Regulations 2001 (Cth), regulation2C.1.03 – for example soliciting donations, gathering
information about personal wealth or proposing to make anoff-market offer under Division 5A of Part 7.9
8 See paragraphs 12 and 13
9 Ford, Austin & Ramsay’s Principles of CorporationsLaw, LexisNexis, para [21.030]
10 MEC understands that Robert Marusco holds 72% of theshares in Marusco Investments Pty Ltd, is one of
four directors and has interests in the MaruscoSuperannuation Fund together with others.
11 Regulation 18 of the Australian Securities andInvestments Commission Regulations 2001 (Cth) provides:
(1) The Panel may refer a matter to the Commission forthe Commission to consider with a view to making an
application.
(2) If the Panel refers a matter to the Commission, thereference must be made:
(a) in writing; and
(b) in sufficient detail to allow the Commission to makea decision about the matter.
12 [2014] ATP 20 at [40]
(20min delay)