specific mention of Kalahari in the body of this report.I hope...

specific mention of Kalahari in the body of this report.
I hope someone out there can interpret this for us...

http://www.freehills.com/7686.aspx

ASIC releases updated policy on downstream acquisitions

06 December 2011

In brief

•ASIC has released a draft updated Regulatory Guide on downstream acquisitions of Australian companies that are subject to the takeover regime.
•The downstream acquisition exemption to the 20 per cent takeover rule applies where a bidder acquires a listed (upstream) company that holds more than 20 per cent of the shares in a (downstream) company that is subject to the Australian takeover regime.
•Despite the existence of the downstream acquisition exemption, ASIC says it may apply to the Takeovers Panel if (a) the acquisition of control of the downstream company was a ‘significant purpose’ of the upstream acquisition or (b) the downstream acquisition subverts or does not meet the policy basis for the downstream acquisition exemption.
•ASIC also sets out the circumstances in which it will expect an upstream bidder to make a follow-on downstream takeover bid.


ASIC releases updated policy on downstream acquisitions
ASIC has published a draft of its updated takeover Regulatory Guide on downstream acquisitions – 15 years after the last update.

The Downstream Acquisition Exemption
The Australian takeover regime contains a number of exemptions to the restriction on acquiring an interest in more than 20 per cent of the shares in an Australian company listed on the ASX (the 20 per cent rule). One of the exemptions operates where the interest in the (downstream) Australian company is acquired as a result of the person acquiring shares in an upstream company listed on the ASX or on a foreign exchange approved by ASIC (the Downstream Acquisition Exemption).

When might there be ‘unacceptable circumstances’?
Even if the Downstream Acquisition Exemption technically applies in a particular case, upstream bidders risk a declaration of ‘unacceptable circumstances' from the Takeovers Panel if they abuse the exemption.

ASIC has said it may consider applying to the Takeovers Panel for a declaration of ‘unacceptable circumstances’ if:

•acquisition of control of the downstream company was a ‘significant purpose’ of the upstream acquisition, and/or
•the downstream acquisition subverts or does not meet the policy basis for the downstream acquisition exemption (eg where the upstream company is listed in name only and is closely held).
In a similar vein, in the Leighton Holdings proceedings in 2010, the Takeovers Panel said that the policy of the Downstream Acquisition Exemption turns on whether the upstream acquisition was a mere ‘artifice’ with the true objective being the acquisition of the downstream interest.

What is ASIC’s approach if relief is required?
If the Downstream Acquisition Exemption is not available (eg because the upstream company is not listed on an approved foreign exchange or the ASX), the bidder for the upstream company will need to obtain relief from ASIC in order to avoid breaching the 20 per cent rule.

ASIC has said that, in deciding whether to grant relief, it will consider:

•whether control of the downstream company may be regarded as a significant purpose of the upstream acquisition,
•whether the downstream shares are a substantial part of the upstream company’s assets, and
•whether the bidder will obtain effective control of the downstream company as a result of the upstream acquisition.
When will ASIC insist that the bidder makes a downstream takeover bid?
If ASIC grants relief to a bidder, it may impose a number of conditions to that relief.

ASIC has said that it will generally require the bidder to make a downstream bid when:

•control of the downstream company appears to be a ‘significant’ purpose,
•the shares in the downstream company are a substantial part of the assets of the upstream company (generally speaking, at least 50 per cent of the assets), or
•effective control of the downstream company will be obtained.
If none of these circumstances exist, ASIC will not require the bidder to make a downstream bid but may impose conditions preventing the bidder from:

•acquiring further shares in the downstream company for a period, and
•exercising voting rights in the downstream company for a period.
In a limited number of cases, ASIC may also impose a sell-down or disposal condition.

If ASIC requires an upstream bidder to make a downstream takeover bid, it will normally require the consideration to be cash, in an amount that is not less than:

•the fair value ascribed to the downstream shares by an independent expert, or
•the ‘effective’ price of the downstream shares (that is, where the price effectively being offered to the upstream shareholders for the shares in the downstream company can be clearly determined from the upstream acquisition price).
As a practical example of the application of this relief regime, CGNPC Uranium Resources Co has been in discussions with Kalahari Minerals (a company listed on the Alternative Investment Market of the London Stock Exchange and the Namibian Stock Exchange – neither of which is an approved exchange for the purposes of the Downstream Acquisition Exemption). Kalahari Mineral’s key asset is a 42.74 per cent shareholding in the ASX-listed company Extract Resources. Extract Resources has been consulted by ASIC and has made submissions to ASIC about the terms and conditions of a possible downstream takeover bid for Extract Resources by CGNPC-URC if CGNPC-URC makes an upstream bid for Kalahari.

Frustration for bidders?
The frustration for potential upstream bidders remains that, in cases where the Downstream Acquisition Exemption is technically available but where it is conceivable that someone may allege that ‘unacceptable circumstances’ exist, there is no means of ensuring certainty for the bidder before it launches its upstream bid.

ASIC does not have the power to make a declaration as to the application of the law in a way that is binding on third parties. Similarly, the Takeovers Panel’s role is to create new rights and obligations and not to determine existing rights (a declaration of the law is not the creation of new rights).

An example is the 2010 hostile takeover bid by ACS for Hochtief (which owned 54.48 per cent of the shares in ASX-listed Leighton and, on some measures, the shares in Leighton comprised over 50 per cent of the assets of Hochtief). Although the Downstream Acquisition Exemption applied (as Hochtief was listed on the Frankfurt exchange – which has been approved by ASIC), there was very little ACS could have done before launching its bid for Hochtief to protect itself against the commencement of the proceedings involving Hochtief, Leighton and ASIC in the Takeovers Panel and a possible declaration of ‘unacceptable circumstances’.

Under the draft policy, it seems almost inevitable that these uncertainties will be exacerbated given the use of the phrase ‘a significant purpose’ which is, at the very least, open to different interpretations. This could capture a situation where the downstream shareholding was not the main asset of the upstream company. That result would undermine the very purpose of the exemption.

Availability of other exemptions
Finally, it is worth noting that ASIC states that it will not consider a downstream acquisition to be exempt from the 20 per cent rule merely because another exemption from the 20 per cent rule is available. This position is inconsistent with Parliament’s intention that at least some of the other exemptions to the 20 per cent rule would have broad application and, accordingly, would apply to downstream acquisitions that are not otherwise technically covered by the Downstream Acquisition Exemption.

If, for example, a scheme of arrangement or takeover bid is used to acquire an unlisted Australian company which holds more than 20 per cent of the shares in a listed Australian company, the exemptions for schemes of arrangement and for takeover bids should be available even though the Downstream Acquisition Exemption would not be available. Of course, if an upstream bidder was abusing these exemptions there could be a declaration of ‘unacceptable circumstances’.

The adoption of ASIC’s draft view would create a regulatory anomaly and would bring about the discriminatory treatment of companies taking part in control transactions involving unlisted upstream Australian companies as compared to those involving listed upstream Australian companies.

This article was written by Andrew Rich, Partner, Sydney and Alison Crocker, Solicitor, Sydney.