IRON ore hopeful BC Iron (BCI) should consider taking Regent Pacific Group to the Takeovers Panel over the Hong-Kong group's purported termination of its proposed acquisition of BCI via a scheme of arrangement.
On January 21, BCI and Regent Pacific announced a recommended cash offer of $3.30 a share for BCI, via a scheme.
The offer price represented a 30 per cent premium to BCI's two-month volume-weighted average price of $2.54 but only a 4 per cent premium to the previous closing price of $3.17, as BCI shares rose sharply shortly before the proposal was announced.
Its share price responded by rising to as high as $3.27.
But on Tuesday, Regent Pacific made a surprise announcement that "in good faith" it had formed the view BCI's largest shareholder Consolidated Minerals, controlled by Ukrainian billionaire Gennady Bogolyubov, would prevent the transaction by voting against it. That view was based on a US business website article on February 14 that claimed Bogolyubov was "flatly opposed" to the transaction and had the votes to defeat the proposal.
Regent Pacific claimed ConsMin had declined to clarify the position so it had accepted ConsMin's "publicly stated position" and decided, after receiving a "specific written legal opinion from Australian legal counsel" to withdraw Regent Pacific's recommendation of the BCI transaction and to terminate, effective immediately, the scheme implementation agreement (SIA) and proposed transaction.
ConsMin, which has a different version, said yesterday that it had responded last Thursday to a written request from Regent Pacific for "unequivocal support" for a takeover of BCI and had told the group that ConsMin had not yet made a decision on the proposal because it was waiting on the explanatory memorandum and independent expert's report.
"Without this information it was not possible for the company to make a fully informed decision", Bogolyubov said.
It's difficult to disagree with that proposition. Bogolyubov called for Regent Pacific to give full disclosure as to why it sought to terminate the proposal.
ConsMin clearly considers there is a hidden agenda and the purported reason for calling off the offer is not the real reason.
If this was a takeover bid Regent Pacific would almost certainly fall foul of section 631 of the Corporations Act, which makes it an offence to fail to proceed with a takeover bid within two months of the offer's announcement and prohibits publicly proposing a bid, knowing it will not be made, or is reckless as to whether it will be made, sometimes referred to as a "bluffing bid". Parties who suffer losses through the failure to comply can sue for damages.
It is not a contravention of section 631 if, at the time of a bid proposal, circumstances existed that the proposed bidder did not know of and could not reasonably be expected to know of, or if after the announcement a change in circumstances occurred. It is doubtful either of those defences would apply to this situation.
BCI's share price fell 39c yesterday, or almost 14 per cent, to $2.43 in reaction to the claimed termination of the takeover, which shows that people who bought in reliance of the takeover announcement face losses.
Although there is no equivalent of section 631 in the Chapter 5 provisions covering schemes of arrangement, the Australian Securities & Investments Commission is indifferent to whether changes of control transactions take place via takers or scheme of selective capital reduction, provided the target holder receives all information required to make an informed decision and has equivalent investor protections to those under the takeover rules.
By analogy it is arguable that the policy of section 631 should apply to schemes and that parties ought not be able to make "bluffing schemes" with impunity.
While the courts have the primary carriage in relation to schemes, the panel also a role.
Section 611(17) exempts schemes of arrangements from the takeover provisions, but a "bluffing scheme" arguably is not a bona fide scheme and exemption therefore does not apply.
On that argument, BCI may have grounds to apply to the panel for a declaration of unacceptable circumstances and an order requiring Regent Pacific to proceed with the proposal.
A scheme needs approval of 75 per cent by value and 50 per cent by number of those who vote.
Regent Pacific owns 19.9 per cent of BCI and cannot vote, but ConsMin owns 20.8 per cent, which means it has just over 25 per cent of available votes and is in a position to unilaterally reject the proposal if it wishes.
That should have been apparent to Regent Pacific and it is surprising it didn't sound out ConsMin before announcing the offer.
It is possible Regent Pacific was lulled by the fact BCI director Glenn Baldwin is also a ConsMin director and he recommended the proposal. In its statement to the Hong Kong Stock Exchange, Regent Pacific noted the BCI board "including Glenn Baldwin" had recommended shareholders vote in favour, in the absence of a superior proposal.
But Regent Pacific was quickly required by ConsMin to issue a clarification pointing out Baldwin had voted only in his capacity as a non-executive director of BCI and his recommendation was in no way representative of how ConsMin may or may not vote.
That should have told Regent Pacific something. Contrary to Regent Pacific's contention, Bogolyubov was not quoted as saying he was flatly opposed to the offer: that was a claim made by the website, but it did quote criticisms of the proposal by ConsMin executive Oleg Sheiko.
But ConsMin was quite within its rights to decline to unilaterally support the proposal before it had received the explanatory memorandum and expert's report.
The purpose of such reports is to enable shareholders to reach an informed decision.
Moreover, ConsMin could have lost its flexibility had it made such a public announcement because it may have been regarded as a "truth in takeovers" commitment to which it was bound. No doubt that's why Regent Pacific wanted such a statement.
Regent Pacific claims the withdrawal of its board recommendation for the BCI proposal allows the company to terminate the SIA unilaterally, which it purports to have done. When the proposal was announced, a summary of the SIA was provided that included a list of termination rights and the payment by Regent Pacific of a reverse break fee of $500,000 if Regent Pacific shareholders failed to approve the company proceeding with the proposal or its financing fell away.
Either party can terminate if the BCI board publicly changes its recommendation but nowhere does it say Regent Pacific has the right to terminate if the board withdraws its recommendation.
The full details of the SIA should be required to see whether it supports Regent Pacific's claim.
Regent Pacific maintains it is still committed to becoming Hong Kong's next major mid-tier mining house in the Asia-Pacific region and it will continue to pursue growth by acquisition of small to medium-sized companies.
But if its performance in relation to BCI is anything to go by, FIRB should think seriously about whether it would be prepared to grant foreign investment approvals for the company to acquire any Australian companies.
BCI Price at posting:
$2.44 Sentiment: Hold Disclosure: Held
(20min delay)