Swimming downstream can be more difficult than it sounds: the practical operation of the downstream acquisitions exception
Gilbert + Tobin David Clee and Alex Kauye
Australia April 20 2011
"""As we know, Australia has come through the global financial crisis better than most and we are in the midst of another resources boom. These happy coincidences have resulted in some instances where a key asset of a foreign company has been its controlling or substantial shareholding in an Australian listed company. The bid by ACS for Hochtief, which has a majority shareholding in Leighton Holdings, and more recently the proposed bid by CGNPC Uranium Resources for Kalahari Minerals plc, which has a controlling shareholding in Extract Resources, are two high profile examples of such an occurrence. These bids have brought a focus on the so-called downstream acquisitions exception to the 20% takeover prohibition. This note considers some of the key issues which arise in connection with the practical operation of that exception.
The 20% takeover prohibition
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Extract Resources: the Chinese bidding for an English company with an African name to get an Australian?
On 7 March 2011, CGNPC-URC and Kalahari made a joint announcement regarding a possible recommended cash takeover of Kalahari by CGNPC-URC.
CGNPC-URC is a state owned enterprise in the People's Republic of China. Kalahari is listed on the Alternative Investment Market of the London Stock Exchange ("AIM") and on the Namibian Stock Exchange. Kalahari's key asset is its 43% holding in Extract Resources Limited, a company listed on ASX and the Namibian and Toronto exchanges.
Neither of the exchanges on which Kalahari is listed has been approved by ASIC for the purposes of the downstream acquisitions exception. Accordingly, the acquisition of a relevant interest in 43% of the voting shares in Extract that would result from the takeover of Kalahari would, in the absence of ASIC relief, breach the 20% rule.
In the joint announcement regarding the deal, CGNPC-URC said that it would seek ASIC relief and foreshadowed that such relief may require it to make a downstream bid for Extract. The announcement also lists certain pre-conditions that would be attached to any bid by CGNPC-URC offer for Kalahari, a number of which relate to the operation of Extract's business. This suggests that acquiring control of Extract (which ASIC would likely consider to be delivered by a 43% shareholding) would be the main (or at least significant) purpose of a bid for Kalahari.
As at the date of this article, no public announcement has been made as to whether ASIC has granted CGNPC-URC relief from the 20% rule. However, guidance can be taken from ASIC's position on the various control transactions proposed in 2007/2008 in respect of Anzon Energy (then listed on AIM) and its 53% owned subsidiary, Anzon Australia (then listed on ASX). From these examples it can be expected that ASIC will require CGNPC-URC to make a downstream bid for Extract under which Extract shareholders are offered cash consideration for their shares of equivalent value to that offered to Kalahari shareholders. The question is ? will this be acceptable to CGNPC-URC? This will likely fall on whether CGNPC-URC is prepared to risk ending up as a controlling shareholder of an ASX-listed company. That is, ASIC is unlikely to allow the downstream bid for Extract to be subject to a minimum acceptance condition, as ASIC is of the view that there should be a reasonably high level of certainty that a downstream bid will become unconditional if the upstream bid is successful.
Accordingly, any restricted relief granted to CGNPC-URC by ASIC will likely require that, if all necessary regulatory approvals for the downstream bid for Extract are obtained and the upstream bid for Kalahari becomes unconditional, CGNPC-URC must declare the downstream bid unconditional, subject only to Extract having done something to trigger a prescribed occurrence (eg issuing securities or disposing of a material asset).
A final comment
As noted by the Takeovers Panel in Cape Lambert MinSec Pty Ltd [2009] ATP 12, ASIC's regulatory guide on downstream acquisitions addresses the law as it stood at July 1996 and as such would benefit from updating. One way it could be updated is to provide restricted relief which, instead of requiring a downstream bid, allows the upstream bid to proceed on the condition that the bidder sells down its stake in the downstream company to less than 20% within a set timeframe (and to not vote shares in excess of 20% in the meantime).""""""
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