Australian investors are urging the Takeovers Panel to prevent Chinese companies from placing conditions on bids that make them subject to getting approval from regulators within China. The push follows Chinese company Hanlong Mining’s move to cut the price of its offer for iron ore explorer Sundance Resources because it said the National Development and Reform Commission (NDRC) would only approve the deal if it got a “reasonable acquisition price”.
Hanlong’s revised offer has sparked heated debate about the merits of Chinese investment in Australia.
Opposition Leader Tony Abbott has said it would “rarely” be in Australia’s interests to allow a Chinese state-owned enterprise to invest here. The Australian Financial Review has reported local fund managers including EIM Capital and Phillip Resources Fund have threatened not to back any mining companies with a Chinese company on their register in the wake of Sundance.
The United Kingdom Takeovers Panel is at odds with its counterparts in Australia, the United States and Canada in that it does not allow Chinese companies to make bids conditional on getting Beijing’s seal of approval. The UK panel does not consider there is enough of a distinction between corporate entities and regulators to prevent them from using Chinese approvals as a “free option” to renegotiate price.
Sundance chairman George Jones told the Financial Review that Hanlong’s behaviour demonstrated why Australia should match the UK’s system.
“I am aware of the UK system whereby Chinese companies get their approvals first and I believe that given what has evolved with the Sundance takeover there appears to be a lot of relevance to examining whether that should apply in Australia. I am sympathetic to the idea,” Mr Jones said.
Lawyers for Hanlong argue that the company is sufficiently distinct from the Chinese government because it is a private entity, rather than a state-owned enterprise (SOE).
“Hanlong is not a state-owned enterprise and actually what we’ve witnessed is a very arm’s length relationship between NDRC and Hanlong,” King & Wood Mallesons partner David Friedlander said.
“There’s no sense whatsoever that they’ve been in their back pocket or anything like that and NDRC have to approve both the transaction and the financing of the transaction by CDB. In fact two teams from NDRC are involved so that in itself is very interesting.
“When you’ve got an SOE there is often discussion about a blurring of the lines. But interestingly, what we’ve witnessed is that NDRC is just very careful.”
Some market sources have cast doubts over whether the move to reduce its offer price was actually driven by the NDRC or a result of Hanlong and its advisors at Merrill Lynch moving to seize on the recent downturn in the iron ore and equity markets.
“I don’t think it’s nefarious and it’s certainly not coming from a Beijing side, if the individual firm wants to pull out of a deal that’s its prerogative I guess, but it’s certainly not coming from a Beijing side,” former Australian ambassador to Beijing and executive director at boutique corporate advisory firm Riverstone Advisory, Geoff Raby, said. “Through my role with Riverstone Advisory that’s not my understanding of how the NDRC approves projects.”
Another junior iron ore explorer, Flinders Mines, was forced to abandon a scheme of arrangement whereby Russia’s Magnitogorosk Iron and Steel (MMK) was set to acquire it for 30¢ a share after a minority shareholder in the steelmaker appealed to a Russian court to block the $544 million acquisition on the basis that it could jeopardise her investment.
Investors have slammed the Takeovers Panel for failing to investigate the deal’s collapse, amid suspicions that MMK was behind the minority shareholder’s approach to the courts and delays in having the matter heard which caused the companies to miss the deadline for approving the scheme implementation agreement.
“The combination of outdated statutory law and a bizarrely passive takeover panel creates a flawed takeover regime that has gaping holes in it allowing companies (particularly non-Australian acquirers) to mock the self-assured description that ASIC and the Panel give of their roles,” Senrigan Capital founder Nick Taylor said. “We’ve seen other regulators act with much more force in much less obviously abusive scenarios.”
“There is little prospect for disrupting the deliberate and motivated abuse of a system where the ossified and sometimes conflictual statutes of the companies act combines with the reluctant and under-empowered normative force of the takeover panel to allow abuses such as the MMK/Flinders debacle.”
Mr Taylor, whose Hong Kong-based hedge fund also holds shares in Sundance Resources, said getting rid of the conditions would limit companies’ ability to blame regulators for wriggling out of deals.
“In allowing conditions precedent that have some chance of subjective control by the acquirer, it is only reputation which will keep companies from exercising that subjective control when it suits them, ” Mr Taylor said.
He said the move by Hanlong to cut its 57¢ a share offer for Sundance whilst blaming the NDRC could damage China’s reputation as a global M&A player and contradicted China’s recent efforts to make clear the lines between companies and the government.
“However, using regulatory approvals to fade price does have a potentially long-term impact on China’s reputation as a bidder [one which until now in terms of walk-aways and price cuts is largely unblemished], which is the only external cost to Australia’s flawed system – unfortunately is an internal cost too, beyond the present losses to shareholders: in the future it will prevent price tension in corporate transactions,” he said.
The Australian Takeovers Panel declined to comment but it is understood that the body – which regulates corporate control transactions for locally listed companies – is watching the Sundance saga closely to determine whether it needs to adopt a more prudent stance with respect to Chinese investments.
A spokesman for Treasurer Wayne Swan said: “The government’s policy of screening all direct investments by government-related entities and our national interest guidelines have proven highly effective in striking the right balance between ensuring proper scrutiny and supporting the investment which is critical to our capital-hungry economy. The greatest threat to our settled and effective foreign investment framework is Tony Abbott’s incredible decision to hand Coalition foreign investment policy over to Barnaby Joyce.”
Hanlong Mining also declined to comment.
Sundance shares remain suspended from trading at 33.5¢, with an announcement expected this week about a new bid price.
SDL Price at posting:
33.5¢ Sentiment: None Disclosure: Held
