Takeover Panel Publishes Reasons, page-8

I get the feeling that some shareholders haven't read all the panels reasons. Or didn't read them all or didn't understand them as there is a lot of legalize. I'm going to copy and paste the things that most concerned me about BL and PRCs actions and how BL betrayed shareholders and looked after PRC instead of us..

There wasn’t just a few mistakes or typos by Bl or PRC. These guys repeatedly did things to push their deal through at the cost of other shareholders. Then once caught…they tried it again and a different way. The Take Over Panel wasn’t impressed. Read the past 30 ruling they’ve made. Companies JUST DON’T talk to a enforcement agency that way.

This isn’t a case of listening to both sides and going with your gut. You’ve been told the TRUTH and FACTS of the matter. You just need to read them. It's just common sense now.

Important to understand...these aren't my or anyone’s else’s thoughts. These are legal FACTS:
(you can see my notes above for match ups and my comments.)

Facts

1. On 21 February 2016, the Board approved the execution of a term sheet with PRCM in respect of the debt facility and the underwriting facility for a non-renounceable rights issue at an issue price capped at $0.03 per share. The term sheet required ABM to pay PRCM a break fee if ABM did not proceed with the transactions contemplated by the term sheet.
2. On 22 February 2016, the term sheet between PRCM and ABM was executed.
3. On 7 March 2016, ABM’s management recommended to the Board that ABM accept an amended PRCM Proposal. The PRCM Proposal was amended, among other things, to increase the issue price to $0.04 per share.

The Debt Facility provided for:

1. PRCM to receive an upfront fee of 10 million 5-year options with an exercise price of $0.058, equivalent to 1.8% of ABM’s issued capital on a fully diluted basis and
2. an interest rate of 15% per annum of the drawn amount, payable in cash or shares of ABM (at ABM’s discretion), which if paid in shares will be equivalent to 2.3% of ABM’s issued capital on a fully diluted basis.

Application
Declaration sought

1. By application dated 10 March 2016, APAC sought a declaration of unacceptable circumstances. APAC submitted that, among other things:
   1. the Rights Issue had structural features that failed to comply with the principles in Guidance Note 17 “Rights Issues” and the policy objectives in s602
   2. the Debt Facility was subject to a number of conditions and there was no disclosure of the risks associated with the Debt Facility, including if the Rights Issue closed but PRCM was not obligated to advance the debt funds because the conditions were not satisfied

Preliminary Submission

1. ABM made a preliminary submission that the Panel not conduct proceedings because, among other things, ABM had a genuine need for funds, the Board had sought legal and financial advice on its obligations and had acted in accordance with Guidance Note 17, and APAC’s application had been made to disrupt ABM’s funding endeavours ahead of the s249D meeting.

Rights Issue
Potential control impact of the Rights Issue

1. In this case, there is a potential for the Rights Issue to have a substantial impact on the control of ABM. If no other shareholders take up their rights, PRCM would obtain voting power of up to 49.91% of ABM under the sub-underwriting arrangement. ABM submitted that it anticipated take up under the Rights Issue to be reasonably low. Accordingly, it is reasonably likely that the shortfall, which will flow through to the underwriter and then the sub-underwriter, may be substantial.

1. Guidance Note 17 provides that underwriting or sub-underwriting by a major shareholder does not, of itself, give rise to unacceptable circumstances. However, “greater care is needed to mitigate the potential control effects if a related party or major shareholder underwrites (sub-underwrites). The failure of directors to properly canvass professional underwriters or seek out alternatives to a related party or major shareholder underwriter (sub-underwriter) may increase the likelihood of unacceptable circumstances.”⁹

1. ASIC submitted that, given the potential for PRCM to acquire up to 49% of ABM as the sole sub-underwriter under the Rights Issue, ABM should have taken greater care and approached alternative underwriters in order to seek to mitigate the potential control effect of the proposal rather than simply engage a party recommended by PRCM.

1. ABM was advised by its legal adviser on several occasions that in order to minimise the control issues associated with the PRCM Proposal ABM should offer its two other major shareholders the opportunity to participate in the underwriting. ABM’s legal adviser also said that professional underwriters (in addition to Treadstone who at the time was PRCM’s proposed underwriter¹²) also be offered the opportunity to submit a proposal to underwrite the rights issue.
2. We asked ABM whether it had canvassed other professional underwriters or sought out alternative underwriters and sub-underwriters to Key Pacific and PRCM. ABM submitted that it had engaged with other funding sources including APAC, Ochre and Hartleys but “ultimately came to the conclusion that the alternatives did not offer the certainty of raising the required funds that was offered by the PRCM proposal”. While these persons were contacted to provide separate funding proposals, it appears no attempt was made to see if any of them were interested in participating in the PRCM Proposal. Further, even though they were contacted, it seems to us that little opportunity was afforded to them to develop an alternative proposal.
3. For example, at one point ABM told its legal adviser that, based on the legal adviser’s advice, it had invited APAC to submit a financing proposal. In response, ABM’s legal adviser told ABM that its advice was not about “simply substituting a control orientated proposal from one shareholder with a similarly orientated proposal from another shareholder”but rather seeking a proposal that modified any control effect (such as by seeking joint underwriting or including a shortfall facility).
4. In a memo dated 3 February 2016 from Mr Lambert to the Board (excluding Mr Ferguson), Mr Lambert noted that the PRCM Proposal was conditional on PRCM being the sole sub-underwriter and “eyond asking if they would entertain APAC being a sub-underwriter, which was flatly refused, I have not pushed Pacific Road”on this point. Mr Lambert also reported that under the APAC Proposal, APAC would sub-underwrite through a broker and had spoken to Hartleys who would allocate as much of the sub-underwriting to its clients as it wished. However, having been rebuffed by PRCM, APAC had indicated that it would not work alongside PRCM if Hartleys’ brought in PRCM as a sub-underwriter.
   [*]In our view, ABM appeared to be hamstrung by the PRCM Proposal; there was either no capacity to seek out other underwriters or sub-underwriters because of the terms of the PRCM Proposal or it was not realistic to expect that any underwriter or sub-underwriter would participate in the PRCM Proposal based on its terms.
   [*]While ABM ultimately appointed a professional underwriter for the Rights Issue, that underwriter was identified by PRCM. By its own submission, Key Pacific was not appointed to act as investment adviser or to undertake any commercial role; its role was to facilitate the PRCM Proposal. As such, Key Pacific did not consider any other potential sub-underwriters.
   [*]In InvestorInfo Limitedthe Panel said of attempts to find unrelated underwriters and sub-underwriters “this indicates that someone who has no collateral involvement is prepared to take the risk of a shortfall; such a person will seek to reduce that risk by seeking to increase the likelihood of shareholders taking up their rights and by attempting to lay off their risk to other investors through sub-underwriting”.¹³
   [*]Other than negotiating the underwriting agreement with Key Pacific, there was no evidence of any engagement between Key Pacific and ABM. We view the arrangement with Key Pacific as merely a “pass-through” arrangement that would result in PRCM taking up all of the unsubscribed shares. In appointing Key Pacific, ABM knew that it was not engaging an underwriter that would seek to pass the risk to several sub-underwriters such as a financial institution or stockbroker would ordinarily seek to do.

1. A professional underwriter wanting to offload risk would also typically be concerned with the price of the rights issue and would be involved in finding a price at which sub-underwriters would be interested. ABM did not have an independent financial advisor providing it with advice regarding structuring the rights issue¹⁴ and we have no evidence that pricing for purposes of finding underwriters and sub-underwriters was tested with any financial institutions or stockbrokers.

1. We accept that joint participation in the sub-underwriting by PRCM and APAC appeared not to be an option, but we are not satisfied that ABM made any attempt, or any genuine attempt, to find additional sub-underwriters or to accommodate an institution that could do so. This was against the advice of ABM’s own legal advisers. ABM sought separate funding proposals from Ochre and Hartleys but no evidence was provided that these entities or any other persons were approached in respect of underwriting the PRCM Proposal. Similarly, no evidence was provided that ABM offered any shareholders the opportunity to participate in the underwriting of the PRCM Proposal.

1. We consider PRCM is taking a fee for no risk and is accruing a benefit not available to other ABM shareholders. This heightens our concern about the underwriting arrangements.

Debt Facility

1. We understand that by having around one third of ABM’s required funds raised through debt, this reduced the capital amount raised and consequently the potential control effect of a much larger rights issue. However, the Debt Facility itself raised concerns.

1. In considering the control implications of a rights issue, the Panel has stated that it is “not primarily concerned with the motive of the issuer, but whether the effect, or likely effect, of the rights issue does not inhibit the principles set out in s602”.²⁰A number of things leave us with an impression that the Rights Issue, coupled with the Debt Facility, was not structured in a way that genuinely mitigated the potential control effectincluding:

1. the early fulfilment of at least some of the conditions precedent to the PRCM Proposal, including the resignation of the Chairman and the appointment of Mr Lambert as full time Managing Director (notwithstanding the separate reasons for those decisions)
2. the failure to develop other funding proposals
3. the underwriting not being a typical underwriting
4. the Rights Issue being structured in a way that was unattractive for underwriters
5. the reluctance to negotiate the sub-underwriting fee
6. the resistance to testing price despite the expected low participation
7. actions taken only to demonstrate compliance with the form over the substance of Guidance Note 17 (such as in respect of canvassing alternative proposals)²¹and
8. the granting of a security interest over the assets of ABM to PRCM under the Debt Facility in circumstances where PRCM could potentially obtain control of 49.91% of ABM under the Rights Issue.

1. In exploring options to restructure the Rights Issue, ABM submitted that it had discussions with Hartleys and Patersons Securities Limited (Patersons) regarding opportunities to underwrite the Rights Issue but neither was willing to underwrite the Rights Issue “in these circumstances”.

1. With its submissions, APAC provided a letter from Hartleys dated 31 March 2016 indicating that Hartleys was willing to underwrite a $14 million renounceable rights issue at a price of $0.0225 per share conditional on a sub-underwriting agreement with APAC being executed for the full amount of the rights issue, less any other sub-underwriting by parties introduced by Hartleys. APAC submitted that ABM’s failure to attract a genuinely independent broker to underwrite the Rights Issue was a result of ABM’s refusal to “meet the market”in relation to a sufficiently attractive price.

Order

1. C) it gives any person to whom the proposed order would be directed, the parties and ASIC an opportunity to make submissions. This was done on 4 April 2016. APAC, ABM, PRCM and ASIC each made submissions and rebuttals.

1. ABM submitted that our order would create significant hardship for ABM by preventing it from obtaining funds that it requires and that the requirement for funds would become more urgent as a result of requiring ABM to restart its funding process. It submitted that its financial position was dire and that effectively ABM would be forced to do a capital raising that was more dilutive to shareholders. For these reasons, ABM submitted that the order unfairly prejudiced ABM and its shareholders. PRCM also made a submission that ABM’s financial position was “parlous”.

1. We had previously been told by ABM that it expected to have available cash in the near term. An urgent need for funds was not relied on here to explain ABM’s actions and was not reflected in the Revised Rights Issue.
2. ABM submitted that to mitigate the adverse effects of the order we should allow the Revised Rights Issue to proceed or the Revised Rights Issue at a lower price as determined by us to proceed.
3. PRCM submitted a list of alternative orders that could be made to remedy the unacceptable circumstances, including ordering that the Rights Issue be renounceable, be at a lower price, include a shortfall bookbuild, that APAC be offered a sub-underwriting allocation pro rata to its shareholdings and PRCM not charge a sub-underwriting fee on its entitlement.