another link - academic this time on Schemes or Arrangement vs...

another link - academic this time on Schemes or Arrangement vs Takeovers...

http://www.lawyersweekly.com.au/articles/92/0c040692.asp

Takeover makeover: it’s time

A fresh approach to takeovers regulation is needed in Australia, argues James McConvill

With mergers and acquisitions activity picking up in recent times (the Toll Holdings bid for Patrick; BHP Billiton’s snatch of WMC), we should pause to assess current takeovers regulation in Australia.

In their book, Schemes, Takeovers and Himalayan Peaks (Sydney University, 2004), Tony Damian and Andrew Rich, both from Freehills, suggest law reform proposals to secure the future of the scheme of arrangement procedure, and ensure that it remains a “true alternative to the takeover bid”.

Damian and Rich’s main reform is the repeal of section 411(17) of the Corporations Act, the “anti-takeover avoidance provision”, which dictates that a court overseeing a takeover through “scheme of arrangement” must reject the arrangement if it is designed to avoid the formalities of a full takeover bid, regulated by Chapter 6 of the Act.

Using a scheme of arrangement to facilitate a takeover remains contentious, because only 75 per cent of voting shareholders (including 50 per cent or more of the number who attended the scheme meeting) need to approve the takeover for the shares of the remaining shareholders to be acquired. For a full takeover bid under Chapter 6 of the Act, the relevant threshold is 90 per cent of voting shares.

In a new book released this month, Coming Down the Mountain: Rethinking Takeovers Regu lation in Australia (Sandstone Academic Press, 2006), I argue that schemes of arrangement should no longer be used for public company takeovers. Rather than having a dual system of schemes and formal takeover bids under Chapter 6 of the Cor porations Act, I argue the chapter should act as a self-contained takeover code.

Schemes of arrangement have been used for takeovers for their many commercial benefits, particularly because the acquiring company can be assured of 100 per cent control by a certain date if a scheme is approved by target company shareholders. But Chapter 6 can be utilised to provide all these benefits. Moreover, Chapter 6 can minimise the cost and time of takeovers due to a court overseeing each stage of the scheme process, as required by Pt 5.1 of the Act.

This is possible because of one little-known provision within Chapter 6: section 611(7). Section 611(7) allows target company shareholders to ‘opt out’ of the formal Chapter 6 bid procedure if a takeover proposal is approved by these shareholders in advance.

The express wording of section 611(7), however, limits the scope of the provision because it excludes “interested shareholders” from voting on the takeover proposal. That includes shareholders involved in the proposal to takeover, and shareholders whose shares are sought to be acquired – potentially ruling out a large proportion of shareholders.

Section 611(7) can, however, be modified by the corporate regulator ASIC to enable “interested shareholders” to vote. If “interested shareholders” can vote, obviously section 611(7) has enormous potential as an alternative to a formal Chapter 6 takeover bid.

ASIC can modify section 611(7) in response to an application to do so under section 655A of the Act. Whilst section 611(7) is not generally understood as a mechanism facilitating ‘opting out’ of Chapter 6, making the regulation of takeovers more efficient and flexible, I believe this is exactly what it should be.

A modified section 611(7) would not adversely affect investor protection and confidence. The Takeovers Panel would continue to have jurisdiction over corporate control arrangements brought in under a modified section 611(7), and could provide a declaration of “unacceptable circumstances” if shareholder rights are trampled. Those would include the right to full and frank disclosure by the acquirer about the purpose and effect of the takeover, before allowing section 611(7) to be modified.

James McConvill is a senior lecturer at La Trobe Law School, Melbourne, and principal of The Corporate Research Group