Takeovers Panel’s new rule on Standing

The Takeovers Panel has announced changes to its procedural rules. These are designed to shed light on whether a shareholder has standing to make an application to the Panel. This follows concerns about applications being made inappropriately.

In brief 

• The Panel has announced that it will require shareholders to explain how their interests are affected by the circumstances about which they are complaining.
• This will enable a more informed discussion about standing and will shed light on the motivations of shareholder applicants.
• The change is part of a broader consultation project being conducted to improve Panel processes with parties.

Standing

Everyone who follows the Takeovers Panel would know that the last 10 years has seen a steady increase in the number of applications to the Panel made by small shareholders seeking declarations of unacceptable circumstances. 

A number of factors are at play. The steps required to make an application are simple. There is an on-line form that can be completed very quickly. The filing fees are low (just $2,400). You don’t have to show a breach of the legislation, merely a breach of general principles (the ‘vibe’ to recall a famous Aussie movie). The Panel responds immediately with a media release highlighting the allegations. There is almost zero prospect of the applicant having to pay the costs of anyone else. And you don’t need to engage a lawyer. It’s nirvana if you wish to complain about something.

Many shareholder applications raise legitimate concerns about whether or not there is an efficient, competitive and informed market in a company’s shares or circumstances that are otherwise unacceptable. But there have also been concerns that applications have been motivated by a collateral purpose or personal grievance. That sort of application is an abuse of process and, apart from wasting time and money, detracts from a proper functioning market for control.

The challenge for the Panel is how to sort out these matters. Panel proceedings remain time-consuming and expensive for respondents, who would typically always need to engage an external law firm. And it is not ideal for the Panel executive nor the Panel members to be required to spend time on complaints that do not genuinely affect the market.

In an article published on the HSF website in November 2022 (click here), I suggested that one way to tackle this issue was for the Panel to consider in greater detail whether a shareholder has genuine standing to bring the application. 

The general standing rule in section 657C does not expressly give standing to shareholders. It only allows ASIC, the bidder, the target or “any other person whose interests are affected by the relevant circumstances” to make an application. A shareholder applicant has to fit into the last category.

I consider that the standing rule is deliberately strict to limit the Panel being used for tactical proceedings (consistent with the fundamental idea behind the Panel after the experience of the 1980s and 1990s, where litigation in the courts was a frequent occurrence in takeover bid tactics). I have felt that the Panel has been too tentative in dealing with this issue.

Subsequent to my 2022 article, the Corporations Committee of the Business Law Section of the Law Council of Australia made a submission to the Takeovers Panel saying that the issue of standing should be dealt with explicitly in the Panel procedural rules. I helped draft the submission.

Panel’s announcement

In January 2024, the Panel announced that it has accepted the Law Council’s submission and intends to change the procedural rules and the pro-forma Panel application to deal with the point. Accordingly, the pro-forma application now has a new item as follows:

How are the applicant’s interests affected by the circumstances? Provide details of how the applicant’s interests are affected by the relevant circumstances identified above pursuant to section 657C(2).

The Panel also intends to amend its Procedural Guidelines to explicitly reference standing as part of the Panel’s routine consideration as to whether it has jurisdiction to conduct proceedings in relation to the application. This amendment will be incorporated into the next issue of the Procedural Guidelines. 

The proposed changes to the Procedural Guidelines are being considered in connection with a broader project being undertaken by the Panel aimed at improving Panel processes with parties. The Panel executive will be in contact with law firms, investment banks, ASIC and other market participants in the next few months with a view to obtaining feedback on how the Panel could improve its processes with parties to ensure that disputes are resolved quickly and efficiently.

Comment

While the new item in the application form might appear to be a small change, I believe it will prove to be significant. 

The new rule will raise, for the first time, the question of standing in every matter before the Panel. That will force applicants (in particular, shareholder applicants) to think about the legislation and its policy and explain how the applicant is affected personally. That should shed more light on the applicant’s motivations.

A concern about a possible breach of the legislation should not, by itself, be a sufficient basis for an application. A shareholder applicant will need to show more.

I think that this is the right approach. It is ASIC’s job to enforce the law, not members of the public. A shareholder can always raise concerns with ASIC, who can assess how to deal with them. That is the overall scheme of the legislation.

Requiring a shareholder applicant to spell out how his or her interests are affected will enable the respondent (usually, the company itself) to argue the issue, when appropriate. 

Overall, the change will make it easier for the Panel to identify applications which should be declined as unmeritorious, an abuse of process or not in the public interest to be heard. That should ensure a better functioning market and a better functioning Takeovers Panel. 

Some issues remain. 

First, will the Panel deal with the standing issue as preliminary matter or will it be dealt with together with other issues in the proceedings? Dealing with it as preliminary matter would obviously save time and costs for all concerned.

Second, if a person holds shares worth a very small amount, say less than $1,000 or even less than $100, how can that person establish that his or her interests are affected sufficiently to justify standing? 

The legislation does not shed any light on this issue. But it seems to me that it would be an odd result if a person could simply acquire a single share in each listed company and then assert their interests were affected by anything undertaken which allegedly breaches a Chapter 6 principle. It is tempting to view anyone making an application over a few dollars of value as merely a troublemaker who must have an ulterior purpose. Dismissing those applications strikes me as being in the public interest.

We will need to wait for the Panel to deal with these issues.