Downstream relevant interests in the Takeovers Panel decision of Southern Cross Media Group Limited

The recent Takeovers Panel decisions regarding downstream relevant interests in Southern Cross Media Group Limited confirm the Panel’s approach to inadvertent breaches of the 20% rule in s606 and provide a reminder for market participants that an honest mistake can still lead to unacceptable circumstances.

In brief

• The Takeovers Panel has made a declaration of unacceptable circumstances in relation to a pre-bid stake in Southern Cross that was partly acquired in breach of the 20% rule.
• The breach was inadvertent and came about because of a downstream relevant interest in Southern Cross. However, this did not convince the Panel that a declaration should not be made, and the Panel was of the view that greater care should have been taken.
• The Panel initially made an order that the shares acquired in breach of the 20% rule be divested, but this was set aside on review in favour of the bidder giving undertakings that lessened the control impact of the relevant shares.

Background

In June 2023, ARN Media Limited announced that it had acquired a 14.8% interest in Southern Cross. ARN acquired part of its interest from Allan Gray Australia Pty Limited, a 21.71% shareholder in Southern Cross. Allan Gray retained a 16.44% shareholding in Southern Cross following ARN’s acquisition.

A few months later in October 2023, ARN and Anchorage Capital Partners announced a non-binding indicative offer to acquire 100% of Southern Cross by way of a scheme of arrangement.
Hot on the heels of ARN and Anchorage’s NBIO, another shareholder in Southern Cross, Keybridge Capital, made an application to the Takeovers Panel for a declaration of unacceptable circumstances in relation to the affairs of Southern Cross.

Keybridge submitted that, at the time of ARN’s 14.8% acquisition from Allan Gray (amongst others), Allan Gray also had a holding of just over 20% in ARN. As a result of Allan Gray having a holding above 20% in ARN, Allan Gray was deemed under s608(3)(a) of the Corporations Act to have a downstream relevant interest in all securities held by ARN, including ARN’s newly acquired shares in Southern Cross. Consequently, when ARN acquired its 14.8% Southern Cross stake, Allan Gray’s voting power in Southern Cross increased from 21.71% to 31.24% (being the aggregate of ARN’s 14.8% and Allan Gray’s own remaining interest of 16.44%).

Keybridge submitted this represented a breach of the 20% rule by ARN as ARN’s acquisition of shares in Southern Cross caused someone else, Allan Gray, to increase their voting power in Southern Cross beyond the 20% threshold. It also led to a breach of the substantial holding disclosure rules in s671B by Allan Gray since Allan Gray had not disclosed its full 31.24% voting power in Southern Cross.

The Panel’s decision

The facts outlined above were not disputed by the parties. ARN accepted that its 14.8% acquisition had caused Allan Gray to increase its voting power in Southern Cross above 20% and Allan Gray accepted that it had failed to correctly disclose its voting power of 31.24%. Allan Gray also disclosed that, after increasing its voting power to 31.24%, it had made some small acquisitions of Southern Cross shares which also represented a breach of the 20% rule (not being aware at the time that its voting power had increased to 31.24%).

Allan Gray submitted that its breaches of the substantial holding provisions and the 20% rule were inadvertent because it was not aware that its holding in ARN had crept above 20% and therefore it was not aware that it had acquired a downstream relevant interest in ARN’s shares in Southern Cross. Its holding in ARN had gone above 20% because of a gradual reduction in the number of ARN shares on issue as ARN had been conducting on-market buy backs. Even though the buy backs were public, the impact had not been picked up by Allan Gray’s compliance systems.

Similarly, ARN submitted that its breach of the 20% rule was inadvertent and technical. It said it was acting based on erroneous or outdated ARN share register information at the time of making its 14.8% acquisition in Southern Cross and had not appreciated that Allan Gray’s holding in ARN was more than 20%. In any event, ARN argued that the contravention was of little impact and had not influenced the control or potential control of Southern Cross.

The Panel did not find either party’s submissions convincing.

In its reasons for decision, the Panel noted that a contravention of the Corporations Act does not necessarily lead to a declaration of unacceptable circumstances. It also noted that a contravention of the 20% rule in s606, though it is more likely to be unacceptable than a breach of other provisions given the central importance of that provision to the takeovers regime, may not be unacceptable if the contravention was ‘an honest and accidental contravention’ and has not had any ‘relevant adverse effect’.

In this case, the Panel said that ARN should have exercised greater care in ascertaining Allan Gray’s voting power in ARN, particularly in circumstances where it knew Allan Gray’s voting power was close to 20% and where ARN was conducting buy backs that had the potential effect of increasing the voting power of remaining ARN shareholders. Likewise, it was unacceptable that Allan Gray had not identified that its holding in ARN had crept above 20%. As an experienced market participant and AFSL-holder, Allan Gray should have had robust systems and procedures in place to ensure compliance. This meant that, while the Panel took account of the submissions that what had occurred was essentially an honest mistake, this should not lead to a finding that the circumstances were not unacceptable.

The Panel also disagreed that there had been no or little impact on the control or potential control of Southern Cross. As a result of the breach, ARN had acquired an additional 6.83% beyond its lawful entitlement (after accounting for Allan Gray’s permitted 3% creep in Southern Cross). Without this, ARN could not have acquired a greater than 10% stake in Southern Cross, which is sufficient to block compulsory acquisition. It also took a block of shares out of the market at a time when Southern Cross was effectively ‘in play’. This meant that ARN’s acquisition of the additional 6.83% was likely to give ARN a competitive advantage with respect to any control transaction.

On that basis, the Panel considered there was enough reason to make a declaration of unacceptable circumstances.

ARN applied for a review of the declaration, but the review Panel affirmed the initial Panel’s views.

Orders and key takeaways

The initial Panel ordered that the 6.83% acquired by ARN in breach of the 20% rule be vested with ASIC for sale. As Allan Gray’s holding in ARN had reduced to below 20%, ARN would be permitted to participate in the on-market sale of those shares by ASIC. Allan Gray gave undertakings that it would make corrective substantial holder disclosure and sell the small number of shares it acquired in breach of s606.

Although the review Panel affirmed the initial Panel’s declaration of unacceptable circumstances, it set aside the initial Panel’s divestment order. The review Panel considered that effect of the 6.83% on the control of Southern Cross could instead be sufficiently ameliorated if ARN was required to:

• vote the 6.83% stake in favour of a competing scheme of arrangement that was recommended by Southern Cross;
• accept the 6.83% stake into a competing takeover if the acceptance would allow the competing bidder to obtain more than 50% of Southern Cross (in circumstances where ARN had not made a competing proposal that had been recommended by Southern Cross); and
• not otherwise dispose of or vote the 6.83% stake.

It goes without saying that bidders and other market participants need to be careful about downstream relevant interests that are deemed to arise under s608(3)(a). As the Panel noted in its reasons, the operation of this provision is well-established and generally well understood by the market.

Mistakes can happen though. In some situations, an inadvertent breach that does not have any adverse effect may be excused by the Panel. However, if the Panel feels sufficient care has not been taken (particularly by sophisticated market participants), then the parties involved risk a declaration of unacceptable circumstances and, potentially, the making of a divestment order or other orders restricting the exercise of rights attached to the relevant shares.