Takeovers Panel declines to make a declaration of unacceptable circumstances in relation to the affairs of Locality Planning Energy Holdings Limited

In brief

• This Panel application concerned the acquisition of shares in Locality Planning Energy Holdings Limited by two of its directors and a professional fund manager following announcement of an off-market takeover bid by River Capital Pty Ltd but before the release of the target’s statement.
• The application was brought by River Capital who submitted that the directors and the fund manager were associates and (among other things) the acquisitions involved breaches of the 20% rule. 
• The Panel ultimately found that there was not enough material to establish an associate relationship. 
• Although the Panel did not venture into the question of whether the share buying actions of the target directors may have constituted insider trading, the Panel expressed significant concerns about the timing of the trades.

Background

On 16 April 2024, Melbourne based investment firm River Capital Pty Ltd (River Capital) announced its off-market takeover bid for the shares in ASX-listed company Locality Planning Energy Holdings Limited (Locality). 

The board of directors of Locality were Mr David Jarjoura, Mr Stanislav (Stan) Kolenc and Mr Simon Tilley. Prior to the launch of the bid, River Capital had acquired a pre-bid stake of 19.75%. The bid was subject to several conditions, including a 90% minimum acceptance condition. 

On the day that the bid was announced, the board of Locality announced that shareholders should take no action in respect of the bid. On 24 April 2024, Locality released a further announcement stating again that shareholders should take no action and that each of the directors in their personal capacity considered the bid undervalued Locality and intended to reject the bid. That announcement also stated that the directors together held 19.65% of Locality shares. 

The target’s statement was released on 16 May 2024. However, between 24 April 2024 and 22 May 2024, Mr Kolenc (directly and through an associated entity) acquired Locality shares on 2 different days, and Mr Tilley (directly and through associated entities) acquired Locality shares on 5 different days. In two instances, the acquisitions occurred on sequential days. In addition, an entity called Boutique Capital Pty Ltd as trustee for Tectonic Opportunities Fund (Tectonic) acquired Locality shares on 10 different days. None of the acquisitions occurred on the same day. 

On 28 May 2024, River Capital brought an application seeking a declaration of unacceptable circumstances, submitting (among other things) that:

• The three directors were acting in concert in relation to the affairs of Locality pursuant to section 12(2)(c) of the Corporations Act and were therefore associates. It submitted that an inference could be drawn based on:

  • a shared goal or purpose, namely that “the purchases were part of a deliberate and coordinated effort to increase their shareholding”; 

  • common knowledge of relevant facts, namely the prospect of a competing bid; and 

  • actions which were uncommercial, namely Mr Tilley and Mr Kolenc having “elected to buy…shares at a significant premium to the undisturbed share price” and the approval of the acquisitions under the Share Trading Policy of Locality by the Chairman, Mr Jarjoura. 

• Tectonic and the Locality directors were acting in concert in relation to the affairs of Locality pursuant to section 12(2)(c) of the Corporations Act.

• The associations resulted in breaches of sections 606 and 671B of the Corporations Act because the directors’ collective voting power in Locality increased from 19.65% to 23.88% (and including the shares acquired by Tectonic, the parties’ collective voting power increased to 32.6%).

• The directors trading in the period prior to lodgement of the target’s statement in circumstances where material price sensitive information was subsequently disclosed in the target’s statement (discussed below) was relevant to the Panel’s overall consideration of whether the market for Locality shares and control of Locality was taking place in an efficient, competitive and informed market.

Locality submitted, on its own behalf and on behalf of the directors, that (among other things):

• Mr Tilley’s initial 12.13% interest represented a blocking stake given the 90% acceptance condition, and so the incremental increases had no bearing on the prospects of the bid. 

• The trading by Mr Kolenc and Mr Tilley occurred over a 4-week period in which on only 2 occasions did their acquisitions occur on sequential days. While each director was generally aware of the other’s intention to buy additional shares, beyond that they had no knowledge of specific acquisition plans and were only made aware when these were announced to the ASX. 

• On the issue of a potential association with Tectonic, while there were conversations between Mr Kolenc and Mr Haan (of Tectonic) during the relevant 4-week period, these were general discussions (which included a “general catch up”). Mr Kolenc submitted that at no time did he provide non-public price sensitive information or encourage the possibility of acquisitions by Tectonic. Mr Kolenc also stated that Mr Haan had not communicated any plans for Tectonic (or a related entity) to acquire Locality shares, although he did concede that they may have been prompted by a discussion between Mr Haan and Mr Kolenc on 6 May 2024.

• It was not reasonable to draw any inferences of association from Mr Kolenc and Mr Tilley trading on different days or from the timing of Tectonic’s trading and that the “basis on which to draw an inference is flimsy.” 

The Panel ultimately declined to make a declaration of unacceptable circumstances based on a lack of material presented before it and noting that sequential or concurrent buying of shares is not itself evidence of an association.

However, the Panel did express concern about the trading undertaken by the Locality directors during the period after the announcement of the bid and before the target’s statement was released. 

On this issue, Locality noted in its submissions that there was no ASIC or Panel guidance about target company director acquisitions or the timing of any acquisitions. However, the target’s statement which was released on 16 May 2024 foreshadowed updated guidance. The following day (on 17 May 2024), Locality announced that it had updated its guidance for a significant improvement in net profit. River Capital submitted that it was not until the release of the target’s statement on 16 May 2024, and a further ASX announcement on 17 May 2024, that the market was aware of the updated profit guidance. River Capital also submitted that the basis for the directors’ view that its offer undervalued the company was undisclosed until the target’s statement.

The Panel noted that it was unusual for there to be no new information in a target’s statement. The Panel remarked:

“Putting to one side the profit upgrade information, in general we would be surprised that a target’s statement contained no “unpublished price sensitive information or potentially price sensitive information”, although we acknowledge that it is possible. We leave for an appropriate case the consideration of whether, for example, collating previously released information generates insights that warrant a trading prohibition.”

Commentary 

The decision provides a timely reminder of the ongoing relevance of the insider trading provisions during a takeover bid. The Panel noted that River Capital had not asked the Panel to investigate or make a finding that there had been a breach of the insider trading provisions (the Panel noted that this is a matter for ASIC and the courts). However, it also said that that is not to say that information asymmetry which would be relevant to the insider trading provisions is necessarily irrelevant to the question of whether the principles in section 602 have been undermined. 

The Panel said that trading by target directors ahead of release of the target’s statement generally poses a significant risk of unacceptable circumstances. It noted that this may come about because information known to a board of directors, but not the market, means that the market is not efficient, competitive and informed and target shareholders cannot make informed decisions whether to accept or reject the bid.

The Panel asked the parties to provide any examples of market practice of target directors acquiring shares in the target after a bid had been made and while preparing a target’s statement, which (perhaps unsurprisingly) could not be found by any of the parties to the proceedings. 

Ultimately, the Panel accepted undertakings from Mr Tilley and Mr Kolenc to accept the shares which they had recently acquired into the bid if that would result in River Capital acquiring voting power over 50% (and, accordingly, the Panel did not need to make a declaration of unacceptable circumstances). That was quite an interesting outcome. Instead of defending the company, the share purchases by the directors could end up accelerating a change of control. In other words, the relevant shares could be the tipping factor which delivers outright control to River Capital.

The decision points to the practical difficulty for applicants in establishing that an associate relationship exists. It also points to the significant risk of unacceptable circumstances (and potential breach of the insider trading provisions) where target directors trade in target shares after the announcement of a takeover bid and ahead of the release of a target’s statement. As the Panel noted, it is unusual for there to be no new information in a target’s statement – this explains why target directors generally do not consider it appropriate to trade in target shares before the target’s statement is published.