Control issues in selective buy-backs: the Panel’s declaration of unacceptable circumstances in Montu Group

In brief

• In Montu Group Pty Ltd [2024] ATP 25, the Takeovers Panel made a declaration of unacceptable circumstances in relation to a proposed selective buy-back arising from its potential to affect control of the company.
• The decision and the Panel’s reasons provide important insight for market participants on the Panel’s approach where control issues arise in selective share buy-backs, including the need to provide sufficient disclosure to shareholders.

Background

Montu Group Pty Ltd (Montu) is the largest medicinal cannabis company in Australia which, apart from its major investor, MG Invest Limited (MG Invest) (who held 100,000,000 shares representing 83.7% of the issued capital), was owned by crowdsourced funding (CSF) shareholders (who together held 128,570 shares representing 16.3% of the issued capital and totalled approximately 2,350 shareholders).

Apart from MG Invest, no single shareholder held more than 1% of the company’s issued capital.

On 2 August 2024, Montu convened a general meeting to consider a special resolution to approve a selective buy-back of up to 12,173,913 shares from all shareholders, other than MG Invest, at an offer price of $1.15 per share. As MG Invest was excluded from the buy-back offer, it was the only shareholder eligible to vote on the resolution to approve the buy-back under section 257D(1) of the Corporations Act.   

The Explanatory Statement for the meeting indicated that MG Invest’s voting power in Montu would increase to 93.2% if all buy-back offers were accepted, enabling MG Invest to move to compulsorily acquire the remaining shares. It also stated that ‘as [MG Invest] is the only shareholder of the Company that is not able to participate in the Buy Back, only [MG Invest] will be eligible to vote as to whether to approve the Buy Back’.

The only financial information provided to shareholders in the Explanatory Statement was a link to Montu’s most recent audited financial statements for the year ending 30 June 2023, and an unaudited consolidated balance sheet and pro forma balance sheet as at 31 May 2024. The Panel noted that no reference was made to the potential future growth of the company or that the value of Montu shares may increase in the future.

The company had two directors, one of whom was nominated by MG Invest.

In response to concerns from its minority shareholders about having not received sufficient information to properly assess the offer, Montu adjourned the meeting from 26 August 2024 until 17 September 2024, and on 29 August 2024, Montu provided supplementary disclosure to shareholders, including the following:

• that Montu established an independent board committee to determine the terms of the buy-back (the Board Committee). However, Montu did not disclose its composition nor the identity of its members;
• the Board Committee had engaged RSM Australia Pty Ltd (RSM) to undertake an independent valuation of Montu shares. The supplementary disclosure to shareholders provided a summary of RSM’s expert report (but not a complete copy);
• information provided by the company to RSM included the company’s unaudited accounts, a statement of Montu’s future expectations and additional ‘unspecified information’;
• Montu would scale back accepted offers to ensure that in no circumstances would MG Invest hold more than 89.9% of Montu shares; and
• the last date for shareholders to accept the buy-back offer was 9 September 2024.

The supplementary disclosure did not include the company’s audited financial statements for the year ended 30 June 2024.

Additionally, Montu did not disclose that, if MG Invest acquired over 90% (through a combination of acceptances under the buy-back and reliance on the 3% creep) and were to proceed to compulsory acquisition, no discount for the lack of control or marketability would be applied in determining fair value by the expert’s report required under sections 664C, 667A and 667C of the Corporations Act.

Application to the Panel

The application was brought on 6 September 2024 by minority shareholders who sought a declaration of unacceptable circumstances, alleging that:

• Montu presented shareholders with the buy-back without disclosing sufficient information to enable shareholders to make a fully informed assessment of its merits;
• Montu’s board did not appear to be independent of MG Invest; and
• shareholders should have been provided with information as to who controlled MG Invest and an independent expert’s report as to the value of Montu’s shares.

The applicants submitted that, for these reasons, they were unable to make an informed decision whether to participate in the buy-back and, if uninformed shareholders accepted the offer, MG Invest would be able to compulsorily acquire the remaining Montu shares.

Discussion of the Panel’s reasons

While Montu was willing to provide undertakings, the Panel ultimately determined that it was necessary to make a declaration of unacceptable circumstances in addition to accepting certain undertakings from Montu and MG Invest. Some of the key issues canvassed in the Panel’s reasons are below.

1. No Independent Expert Report Required

The applicants submitted that Montu should have provided shareholders with an independent expert’s report to enable them to make an information decision whether to accept the buy-back.

While the Panel acknowledged that an expert’s report would be desirable and beneficial to shareholders, the Panel recognised that there was no express requirement for Montu to provide such at law or pursuant to ASIC policy.

Further, the failure to provide an expert report did not, alone, constitute ‘unacceptable circumstances’ as the Panel did not consider it necessary considering the expense and delay it would involve.

ASIC submitted that, while there is no express requirement to provide an expert’s report, the overall circumstances of the buy-back and potential for MG invest to compulsorily acquire shares, suggested that an expert’s report would be desirable and beneficial to shareholders.

Ultimately, notwithstanding that it was not required, the Panel agreed with ASIC that further disclosure was warranted, and accepted an undertaking from Montu to provide more robust financial information to the independent expert and to shareholders, including a revised summary of the expert’s report, an outlook statement and the explanation that no discount for the lack of control or marketability would be applied in determining fair value by the expert’s report if MG Invest proceeded to compulsory acquisition. 

2. Undisclosed Composition of the Board Committee

In response to shareholder concerns regarding the independence of the board from MG Invest, Montu established the Board Committee to determine the terms of the buy-back but did not disclose the identity of its members.

The Panel considered it unnecessary to determine whether the Board Committee was, in fact, ‘independent’. Rather, it noted that the proper inquiry was whether shareholders had received all the information about the buy-back that an independent board could be expected to provide. This included the composition of the Board Committee itself.

The Panel determined that Montu had failed to demonstrate to shareholders that the decision to undertake the buy-back had been made by a board committee in a position to consider properly the effects of the transaction on all shareholders.

3. Control effect of the buy-back

The indicative results (based on acceptances) of the buy-back confirmed that MG Invest’s voting power would only increase to 88.8%. Therefore, the Panel considered whether an increase in voting power from 83.7% to 88.8% would have an effect on control or potential control of Montu or result in the acquisition of a substantial interest.

Montu claimed that this increase would have ‘no practical effect on control’ since MG Invest already ‘effectively [had] absolute control’.

However, the Panel found that although an 88.8% interest was insufficient to enable MG Invest to compulsorily acquire the remaining shares, the circumstances were ‘unacceptable’ based on their effect on ‘potential control’. In particular, MG Invest would be materially closer to the 90% threshold required to seek compulsory acquisition (and referring to its power under section 657A(2)(a)(i) to declare circumstances unacceptable based on their effect or likely effect on ‘potential control’).

4. Voting exclusions

The Panel considered it unacceptable that MG Invest, as the only shareholder who stood to benefit from the buy-back’s effect on control of the company, could approve it regardless of the votes of other shareholders.

The Panel agreed with ASIC that the inquiry of whether MG Invest could vote required careful attention to the circumstances and the structure for the buy-back in question. Insofar as only MG Invest could receive a material benefit from the resulting consolidation of its control, the Panel found it unacceptable for MG Invest to vote in favour of the buy-back.

Montu submitted that section 257D(1) of the Corporations Act exhaustively identified those precluded from voting on a selective buy-back transaction. This was rejected by the Panel. The Panel thought that the section ‘cannot have been intended to… operate to the exclusion of the Panel’s role in addressing unacceptable control effects of buy-backs’.

Interestingly, the Panel notes that when it first sought submissions from the parties on the draft declaration, it asked the parties to make submissions on whether any unacceptable circumstances could be better addressed by Montu giving certain undertakings, including to pass an advisory ordinary resolution of the minority shareholders (i.e. excluding the votes of MG Invest) to approve the buy back. Montu submitted that this would be ‘unlawful’. However, the Panel disagreed saying that, while an advisory resolution does not have legal effect, that alone does not make it unlawful and it would be consistent with the Panel’s intention to address buy-backs having unreasonable effects on control.

In the end, the Panel accepted an undertaking that MG Invest would not compulsorily acquire the shares within 12 months, as this would prevent MG Invest from being able to proceed more quickly to compulsory acquisition than it would have been able to under the ‘creep exception’.

Commentary

The decision is an important reminder of the Panel’s willingness to intervene in situations where it considers there have been unacceptable effects on the control of a company, including where those arise from a selective buy-back, and its approach to addressing those concerns.

The Montu case was a unique case to come before the Panel. It involved an unlisted proprietary company where the relevant shareholders who stood to have their shares compulsorily acquired as a result of a buy-back were crowd-funded and individually no shareholder in that group held over 1% of shares.

Montu’s nature as a proprietary company with crowd-funded shareholders was key to the Panel’s decision to conduct proceedings. This was particularly in the context where the control effect of the selective buy-back was to bring Montu’s majority shareholder to the compulsory acquisition threshold and there were concerns about disclosure. However, the Panel was also mindful that smaller shareholders of Montu faced challenges in selling their shares and there was a desirability for such shareholders to have the opportunity to do so. The Panel ultimately found, however, that given the circumstances were unacceptable, Montu’s specific status as a proprietary company with CSF shareholders was not determinative, and making a declaration of unacceptable circumstances was not against the public interest.