It’s who you know: a reminder on the importance of ‘association’

We review the concept of ‘association’ and practical considerations in light of the Panel’s recent declaration of unacceptable circumstances regarding various undisclosed associations in relation to the affairs of The Market Herald Limited (ASX: TMH). 

In a recent decision, the Takeovers Panel has made a declaration of unacceptable circumstances and a finding of various undisclosed associations in relation to the affairs of The Market Herald Limited (ASX: TMH). This decision is an important reminder for market participants of the breadth and importance of the concept of association and related rules and implications of non-compliance with these rules.

IN BRIEF

• The concept of association is broad, complex and heavily fact dependant.
• The Panel’s recent decision is an important reminder for parties to consider the concept of association and related rules in their interactions in relation to the board or affairs of an entity.
• While heavily fact-specific, the Panel’s reasoning demonstrates the breadth of material that may support an inference of association, cautioning parties to consider the totality of their interactions, and the importance of full and proper disclosure in the context of transactions and their control effects.

OVERVIEW OF THE CONCEPT OF ASSOCIATION

A person is an associate of a primary person in relation to an entity if:¹

• essentially, the person and the primary person are members of the same corporate group;
• the person and the primary person have a ‘relevant agreement’ (see further below) for the purpose of controlling or influencing the composition of the entity’s board or the conduct of the entity’s affairs; or
• the person and the primary person are acting, or proposing to act, in concert in relation to the entity’s affairs.

A ‘relevant agreement’ is an agreement, arrangement or understanding, whether formal or informal, whether written or oral, whether or not it has any legal force and whether or not it is based on legal or equitable rights.² This includes a proposal to enter into a relevant agreement.³

There is a significant degree of overlap between the second and third limbs of the association tests (above). Two people act in concert where they reach an understanding or arrangement amounting to an agreement in relation to the entity’s affairs. Both parties must understand their common purpose or object.

The “entity’s affairs” includes ownership of the entity’s shares and, in particular, the power to exercise the rights attached to the entity’s shares or control their disposal.⁴

Establishing an association is a complex matter which is highly dependent on the specific facts and circumstances at hand, including interactions between relevant parties. The question of whether an association exists in any particular case frequently does not lend itself to a definitive answer.

THE MARKET HERALD LIMITED: FACTUAL BACKGROUND

THE MARKET HERALD LIMITED: FINDINGS AND PRACTICAL CONSIDERATIONS

On 19 May 2023, the Panel announced a declaration of unacceptable circumstances in relation to the affairs of TMH, following an application dated 6 February 2023 made by UIL Limited (TMH’s second largest shareholder and a substantial holder of TMH shares).

The application concerned the conduct of various parties, including Mr David Argyle and Mr Gavin Argyle, in the context of the GCA Acquisition, the 2022 Entitlement Offer and the 2023 Entitlement Offer.

The Panel found three sets of undisclosed associations had arisen, leading to various contraventions of related rules, being:

• an association between Mr David Argyle and Mr Gavin Argyle;
• an association between Mr Pismiris, Chairman of TMH, and Mr David Argyle and Mr Gavin Argyle; and
• an association between Mr Gavin Argyle and Ms Linney and Mr Rosenal (each employees of CIP and sub-underwriters to the 2022 Entitlement Offer).

Association between Mr David Argyle and Mr Gavin Argyle

The Panel found that Mr David Argyle and Mr Gavin Argyle had a shared control purpose to maintain the level of ownership control of Mr David Argyle or the Argyle family in TMH, which went beyond good corporate governance. The Panel highlighted the following factual matters as supporting its conclusion:

• Mr Gavin Argyle appeared to have been briefed about the GCA Acquisition before the market – inferred by a text message sent by Mr Gavin Argyle;
• CIP was a company controlled by Mr Gavin Argyle, and that company had the ability to influence the dispersion of new shares under the 2022 Entitlement Offer;
• Mr David Argyle and Mr Gavin Argyle concurrently acquired most of the TMH shares which were shortfall shares under the 2022 Entitlement Offer after they were sold on market by Ms Linney and Mr Rosenal – inferred from trading volumes at the relevant time; and
• circumstances surrounding the removal of Mr Sanger, the managing director of TMH, which involved actions by Mr David Argyle, Mr Gavin Argyle, Mr Pismiris and personnel of CIP, including the drafting of a section 249D notice by Mr Pismiris, which was sent to personnel of CIP, for signing by Mr David Argyle.

The Panel held that from no later than 9 August 2022:

• Mr David Argyle and Mr Gavin Argyle had an agreement, arrangement or understanding for the purpose of controlling or influencing the composition of TMH’s board or for the purpose of controlling or influencing the conduct of TMH’s affairs, including financing, and were associated under section 12(2)(b); or
• alternatively, Mr Gavin Argyle was acting, or was proposing to act, in concert with Mr David Argyle in relation to TMH’s affairs and were associated under section 12(2)(c).

Association between Mr Pismiris and Mr David Argyle and Mr Gavin Argyle

The Panel found that Mr Pismiris was associated with each of Mr David Argyle and Mr Gavin Argyle as a result of Mr Pismiris:

• drafting the section 249D notice at Mr David Argyle’s request;
• sending that notice to personnel of CIP copying Mr Gavin Argyle for Mr David Argyle to sign;
• correcting a typographical error in the notice and applying Mr David Argyle’s signature with approval; and
• voting in favour of removing Mr Sanger at a board meeting (along with Mr Gavin Argyle).

The Panel held that from no later than 29 November 2022, Mr Pismiris had acted in concert with each of Mr David Argyle and Mr Gavin Argyle in relation to TMH’s affairs, specifically the composition of its board, and therefore became associated with them under section 12(2)(c).

Association between Mr Gavin Argyle and each of Ms Linney and Mr Rosenal

The Panel found that from no later than 6 October 2022:

• Mr Gavin Argyle had an agreement, arrangement or understanding with each of Ms Linney and Mr Rosenal with respect to their respective holdings of TMH shares for the purpose of the conduct of TMH’s affairs and was associated with each of them under section 12(2)(b); or
• alternatively, Mr Gavin Argyle was acting, or was proposing to act, in concert with each of Ms Linney and Mr Rosenal with respect to their respective holdings of TMH shares for the purpose of the conduct of TMH’s affairs and was associated with each of them under section 12(2)(c).

Disclosure requirements

As a result of its findings in relation to association, the Panel found that the 2022 Entitlement Offer booklet did not disclose (among other things):

• the association between Mr David Argyle and Mr Gavin Argyle (and in fact it included a positive statement to the effect that those individuals were not associates);
• the aggregated control effect of the 2022 Entitlement Offer by reason of the association; and
• the sub-underwriting agreement with employees of CIP.

The Panel also found that the 2023 Entitlement Offer booklet did not disclose, in addition to the items above (among other things):

• the association of Mr Pismiris and each of Mr David Argyle and Mr Gavin Argyle;
• the association of Mr Gavin Argyle and each of Mr Rosenal and Ms Linney; and
• the possibility that the voting power of Mr David Argyle and Mr Gavin Argyle could be increased by acquiring rights on market (which Mr Gavin Argyle did).

Declaration of unacceptable circumstances

The Panel considered the matters to which it must have regard and the public interest and made a declaration of unacceptable circumstances in relation to the affairs of The Market Herald Limited.

As a result of its findings of association and its effects, the Panel found:

• shareholders and the market are not informed of the aggregate relevant interests held by the associated parties in TMH or of the identity of persons who may acquire a substantial interest in TMH;
• the acquisition of control over voting shares in TMH has not taken place in an efficient, competition and informed market;
• numerous contraventions of the substantial holder provisions; and
• various deficiencies in the disclosure documentation surrounding the 2022 Entitlement Offer and the 2023 Entitlement Offer.

Practical considerations

The Panel’s findings clearly demonstrate that establishing an association is highly dependent on the specific facts and circumstances at hand (including in this case interactions between the relevant parties) and the importance of full and proper disclosure in the context of transactions and their control effects.

Importantly, in making these findings, the Panel drew inferences from supporting material presented before it. These materials included statements made by the parties at a staff meeting and in text messages, trading volumes on the ASX and inferences drawn from the interactions between relevant parties.

This serves as a reminder for market participants to consider the totality of their interactions, not merely formal documentation, in considering the risk of forming an association in relation to an entity. While, as a practical matter, associations may be difficult to prove, it is clear the Panel will consider all relevant facts and circumstances and may draw inferences in its findings.

In addition, in its findings, the Panel did not distinguish between the relevant agreement and acting in concert limbs of the association tests, or between the purpose of the association being the composition of TMH’s board or the conduct of its affairs. This demonstrates the breadth and overlap between the various association tests in practice.

CONCLUSION

The Panel’s decision in The Market Herald Limited serves as an important reminder to all parties and market participants who act in relation to an entity’s board or affairs. The concept of association is broad and contravention (or inadvertence) in relation to the rules can have significant implications, including a market for shares which is not efficient, competitive and informed, misleading (or absent) disclosures and, ultimately, a declaration of unacceptable circumstances in relation to the affairs of an entity.

1. Corporations Act 2001 (Cth) s 12(2).
2. Ibid s 9.
3. Ibid s 15(2).
4. Ibid s 53.