51+ problems and Chapter 6 is one

Unlisted Australian companies with more than 50 members are subject to Australia’s takeover laws, even if they are proprietary (and not public) companies¹.

Companies that deliberately reduce their shareholder numbers in order to circumvent takeovers law will risk a finding from the Takeovers Panel that “unacceptable circumstances” have arisen. A Panel can make a declaration of “unacceptable circumstances” even if there has been no breach of the Corporations Act and has broad powers to make remedial orders.

In this article, we consider a recent Panel² decision that signals it may treat proprietary companies differently (when compared to listed public companies) for the purposes of Australia’s takeovers laws³. The Panel’s comment was made in the context of an application by a shareholder alleging, amongst other things, that an unlisted proprietary company had taken steps to deliberately avoid Chapter 6.

Background

A S P Aluminium Holdings Pty Ltd (ASP), a proprietary company limited by shares, had 51 shareholders as at the date of the Panel application. The applicant, Villefranche Investments Pty. Limited (as trustee of the Gates Family Trust), was the second largest shareholder of ASP. Between 2 July 2021 and 18 August 2022, a series of transactions occurred which resulted in the number of ASP shareholders reducing from 68 to 51.

The applicant sought a declaration of unacceptable circumstances alleging that those transactions were undertaken deliberately to remove ASP from the ambit of Australian takeovers law.

In response, ASP submitted that the transactions were made for the legitimate corporate objective of facilitating exits for shareholders (who are current or former employees) in an otherwise illiquid market for ASP shares and to hold those shares in a trust for the purposes of operating an employee share scheme.

The initial Panel’s finding

The initial Panel declined to make a declaration of unacceptable circumstances, accepting ASP’s submissions that the transactions were undertaken for a legitimate corporate purpose and referencing the fact that the company was only subject to the takeovers laws as a result of having employee shareholders:

[69] …However, to the extent that ASP or the Controlling Shareholders wanted the company to cease to be subject to Chapter 6, we are not satisfied that was unacceptable in the circumstances of this matter as a whole, including the fact that ASP: (a) is a proprietary company which only falls under Chapter 6 due to employee shareholders; and (b) has pre‑emptive rights in its constitution that are not unusual for proprietary companies.

In coming to its decision, the Panel observed that proprietary companies should not always be treated in the same way as listed or public companies:

[45] …we do not think it appropriate, or in the public interest, to impose on proprietary companies that fall (often unwittingly) within Chapter 6 the same expectations, when they have not had the benefit of guidance as to what is required of them.

[90] In our view, the fact that the Panel is given jurisdiction in relation to proprietary companies does not mean the Panel must exercise its jurisdiction in the same way as it would for public companies or listed entities. As noted above, Parliament itself has treated certain proprietary companies differently for the purposes of Chapter 6. Furthermore, in deciding whether making or declining to make a declaration would not be against the public interest, we are required to take into account policy considerations that we consider relevant. In this case, we do consider the fact that ASP is a proprietary company to be relevant, for the reasons explained above.

The Panel also cited the following points as factors that may justify the different treatment of proprietary companies:

• Parliament itself treats certain proprietary companies differently for the purposes of Chapter 6⁴; and
• Proprietary company constitutions often contain a pre-emptive rights regimes and ‘tag along’ and ‘drag along’ rights.

The review Panel’s finding

The review Panel affirmed the initial Panel’s decision.

While ASIC provided a submission – which noted that Chapter 6 clearly applies to proprietary companies with more than 50 members as a matter of law – the review Panel stated:

[54] …We also consider that, depending on the circumstances of the particular matter, a company’s status as a proprietary company could be a relevant factor in the exercise of the Panel’s discretion in deciding whether to make a declaration of unacceptable circumstances in relation to the affairs of that company. Further, depending on the circumstances, the presence of a pre‑emptive rights regime in a proprietary company’s constitution could also be a relevant factor in the exercise of that discretion. In addition, it may well be that the “efficient, competitive and informed market” in section 602(a) means something different for a proprietary company as opposed to a listed company.

Commentary

Sponsors should be cognisant of whether takeovers laws apply to their portfolio companies, particularly as exit milestones approach. Where the portfolio companies are proprietary companies, it is relevant to note the following key principles:

• Proprietary companies with more than 50 members may have many legitimate reasons for their shareholder numbers to reduce to 50 or fewer – this could include, for example, the management of an employee share scheme as was the case in ASP.
• Considering the circumstances of the matter as a whole, unless a plan or proposal was implemented to deliberately reduce shareholder numbers for the purpose of circumventing takeovers law, the Panel will generally not find that unacceptable circumstances have arisen.

The Panel’s observation in ASP further signals that it may be more lenient in its regulation of proprietary companies when compared against its listed and public company counterparts if circumstances justify this treatment.
As a separate point on timelines, while the usual deadline for a Panel application is 2 months, the Panel extended the timeline in ASP because material information was not available to the applicant as a result of ASP being an unlisted proprietary company and ASP resisting the applicant’s information requests. This is an important reminder to sponsors that the Panel has discretionary powers to extend its 2-month deadline.

1. There is an exception for proprietary companies (not public companies) that have “crowd-sourced funding” shareholders where those companies have complied with certain disclosure requirements.
2. A S P Aluminium Holdings Pty Ltd [2023] ATP 8 and the review Panel’s decision in A S P Aluminium Holdings Pty Ltd 02R [2023] ATP 9.
3. Colloquially referred to in the Australian market as “Chapter 6” by reference to the chapter in the Corporations Act which regulates takeovers.
4. By exempting proprietary companies (but not public companies) that have “crowd-source funding” shareholders from the prohibition in section 606(1) of the Corporations Act.