Approval of Government through FIRB, Australian Gas Light Company - Assignment Example

Section A Question I A. Yes, the said transaction requires approval of Government through FIRB. According to the Australian prior approval foreign investment policy 2007. The proposed foreign purchases of Australian business calling for a substantial interest ie. More than 15% constitutes a big proposal. Such a big proposal, necessitate prior approval of Government through FIRB. B. Yes, Blue gum needs approval to acquire Acacia as the TPA constraints the further acquisitions in Australia. It will make a formal application, under section 88(9) to ACCC for approval . The purpose of application is to obtain clearance that the proposed acquisition is not anti-competitive. It is an informal process that helps ACCC to better deal with any existing competitive concerns or business issues. Alternatively, as per the latest amendments, Blue gum can follow an optional formal notification procedure for a formal clearance. It makes ACCC takes 40 business days to make a decision Advantage of informal clearance process: It is relatively fast process; and It is an economical process. C. What Blue gum can do? Under the Part 6C.2, with heading “Tracing beneficial ownership of shares” , section 672A deals with the disclosure notices. In the present case, Blue gum , which is a listed company has the power to direct the named beneficial owners to disclose their identities. Also, blue gum can also ask ASIC to exercise its powers to make the beneficial owners disclose their identities under Section 672B requiring them to render full details of their own relevant interest in the shares or interests in the scheme and of the circumstances that give rise to that interest, along with the name and address of each other person who has a relevant interest, giving the nature and extent of the interest and the circumstances that give rise to the other person’s interest and such other information. D. The relevant interest of Raider Inc.’s total the sum of interests of the nominee investors (4.9%), portfolio mangers (4.5%) and nominee custodian (4%) constituting 13.4%. The substantial holding in Blue gum belongs to Origami that owns a share of 18% in total. E. According to Section 671B(1), it was obligatory for Riader Inc. to notify about its interests in Blue gum , within two business days. Thus, the Section 671C(1) holds Riader Inc’s liable for breach or contravention of Section 671B and hence, liable to compensate the company or corporate body, for the loss or damage so caused. Further, under such proceedings, the contravening party can take a defence under Section 671C(2). To take the defence, the contravening party has to prove that the company has violated the section: a) inadvertently or mistakenly; or b) being unaware of a relevant fact or occurrence. Question 2 a) Four key pieces of information omitted : (i) Biogrow’s current cost of capital (ii) The Debt (iii) NPV of the project. (iv) The offer being contingent ie. Dependent on the project Active grow’s being operational b) The intern has not chosen the appropriate valuation methodology, the reason is that there is an omission of the key information which is needed for the valuation. It includes the total cost of capital and the value of debt, although the company is said to have a minimal debt. Valuation of securities is to be done in compliance with the section 667C of the Corporation Act 2001. c) d) e) Question 3 a. By accepting the off-market takeover, the Lollyco company is expected to save the shareholders from the brokerage charges. b. Four conditions: Section 626 : Maximum acceptance conditions in off‑market bids Offer falling under an off‑market bid should not be subject to a maximum acceptance condition, that provides that the offers will terminate, or the maximum consideration offered under the bid will be reduced, if one or more of the prescribed conditions get fulfilled. Section 627 : Discriminatory conditions not allowed for off‑market bids Offers under an off‑market bid should not be subject to a condition that enables the bidder to acquire, or might result in the bidder acquiring, securities from some of the people who accept the offers. Section 628 : Conditions requiring payments to officers of target not allowed in off‑market bids Under this, an offer to a person under an off‑market bid need not be made subject to a condition that necessitates the person to approve or consent to a payment or other benefit to an officer or employee of the target or a related body corporate as a compensation for loss of or as consideration in connection with retirement from any office or employment in connection with the management of the target or of a related body corporate. Section 629 : Conditions turning on bidder’s or associate’s opinion not allowed in off‑market bids Offers under an off‑market bid must not be subject to a defeating condition if the fulfilment of the condition depends on bidder’s opinion or happening of an event within the control of the bidder or the associate. c. Sally smith has acquired 1000 shares and this acquisition if amounts to more than 5% in the target company, would render her the status of a shareholder , upon informing her shares to the ASX. This would make the acquisition process easy. d. Approvals needed Approval of ASIC For the approval of ASIC, a notice of application is forwarded to ASIC again examined by the Court for reasonable opportunity available to ASIC for determining the terms of scheme/explanatory statement. Approval of Scheme Members The parties sign a Merger implementation agreement which sets out conditions and processes between bidder and target on commercial terms along with due diligence, break fees, and ‘no shop’ provisions. Subsequent to this, the parties announce proposal and prepare draft scheme and explanatory statement for the approval by scheme members. An application is made by the target to court to convene meeting(s) of creditors, classes of creditors, or stakeholders whose rights or interests will be affected. Approval of Court The documents need the approval of the Scheme Members, and upon reviewing these documents, the Court automatically approves the same. e. Benefits of the Scheme of Arrangement over off-market takeover in the present case: i) Retention of brand name with the scheme of arrangement; ii) Benefit through cross-selling; iii) Future security associated with company’s outlook and no more exposure to risk that can affect share price. f. Need of IER As seen from the facts, it seems that the scheme of arrangement does not need any IER. However, it is recommended to have one because it will protect the minority investors and will ensure a healthy foundation for to their recommendations extended to the investors. SECTION B Question 1 (a). Five major transactions announced by AGL and/or Alinta from October 2005 to April 2006: and outcomes: 1. In October 2005, the Australian Gas Light Company (AGL) made an announcement regarding its plan to demerge into two new businesses by separating its retail and merchant energy assets from its infrastructure assets. The outcome was that Alinta came ahead with its proposal regarding off-market takeover bid on 3 Feb 2006. 2. In January 2006, another announcement was made by Mark Johnson, the AGL about the appointment of chief executive officers and chief financial officers for AGL Infrastructure and AGL Energy. Also, it included the statement about the proposed structures of the boards, upon the shareholder approval of the demerger. The outcome was the release of the Scheme Booklet by AGL. 3. On 13 February 2006, the structure, strategic direction and outlook was announced by AGL for the two new companies expected to result from the demerger. It also included the forecast of increased dividends accompanied by an outline of growth prospects. It led Alinta to again forward a share capital acquisition through the ASX statement. 4. On 21 February 2006, An announcement was made about the acquiring of approximately 10 percent of issued ordinary capital of AGL by Alinta Limited. The outcome was rejection by the AGL board and application of Alinta for Takeover Panel’s intervention. 5. On 13 March 2006, AGL announced its proposal to merge with Alinta Limited and in the proposal, intended to subsequently demerge the expanded infrastructure. The proposal included an offer of 0.564 AGL shares per one Alinta Share. It was to be implemented through an off-market takeover (a scrip-for-scrip) offer by AGL for ordinary shares. The announcement also concerned AGL’s intention to subsequently proceed with a demerger of the combined AGL/Alinta energy and infrastructure businesses. (b) Documents to the shareholders included: 1. Chairman’s Letter to AGL Shareholders : The letter intended to put forth the plan regarding the demerger of AGL into two new Australian companies. 2. Chairman’s Letter to AGL Shareholders : The letter was regarding the cancellation of the original demerger General Meeting scheduled to be held on 27th March 2006. As a result, the Federal Court also approved the cancellation of the demerger Scheme Meeting scheduled to be held for 23rd March 2006. 3. A letter to AGL Shareholders on 24th April 2006 : It extended the AGL’s plan for a stronger and more valuable future by which the shareholders were updated by their offer to merge with Alinta and put forth the occurrence of three things including the change in AGL Share Registry, AGL’s offer to merge with Alinta and Alinta’s Bidder’s Statement and AGL’s Target Statement. Question 2 a) (i) The two types of takeover bids are recognized under Section 616 sets out the two types of takeover bids under Australian Law: 1 Off market bid or takeover scheme: It is used commonly with quoted or unquoted securities. In this, the bidder sends the formal written offer documents to securities holders of the target who may indicate acceptance by completing and returning the acceptance form. 2 A market bid or takeover announcement: It is used only for securities quoted on a financial market like ASX. Herein, the bidder engages a broker who announces the bid to the financial market, make offers (bids) SEATS to acquire all the relevant securities in the bid class. ii) In February, AGL put forward the demerger proposal involving a scheme of arrangement as a step to takeover. In the end of February, AGL changed its proposal to merge with Alinta and then subsequently, demerge the expanded infrastructure business. b) (i) Rationale for choosing the legal form of transaction by Alinta in February: Alinta wanted to maintain predominance in the target company by acquiring more than prescribed shares. Also, it wanted to buy the shares of AGL at substantially low price than the fair value. Alinta wanted to restrict AGL by such broad-based conditions. Alinta’s proposal of takeover bid was also based on its intention to increase its shareholding and voting power in the target company. (ii) Two possible advantages of choosing the alternative form of transactions for takeover : Alternatively, Alinta could choose the demerger proposal. An alternative transaction can give a number of advantages enumerated as: Firstly, it can be based on the hybrid of proposals extended by AGL as well as Alinta that can provide equal status and a good combination of Board and Management Strengths. Secondly, an alternative transaction would also give fewer competition issues in the proposed structure. c) (i) Rationale for choosing the transaction march 2006 The reason behind the proposal of transaction of merging and subsequently merging was to: i) enhance index weighting and liquidity for shareholders; ii) attain best combination of board and management strengths and reduce the competition issues. ii) No, The acceptance of Alinta’s offer would have stunted the growth of AGL. It is because of the predominance of Alinta’s shares in the merged company, with high voting power for Alinta. Moreover, the offer is highly conditional and broad based, putting enormous restrictions on AGL. d) (i) Alinta changed its offer because of the Takeover panel’s decision that declared the offer of Alinta as unacceptable circumstances. (ii) The legal form of transaction intending merger and subsequent demerger would have been appropriate for the circumstances to a large extent. The first proposal of demerger would give full internal control and management to the company with deep operating competence and experiences. Also, it would give good funding capacity for the intending capacities. However, the second proposal of interim merger followed by demerger would render comparatively more measurable benefits to the business in the form of enhanced index weighting and liquidity for its shareholders. It would also give the best combination of board and management strength with an almost equal say of both the managements. It will also further enhance the funding capacity of the infrastructure business. Question3 Alinta acquired 10% of agl on-market prior to announcing a merger proposal and then increased its shareholding to 19.9% of agl the following day: a) Alinta acquired 19.9% of AGL shares to : i) to be under section 611 dealing with the exceptions to the prohibition, under which Alinta can acquire over 20% shares. ii) not to violate section 606 which imposes prohibition on certain acquisitions of relevant interests in voting shares This way Alinta can target the newly formed company and acquire from the issues of securities of company in which acquisition is made and if the company has not started to carry on any business and has not borrowed money. b) It is often difficult to acquire sizeable pre-bid stakes, and there have been a number of high profile failures in recent years. Identify three possible reasons why Alinta was successful in acquiring 19.9% in AGL. 1. Because, acquiring 19.9% constituted a value below the critical value to be called sizeable for the purpose of Chapter 6 of Corporations Act, 2001. 2. Because of the on-market bid takeover by buying shares through a broker. 3. Because Alinta did not disclose of its already acquired interest in the target company. c) Alternatives to takeovers An alternative to a takeover means the purchase of the relevant assets and liabilities of the target company as well as acquiring control of the business of the target company. The alternatives available in the present case includes either through a voluntary liquidation of the target company and purchase of the assets or by reverse takeover, where the target makes an offer for the acquirer using the targets shares as consideration so that the control of the target passes to the acquisitive company or its shareholders . Alinta can thus acquire from the acceptance of an offer under a takeover bid. In On-market transaction, the acquisition has to be by or on behalf of the bidder, during the bid period and the bid has to be unconditional or conditional only on the happening of the event. It was done to possess a voting power in the company of atleast 19% throughout 6 months before the acquisition. it had an acquisition throughout 6 months before the acquisition that person or any other person has had voting power in the company of at least 19%. d) With such an assumption that AGL had a market capitalization approximately three times larger than alinta, it would have been impossible for Alinta to pursue such an alternative . Moreover Alinta should not pursue this alternative as it would not affect the voting power in AGL and hence, of no use. Instead of this, it can do the same by adopting the means of a scheme of arrangement or through a selective reduction of capital. Question 4 a. Purposes of ACCC Review: The merger provisions are administered and enforced by the ACCC under TPA, 1974. Mergers have been recognized to perform a significant role in the effective functioning of the economy. It enables the firms to attain efficiency in the form of economies of scale, synergies and risk spreading. It facilitates a mechanism for replacing the under-performing firms and managers by better performing substitutes. b. Types of clearance available from 1 January 2007 The merger and acquisition provisions fall within the competition provisions of Part IV of the Act. Section 50 of the TPA prohibits acquisitions that would have the effect, or likely effect, of substantially lessening competition in a substantial market in an Australian state or territory. Most recently, the formal clearance process has been introduced in 2007 and this has made available three main clearances for a proposed acquisition or merger. Informal merger clearance under Section 50 It extends ACCC’s informal view on whether a particular proposal is likely to breach s. 50 of the Act. It also states whether the ACCC would challenge the merger in the Federal Court . This clearance does not provide any review mechanism to the merger parties or third parties to appeal for the decision by the ACCC. Formal clearance of a proposed merger It is the clearance to a person under Section 95AC, enabling him to acquire shares in capital of a body corporate or acquire assets of another person. Once granted this clearance, the person would not be stopped from acquiring the shares or assets under section 50. The basis of clearance lies in the ability of acquisition to have no effect to substantially lessen the competition in a market with the onus on the applicant. Clearance of Competition Tribunal for merger authorisation It is granted to ensure protection for mergers and acquisitions on public benefit basis, which would otherwise contravene s.50 of the Act. It comprises of acquisitions that have not already taken place. c. Issues identified by ACCC that would lead to opposing of the transaction between AGL and Alinta: A number of statements in and omissions from Alinta's Bidders' Statement were identified that were likely to mislead AGL Shareholders. It was found that such an offer could potential cause market disruption because of the competing nature arising from the takeover bids by AGL and Alinta for each other. Defeating conditions were found in the offer by AGL as well as Alinta requiring less than 50% acquisition of shares by the rival bidder. d. How were the issues identified in Part (c) resolved? To resolve the issues so identified, intervention of Takeover panel was sought that ordered them to modify their respective terms as to prevent the offers from becoming unconditional. e. If ACCC had an issue with the transaction that Alinta would not resolve, how will then Alinta proceed to carry on with the transaction? In such a case, Alinta would have to withdraw its offer and this would frustrate the proposal of merging of the two companies. Question 5: (a) The acquisition would not contravene chapter 6of the corporations act 2001 in this case. The reason is that according to Section 606, a person cannot acquire a relevant interest in issued voting shares in a company because of which that person’s or someone else’s vetoing power in the company increases from a starting point which is above 20%. But according to section 609(7) of act 2001, as this concerned the interest which is conditional upon a resolution or ASIC’s exemption, it was not found to be a relevant interest and hence, there was no contravention of Chapter 6. (b) In July, 2006, ASIC made a declaration as to modifying the provision of section 609(7) of the Act. It does change the response to part a of the question. Consequently, it changed the meaning of relevant interest and this led to the interest in AGL and Alinta case, to be a relevant interest for the purposes of chapter 6. It thus led to the conclusion, that such an acquisition subsequently contravened chapter 6. (c) In the absence of a takeover offer by Alinta, chapter 6 does not allow such an acquisition. ASIC has the power to exempt a person from a provision of Chapter6 . Section 655A, ASIC has the power to exempt and modify in such case and the takeover panel has the power to review the decision of ASIC, under Section 656B(1). However, in the present case, APT applied to Takeover panel, without giving reasonable opportunity to ASIC as it is permissible under 656B(4). For this, APT took the plea of an urgency on the grounds of public interest. Under such grounds, it is fair for the Takeover panel to directly deal with the case. Thus, Apt wanted the Takeover Panel to speedily decide the case concerning its interest. (d) What was the outcome of the Takeovers Panel application? Takeover Panel found a number of statements in and omissions to be misguiding for AGL Shareholders and hence, AGL shareholders were asked not to take action until they receive all the relevant information including the required information, modified bidder statement and AGL’s Target statement. The Panel declared the application as “unacceptable circumstances” for the fear of causing potential market disruption arising from the competing takeover bids by AGL and Alinta for each other. The Panel found the conditions put forth by the two parties to be defeating requiring each of them to acquire more than 50% of shares in their target with rival bidder possessing less than 50%. (e) Firstly, Alinta decided to challenge the orders of the Panel; and Secondly, to challenge the declaration of unacceptable circumstances based on the conditions put forth by them. f) The outcome was an amicable settlement through negotiations giving rise to a new merger deal with Alinta acquiring AGL's infrastructure assets and asset management business Agility for $6.45 billion, making it Australia's largest energy infrastructure company. No cross-shareholdings between the companies intended, with Alinta's 19.9 % shareholding in AGL to be cancelled. The AGL shareholders will retain ownership of AGL subsequent to the deal and the enlarged Alinta will be 55 % owned by existing Alinta shareholders and 45 % by AGL shareholders. 2) Discuss broader implications for the role of the takeovers panel as a result of the rulings on the matter in Part (f)(i) In case the Takeover Panel has declared unacceptable circumstances under Section 657D or 657E, the matter can be handed over by the panel may ask the concerned person, party to the proceeding and ASIC to make submissions to the Panel about the matter. Further, In case, the company does not abide by its decision, under Section 657F, it is an offence to contravene Panel order and a person who contravenes a Panel’s order commits an offence and is strictly liable for the same. In such cases, the Court may make any orders in order to secure compliance with the Panel’s order which may be remedial in nature or a direction to restrain a person from doing a specified act. Read More