Member Article

The tightening of the credit market in Australia has led a significant number of companies to explore raising further capital by issuing additional equity to new or existing holders. Unlike taking on additional debt, the issue of new equity by a company can result in a change of control. Where the company is listed on the Australian Securities Exchange (ASX), this may give rise to various issues under both the Corporations Act and the ASX Listing Rules.

The basic position established by section 606 of the Corporations Act is that a person cannot acquire a relevant interest in 20 percent or more of a listed company, or an unlisted company with more than 50 members except in certain narrowly defined circumstances. The two exceptions to this prohibition that are most relevant to an entitlement offer are those described in section 611, item 10 (relating to interests acquired via rights issues) and section 611, item 13 (relating to interests acquired via the underwriting of a public capital raising). The Takeovers Panel emphasised in Guidance Note 17: Rights Issues that entitlement offers falling within item 10 or item 13 of section 611 could give rise to unacceptable circumstances depending on their structure. ASIC also stated in Regulatory Guide 159: Takeovers, compulsory acquisitions and substantial holding notices that it will consider making an application to the Panel if it considers that these exceptions are being abused.

The Takeovers Panel recently had the opportunity to consider its approach to these issues in the context of proceedings concerning a 178:1 pro rata non-renounceable entitlement offer by the Multiplex Prime Property Fund (MAFCA) administered by its responsible entity, Brookfield Multiplex Capital Management Ltd (BMCM). MAFCA had announced the entitlement offer as a means of raising capital to remedy breaches of loan to valuation covenants with its financiers. These breaches had been waived for several months but MAFCA advised the Panel that the waiver would not be extended any further.

Structure of the entitlement offer

The entitlement offer was to be wholly underwritten by a related entity, Brookfield Multiplex Capital Securities Ltd (BMCS) in its capacity as the trustee of another Brookfield Multiplex fund. The entitlement offer also included a 'cash-out' facility under which BMCS would buy units in MAFCA from existing holders at 0.1 cent per unit. A waiver was required from ASX to allow the entitlement offer to proceed in its proposed form, because ASX Listing Rule 7.11.3 prohibits the ratio of securities offered under a non-renounceable issue being greater than 1:1.

As initially proposed, the entitlement offer did not include a shortfall facility or a bookbuild. This meant that any units not taken up by existing unitholders would be taken up by BMCS in its capacity as the underwriter of the offer. Given the 178:1 ratio of the offer, it was likely that unless a large number of current unit holders took up their entitlements, BMCS would become the holder of a significant, perhaps even controlling, interest in MAFCA.

Applications to the Panel

While preparations for the entitlement offer were continuing, Australian Style Investments Pty Ltd (Australian Style) and Grocon Investment Management Pty Ltd (Grocon) were making their own moves to acquire interests in MAFCA. Australian Style attempted to make an on-market takeover bid for MAFCA units, but the Panel found that the bid was coercive and could not proceed (see the November edition of Mergers & Acquisitions for an overview of the Panel decision). Grocon had put a number of alternative recapitalisation proposals to MAFCA in the months leading up to the announcement of the entitlement offer, but these had each been rejected by the BMCS board.

Both Australian Style and Grocon lodged applications with the Panel seeking declarations of unacceptable circumstances soon after MAFCA released the booklet containing the terms of the entitlement offer to the ASX. Among other things, both applications claimed that structure of the entitlement offer had an unacceptable control effect on MAFCA. The Panel quickly announced (see Multiplex Prime Property Fund 04 [2009] ATP 21) that it would not be proceeding with Grocon's application because it had been made late, and because the only matters raised in it that the Panel considered to be substantive were also raised in the application lodged by Australian Style to which Grocon had also been made a party.

Control issues

The Panel decided to conduct proceedings on the application by Australian Style in relation to whether the structure of the entitlement offer and further actions taken by MAFCA mitigated any potential control impact of the entitlement offer (see Multiplex Prime Property Fund 03 [2009] ATP 22). The Panel noted that the factors to be taken into account when assessing the offer included ratio, pricing, renounceability, underwriting and the dispersion of any shortfall.

Ratio, pricing and renounceability

The Panel noted that normally a massively dilutive rights issue of the kind proposed would not be acceptable. However, because it appeared to be the only way for MAFCA to obtain the funding that it required by the deadline set by its financiers, the Panel was prepared to accept the decisions made by MAFCA regarding the ratio, pricing and renounceability of the offer.

Underwriting

Australian Style had complained in relation to the underwriting arrangements between MAFCA and BMCS that it appeared that the entitlement offer had been structured so as to effect a change of control in favour of BMCS without BMCS having to undertake a formal takeover bid. The Panel noted BMCS's submission that, given MAFCA's financial distress, it was unlikely that any other entity would be willing to act as underwriter. BMCS also argued that it was not interested in taking control of MAFCA but wanted to protect the Brookfield Multiplex group's investment in MAFCA from the prejudice that it might suffer if MAFCA was wound-up. The Panel did not find that the underwriting arrangements were unacceptable.

Shortfall

The Panel was not prepared to accept a structure that did not have some measures in place to minimise the potential consequences of the entitlement offer on the control of MAFCA. To address these concerns, BMCM agreed to institute a shortfall facility for existing unitholders and a bookbuild to deal with any shortfall before it was allocated to the underwriter. BMCM further undertook to remove certain conditions it was initially minded to place on the use of these measures including that:

• there would be no allocation of units to a person under the offer if to do so could cause that person's voting power in MAFCA to exceed 20%, and
  
  
• a person would only be allocated units in excess of the amount required to give that person a 'substantial holding' in MAFCA if the person made a public statement that the they intended to retain the units for a certain period of time, and demonstrated to BMCM that they had the financial ability to pay all further calls that might be made on the MAFCA units.

Following the offer's close, BMCM announced to the ASX that, through a combination of applications under the offer and the shortfall facility, 51.6% of the new units on offer were taken up by existing unit holders. BMCM announced on the following day that a further 3.34% of new units had been taken up in the institutional bookbuild, with BMCS taking up the remaining 45% of new units in its capacity as the offer's underwriter.

Conclusion

The Panel decided that the structure of MAFCA's entitlement offer did not warrant the declaration of unacceptable circumstances – a decision subsequently upheld by a further review Panel (see Multiplex Prime Property Fund 03R [2009] ATP 23). The Panel made it clear that this was almost entirely due to the extreme state of financial distress that MAFCA found itself in, and the lack of any realistic alternative course of action other than defaulting on its financial covenants and being wound-up. Even in these circumstances, the Panel was reluctant to find that a non-renounceable entitlement offer resulting in massive dilution of holders that did not take up their entitlement was acceptable. It would still have refused to accept the structure proposed without the addition of the shortfall facility and bookbuild. The lesson flowing from the Panel's approach is that the potential control impacts of entitlement offers can no longer be brushed aside as unavoidable 'side effects', but are key considerations that must be addressed by issuers to avoid Panel action.