New developments in Australian corporate law

1) Corporate Governance Update:  Changes to the Regulation of Director’s Remuneration

On 12 May, 2011, the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Bill) was passed by Australia’s House of Representatives.  The Bill now progresses to the Senate where, if passed, it will become law in Australia from 1 July, 2011.

The Bill represents the culmination of the Australian Federal Government’s review of executive remuneration following the global financial crisis, and seeks to further empower shareholders to influence the remuneration decisions of their company.

At the heart of the reforms is the “two-strikes rule”, applicable to listed companies only.  Under this proposal, where 25% of shareholders vote against an annual remuneration report on 2 consecutive occasions, the opportunity is then created for shareholders to vote on a board spill.  If a 50% shareholder majority is achieved on that spill resolution, a further shareholder meeting would need to be held within 90 days to determine the composition of the board.  The mechanism, therefore, provides shareholders with leverage where their concerns on remuneration issues are not adequately met over a 2 year cycle.

The “two-strikes rule” will only apply once its two most recent AGMs are held on or after 1 July, 2011.

In addition, other key measures of the Bill are:

(a) Remuneration consultants:  companies will need to disclose key details of the remuneration consultant, including the fees the consultant was paid.  Further, the remuneration consultant must generally be approved by, and only report to, the remuneration committee – as opposed to the board of directors – further ensuring that shareholders can make an informed and objective assessment about recommendations in relation to remuneration issues;

(b) Voting restrictions:  a company’s directors and key executives (“key management personnel”) and their closely related parties are prohibited from voting their shares on certain remuneration matters, further addressing the conflicts of interest (perceived or otherwise) that may arise with key management personnel voting on their own remuneration decisions;

(c) Hedging restriction:  key management personnel are prohibited from hedging their incentive-based remuneration by entering into “arrangements” that limit their exposure to risk relating to their remuneration that is unvested (due to time or other conditions) or is subject to a holding lock, ensuring further that the actual level of executive remuneration is solely linked to performance.

Draft regulations published on 16 May, 2011 indicate that “arrangements”, for the purpose of the above prohibition, will include a put option on incentive remuneration and income protection insurance contracts in which the insurance risk event affects the financial value of remuneration or equity or an equity-related instrument;

(d) No vacancy rule:  boards are prevented from declaring a “no vacancy” of board positions below a constitutional limit without explicit shareholder consent, further ensuring that boards cannot operate in a “closed shop” fashion; and

(e) Cherry picking of proxies:  proxyholders are prevented from cherry picking which proxies they exercise, further enfranchising shareholders who choose to vote by proxy.

The Government announced on 12 May, 2011 amendments to the Bill that would delay the application date for certain measures from 1 July, 2011 to 1 August, 2011. This delay is intended to provide transitional relief to companies facing difficulties in their preparations during May and June 2011 for AGMs scheduled for July 2011 because the Bill remains subject to parliamentary consideration.  Accordingly, careful attention needs to be paid to the transitional nature of the Bill.

2) Mergers & Acquisitions Update:  Walking away from schemes 

Where a party (acquirer) is considering effecting a control transaction of an Australian listed company (target) by way of a scheme of arrangement, the proposed acquirer should be aware that unless the target’s market announcement is either:

(a) accompanied by a copy of the scheme implementation agreement (SIA); or

(b) includes a summary of those termination provisions of the agreement necessary to ensure that, when the full agreement is published, the market does not become aware that the proposal is in fact less favourable than as announced,

the right of the acquirer to terminate the SIA under an express termination provision of the SIA may not be enforceable.

In the recent Australian Takeovers Panel (Panel) decision of BC Iron Limited [2011] ATP 6, Regent Pacific Group Limited (Regent Pacific), a company listed on the Hong Kong Stock Exchange (HKSE) (and its wholly owned Australian subsidiary) entered into a SIA with BC Iron Limited (BC Iron), a company listed on the Australian Securities Exchange (ASX).

Regent Pacific and BC Iron each made an announcement that they had entered into an SIA with the other party on the 20 and 21 January, 2011 respectively.  The BC Iron announcement listed a summary, in some detail, of the key terms of the SIA, including those concerning each parties’ termination rights.

On 14 February, 2011, an article appeared in the “Business Insider” website which stated that Consolidated Minerals Pty Ltd (ConsMin) – which owns or controls 20.7% of BC Iron’s share capital – was “flatly opposed” to the deal.  On 10 March, 2011, ConsMin further informed Regent Pacific that it was not able to decide how to vote without being provided the Explanatory Memorandum and an Independent Expert’s Report.

On the basis of the ConsMin’s position, on 15 March, 2011 Regent Pacific publicly announced that Regent Pacific’s board had withdrawn its recommendation for the scheme and that, inter alia, Regent Pacific had terminated the SIA under clause 15.1(d) of the SIA (Termination Clause).  The Termination Clause permitted Regent Pacific to terminate the SIA if “the Regent Pacific Board publicly changes or withdraws its recommendation” on or before the second court hearing.

By application dated 21 March, 2011, BC Iron sought a declaration of “unacceptable circumstances” with the Panel and orders, among others, that:

(a) the purported termination of the SIA by Regent Pacific was void; and

(b) neither Regent Pacific nor its board could further rely on the Termination Clause to terminate the SIA.

The primary reason provided by BC Iron was that, because the Termination Clause had not been disclosed to the market (notably, by BC Iron themselves), nor could be inferred from the announcements provided, the board of Regent Pacific was attempting to walk away from a publicly proposed control transaction at its election, contrary to the certainty required to maintain an “efficient, competitive and informed market” for BC Iron’s shares.

Regent Pacific submitted that it should not be precluded from relying on the Termination Clause because it was not responsible for the disclosure of the key terms of the SIA.  That is, BC Iron was responsible for its announcement under the ASX Listing Rules, and Regent Pacific was responsible for its announcement under the HKSE Listing Rules.

Despite Regent Pacific’s submission, the Panel gave orders of “unacceptable circumstances”, deciding that Regent Pacific could not rely on the Termination Clause to terminate the SIA because that clause had not been disclosed by BC Iron.  It resulted in the market for shares in BC Iron being traded in a market that was not “efficient, competitive and informed”, as required by Australian company’s law.  The decision was in line with previous Panel decisions on the subject (see AMP (No. 2) [2003] ATP 24).

The decision highlights that full disclosure in the target’s market announcement should be a material concern for an acquirer – even where that acquirer is a foreign entity primarily concerned with the compliance of its own listing rules.  Where a detailed summary of terms and conditions are provided – but not a copy of the SIA – “all terminations rights” should be included: BC Iron Limited [2011] ATP 6, [25].  Accordingly, reliance on an undisclosed termination provision to terminate a SIA may be ineffective.

Addisons is one of Australia’s longest established law firms, specialising in all aspects of corporate law.  David P. Selig is a Partner at Addisons specialising in initial public offerings, public capital raisings, mergers and acquisitions and compliance with Australian company law and listing rules, having over 30 years experience in private legal practice, as in-house counsel and as an investment banker.

In recent years, David has acted in a number of hotly contested public company takeover bids, including Hillgrove Resource Limited's bid for InterMet Resources Limited and Centrebet International Limited's bid for International All Sports Limited.  Both these bids resulted in Australian Takeovers Panel proceedings.

Mr Selig can be contacted on +61 2 8915 1010 or by email at david.selig@addisonslawyers.com.au.