Companies disguise takeovers to dodge rules

Companies are dodging the Takeovers Code by taking advantage of merger rules instead of launching a takeover bid, the Takeovers Panel says.

The panel is seeking public comment on proposals to plug gaps in the Companies Act that have allowed the loophole.

A number of recent deals employing schemes of arrangement - in which companies can agree to merge - have been widely slated as "takeovers dressed as mergers".

The deals, including Origin Energy's merger with Contact Energy, have been criticised as attempts to gain control of companies without meeting Takeovers Code rules designed to protect the interests of minority shareholders.

Transpacific's merger with Waste Management, which uses a different provision in the Companies Act, has been criticised for similar reasons.

In a discussion paper released yesterday, the panel said its existing policy aimed to permit mergers by way of schemes of arrangement "in limited circumstances" subject to conditions that provided a balance between the objectives of the Takeovers Code and the Companies Act.

However, the panel proposed revisions to that policy because it found recent use of schemes of arrangement as avoidance mechanisms "unsatisfactory".

"There can be good and proper reasons to utilise the scheme of arrangement procedure but it is not appropriate for it to be used as a device to avoid key requirements of the Companies Act and the code," the panel said in the discussion paper.

As well as an exemption from the panel, schemes of arrangement also require High Court approval.

"However, at present the court, in approving schemes of arrangement, is apparently not taking into account the fact that a technical device is being used to avoid the code, and the exemption procedure, and/or to avoid the application of the minority buy-out provisions in the Companies Act," the panel said.

The panel has proposed that any exemption it grants would be subject to conditions based on the objectives and mechanisms of the Takeovers Code and that the conditions would ensure the principles of the code are not subverted by the use of a scheme of arrangement.

To help facilitate that, the panel has proposed additions to the threshold of shareholders' votes required to approve a scheme of arrangement.

Ben Tothill, of law firm Duncan Cotterill, said the discussion document signalled the panel was intending to look more at achieving the objectives of the Takeovers Code rather than being prescriptive and applying a rigid set of rules that could be easily manipulated.

"There's been recent uses of schemes of arrangement that seem to blatantly avoid the mechanisms of the code and this is designed to readjust the balance so that these avoidance mechanisms are more difficult to use."

Comments on the discussion paper must be received by May 1.