Case law after the enactment of clause 20(2)
67 The Corporations Law replaced the Companies (Acquisition of Shares) Codes on 1 January 1991. Clause 20(1) of Part A of s 750 replicated paragraph 5A of the Code, while clause 20(2) was added. The explanatory memorandum for the Corporations Bill 1988, para 2310, states somewhat uninformatively:
'The requirement to set out particulars of the offeror's intentions (clause 20) is different to the requirement found in clause 5A of the Part A to the Schedule of CASA in that it provides that, where a relevant intention has not been finalised but the offeror is considering possible courses of action, those possibilities are to be specified (sub-clause 20(2)).'
68 It appears to me that clause 20(2), while confirming Beach J's second ground of decision in Cumberland Credit, expands the disclosure requirement. In ICAL, Bryson J was careful to find, on the basis of substantial evidence, that an actual intention had been formed, albeit dependent on conditions and subject to possible review; and in Cumberland Credit Beach J treated evidence about possible courses of action as signifying that the offeror had formed some alternative intentions . On the reasoning in those two cases, it would not have been necessary, prior to 1 January 1991, to disclose possible courses of action which were merely under consideration or, in Asquith LJ's words, a state of affairs which the offeror had done no more than 'merely contemplate'. Clause 20(2) advances the disclosure obligation to merely possible courses of action, provided that the offeror 'is considering' them.
69 The expanded disclosure obligation in clause 20 has been the subject of discussion in the following cases: QIW Retailers Ltd v Davids Holdings Pty Ltd (No.1) (1992) 36 FCR 386, 8 ACSR 245; Samic Ltd v Metals Exploration Ltd (1993) 60 SASR 300, 11 ACSR 84; Associated Dairies Ltd v Central Western Dairy Ltd (1993) 44 FCR 335, 11 ACSR 234; Gantry Acquisition Corp v Parker & Parsley Petroleum Australia Pty Ltd (1994) 51 FCR 554, 14 ACSR 11; Bridge Oil Pty Ltd v Parker & Parsley Petroleum Australia Pty Ltd (1994) 15 ACSR 240; Stirling Resources NL v Capital Energy NL (1996) 19 ACSR 701; Ampolex Ltd v Mobile Exploration and Producing Australia Pty Ltd (1996) 19 ACSR 354; Kresta Holdings Ltd v CHKP Capital Pte Ltd (1998) 26 ACSR 486; Savage Resources Ltd v Pasminco Investments Pty Ltd (1998) 30 ACSR 1.
70 In the QIW case the Part A statement said that the offeror 'has not yet formulated a detailed merger plan', and the offeror contended that no 'detailed' plans had been made as to precisely how the merger would take place, how it would be funded, and what precise assets would be transferred. Heerey J observed that the qualifiers 'detailed' and 'precisely' suggested that there were in fact plans of some sort, and referred to evidence of discussions between the offeror and the target well before the making of the bid which indicated that even then, details of funding proposals had been worked out. He concluded that according to the evidence, the offeror had a present intention with respect to major changes to the target's business, even though a decision may not have been made as between a number of possible courses of action.
71 In the Samic case the target's assets were entirely in cash. The Part C statement said that the intention of the offeror was to identify investments for the target which would earn a higher yield than existing bank deposits, with the ultimate objective of increasing the value of shareholders' interests in the target. The judge at first instance found that the offeror intended to use the target's cash for corporate acquisitions or investment in substantial holdings in companies, rather than merely for passive investment in listed securities. One of the witnesses explained the transaction as 'a case of buying cash at a discount'. The Full Court of the Supreme Court of South Australia concluded that the statement of intention in the Part C statement concealed rather than revealed the offeror's true intentions. King CJ observed (60 SASR at 303) that the true nature of the offeror's intentions could affect the assessment by offeree shareholders of whether the offeror was likely to improve its offer, the prospects of a competing offer, and the prospects for the shares if they were retained under new management.
72 In the Associated Dairies case, the Part A statement for a cash bid which was subject to a 50% minimum acceptance condition, made the following points about the offeror's intentions: if the offer became unconditional, the offeror would conduct a review of the target's business in conjunction with existing management to examine whether opportunities existed to improve operating and organisational efficiencies and increase overall profitability; pending the results of the review, and on the basis of the information known to it, the offeror's intention was to continue the business and employees of the target and not to make any major changes; if the offeror became entitled to all of the target's shares, its intention was to de-list the target and 'integrate its operations with those currently conducted' by the offeror, with the result that the target would continue as the subsidiary responsible for developing the group's presence in the Victorian market. Ryan J found that the concept of 'integration' which had been used in the Part A statement was ambiguous, just as the word 'rationalise' had been found to be ambiguous by Bryson J in ICAL. The word might have connoted the amalgamation of some head office functions with consequent redundancies of employees, and might have connoted the redeployment of fixed assets. Therefore the Part A statement failed to comply with clause 20.
73 In the Gantry Acquisition case the Part A statement of one of two competing offerors who had made cash bids contained a lengthy clause dealing with intentions. The clause stated that the offeror intended ultimately to concentrate its activities within the United States, and consequently it intended to cause the target to divest its non-US operations and assets at an appropriate time and on the most favourable terms. It identified several options under consideration, namely a sale of assets in whole or in part, and a possible Australian public offering of all or a proportion of the non-US assets. The offeror had not made a decision in respect of those options in the absence of sufficient information, and any decision would be made only after it had examined the operations and assets and further considered its position. Its intention was that the non-US assets would continue to be managed in their best long term interests. The offeror said it intended to cause a royalty interest to be sold for an approximate purchase price which was specified. Subject to those matters, the offeror intended to continue the business and employees of the target and did not intend to made major changes to the business.
74 Sheppard and Burchett JJ held, Beazley J dissenting, that the Part A statement failed to comply with clause 20 of s 750. Sheppard J regarded the disclosure as generally satisfactory, but found that the subparagraph which disclosed the intended sale of a royalty interest was expressed in a confusing and incomplete manner. Noting that clause 20(1) requires 'particulars', and that clause 20(2) requires the offeror to 'specify' possible courses of action, he said (51 FCR at 560):
'Accordingly, an offeror must do the best it can to be particular and specific about its intention. Nevertheless the document is dealing with a commercial situation. It is being delivered in a context in which the offeror does not have control of the target company. In those circumstances it is not only reasonable, it is also necessary to express itself in a guarded way. If it does not do this, it runs the risk that statements it makes may, because of their very particularity, be found to have been misleading.'
75 As to the sale of the royalty interest, he reasoned that further particularisation and an indication of the ultimate destination or use of the sale proceeds would give the offeree shareholder an idea of how important the acquisition of the target was to the offeror; this would better enable the offeree shareholder to gauge the likelihood of being able to gain an increased offer by refusing acceptance for the time being. He said (51 FCR at 561):
'It is a question of being given full and sufficient information to make a judgment concerning how valuable the acquisition will be to the appellant and thus of making an informed assessment of whether the appellant may be prepared to pay more for the shares than its offer suggests.'
76 Burchett J also stressed the use of the words 'particulars' and 'specify', which left him in no doubt that precision was essential for compliance with clause 20. Finding that the disclosure of intentions fell far short of what was required by clause 20, he observed that words such as 'ultimately' and 'at an appropriate time' reduced the disclosure to such generality that the information which it provided was useless (51 FCR at 569).
77 In Stirling Resources the Part A statement for a scrip bid stated the offeror's intentions if the bid was 'successful' and its nominees constituted the majority of directors on the board of the target. The intentions in those circumstances were to continue the target's business in its present form but to focus the target more on its core activities of petroleum exploration and production, and to evaluate non-core businesses in terms of their strategic value and future benefits. The divestment of non-core assets that produce a marginal return and have no strategic value might be considered. Subject to that, no major changes were intended to be made to the business of the target, other than that the offeror would consider pooling office administration and technical facilities. The staffing requirements of the combined group would be reviewed and the present employees would be given due consideration for continued employment, but to the extent that there would be a duplication of functions, the employment of surplus staff could be terminated.
78 Hill J rejected a submission that this disclosure was simply too vague to be satisfactory. However, he held that the disclosure did not comply with clause 20 because it dealt only with intentions in the event that the bid was successful and the offeror's nominees became a majority of the board of the target. He held that clause 20 is not satisfied by disclosure of particulars of the offeror's intentions only in limited circumstances but not in other circumstances. He also rejected a submission that the Part A statement was inaccurate because some correspondence between two directors indicated that they had formed a more specific intention. In Hill J's opinion, views in the minds of individual directors not communicated to other directors nor made the subject of board decisions could not be taken to be the plans of the company. He said that 'a company's intentions can only be judged by reference to the intentions of the directors, not the directors singularly but the directors acting as a board', although there may be cases in which 'a particular person may be found as a fact to be the governing mind of a company so that that person's intentions may be taken as being the intentions of the company' (14 ACLC at 1010).
79 In the Ampolex case the Part A statement for a conditional cash bid stated that the offeror's intention, if the bid was successful, was that the target's business and the employment of employees would be continued and no changes would be made. However, if the bid were successful, the offeror's executives would discuss with executives of the target the best way to utilise the assets and the experience and expertise of the target's employees for the benefit of the group. In accordance with usual practices of the offeror, the target's assets would be subject to regular scrutiny and review. The Part A statement referred to a review which the target had announced with respect to its United States assets, and said that the offeror proposed to discuss that review process with executives of the target to determine whether the United States assets should be retained, merged with existing assets of the offeror's affiliates or divested. The offeror stated that it recognised that an issue which will need to be resolved is the rationalisation of functions presently carried out by the respective Australian offices of the offeror and target, and that the offeror intended to identify and realise potential costs savings associated with avoiding duplication of functions.
80 Sackville J held that the statement of intentions did not comply with clause 20 and was misleading. There was significant evidence to indicate that the offeror had a well developed strategy to integrate the business of the target into the offeror's worldwide operations. In particular, a director of the offeror's parent set out the strategy in a letter to the managing director of the target, after the letter had been reviewed by the offeror's chairman and managing director. Sackville J said that the bland statement that the offeror intended to discuss with executives of the target the best way to utilise the assets and experience of the target for the benefit of the offeror's group, obscured the true position and was apt to mislead shareholders. A shareholder reading the Part A statement would gain the impression, not merely that the offeror contemplated no change in relation to the business and assets of the target, but that the offeror had been unable to form a clear view as to the future conduct and direction of the business until discussions with the target's management had taken place. He said (14 ACLC at 769):
'The point is not that MEPA is obliged to specify in a Part A statement the details of all plans it is considering for Ampolex's future operations. In order to avoid misleading shareholders it is clearly necessary for an offeror to couch its language carefully. It is also necessary to avoid speculation. General statements may well be enough, especially if intentions cannot be formulated precisely until after a takeover is completed. … But the defect in [the Part A disclosure of intentions] in my opinion, is not merely that it omits material information, it is that it creates the impression that MEPA is much less advanced in its planning with respect to the development and exploitation of Ampolex's under performing resource base than is in fact the case.'
81 In Kresta Holdings the Part A statement for a partial takeover bid said that the offeror's overall strategy was to 're-engineer' the target into a professional, lean and fighting fit company, successful in Australia, New Zealand, the Middle East and Asia. The first plan was to stem losses and return the target to profitability quickly. Thereafter the target would be expanded aggressively into the Middle East and Asia by 'leveraging' on the bidder's extensive overseas business network. Templeman J conceded that this disclosure may have been little more than advertising puff, but he said that it did provide some indication of intentions, and the matter could be made the subject of comment in the Part B statement.
82 In the Savage Resources case, the Part A statement for a cash bid subject to a minimum acceptance clause set out the offeror's intentions concerning the target in the event that the target became its wholly owned subsidiary. Those intentions included the achievement of synergistic benefits from operating the target's US zinc assets in conjunction with the offeror's Australian and European zinc operations; disposal of the target's coal interests and its interest in a copper and gold project; a review of whether to continue to develop or dispose of certain other exploration assets; and the probable closure of the target's Sydney head office as part of a process of reducing or eliminating costs arising from the maintenance of a separate share registry, secretarial and head office functions for the target. No complaint was made about the sufficiency of this disclosure. However, the target complained that the offeror had not adequately disclosed its intentions should the target become a controlled entity but not a wholly owned subsidiary. The Part A statement said that although the offeror had no present intention of waiving the minimum acceptance condition in the offer, if this were done and the target became a controlled entity but not a wholly owned subsidiary, the offeror would review whether continuation of the target's listing was worthwhile, replace some or all of the directors of the target to reflect the offeror's ownership interest, and implement such of its intentions as were consistent with the target being a controlled entity but not a wholly owned subsidiary. The Part A statement said that the offeror would only make a decision on these possible courses of action following receipt of legal and financial advice, and its intentions must be read subject to the legal obligation of the board of directors of the target to have regard to the interests of all of the target's shareholders.
83 Hely J held that the statement of intentions was adequate, and that there was no evidence which would establish that the offeror had any intentions which had not been disclosed. He noted the law's rigorous insistence that a majority shareholder cannot dictate to directors how they should discharge their duties of office, and took the view that clause 20 does not require the formation of specific intentions which would pay only lip service to the basis company law. He said that statements as to the offeror's intention should its preferred position that there be no waiver of the minimum acceptance condition change must necessarily be guarded, because in that event the reconstituted board would have to act in the interests of the target's shareholders as a whole.