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Kardi, Justin --- "Placing the Eggleston Principles in Australia's Takeovers Legislation: Flexible Guide Or Uncompromising Goal?" [2018] UNSWLawJlStuS 6; (2018) UNSWLJ Student Series No 18-06


PLACING THE EGGLESTON PRINCIPLES

IN AUSTRALIA’S TAKEOVERS LEGISLATION:

FLEXIBLE GUIDE OR UNCOMPROMISING GOAL?

JUSTIN KARDI

First articulated in 1969 by the Eggleston Committee, the ‘Eggleston principles’ have subsequently played a significant role in the development of Australia’s corporate takeovers laws. By referencing the Eggleston Committee reports, and subsequent reviews and changes to legislative drafting over time, this article charts the growth in prominence of the Eggleston principles and their entrenchment into the black letter law. With takeovers regulation framed as a balancing act between investor protection and market efficiency, this article explores whether the Eggleston principles play a role in balancing those interests beyond what was originally intended or is necessary. With the failure of government to legislate a mandatory bid rule, and calls to abolish the three per cent creeping acquisition exemption, the impact of an uncompromising interpretation of the Eggleston principles on the market for corporate control is considered. Focusing on the Eggleston equal opportunity principle, proposals for reform are outlined.

I INTRODUCTION

The market for corporate control in Australia today is primarily governed by provisions in chapters 6 to 6C of the Corporations Act 2001 (Cth) (‘Corporations Act’). While the scope and level of detail in the current legislation has grown substantially from the first takeovers laws enacted in 1961,[1] a common influence behind much of this development has been four policy objectives generally known as the ‘Eggleston principles’.[2] The principles were first articulated in a report by the Company Law Advisory Committee in 1969 (‘Eggleston Committee’),[3] chaired by Sir Richard Eggleston. By setting standards for access to information about a takeover bid, the provision of sufficient time to consider that information, and equal opportunity to share in the benefits of a control transaction,[4] the principles have helped shape Australian laws in favour of investor protection.[5]

The Eggleston principles were adopted as general principles that informed amendments to state-based takeovers laws in 1971.[6] Subsequently, the principles have gained greater prominence through revisions to the laws in 1980, 1989, and most recently in 2001.[7] Written directly into law for the first time in 1980,[8] the Eggleston principles are now enacted in section 602 of the Corporations Act as four of the stated ‘purposes’ of the primary takeovers chapter. Given their durability, there is unsurprisingly widespread agreement that the Eggleston principles have profoundly influenced the shape of the law.[9] The consequence of this influence on the market for corporate control, however, remains a point of debate. Although praised for introducing equitable principles into takeovers laws,[10] the Eggleston principle of equal opportunity has been the target of special criticism by those who argue it adds to costs and discourages bids.[11] An uncompromising view of this principle has also been used as grounds for rejecting a mandatory bid rule,[12] and more recently, for seeking abolition of the three per cent creeping acquisition exemption.[13]

With the regulation of takeovers often framed as an act of balancing investor protection and market efficiency,[14] this essay will explore if the Eggleston principles have come to play a role in balancing those interests beyond what was originally intended or is necessary. Part II introduces the history of the Eggleston principles and their application through successive revisions of the legislative framework. The reports of the Eggleston Committee, as well as changes to legislative drafting over time, are used to chart the changing scope of the principles. Part III examines ways in which the current law recognises a need to balance competing interests, with reference to existing exceptions that infringe upon the Eggleston principle of equal opportunity. By contrast, the rejection of a mandatory bid rule, and calls to abolish the three per cent creeping acquisition exemption, are used to argue the Eggleston principles have become entrenched in a way that may prevent reform to enhance market efficiency. Part IV looks at reasons why the Eggleston principles may need reform, and considers proposals to clarify their scope. This article will conclude that investors, and the market for corporate control in Australia, could both be better served by a takeovers legislation that better clarified the Eggleston principles and provided opportunities to opt-out.

II EVOLUTION OF THE PRINCIPLES

A Overview

The Eggleston principles were first outlined in the Eggleston Committee’s 1969 Second Interim Report to the Standing Committee of Attorneys-General on Disclosure of Substantial Shareholdings and Takeovers.[15] Each of the four principles aims to protect shareholders in a target company subject to a control transaction. They require limitations, ‘so far as is necessary’,[16] to be placed on the actions of a bidder making a general offer for a company, thereby ensuring:

(i) that his [the offeror’s] identity is known to the shareholders and directors;

(ii) that the shareholders and directors have a reasonable time in which to consider the proposal;

(iii) that the offeror is required to give such information as is necessary to enable the shareholders to form a judgment on the merits of the proposal and, in particular, that the kind of information which would ordinarily be provided in a prospectus is furnished to the offeree shareholders;

(iv) that so far as is practicable, each shareholder should have an equal opportunity to participate in the benefits offered.[17]

The first three Eggleston principles relate to procedural elements of disclosure and timing in a takeover offer, while the fourth principle seeks to deal substantively with the distribution or ‘allocation of property rights’ arising from the transaction.[18] This distinction has likely contributed to the fourth principle being the focus of much of the ongoing debate as the influence of the Eggleston principles has grown.[19]

There have been economic arguments made in favour of the Eggleston principles, based on the idea that higher levels of investor confidence will result in benefits such as greater liquidity in the market.[20] However, insofar as these arguments are built on investor confidence, they are ultimately a product of the way the Eggleston principles address certain social aspects of takeovers.[21] For example, by recognising the likelihood of a power imbalance between an investor with a small shareholding and a takeover bidder, the first three principles seek to ensure fair access to information by all shareholders regardless of their resources. Similarly, the fourth Eggleston principle seeks to impose a form of ‘distributive justice’,[22] requiring the benefits of a control transaction to be shared equally or proportionally amongst the target company’s shareholders. The presence and ongoing retention of these investor protections is said by some to provide the confidence necessary to support widespread participation in the securities market.[23]

Having survived several reviews in the decades since 1969,[24] the Eggleston principles remain well entrenched at the heart of the current regulatory framework in the Corporations Act. Very little reform has occurred around the Eggleston principles since 2001, with the most recent amendment in 2007.[25] Examining the development of the Eggleston principles may therefore be beneficial in re-evaluating their contemporary application in the law. The following sections look at key stages in the history of the Eggleston principles, starting with the Eggleston Committee. They note moments where the Eggleston principles may have grown in scope, or become further entrenched in the law.

B The Eggleston Committee

A string of large corporate collapses in the 1960s led to a public outcry over the hardship caused to small investors.[26] With questions over the efficacy of Australia’s corporate regulation, the Standing Committee of Attorneys-General appointed the Eggleston Committee in 1967, giving it the following terms of reference:

To enquire into and report on the extent of the protection afforded to the investing public by the existing provisions of the Uniform Companies Acts and to recommend what additional provisions (if any) are reasonably necessary to increase that protection.[27]

Former judge and chair, Sir Richard Eggleston, was joined by solicitor JM Rodd and accountant PCE Cox as the members of the Eggleston Committee.[28] According to the recollections of Tony Greenwood, who was working in a senior capacity under the New South Wales Attorney-General at the time,[29] one of the motivations for appointing the Committee was to lend authority to what would likely be politically difficult reforms.[30] Greenwood also suggested the Eggleston Committee was under-resourced, with the basis for much of its proposed takeovers reforms being a paper he ‘prepared over a few days’.[31] Lawyer Robert Baxt has said the actual Eggleston principles themselves were drafted after just ‘one month of study and no discussion period’.[32]

The work of the Eggleston Committee received some criticism for its focus on shareholder protection at the expense of other areas of corporate regulation.[33] However, its narrow terms of reference meant many of its recommendations were based on ideas captured in existing laws.[34] While those laws applied only to takeovers by a company and not natural persons,[35] the substance of the first three Eggleston principles was addressed already. The first Eggleston principle was captured in a requirement that a notice of a takeover offer include the ‘names, descriptions and addresses of all directors of the offeror corporation’.[36] The second principle was addressed through a minimum offer period of one month.[37] The third principle was covered by applying prospectus disclosure requirements to statements made under a takeover offer.[38]

The fourth Eggleston principle, the ‘equal opportunity principle’, appears to have less of a precedent in the existing legislation and has been attributed instead to Sir Richard Eggleston’s ‘equity jurisprudence’.[39] However, three specific scenarios were identified by the Eggleston Committee in which the equal opportunity principle was to apply, with existing laws touching on aspects of these. The first scenario covered the need to ensure investors did not become trapped as minority shareholders after a takeover.[40] This was partially addressed through an existing provision for the compulsory acquisition of shares.[41] The second scenario covered situations where market pressure may result in different prices being paid to different shareholders, depending on when an offer was accepted.[42] This came to be addressed in the legislative amendments that followed the Eggleston Committee, with a provision entitling all shareholders to a later price increase.[43] The third scenario covered partial offers for shares in a company, with the suggestion that all shareholders should be entitled to accept for an equivalent proportion of their holding.[44]

Importantly, in what appears to be a concession that the equal opportunity principle was not intended to be uncompromising, the Eggleston Committee noted in the third scenario it would be ‘impossible to secure complete equality in this respect’.[45] Similarly, the Committee also recommended against the equal opportunity principle applying to on market purchases.[46] Acknowledging the desirability of market freedom, the Committee noted the cost to a bidder may become prohibitive if forced to pay shareholders who accept an offer the same price paid for on market purchases.[47]

In drafting its report, the Eggleston Committee referred to the Eggleston principles collectively as a ‘general principle’ with which they agreed.[48] No justification for the equal opportunity principle was given,[49] and no suggestion was made that the principles themselves were intended to form part of the substantive law. The economic rationale behind takeovers as improving the value of an investment was acknowledged,[50] with the Committee’s report noting they did not want to discourage bids where safeguards were met.[51] Because the existing safeguards were often circumvented,[52] this meant the Eggleston Committee’s recommendations were largely focused on closing loopholes or extending the reach of existing laws. This was reflected in the 1971 amendments that applied takeovers provisions to natural persons,[53] reduced the threshold from which takeovers provisions applied to partial bids,[54] and aggregated interests held by associates of an offeror when determining if they met the takeovers threshold.[55] The role of the Eggleston principles in justifying or informing the Eggleston Committee’s recommendations was acknowledged in parliament,[56] but the Eggleston principles themselves were not included in the amended legislation.

C Companies (Acquisition of Shares) Act 1980

In what was a significant reworking of takeovers laws, the Eggleston principles were written directly into the legislation for the first time in the Companies (Acquisition of Shares) Act 1980 (Cth) (‘CASA’).[57] Picking up on a recommendation of the Eggleston Committee that was previously ignored, CASA introduced the National Companies and Securities Commission (‘NCSC’) as a federal body with powers to vary or exempt parties from the takeovers laws.[58] The NCSC also had powers to declare an acquisition of shares, or conduct surrounding that acquisition, to be ‘unacceptable’.[59] Sections 59 and 60 of CASA included versions of the Eggleston principles as considerations or criteria for the NCSC to use when determining if it would exercise those powers.

Significantly, the drafting of section 59 commenced with a leading paragraph that stated the NCSC ‘shall take account of the desirability of ensuring that the acquisition of shares in companies takes place in an efficient, competitive and informed market’.[60] The Eggleston principles then followed as subpoints, after the connecting phrase, ‘without limiting the generality of the foregoing’.[61] This appears to have been a deliberate attempt to capture the balance between the interests of investor protection and market efficiency. It could arguably be interpreted as framing the Eggleston principles as subsidiary to the leading paragraph. Greenwood identified the founding NCSC chairman, Leigh Masel, as the author of the ‘efficient, competitive and informed market’ phrase (‘Masel principle’), noting it was a shift from Eggleston’s ‘purely equity lawyers approach’.[62] The drafting of the section may also have been influenced by a 1974 report from the Senate Select Committee on Securities and Exchange (‘Rae Committee’). This report recommended pursuing two ‘sometimes conflicting’ policy objectives.[63] In addition to the policy objective of investor protection, highlighted by the Eggleston principles, the Rae Committee added the interests of ‘economic development, efficiency and stability’.[64]

The drafting of the Eggleston principles in section 60 of CASA did not, however, include the Masel principle. This may have been because the NCSC’s power to make a declaration was aimed squarely at investor protection. However, it was likely due to the Eggleston principles being reworked as criteria that the NCSC had to satisfy itself had been breached before making a declaration. Regardless, the Eggleston principles or Masel principle were not framed as the purposes of the CASA takeovers provisions, even if that implication could be drawn from section 59. The Eggleston principles were, however, advanced through the substantive law. A new prohibition would apply to acquisitions that would see a bidder (or a bidder and their associates) increase their entitlement to more than 20 per cent of a company’s voting shares without launching a takeover.[65] This went beyond the scope of the equal opportunity principle enunciated by the Eggleston Committee,[66] as it no longer allowed an unlimited number of shares to be acquired through on market transactions. To balance the impact of this new prohibition, CASA introduced a range of exemptions including the three per cent creeping acquisition exemption (‘three per cent creep rule’).[67]

Subsequent amendments to CASA further extended the reach of the Eggleston principles, bringing conduct before a takeover offer under the section 60 powers.[68] The equal opportunity principle was also advanced through the restriction of partial bids to proportional bids,[69] and a prohibition on the use of escalation agreements in the six months prior to a takeover bid.[70] A proposal to include a clear ‘statement of objectives’ in the legislation was, however, not accepted.[71] This proposal would have seen a broad reading of the Eggleston principles inserted into CASA with the addition of a statement that a control premium should be ‘as reasonably practicable ... proportionally vested in each voting share’.[72]

D Corporations Law

The Corporations Law was created through an amendment to the Corporations Act 1989 (Cth) in 1990.[73] By this stage the Eggleston principles were well entrenched in the substantive law, with most of the reforms from CASA carried over.[74] A broad reading of the equal opportunity principle, such that a control premium must be shared equally amongst shareholders, was also recognised in the Explanatory Memorandum to the Bill, despite being rejected just five years earlier.[75] Strong representations against incorporating this interpretation were made,[76] however a subsequent review by the House Standing Committee on Legal and Constitutional Affairs did not recommend change.[77]

As was the case with CASA, the Eggleston principles (and Masel principle) remained confined as policy considerations or criteria for the exercise of powers, in sections 731 and 732 of the Corporations Law. However, in an interesting move, the power to make a declaration of unacceptable circumstances was handed to an independent Corporations and Securities Panel (‘CSP’).[78] To enliven the CSP’s power, the Australian Securities Commission (‘ASC’), as the successor to the NCSC, had to refer a matter to the CSP after determining there had been a breach of the Eggleston principles as adapted in section 732. Before making a declaration, the CSP had to consider the Eggleston principles and Masel principle again in section 731, being the same considerations for the ASC in exercising modification or exemption powers. This was a significant step in the process of the Eggleston principles and Masel principle becoming the defining purposes of the takeovers regulation.

E The Current Law

The current takeovers laws in the Corporations Act were a product of the Corporate Law Economic Reform Program (‘CLERP’) from 1997.[79] Unlike many of the prior reviews, the focus of CLERP was directed unambiguously at enhancing market efficiency.[80] While the Eggleston equal opportunity principle came under scrutiny in the CLERP paper on takeovers, the authors chose to recast its role of promoting investor confidence as a ‘crucial feature of efficient financial markets’.[81] This was an interesting argument to make, given the Commonwealth Treasury could not find a compelling economic rationale for the principle just six years earlier.[82] Others have also disputed the idea that the equal opportunity principle is in any way efficient.[83] Crucially, while recommending the retention of the equal opportunity principle as its first ‘reform’ proposal, CLERP noted that the inefficiencies it may cause could be mitigated by ‘gains in other areas’, such as a recommended mandatory bid rule.[84] Although the mandatory bid rule did not make it into the law, the Eggleston equal opportunity principle was retained and is now in section 602. Justin Mannolini has argued that this is an example of inefficient rules being ‘locked in’ for reasons of political expedience.[85]

Two significant drafting changes were made to the Eggleston principles and Masel principle in the Corporations Act. Firstly, they appear only once in section 602 and are explicitly referred to as the ‘purposes’ of the chapter. They are no longer limited to being considerations for the regulatory bodies. This key change may have contributed to the Eggleston principles now being seen as part of the ‘black-letter’ law of the Corporations Act.[86] Whether this symbolic shift was intentional or not, it was likely driven by calls for greater simplicity and flexibility in the regulation, to better address attempts at circumventing the spirit of the laws.[87] The second significant drafting change in section 602 is the recasting of the Masel principle as one of five purposes, equivalent to the four derived from the Eggleston principles. Some have argued this elevated the Masel principle to ‘equal prominence’ with the Eggleston principles.[88] However, the change could also be seen as demoting the Masel principle from its position in CASA, where it was drafted as an overarching objective to which the Eggleston principles were written as sub-points. Either way, it is hard to argue the change helps reconcile the equitable element of the Eggleston equal opportunity principle with the efficiency element of the Masel principle.

III A BALANCING ACT

The role of takeovers regulation has long been framed as a balancing act between the promotion of market efficiency and protecting investor interests.[89] Despite differing perspectives, most recognise the need for some regulation.[90] In Australia, these competing interests are captured in the form of the Masel principle and the Eggleston principles. Although the first three Eggleston principles can be matched somewhat comfortably with the Masel principle, as each promotes an informed market, it is clear the equal opportunity principle and the Masel principle will sometimes be in conflict. While a greater emphasis on market efficiency in the substantive law of recent years has been observed,[91] the entrenchment of the equal opportunity principle over time has contributed to halting efficiency focused reforms like the mandatory bid rule, and has brought into question existing provisions of the Corporations Act. With calls to legislate to ensure the Eggleston principles apply to a members’ scheme of arrangement,[92] and a push to scrap the three per cent creep rule,[93] the equal opportunity principle is prominent during debates over balancing competing interests.

While CLERP recommended the retention of the equal opportunity principle, the practical effect of many CLERP reforms has in fact been gains in efficiency. For example, changes to the Takeovers Panel have helped reduce the cost and delay of strategic litigation.[94] New provisions have allowed an offeror in certain circumstances to compulsorily acquire securities that are convertible into a bid class, removing a previously legal avenue for greenmail.[95] The ongoing balancing act between efficiency and investor protection is also played out in exemptions to the prohibition on acquiring relevant interests in a company above the 20 per cent takeovers threshold.[96]

While all exemptions and exceptions to the equal opportunity principle will be an infringement of the principle in some way, improvements in efficiency such as those brought about by the CLERP reforms do not have to mean an equivalent decline in investor protection. The following sections consider this balancing act with reference to the three per cent creep rule and the failed mandatory bid rule.

A Creeping Acquisitions

Introduced as a part of CASA in 1980, and now in section 611 of the Corporations Act, the three per cent creep rule allows gradual acquisitions beyond the 20 per cent takeovers threshold under certain conditions. An acquirer must have held a minimum of 19 per cent of the voting rights in the target company for at least six months before the acquisition, and must not acquire more than an additional 3 per cent within any six-month period. This exemption infringes on the equal opportunity principle as it may allow control to pass without all shareholders being paid the same price. Greg Medcraft, who was chairman of the Australian Securities and Investments Commission (‘ASIC’) at the time, called for the exemption to be abolished as it allowed ‘takeover by stealth’.[97] This argument is difficult to reconcile with disclosure requirements for substantial holdings, which mean an acquirer in this situation must alert the market to any increase of at least 1 per cent.[98] In fact, the three per cent creep rule is a significantly more conservative exemption than the on market transactions of unlimited numbers of shares which the Eggleston Committee saw as sitting outside the equal opportunity principle.[99] Creeping acquisitions are slow, giving the market time to respond, and may beneficially incentivise management to improve performance. In these circumstances, the potential benefits of greater takeover activity appear to outweigh any imposition on the equal opportunity principle.

B The Mandatory Bid Rule

The Mandatory Bid Rule proposed by CLERP was singled out as an efficiency offset for the retention of the equal opportunity principle.[100] This exception would have allowed the acquisition of a block of shares exceeding the 20 per cent takeovers threshold, providing it was followed by a bid for the rest of the shares.[101] The benefits for a person seeking control of a company would be a decrease in the risk of entering a bidding war, with reduced costs and increased bid certainty.[102] While the model proposed would have protected shareholders by requiring the bid offer price to be at least as high as that paid by the bidder in the last four months, it was rejected by the Senate for being ‘contrary’ to the Eggleston principles.[103] The idea that control of a company could change through a private pre-bid agreement, without all shareholders being able to participate, was held to infringe on the equal opportunity principle.[104] This is again beyond the scope envisaged by the Eggleston Committee, which recommended an offeror should be entitled to approach a limited number of block shareholders and make purchases from them outside of the takeovers provisions.[105]

Even if the view of the Eggleston Committee on pre-bid agreements has subsequently been exposed as too lenient, others have argued a mandatory bid rule could still be in the interests of investors as a block shareholder would likely be the most motivated and capable of extracting the best price.[106] This may also have offset the effect of any reduction in competition from fewer bids being contested. Under the proposed rule, the price obtained would have flowed on to all shareholders, providing a reasonable balance with the equal opportunity principle.

IV REFORM

A Overview

Major reforms were undertaken to Australia’s corporate laws approximately every decade from 1961 to 2001.[107] Although the absence of significant change in the following years could be evidence of a well-functioning system, there are compelling reasons to revisit the Eggleston principles. Firstly, CLERP placed substantial weight on a mandatory bid rule when justifying the retention of the equal opportunity principle. The subsequent failure to legislate a mandatory bid rule should be grounds to reassess that principle. Secondly, the elevation of the Eggleston principles within the legislation has made the conflict between the equal opportunity principle and the Masel principle more critical. Clarity is needed to address the risk that an uncompromising interpretation of the equal opportunity principle may be used to justify a loss of existing flexibility, or prevent future efficiency-focused reform. Finally, the passage of almost two decades since CLERP is itself cause for review. During this time, there have been attempts to revive a mandatory bid rule,[108] and numerous calls to reassess or remove the equal opportunity principle.[109] With neither considered by a 2012 Treasury scoping paper,[110] politically brave reform may be needed to help reset the balance between market efficiency and investor protection.

B Reform Proposals

Proposing change to the Eggleston principles is likely to be hard. The perception of their entrenched position is such that they are referred to as everything from a ‘cornerstone’ of Australian takeovers laws,[111] to the embodiment of ‘the uniquely Australian belief that everyone ... deserves a “fair go”’.[112] Fortunately, a change to all four principles should not be necessary. The first three Eggleston principles have not been the subject of much controversy,[113] as they are procedural and have long been covered by broadly supported disclosure provisions.[114] On the other hand, the fourth Eggleston principle of equal opportunity has been the subject of ongoing controversy.[115] Attempts at justifying its continued presence in the legislation are often absent,[116] or vague.[117] For example, the argument put forward by CLERP that it supports investor confidence is questionable. The types of corporate collapses that damaged investor confidence in the 1960s, and gave rise to the Eggleston Committee, did not result from unequal treatment of shareholders in a takeover.[118] Similarly, investors who suffered through corporate collapses in the 1980s were not protected by the presence of the equal opportunity principle.[119] While Australia is not unique in having an equal opportunity principle, its application in unusually strident.[120] In the United Kingdom, it is applied in substantive provisions as well as being a general principle,[121] however the principle uses the term ‘equivalent’ not ‘equal’ treatment.[122] Similarly, in Japan, the principle is captured only in substantive provisions, such as an equal price provision for shareholders in a target company subject to a takeover.[123]

Sufficient clarity could therefore be brought to the Eggleston principles by removing reference to the equal opportunity principle as a foundational purpose in section 602 of the Corporations Act. This would prevent the principle from being used as expansive grounds on which to reject a reform such as the mandatory bid rule, or to seek the abolition of exceptions including the three per cent creep rule. The remaining principles, including the Masel principle, could continue as useful policy considerations for the Takeovers Panel,[124] maintaining flexibility to address attempts at circumventing the spirit of the law. They could also continue to be used by the ASIC when exercising powers of modification or exemption. While this proposal would resolve the conflict between the Masel principle and the equal opportunity principle, it should not alone result in a change to current investor protections. This is because elements of the equal opportunity principle are already applied in substantive provisions including the 20 per cent takeovers threshold and the requirement for the equal treatment of shareholders under a takeover offer.[125]

In addition to the removal of the equal opportunity principle as a foundational purpose, consideration should be given to allowing an opt-out from selected provisions in the Corporations Act that remain as substantive applications of the principle. This could operate in a manner similar to the replaceable rules in the Corporations Act, where the legislation sets a standard from which a company constitution can deviate.[126] James Mayanja has advocated both an ‘opt-in’ system for the equal opportunity principle,[127] and an ‘opt-out’ system for creeping acquisitions.[128] However, of the two models, an opt-out system is likely to be easier to sell politically, as it is less of a sudden departure from current arrangements. An opt-out would also reflect the modification and exemption powers of ASIC, which have been granted by legislation to the corporate regulators since CASA.[129]

In situations where provisions requiring the equal treatment of shareholders in a target company were opted out of, Mannolini has argued there are other statutory and common law protections which mean minority shareholders would not be disadvantaged.[130] These include fraud on the minority, and directors’ fiduciary duties.[131] Additionally, confining the ability to ‘opt-out’ to a company’s constitution would subject it to a special resolution of the shareholders.[132]

Mayanja, who also advocated the removal of the equal opportunity principle, believes shareholders in a target company are best placed to identify their needs with regards to allocating any control premium.[133] An example of this can be found in the acquisition of Uecomm Limited (‘Uecomm’) by Optus Networks Pty Limited (‘Optus’). The majority shareholder in Uecomm, Alinta Ltd, had a 66 per cent holding.[134] Alinta Ltd accepted a lower price for 20 per cent of its holding through a pre-bid collateral agreement, so the takeover deal could fit within the control premium Optus was prepared to pay.[135] With minority shareholders receiving the larger per-share percentage of the control premium, Alinta Ltd was able to structure the deal so it was accepted by ASIC.[136] While the size of Alinta Ltd and its resources may have influenced ASIC in this regard, the same opportunity of weighing up the distribution of a control premium against the benefit of a takeover proceeding should be afforded to all companies who so choose.

Because the equal opportunity principle will almost always add to costs, it is said to discourage bids and result in lower control premiums which are less likely to be accepted.[137] By allowing an opt-out from the principle, those seeking control would benefit from lower costs. Likewise, the threat of increased takeovers activity should benefit all investors by encouraging managers to work more efficiently at realising the true worth of their company.[138]

V CONCLUSION

From the first use of the Eggleston principles as a guide to amending takeovers laws in 1971, ongoing legislative change has seen their influence grow. Enacted into the law as policy considerations in 1980, the Eggleston principles now cover a range of takeovers activity beyond the scope identified by the Eggleston Committee. Despite the addition of the Masel principle, the Eggleston equal opportunity principle is now applied with diminishing flexibility and has been influential in stopping efficiency-focused reforms like the mandatory bid rule. A reconsideration of the contemporary role played by the Eggleston principles is required, with politically brave reform necessary to provide clarity. By removing reference to the Eggleston equal opportunity principle as a foundational purpose, and allowing an opt-out from select substantive provisions, the interests of investors and the market are likely to be better served by higher levels of takeovers activity. Even with such a change, the Eggleston principles may continue to play a role informing the balance between market efficiency and investor protection, provided that role is more in line with their original application as a flexible guide and not an uncompromising goal.


[1] Emma Armson, ‘Evolution of Australian Takeover Legislation’ [2013] MonashULawRw 22; (2013) 39 Monash University Law Review 654, 694.

[2] Ibid 660.

[3] Company Law Advisory Committee, Australian Parliament, Second Interim Report to the Standing Committee of Attorneys-General on Disclosure of Substantial Shareholdings and Takeovers (1969) (‘Second Eggleston Report’).

[4] Ibid 5 [16].

[5] Justin Mannolini, ‘The Reform of Takeover Law – Beyond Simplification’ (1996) 14 Company and Securities Law Journal 471, 479.

[6] See, eg, Companies Act 1961 (NSW) ss 180A–180Y, introduced by the Companies (Amendment) Act 1971 (NSW).

[7] Companies (Acquisition of Shares) Act 1980 (Cth) ss 59, 60; Corporations Act 1989 (Cth) ss 731, 732; Corporations Act 2001 (Cth) s 602.

[8] Companies (Acquisition of Shares) Act 1980 (Cth) ss 59, 60.

[9] See, eg, Benedict Sheehy, ‘Australia’s Eggleston Principles in Takeover Law: Social and Economic Sense?’ (2004) 17 Australian Journal of Corporate Law 218, 219; Justin Mannolini, ‘Convergence or Divergence: Is There a Role for the Eggleston Principles in a Global M&A Environment?’ (2002) 24 Sydney Law Review 336, 336–7; Chris Maxwell, ‘The New Takeover Code and the NCSC: Policy Objectives and Legislative Strategies for Business Regulation’ [1982] UNSWLawJl 6; (1982) 5 University of New South Wales Law Journal 93, 94.

[10] See, eg, Sheehy, above n 9, 219, 223.

[11] John Lessing ‘Corporate Takeovers: Law Reform and Theory – Is the Minority Shareholder Being Disadvantaged?’ [1997] BondLawRw 1; (1997) 9 Bond Law Review 1, 9; Elaine Hutson, ‘Our Iron Takeover Law: Why Australian Needs a Mandatory Bid Rule [2000] 2 Finsia Journal of Applied Finance 2, 4.

[12] Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Report on the Mandatory Bid Rule (2000), Dissenting Report by Labor Members and Senators.

[13] Raymond da Silva Rosa, Michael Kingsbury and David Yermack, ‘Evaluating Creeping Acquisitions’ [2015] SydLawRw 2; (2015) 37 Sydney Law Review 37, 42; Peter Ryan, ‘ASIC Seeks End to “Takeovers by Stealth”’, ABC News (online), 11 July 2012 <http://www.abc.net.au/news/2012-07-11/asic-seeks-creeping-acquisition-changes/4123342> .

[14] Hutson, above n 11, 3.

[15] Second Eggleston Report, above n 3.

[16] Ibid 5.

[17] Ibid.

[18] Mannolini, ‘The Reform of Takeover Law’, above n 5, 472.

[19] Hutson, above n 11, 4; Maxwell, above n 9, 94.

[20] Corporate Law Economic Reform Program, ‘Takeovers: Corporate Control: A Better Environment for Productive Investment’ (Paper No 4, 1997) 16 (‘CLERP Paper 4’).

[21] Sheehy, above n 9, 219–20.

[22] George Williams, ‘The Corporations and Securities Panel – What Future?’ (1994) 12 Company and Securities Law Journal 164, 169.

[23] CLERP Paper 4, above n 20, 16.

[24] See, eg, CLERP Paper 4, above n 20; House Standing Committee on Legal and Constitutional Affairs, Parliament of Australia, Corporate Practices and the Rights of Shareholders (1991) (‘Lavarch Report’); Senate Select Committee on Securities and Exchange, Parliament of Australia, Australian Securities Markets and Their Regulation (1974) (‘Rae Report’).

[25] Corporations Act 2001 (Cth) s 657A(2)(b), inserted by Corporations Amendment (Takeovers) Act 2007 (Cth).

[26] Kyle Oliver, Graeme Dean and Frank Clarke, Corporate Collapse: Accounting, Regulatory and Ethical Failure (Cambridge University Press, 2nd ed, 2003) 51.

[27] Company Law Advisory Committee, Parliament of New South Wales, Report to the Standing Committee of Attorneys-General on Accounts and Audit (1970) 6.

[28] Commonwealth, Parliamentary Debates, House of Representatives, 19 March 1970, 628 (Tom Hughes, Attorney-General).

[29] Tony Greenwood, ‘In Addition to Justin Mannolini’ (2000) 11 Australian Journal of Corporate Law 308, 308.

[30] Ibid 309.

[31] Ibid 309–10.

[32] Robert Baxt, ‘Comment’ in Peter Dodd, Takeovers and Corporate Control: Towards a New Regulatory Environment (Centre for Independent Studies, 1987) 89, 93.

[33] New South Wales, Parliamentary Debates, Legislative Assembly, 9 September 1971, 911 (John Waddy).

[34] Second Eggleston Report, above n 3, 5 [17].

[35] See, eg, Companies Act 1961 (NSW) s 184(1).

[36] Ibid s 184, sch 10 pt B(1)(a).

[37] Ibid s 184, sch 10 pt A(1).

[38] Ibid s 184, sch 10 pt B(1)(d)(i).

[39] Greenwood, above n 29, 310.

[40] Second Eggleston Report, above n 3, 6 [17].

[41] Companies Act 1961 (NSW) s 185.

[42] Second Eggleston Report, above n 3, 6 [17].

[43] See, eg, Companies (Amendment) Act 1971 (NSW) s 180L(4).

[44] Second Eggleston Report, above n 3, 6 [17].

[45] Ibid 7 [21].

[46] R M Eggleston, Company Law Advisory Committee, Memorandum on Take-Over Bids and Stock Exchange Purchases (29 June 1970) [13] <http://www.takeovers.gov.au/content/Resources/eggleston_committee/takeover_bids_and_stock_exchange_purchases.aspx> .

[47] Second Eggleston Report, above n 3, 8 [25].

[48] Ibid 5 [16].

[49] Justin Mannolini, ‘CLERP and Takeover Law Reform – Politics Trumping Principle?’ (1999) 10 Australian Journal of Corporate Law 1, 6.

[50] Second Eggleston Report, above n 3, 4–5 [14].

[51] Ibid 5 [15].

[52] New South Wales, Parliamentary Debates, Legislative Assembly, 9 September 1971, 911 (John Waddy).

[53] Ibid 917 (John Waddy).

[54] Companies (Amendment) Act 1971 (NSW) s 180C(2)(a).

[55] New South Wales, Parliamentary Debates, Legislative Assembly, 9 September 1971, 912–13 (John Waddy).

[56] Ibid 917 (John Waddy).

[57] Companies (Acquisition of Shares) Act 1980 (Cth) ss 59, 60.

[58] Ibid ss 57, 58.

[59] Ibid s 60.

[60] Ibid s 59 (emphasis added).

[61] Ibid s 59 (emphasis added).

[62] Greenwood, above n 29, 311.

[63] Rae Report, above n 24, 16.15.

[64] Ibid.

[65] Companies (Acquisition of Shares) Act 1980 (Cth) s 11.

[66] Second Eggleston Report, above n 3, 8 [25]; see, eg, Companies Act 1961 (NSW) s 185.

[67] Companies (Acquisition of Shares) Act 1980 (Cth) ss 1215.

[68] Companies and Securities Legislation (Miscellaneous Amendments) Act 1983 (Cth) s 17.

[69] Companies and Securities Legislation Amendment Act 1986 (Cth) s 6.

[70] Ibid s 10.

[71] Companies and Securities Law Review Committee, Parliament of Australia, Partial Takeover Bids (Report to the Ministerial Council, 1985) [9]–[10].

[72] Companies and Securities Law Review Committee, Parliament of Australia, Partial Takeover Bids (Discussion Paper No 2, 1985) [52].

[73] Corporations Legislation Amendment Act 1990 (Cth) s 4.

[74] Armson, above n 1, 669.

[75] Explanatory Memorandum, Corporations Bill 1988 (Cth) 15 [29].

[76] Lavarch Report, above n 24, 59 [3.3.14].

[77] Ibid 62 [3.3.24].

[78] Australian Securities Commission Act 1989 (Cth) s 171.

[79] CLERP Paper 4, above n 20.

[80] Ibid 7.

[81] Ibid 10.

[82] Lavarch Report, above n 24, 60 [3.3.16].

[83] Sheehy, above n 9, 222; James Mayanja, ‘The Equal Opportunity Principle in Australian Takeover Law and Practice: Time for Review?’ (2000) 12 Australian Journal of Corporate Law 1, 16.

[84] CLERP Paper 4, above n 20, 16.

[85] Mannolini, ‘CLERP and Takeover Law Reform’, above n 49, 2.

[86] Anton Trichardt and Jeanne Cilliers, ‘The New Australian Takeovers Panel: The End of Legalism and Tactical Litigation?’ (2001) 9 Tilburg Law Review 19, 23.

[87] Commonwealth, Parliamentary Debates, House of Representatives, 30 November 1983, 3036 (John Spender).

[88] Armson, above n 1, 685.

[89] Rae Report, above n 24, 16.15; CLERP Paper 4, above n 20, 5.

[90] See, eg, Mannolini, ‘The Reform of Takeover Law’, above n 5, 483; CLERP Paper 4, above n 20, 4 [14].

[91] Armson, above n 1, 688–9.

[92] Julia Mignone, ‘Is There Sufficient Protection for Shareholders in a Members’ Scheme of Arrangement? An Analysis of the Eggleston Principles and s 411(17) of the Corporations Act 2001 (Cth)’ (2016) 30 Australian Journal of Corporate Law 259, 283.

[93] Da Silva Rosa, Kingsbury and Yermack, above n 13, 65; Ryan, above n 13.

[94] Bob Baxt, Felicity Day and Emily Coghlan, ‘The Australian Takeovers Panel’ in Dennis Campbell (ed) Mergers and Acquisitions in North America, Latin America, Asia and the Pacific – Selected Issues and Jurisdictions (Kluwer Law International, 2011) 3, 21.

[95] Corporations Act 2001 (Cth) 661A–661F; ANZ Executors and Trustees Ltd v Humes Ltd [1990] VicRp 54; [1990] VR 615, 633, 639 (Brooking J).

[96] Corporations Act 2001 (Cth) s 611.

[97] Ryan, above n 13.

[98] Corporations Act 2001 (Cth) s 671B.

[99] Companies Act 1961 (NSW) s 185; Second Eggleston Report, above n 3, 8 [25].

[100] CLERP Paper 4, above n 20, 16.

[101] Corporate Law Economic Reform Bill 1998 (Cth) s 611 item 5.

[102] CLERP Paper 4, above n 20, 21–2.

[103] Mandatory Bid Rule Report, above n 12, Dissenting Report by Labor Members and Senators.

[104] Ibid.

[105] Second Eggleston Report, above n 3, 11 [34].

[106] Mannolini, ‘CLERP and Takeover Law Reform’, above n 49, 19–20.

[107] See, eg, Companies (Amendment) Act 1971 (NSW); Companies (Acquisition of Shares) Act 1980 (Cth); Corporations Act 1989 (Cth); Corporate Law Economic Reform Program Act 1999 (Cth); Corporations Act 2001 (Cth).

[108] Finsia, ‘News: Finsia Proposes Takeover Law Reforms’ [2006] 2 Finsia Journal of Applied Finance 18.

[109] See, eg, Philip Brown and Raymond da Silva Rosa, ‘Australia’s Corporate Law Reform and the Market for Corporate Control’ (1998) 5 Agenda 179, 188; Mannolini, ‘CLERP and Takeover Law Reform’, above n 49, 16; Mayanja, ‘The Equal Opportunity Principle’, above n 83, 18–19.

[110] Treasury, Australian Government, Takeovers Issues - Treasury Scoping Paper (2012) <https://static.treasury.gov.au/uploads/sites/1/2017/06/Taskeovers-issues-TSY-scoping-paper.pdf>.

[111] Paul Redmond, Corporations and Financial Markets (Thomson Reuters, 6th ed, 2013) 959.

[112] Mannolini, ‘CLERP and Takeover Law Reform’, above n 49, 9.

[113] Hutson, above n 11, 4.

[114] See, eg, above n 36–8.

[115] Hutson, above n 11, 4.

[116] Lavarch Report, above n 24, 60 [3.3.16].

[117] CLERP Paper 4, above n 20, 16.

[118] Oliver, Dean and Clarke, above n 26, 48, 51.

[119] Mannolini, ‘CLERP and Takeover Law Reform’, above n 49, 20.

[120] Hutson, above n 11, 2.

[121] Athanasios Kouloridas, The Law and Economics of Takeovers (Bloomsbury, 2008) 207–9.

[122] The Panel on Takeovers and Mergers, The Takeover Code (RR Donnelley, 12th ed, 2016) A1.

[123] 金融商品取引法 [Financial Instruments and Exchange Act] (Japan) 7 June 2006, art 27-2.3.

[124] Langley, Rebecca, ‘Information Access Denied ... Is the Australian Takeovers Market Really “Efficient, Competitive and Informed”?’ (2009) 27 Company and Securities Law Journal 344, 353–4.

[125] Corporations Act 2001 (Cth) ss 606, 621.

[126] Ibid ss 134141.

[127] Mayanja, ‘The Equal Opportunity Principle’, above n 83, 16.

[128] James Mayanja, ‘Why Prohibiting Creeping Takeovers Would Not Be Such a Good Idea’ (2014) 29 Australian Journal of Corporate Law 322, 337–8.

[129] Companies (Acquisition of Shares) Act 1980 (Cth) ss 57, 58; Corporations Act 2001 (Cth) s 655A.

[130] Mannolini, ‘The Reform of Takeover Law’, above n 5, 483.

[131] Ibid.

[132] Corporations Act 2001 (Cth) ss 9, 136.

[133] Mayanja, ‘The Equal Opportunity Principle’, above n 83, 16.

[134] Optus Networks Pty Limited, ‘Optus Announces Recommended Cash Offer for Uecomm’ (Press Release, 21 May 2004) <https://media.optus.com.au/media-releases/2004/optus-announces-recommended-cash-offer-for-uecomm>.

[135] Michael Barr-David et al, ‘Dual Priced Takeover Bid: A Premium for Minority Shareholders’ (2005) 23 Company and Securities Law Journal 141, 141.

[136] Ibid 142.

[137] Mayanja, ‘Why Prohibiting Creeping Takeovers Would Not Be Such a Good Idea’, above n 128, 10–11.

[138] Ibid.


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