Kumarina Resources have bidders' dreams come true?

Ashurst 11 June 2013 Takeovers Legal Update In this update Kumarina Resources have bidders' dreams come true? 1 Touch but don't associate 3 Kumarina Resources have bidders' dreams come true? WHAT YOU NEED TO KNOW Acquirer's associates were permitted to vote shares to approve a scrip merger scheme However it is doubtful whether other courts will follow the decision If the decision in Re Kumarina Resources is followed, it is a game-changer for M&A in. At the very least it will mean that acquirers under a scrip merger scheme will usually do their utmost to get a pre-bid stake. Potentially, it could even encourage the development of a two-stage process (similar to the US) where a bid to acquire control is followed by a "squeeze out" scheme to acquire 100%. However it is doubtful whether the decision will be followed. It is contrary to the approach that regulators and most advisers have, for decades, assumed to be correct. Acquirer's associates permitted to vote In Re Kumarina Resources Gilmour J approved Kumarina's scheme of arrangement despite the fact that shareholder approval was only secured through the votes of associates of the acquirer, Zeta Resources, a whollyowned subsidiary of LSE listed Utilico. The scheme was narrowly approved by 79% of votes cast, with Utilico and its associate ICM accounting for 23% of votes cast. Court approval of the scheme was opposed by two shareholders, but not ASIC, which gave its usual "no objection" letter. Gilmour J accepted that Utilico and its associate ICM could vote in the same class as other shareholders and concluded that there was no reasonable basis for the court to refuse to approve the scheme. Objectors' arguments The objectors argued that shareholders associated with the acquirer must either be treated as constituting a separate class or have their votes discounted. Gilmour J distinguished the authorities relied on by the objectors, including the English decision of Re Hellenic & General Trust Ltd. In that case the court refused to approve a cash "cancellation" scheme where a wholly-owned subsidiary of the acquirer had voted its 53% shareholding in favour. Gilmour J concluded that Kumarina's case was different since the scheme was not a buy-out, but rather effected a merger with Zeta in which existing shareholders participated equally and would continue as shareholders of Zeta. His Honour also commented that a large majority of Kumarina's shareholders voted in favour of the scheme, and that would be so even if the votes of Utilico and ICM were excluded. AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

The fact that target shareholders continue as shareholders of the merged entity undoubtedly makes a scrip merger quite different from a cash scheme. However, this does not address the reasoning in Re Hellenic, which emphasized that shareholders who were effectively vendors and purchasers could not sensibly consult together as "no one can be both a vendor and a purchaser". The effect of the Kumarina scheme was that Zeta would acquire Kumarina, with Utilico retaining control (between 49% and 72%) of Zeta. In essence, Utilico was the purchaser of indirect control over Kumarina, and Utilico and other Kumarina shareholders had competing interests as to their respective shares in the merged entity. Collateral benefits The court also took account of the fact that, separately from the scheme but contemporaneously with its implementation, Utilico would sell assets to Zeta in return for scrip and ICM (the investment manager of Utilico) would be appointed as Zeta's investment manager. Gilmour J did not consider that this provided any basis for treating Utilico or ICM as a separate class or discounting their votes (which were tagged). His Honour noted that the independent expert had opined that each of these agreements was arm's length and concluded that the consideration received by Utilico and ICM under these arrangements was non-scheme consideration received in exchange for rights arising independently from their rights as shareholders of Kumarina. This case may be contrasted with others in which ASIC has expected shareholders receiving a benefit in another capacity to vote in a separate class (see "ASIC plays hard on isoft scheme collateral benefits" in our 15 July 2011 Takeovers Legal Update) or undertake not to vote (see "isoft approach to collateral benefits and scheme meeting classes clarified" in our 24 August 2012 Takeovers Legal Update). There is much to be said for the approach taken in this case, provided a shareholder is not associated with the acquirer, but it may well be a step too far if acquirers are to be permitted to vote. Implications If correct, the decision in Re Kumarina Resources suggests that an acquirer should be able to vote a pre-bid stake in favour of a scrip merger scheme, provided it is supported by a majority of votes cast by other shareholders. This will greatly increase the incentive for acquirers to acquire such a stake (either as an outright acquisition or by way of an option giving voting rights). The reasoning in the decision could go even further and encourage a takeover bid which the bidder allows to close after acquiring, say, 40%, followed by a scrip scheme to acquire 100% in which the bidder votes its holding. This would turn the tables, quite significantly, in favour of bidders. However, the significant implications of this for M&A practice in may make other courts reluctant to follow Re Kumarina Resources. Also, it is possible ASIC did not appreciate these implications in Kumarina's case. If so, it would not be surprising if ASIC decides to oppose voting by acquirers and their associates in future. Contact Bruce Dyer Partner T: +61 3 9679 3413 E: bruce.dyer@ashurst.com Ashurst Takeovers Legal Update 11 June 2013 2

Touch but don't associate WHAT YOU NEED TO KNOW Including provisions concerning conduct of business or board composition in a share sale agreement is likely to make all parties associates For only the second time since 2000 the Takeovers Panel has made a decision by majority Associated purchasers In Touch Holdings the Panel considered an allegation of association between the purchasers of a 56% stake in an unlisted company with more than 50 members. After Touch directors failed to negotiate acquisition of the stake, it was acquired by four purchasers under a single agreement. One purchaser was controlled by a Touch director who negotiated the agreement for another party connected to him by family and structural links. The Panel found these parties to be associated. The Panel also found that all four purchasers were associates of the vendor and each other as a result of the share sale agreement, which contained provisions concerning conduct of business and board composition. The Panel noted that the effect of these provisions was to ensure that the purchasers acted together in relation to the affairs and board composition of Touch at the behest of the vendor. These provisions also meant that parties could not rely on ASIC's "associates" class order. Where it applies, ASIC's class order confirms that parties to a share sale agreement (or other agreement to dispose of securities) do not become associates merely because of that agreement. This means an acquirer obtains a relevant interest and voting power in the shares to be acquired under the agreement, but not in other shares held by the vendor. In this case, however, the conduct of business and board composition provisions meant that the share sale agreement did more than merely sell shares. As a result, all parties acquired voting power of 59% (the entire 56% stake plus a 3% prior holding of one purchaser). The Panel endorsed statements in an earlier case that the associates definition should not be read so widely as to catch agreements not within its policy. However, the Panel said the share sale agreement was not of that type. The Panel made orders cancelling the share sale agreement, commenting that this would not be futile since even replacing the agreement with separate agreements would need shareholder approval under s611 item 7. The Panel declined to make orders vesting shares in ASIC for sale noting that this would have a major impact on Touch. Although vesting orders are often made where there is a breach of the 20% threshold, the fact that Touch was unlisted meant that there would have been no ready market for the shares. Minority view on further association Two Panel members rejected a claim of a broader association between the purchasers of the 56% stake and another director of Touch with control of 26%. This director had introduced 2 of the purchasers to the transaction and was a director of a company financing all the purchasers. The majority felt there were not unreasonable explanations for the arrangements. The third Panel member drew different inferences from the material before the Panel and was satisfied that there was association. Comment As with other association cases, the Panel's decision turns very much on its facts. The dissent of one Panel member illustrates the potential for Panel members to take different views of the facts and the inferences they support. Ashurst Takeovers Legal Update 11 June 2013 3

This is only the second time since the "new" Panel was established in 2000 that a Panel decision has not been unanimous (the previous example being in 2002). There will probably be ongoing debate as to the desirability of "dissenting" opinions. Some may be concerned that if dissents become common confidence in the consistency and predictability of Panel decisions may be undermined. On this view, differences between individual Panel members are best flagged only by qualifications or descriptions of contrary arguments that the Panel thought had merit. The contrary view would be that dissenting opinions are needed to demonstrate that Panel members take their role seriously and will not compromise what they believe to be right for the sake of unanimity. In our view, dissenting opinions do have a role to play where Panel members feel strongly about an issue. Dissent on a question of fact may assist parties in deciding whether (and on what grounds) to appeal to a Review Panel. Dissent on matters of policy may usefully flag competing approaches that warrant further consideration by the broader Panel membership (although in that case it would be best for the issue to be resolved subsequently in a guidance note). We would hope, however, that in most cases the Panel continues to produce a single set of reasons. At the very least, that should save a few trees. Contact Marie McDonald Partner T: +61 3 9679 3264 E: marie.mcdonald@ashurst.com Ashurst Takeovers Legal Update 11 June 2013 4

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