The 20% rule and key concepts
- A person cannot acquire a 'relevant interest' in voting securities of an entity that is subject to the takeovers rules if that would result in any person's 'voting power' exceeding 20%, except via a specified exception (such as a takeover bid or scheme of arrangement).
- The concept of 'relevant interest' is extremely broad, covering almost all situations where a person has direct or indirect control over the voting or disposal of a security.
- A person's 'voting power' in an entity is the aggregate of that person's 'relevant interests' in voting securities and the 'relevant interests' of that person's associates, expressed as a percentage of all issued voting securities.
- The concept of 'association' seeks to ascertain all persons who should be considered as belonging to a single security holding bloc in relation to an entity. It covers all entities within the same corporate group, and persons who are deemed to be working together for the purpose of influencing the composition of the relevant entity's board of directors or its management, or working together in relation to the relevant entity's affairs.
2.1 The 20% rule
The basic takeover rule is that a person cannot acquire a 'relevant interest' in issued voting shares of an Australian-incorporated company listed on the ASX (or issued voting shares of an unlisted Australian-incorporated company with more than 50 shareholders or issued voting interests in an Australian-registered managed investment scheme listed on the ASX) through a transaction in relation to securities entered into by or on behalf of the person if, because of that acquisition, that person's or someone else's 'voting power' in the relevant entity:
- increases from 20% or below to more than 20%; or
- increases from a starting point that is above 20% and below 90%,
unless the acquisition occurs via a specified exception (such as a takeover bid, scheme of arrangement or with target shareholder approval).
This is commonly known as the '20% rule' or '20% takeovers threshold'. At a basic level, the 20% rule means that a person is limited to holding a 20% shareholding interest in an ASX-listed company and cannot move beyond that except via a specified exception
2.2 Key concepts
The key concepts for the purposes of the 20% rule and the takeovers regime generally are:
2.3 Relevant interest
As explained below, there are five different ways in which a person will have a relevant interest in voting shares in a company or voting interests in a managed investment scheme (ie. trust). More than one person can have a relevant interest in the same parcel of shares at the same time. For simplicity, the term ‘shares’ rather than voting shares or managed investment scheme interests is used below.
(a) Registered holder
A person who is the registered holder of shares will have a relevant interest in those shares, unless the person holds the shares as a ‘bare trustee’ for the beneficial holder (ie. the person can only deal with or vote the shares upon the beneficial holder’s instructions). Often a professional custodian or nominee holder will be considered a ‘bare trustee’.
(b) Control over voting
A person who is not the registered holder of shares but nevertheless has the power to exercise, or control the exercise of, a right to vote attached to the shares will also have a relevant interest in those shares. The references to power and control are to be read broadly, and include power or control that: is indirect, or is express or implied, or is formal or informal, or can be exercised as a result of an agreement or practice (whether or not legally enforceable), or can be made subject to restraint or restriction.
For instance, where a registered holder of shares has conferred on another person the right to decide how to vote the shares, whether on a single resolution or for a specified period or otherwise, the other person will have a relevant interest in the shares for so long as that right exists. Also, an arrangement or practice whereby a person other than the registered holder of shares can determine how the shares are voted will give that person a relevant interest in the shares.
However, there is an exception for proxy appointees – a person who is appointed by a registered holder of shares to vote as a proxy at a single meeting of shareholders and has not been provided any valuable consideration for that appointment will not be taken to have a relevant interest in the shares.
(c) Control over disposal
A person who is not the registered holder of shares but has the power to dispose, or control the exercise of, a power to dispose of the shares will have a relevant interest in those shares. The references to power and control are to be read broadly, and includes power or control that: is indirect, or is express or implied, or is formal or informal, or can be exercised as a result of an agreement or practice (whether or not legally enforceable), or can be made subject to restraint or restriction.
There are various situations in which a person other than the registered holder will be taken to have control over the disposal of shares. These include, for instance:
- where the person has contracted to purchase shares but completion has yet to occur;
- where the person’s consent is required for disposal of the shares; and
- where the person has a pre-emptive or other right to purchase the shares before they can be offered for sale to a third party.
There are various situations in which a person who is taken to have control over the disposal of shares will not be treated as having a relevant interest in the shares. These include:
- where a person has taken security interests over the shares in the ordinary course of the person’s business of the provision of financial accommodation (commonly known as the ‘moneylender exemption’);
- where the person holds exchange-traded derivatives over shares (prior to the obligation to make or take delivery of the shares arising);
- where the person has the benefit of pre-emptive rights on the transfer of shares and those rights are contained in a company constitution where all shareholders have pre-emptive rights on the same terms; and
- where the person has entered into an agreement (eg to purchase shares) that is conditional upon target shareholder approval or an ASIC exemption.
(d) Accelerated relevant interests
A person will be taken to have a relevant interest in issued shares if:
- the person has entered into an agreement with another person with respect to the shares and would have a relevant interest in the shares if the agreement were performed (eg entry into a share purchase agreement confers on the purchaser a relevant interest in the shares even if completion occurs at a later date);
- another person has given or gives the person an enforceable right in relation to the shares – whether the right is enforceable now or in the future and whether or not on the fulfilment of a condition – and the person would have a relevant interest in the shares if the right is enforced (eg if a person is given a right to exercise votes attached to shares but that right only arises upon the satisfaction of a certain condition, the person immediately obtains a relevant interest in the shares and not only if and when the voting right actually arises); or
- another person has granted or grants an option to, or has been or is granted an option by, the person with respect to shares (in other words all parties to a call option or put option arrangement in respect of shares are taken to immediately have a relevant interest in the shares, to the extent they do not have a pre-existing relevant interest, upon the creation of the option).
(e) Deemed relevant interests through corporate groups
There are broad tracing provisions whereby each entity within a corporate group (ie. the parent and all of its controlled entities) is deemed to have a relevant interest in any shares in which any group entity has a relevant interest.
Specifically, a person is deemed to have a relevant interest in any shares that any of the following has:
- a body corporate, or managed investment scheme, in which the person’s ‘voting power’ is above 20% (the ‘20% deeming rule’); and
- a body corporate, or managed investment scheme, that the person controls (the ‘control deeming rule’).
The 20% deeming rule can apply only once in a chain of entities, whereas the control deeming rule can be applied multiple times in a chain. The rules can result in a person breaching the basic 20% threshold with respect to an ASX-listed company via upstream acquisitions (eg acquisitions of shares in a company which either holds shares in the ASX-listed company or which holds shares in a company which holds shares in the ASX-listed company).
2.4 Voting power
A person’s ‘voting power’ in a company or managed investment scheme is calculated by aggregating:
- the relevant interests which the person holds in the entity’s voting shares or voting interests; and
- the relevant interests which the person’s ‘associates’ hold in the entity’s voting shares or voting interests,
and expressing the result as a percentage of all voting shares or voting interests on issue.
The concept of ‘association’ in the Corporations Act seeks to ascertain all persons who should be considered as belonging to a single securityholding bloc in relation to a company or managed investment scheme. It is possible for a person to be associated with another person even if they do not also acquire a relevant interest in each other’s shares.
Two or more persons will be considered ‘associates’ in relation to a company or managed investment scheme where:
- they are companies belonging to the same corporate group;
- they have entered into a ‘relevant agreement’ (being an agreement, arrangement or understanding) for the purpose of controlling or influencing the composition of the board of the company or of the entity which is the responsible entity of the managed investment scheme or the conduct of the company’s or managed investment scheme’s affairs (where ‘affairs’ is broadly defined to include an entity’s business operations, internal management and the exercise of voting rights attached to its securities) – this is known as the ‘relevant agreement’ test; or
- they are ‘acting or proposing to act in concert’ (ie. with a common purpose and a meeting of the minds) in relation to the company’s or managed investment scheme’s affairs (where ‘affairs’ is broadly defined to include an entity’s business operations, internal management and the exercise of voting rights attached to its securities) – this is known as the ‘acting in concert’ test.
There is significant overlap between the ‘relevant agreement’ and ‘acting in concert’ tests.
2.6 Practical application of the 20% rule
The 20% rule is not breached merely because a person’s voting power has exceeded 20%. For instance, if person A holds 18% of a company’s voting shares and becomes associated with person B (otherwise unrelated to and not associated with person A) who holds 10%, each of person A and person B will have voting power of 28% in the company. However, if neither A nor B has a relevant interest in each other’s shares, there is no breach of the 20% rule. This is because the rule only applies where there is an acquisition of a relevant interest which results in a person’s voting power exceeding 20%.
This means that merely forming an association which results in a person’s voting power increasing beyond the 20% threshold is itself not unlawful. However, in practice, there is a fine line between association and relevant interest. Also, any person who has voting power of 5% or more needs to publicly disclose that fact within two business days via the filing of a substantial holding with the ASX and the relevant entity, which must disclose how the voting power (relevant interest and/or association) arose.
As a final point, the 20% rule will apply to the acquisitions of relevant interests between associates. Using the above example, each of persons A and B will have voting power of 28% as a result of their association. If A sought to acquire B’s 10% stake its voting power will not increase but in that circumstance the takeovers rules operate to disregard the association for the purposes of the 20% rule. Therefore A could not acquire B’s stake except via a specified exception to the 20% rule.
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