A cautionary tale for shareholder requisitioned board spills

Activist shareholders and companies alike should take note of the Takeover Panel’s recent decision in response to an attempt by a group of rebel shareholders to spill the board of DRA Global Limited (DRA) via a shareholder requisitioned meeting and in particular the rules of “association” in relation to shareholder actions.

Three of DRA’s senior executives (Requisitioning Shareholders), and a fourth former executive (Dowding), each with shares in the company, collaborated over a number of months in relation to oust the managing director and install new directors on the board through a shareholder requisitioned meeting. In the lead up to the requisition notice, the Requisitioning Shareholders and Dowding signed, and approached other DRA shareholders to sign, deeds of irrevocable undertakings to vote in favour of the spill (Voting Undertakings).

The Panel made a finding of “unacceptable circumstances” on the basis that the conduct of the Requisitioning Shareholders and Dowding led to the formation of an association, which together with the support of the other DRA shareholders that signed Voting Undertakings, unlawfully increased the voting power of the Requisitioning Shareholders above the 20% threshold without disclosure.  Furthermore, that none of the Requisitioning Shareholders lodged a substantial shareholding notice disclosing their increased holding as a result of the abovementioned association was also found by the Panel to be unacceptable (and in breach of a number of sections of the Corporations Act).

Shareholders contemplating a joint shareholder requisitioned meeting to vote on changes to the composition of a board must exercise caution to ensure that their actions do not result in the formation of an undisclosed association in contravention of the takeover and substantial holding provisions. 

Circumstances that may give rise to an association in the context of a shareholder requisitioned meeting to affect a board spill

For a group of shareholders to be associated under the Corporations Act, they must:  

• have (or propose to have) a relevant agreement for the purpose of influencing the composition of the company or its affairs (Relevant Agreement); or
• act (or propose to act) in concert in relation to the company (Acted in Concert).

Past decisions of the Panel demonstrate that a sufficient body of probative evidence must exist to convince the Panel that an association is present and that there are grounds to conduct proceedings.^[1] Circumstances commonly used to establish an association between shareholders include a shared goal, common dealings, collaborative conduct, structural links and common knowledge of relevant facts.^[2]

Regulatory guidance released by ASIC suggests that the act of jointly signing a requisition notice under section 249D of the Corporations Act is likely to constitute entering into a Relevant Agreement and result in the association of requisitioning shareholders.

The Panel examined this guidance in Caravel Minerals Limited [2018] ATP 8 and determined that the signing of a requisition notice alone is not sufficient to establish a Relevant Agreement between requisitioning shareholders without further evidence establishing a “meeting of minds” or a purpose beyond that of calling a general meeting to vote on resolutions.

This is consistent with the approach applied by the Panel in DRA. In this instance, the Panel was satisfied that the purpose and effect of the requisition notice went beyond the promotion of good corporate governance, to control over DRA.

Finding of an association in DRA Global

In addition to the jointly signed requisitioned notice, the Panel concluded that the Requisitioning Shareholders and Dowding had a Relevant Agreement and Acted in Concert and were therefore associated by reason of their:

• structural links including their historic professional relationships, current and past positions as members of the DRA management team, references to themselves as the “Oxford Consortium” and perhaps most symbolically, use of a shared common adviser;
• shared goal of changing the composition of DRA’s board, as evidenced by their meetings and correspondence, and the circulation of documents detailing their concerns and strategy going forward; and
• collaborative and coordinated approach to seeking out the support of other DRA shareholders and obtaining the Voting Undertakings.

As noted previously, the Voting Undertakings between each of the other DRA shareholders and the Requisitioning Shareholders also constituted Relevant Agreements, increasing the Requisitioning Shareholders and Dowding’s voting power above the 20% threshold.

Importantly, as the Voting Undertakings allowed the Requisitioning Shareholders and Dowding to control the vote of the other DRA shareholders, the Panel was satisfied that the Requisitioning Shareholders acquired a relevant interest in these shares.  At no stage was a substantial shareholding notice lodged by any of the Requisitioning Shareholders.

Consequences of the formation of an association

Where the collective voting power of a group of associated shareholders increases to 5% or more, a substantial holding notice disclosing the combined interest must be lodged with the Company and ASX. A failure to disclose the combined substantial interest to the market will result in a breach of section 671B of the Corporation Act.

Where the collective voting power of a group of associated shareholders increases to 20% or more, and the shareholders acquired a relevant interest in the shares, the shareholders are likely to be in breach of section 606 of the Corporations Act.

Notably, it is not unlawful to form an association that results in a person’s voting power increasing above the 20% threshold, unless there is an acquisition of a relevant interest in those shares. However, in practise, the line between association and relevant interest is rarely not crossed.

In addition, contraventions of the substantial holding and takeover provisions may result in the Panel finding that the acquisition of control over the voting shares has not taken place in an efficient competitive and informed market, resulting in a contravention of section 602 of the Corporations Act.

As demonstrated by the Panel’s orders in DRA, each of these breaches, alone and together, are grounds for the Panel to declare unacceptable circumstances.

It should be noted that the Requisitioning Shareholders withdrew the Voting Undertakings.