A S P Aluminium Holdings: Shedding some light on the Panel’s approach to exercising jurisdiction over proprietary companies in Australia

The Takeovers Panel has considered an application for a declaration of unacceptable circumstances concerning the affairs of a proprietary company with more than 50 members. The claims primarily concerned alleged contraventions of the 20% rule and alleged attempts to avoid the application of the takeovers provisions by reducing the number of shareholders to 50 or below. We take a look at the Panel’s reasons for declining to make a declaration of unacceptable circumstances and how the Panel has indicated that proprietary companies may be approached differently than listed public companies when applying the purposes of Chapter 6.

IN BRIEF

• The Takeovers Panel recently considered an application for a declaration of unacceptable circumstances concerning the affairs of A S P Aluminium Holdings Pty Ltd (ASP), an unlisted company with more than 50 members.
• The applicant, a longstanding shareholder of ASP, claimed that ASP and other controlling shareholders had contravened the 20% rule and that ASP had plotted to reduce the number of shareholders to 50 or below so that the takeovers provisions of the Corporations Act no longer applied.
• In declining to make a declaration, the initial Panel held that, among other things, the alleged contraventions raised questions of law and contested factual matters which would be more appropriately ventilated in a court. That decision was ultimately affirmed by the review Panel.
• Perhaps most interestingly, it was noted, while the Panel has jurisdiction in relation to proprietary companies, that does not mean the Panel must exercise its jurisdiction in the same way as it would for public companies or listed entities.¹

BACKGROUND

Background to initial application

On 2 May 2023, Villefranche Investments Pty. Limited as trustee of the Gates Family Trust (Villefranche) made an application to the Panel regarding the affairs of A S P Aluminium Holdings Pty Ltd (ASP). ASP is an unlisted company which had 51 shareholders at the date of the initial application and a net asset value of $175.78 million (approximately $640 per ASP share) as at 30 June 2022.

The applicant alleged that a series of dealings in ASP shares resulted in breaches of the 20% rule and an attempt to reduce the number of shareholders to 50 or below so that the takeovers provisions in the Corporations Act would not apply to ASP.

By way of background:

• The applicant, Villefranche, was the second largest shareholder of ASP, holding 17.02% of the ASP shares. Villefranche had been a longstanding shareholder; its shareholding was originally associated with one of the founding shareholders of ASP.
• ASP Staff Holdings Pty Ltd (ASP Staff) was a wholly owned subsidiary of ASP and trustee of the Alspec Employee Share Trust which was established to hold securities on behalf of ASP employees as part of employee incentive arrangements. 
• The founder of ASP, Mr Michael Millard, is married to Ms Lolita Younes. ASP and ASP Staff were controlled by Ms Younes and her controlled entities. Ms Younes was a director of ASP and a director and company secretary of ASP Staff.
• In late 2020, Mr Millard, through four different entities, controlled 50.73% of the ASP shares.
• The constitution of ASP contained restrictions on the transfer of shares including pre-emptive rights which apply where shares are sold or transferred to entities other than family members or entities majority owned by the existing shareholder and family members.

A series of transactions followed between 2020 and 2022:

• Between November 2020 and March 2021, Mr Millard transferred his 50.73% interest in ASP to two separate companies – Michael Three Pty Ltd (Michael Three) (13.34%) and Michael Four Pty Ltd (Michael Four) (37.39%).
• On 25 March 2021, Lalspec Pty Ltd (Lalspec) was incorporated and acquired all of the shares in Michael Three and Michael Four (Lalspec Acquisitions), as set out in the diagram prepared by the Panel below.

• Between 2 July 2021 and 18 August 2022, following letters from ASP to gauge shareholders’ interest in selling their ASP shares, various ASP shareholders offered to sell their ASP shares pursuant to the pre-emptive rights regime in the Company’s constitution. 16 of these shareholders sold their shares to ASP Staff (ASP Staff Acquisitions) and 4 sold their shares to Villefranche. The effect of this was that the number of shareholders in ASP was reduced from 68 to 51, and ASP Staff’s interest increased from 5.90% to 8.96%.
• On 8 April 2022, Mr Cooper, an existing shareholder, offered his shares for sale through the pre-emptive rights process under the ASP constitution. No shareholder accepted his offer.
• Villefranche subsequently acquired some of Mr Cooper’s shares for various beneficiaries of the Gates Family Trust (Cooper Transfers).
• On 20 September 2022, Villefranche agreed to transfer some of its shares to various entities in the Gates Family Trust (Villefranche Transfers).
• ASP subsequently refused to register the Cooper Transfers and the Villefranche Transfers.

Application

Villefranche submitted (among other things) that:

• the Lalspec Acquisitions and ASP Staff Acquisitions involved contraventions of section 606(1) and involved unacceptable circumstances because, as a result of those transactions, the voting power in ASP of Ms Younes, Lolita Investments Pty Ltd, Lalspec, Youla Holdings Pty Ltd and other controlling shareholders increased from below 20% to more than 20% and the voting power of ASP Staff increased from above 20% but below 90%; and
• ASP and Ms Younes had attempted to reduce the number of shareholders in ASP to 50 or below so that the takeover provisions in the Corporations Act would not apply to ASP, including refusing to register the Cooper Transfers and the Villefranche Transfers.

In response, Mr Millard and Ms Younes submitted that Ms Younes had a relevant interest in the ASP shares held by Michael Three and Michael Four as a result of section 608(2)(b)(iii) prior to the Lalspec Acquisitions and that they only became ‘associates’ (or otherwise acquired relevant interests in ASP shares held or controlled by the other) before ASP gained more than 50 members. On this basis, it was submitted, the Lalspec Acquisitions did not contravene the 20% prohibition.²

It was said that there was an associate relationship because Ms Younes acted in concert with Mr Millard to effect his estate planning and because they had a common understanding to work together to control the composition of ASP’s board and its affairs (which could be inferred from their marriage and the fact that since 2010 they had cast the votes attached to ASP shares in the same way, amongst other factors).

Initial Panel’s decision

Ultimately, the initial Panel held that:

• the issues raised questions of law and contested factual matters, some which occurred more than a decade ago, and that the Panel had previously declined to determine whether old historical contraventions of section 606 had occurred;
• courts are better equipped to conclusively determine questions of law, noting other forums may provide a better opportunity for the applicants to ventilate their claims;
• some matters alleged to form part of the conduct constituting unacceptable circumstances occurred some time ago – and as such it would be difficult for the Panel to investigate these claims; and
• in any event, it would be difficult to provide a suitable remedy in all of the circumstances.

In its reasons, the initial Panel noted that while it is entitled to exercise jurisdiction over proprietary companies (like ASP), whether the circumstances were ‘unacceptable’ raised a policy question that the Panel has rarely had to consider³ and which does not appear to have been the subject of detailed consideration in previous Panel decisions.

Interestingly, the Panel noted that there may be circumstances or factors which justify the Panel approaching proprietary companies differently for the purposes of Chapter 6, including the fact that:

• proprietary companies need to have no more than 50 shareholders (excluding employee shareholders and crowd-sourced funding (CSF) related shareholders) – therefore the Panel’s jurisdiction generally only extends to proprietary companies that have employee shareholders or “CSF shareholders”; and
• the constitutions of proprietary companies often contain a pre-emptive rights regime and “tag along” or “drag along” rights similar to those in ASP’s constitution.

In support of this conclusion, the Panel noted the exemption for proprietary companies (but not public companies) that have “CSF shareholders” (as defined in the Corporations Act) from the 20% prohibition as an example of Parliament treating certain proprietary companies differently for the purposes of Chapter 6.

In light of this, it declined to make a declaration of unacceptable circumstances, holding that it is not ‘appropriate, or in the public interest, to impose on proprietary companies that fall (often unwittingly) within Chapter 6 the same expectations, when they have not had the benefit of guidance as to what is required of them.’⁴

In relation to the allegations concerning attempts to reduce the number of shareholders to 50 or below and the ASP Staff Acquisitions, the Panel was not satisfied that ASP or the controlling shareholders’ desire to avoid the application of Chapter 6 was unacceptable in the circumstances as a whole, including:

• the fact that ASP was only a proprietary company which fell under Chapter 6 due to employee shareholders and that ASP had pre-emptive rights in its constitution (which is not unusual for a proprietary company);
• that the ASP Staff Acquisitions appeared to have a legitimate purpose (to facilitate an exit for employee shareholders where there is no market for those shares, and to hold those shares on trust for eligible shareholders that may have been granted incentives under the Alspec Employee Share Trust); and
• that the ASP Staff Acquisitions were made in response to shareholders offering to sell shares in accordance with the pre-emptive rights provisions under the constitution.  

As noted above, the review Panel ultimately affirmed the initial Panel’s decision. In relation to the Lalspec Acquisitions, the review Panel noted the existence of a broad constitutional provision allowing for intra-familial transfers to be a relevant factor in its conclusion that they were not unacceptable in the circumstances.⁵

In the review Panel, Villefranche submitted that the initial Panel erred in forming the view that ‘proprietary companies should be held to a lower standard in terms of compliance with Chapter 6 and the principles in section 602’. ASIC submitted that whilst it is clear from section 602(a)(i) that the overarching purpose of Chapter 6 applies to the acquisition of control over an unlisted company with more than 50 members (as well as listed entities), there may be circumstances which justify the Panel reaching a different decision in respect of different sized companies but ‘that is because the circumstances themselves differ and the effect of those circumstances differ, rather than the principles and expectations which operate, by reason of law, over any set of circumstances before the Panel.'⁶

COMMENTARY

What we can take away from these proceedings is that:

• although the Panel clearly has jurisdiction over proprietary companies with more than 50 members, that does not mean the Panel must exercise its jurisdiction in the same way as it would for public companies or listed companies - in deciding whether to exercise its powers and apply the purposes of section 602, the Panel is prepared to take into account policy considerations that it considers relevant;
• a company’s status as a proprietary company could be a relevant factor in the exercise of its discretion in deciding whether to make a declaration of unacceptable circumstances in relation to that company’s affairs, as could the existence of a constitutional pre-emptive rights regime; and
• the meaning of an ‘efficient, competitive and informed market’ in section 602(a) could mean different things in relation to a proprietary company.

Accordingly, despite the purposes in section 602 not differentiating between listed and proprietary companies, the Panel considers that it has a discretion to approach the latter differently if justified in the circumstances.

1. A S P Aluminium Holdings Pty Ltd [2023] ATP 8 at [90].
2. A S P Aluminium Holdings Pty Ltd [2023] ATP 8 at [42].
3. A S P Aluminium Holdings Pty Ltd [2023] ATP 8 at [47].
4. A S P Aluminium Holdings Pty Ltd [2023] ATP 8 at [49].
5. A S P Aluminium Holdings Pty Ltd [2023] ATP 9 at [38].
6. A S P Aluminium Holdings Pty Ltd [2023] ATP 9 at [53].