Targeting shareholder intention statements and potential net benefits: the latest in the Bullseye Mining Takeovers Panel proceedings

On 15 November 2023, the Takeovers Panel provided its reasons for the declaration of unacceptable circumstances made in Bullseye Mining Limited 06 [2023] ATP 11 in relation to Emerald Resources NL’s most recent takeover bid for Bullseye Mining Limited. The proceedings are an important reminder to takeover participants of the Panel’s guidance in relation to shareholder intention statements, and that such statements may result in a breach of the 20% rule in certain circumstances.

In brief

• The Takeovers Panel recently made orders and issued a declaration of unacceptable circumstances in Bullseye Mining Limited 06 [2023] ATP 11 relating to the takeover bid by Emerald Resources NL for Bullseye Mining Limited.
• The Bullseye decision follows a long line of previous Panel and Court proceedings relating to Bullseye, Emerald’s holding in and previous takeover for Bullseye and allegations of oppression from certain shareholders against Bullseye and current and/or former directors of Bullseye. These proceedings span over two years.
• The Bullseye proceedings are an important reminder to takeover participants of the Panel guidance in relation to shareholder intention statements and that such statements can result in a breach of the 20% rule in section 606 of the Corporations Act in certain circumstances.
• In particular, the decision illustrates that, even if a shareholder intention statement is qualified by no emergence of a superior proposal, if the surrounding circumstances indicate that an agreement, arrangement or understanding has been reached, this may evidence a breach of section 606 of the Corporations Act, particularly where it is unlikely that a superior proposal may emerge.
• Additionally, the matter highlights the need to carefully consider the implications of any ‘benefit’ given to a shareholder in connection with a bid and whether this may be a ‘net benefit’ (even if not a collateral benefit under section 623 of the Corporations Act). Determining whether there has been a ‘net benefit’ is, in reality, difficult for the Panel (given it is ultimately a matter of weighing up the commercial advantages and disadvantages), and the decision shows the Panel’s willingness to order a target to commission an expert’s report to opine on this where there is a risk that a ‘net benefit’ may have been provided.

Background

Bullseye Mining Limited is an unlisted public company with more than 50 shareholders which operates a gold operation in North Laverton, Western Australia. Emerald Resources NL is an ASX listed mining company, which as at the date of the application to the Takeovers Panel, held approximately 57.34% of Bullseye’s shares.

On 27 July 2023, Emerald announced entry into a bid implementation agreement with Bullseye for a bid for all of the shares in Bullseye that it does not already own for consideration of 1 Emerald Share per 4 Bullseye Shares.

At the time the transaction was announced, Emerald also announced that it had received shareholder intention statements from both Xinhe and Au Xingao (holders of 13.94% and 0.14% of the shares in Bullseye respectively at the time) confirming that they intended to accept the takeover bid, in the absence of a superior proposal “on a date that is not earlier than 21 days after the date of the announcement”.

In the same public announcement, Emerald noted that Bullseye, Xinhe, Au Xingao and “various other parties” had reached a settlement of certain historical oppression proceedings by Xinhe and/or Au Xingao against Bullseye and certain former or current directors as a result of which Bullseye would issue 22,800,000 Bullseye shares to Au Xingao (roughly 4.5% of Bullseye shares post-issue).

Prior to the most recent application, the Panel had previously dealt with a number of applications in relation to Bullseye, including in relation to a prior 2021 takeover offer by Emerald.¹

Applications made to the Takeovers Panel

On the same day that Emerald’s takeover bid opened (21 August 2023), a shareholder of Bullseye made an application to the Takeovers Panel requesting a declaration of unacceptable circumstances in relation to the Emerald takeover bid.

The applicant submitted that:

• Emerald, Bullseye, the directors of Bullseye and the two shareholders, Xinhe and Au Xingao, were associated and therefore had aggregated voting power of at least 75.54% in Bullseye;
• Emerald’s bidder’s statement was deficient; and
• Emerald, through its control of Bullseye, had given a collateral benefit to Xinhe and Au Xingao by issuing Bullseye shares as part of the settlement of the court proceedings.

The Panel made interim orders on 22 August 2023 restraining Emerald from processing any acceptances from Xinhe and Au Xingao in order to preserve the status quo of the live bid while the Panel considered its final orders. The Panel subsequently accepted an undertaking from Emerald not to process any acceptances received under the takeover bid without Panel consent, after Emerald declared the bid unconditional while proceedings in the Panel remained ongoing.

Declaration of unacceptable circumstances and orders

On 6 October 2023, the Panel made a declaration of unacceptable circumstances. The orders included that:

• Emerald be restricted for 3 years from, amongst other things, exercising voting rights in respect of certain of its Bullseye shares (excluding Emerald’s voting power of 57.34% plus any percentage voting power increase resulting from acceptances under the takeover bid, other than the acceptances of Xinhe and Au Xingao), unless Emerald’s voting power increased to 90% or more;
• Bullseye engage an independent expert to opine on whether, as a result of the issue of shares to Au Xingao in connection with the settlement of the court proceedings, Au Xingao and Xinhe obtained a ‘net benefit’ in connection with the Emerald offer not provided to other shareholders (to be contained in a supplementary target’s statement);
• withdrawal rights be offered to Bullseye shareholders (other than Xinhe and Au Xingao) who have accepted the Emerald offer; and
• Emerald extend the closing date of the takeover offer until the time of expiry of those withdrawal rights.

In summary, the Panel considered that:

• the takeover bid, the shareholder intention statements and the settlement of the court proceedings were interconnected and part of the one commercial transaction;
• by virtue of Emerald and each of Xinhe and Au Xingao entering into the shareholder intention statements and the settlement, Emerald acquired a relevant interest in the shares held by Xinhe and Au Xingao, and therefore increased its voting power in Bullseye shares from approximately 57.34% to approximately 75.54% in contravention of the 20% rule in section 606 of the Corporations Act;
• Bullseye shareholders had not been provided with sufficient information about the connection between the takeover bid, the shareholder intention statements and the settlement of the court proceedings, including whether Xinhe and Au Xingao had been provided with a benefit that had not otherwise been provided to other shareholders of Bullseye;
• the timing for acceptance by Xinhe and Au Xingao of the takeover bid did not allow a reasonable time to pass for a superior proposal to emerge contrary to the Panel’s guidance on shareholder intention statements; and
• the terms of the shareholder intention statements were not accurately disclosed to the market.

Shareholder intention statements

One of the key issues considered by the Panel in its reasons was the shareholder intention statements that had been given by Xinhe and Au Xingao in relation to the Emerald takeover bid. In particular, the Panel considered whether:

• the shareholder intention statements had contravened the Panel’s Guidance Note 23 on such matters; and
• the shareholder intention statements given by Xinhe and Au Xingao were executed in breach of the 20% rule in section 606 of the Corporations Act.

Takeovers Panel Guidance Note 23

In relation to Guidance Note 23, the relevant issue was that the shareholder intention statements signed by Xinhe and Au Xingao stated that the timing for acceptance of the Emerald offer was “that date that the Offer is first open for acceptance”. This was inconsistent with the announcement of the relevant intention statements, which stated that this was “a date that is not earlier than 21 days after the date of this announcement”, in compliance with Guidance Note 23.

In this regard, Guidance Note 23 provides as follows:

“If a statement is qualified by reference to a superior proposal, it is likely to give rise to unacceptable circumstances if the shareholder accepts before allowing a reasonable time to pass for a superior proposal to emerge. The Panel considers that this is implied by the statement. The amount of time required will depend on the circumstances, but generally the Panel will consider a reasonable time to be 21 days after the offer has opened² (emphasis added)

It was argued that the signed shareholder intention statements did not allow for a sufficient period of time to accept the Emerald takeover bid and Xinhe and Au Xingao were bound to accept the Emerald offer.

The Panel considered that the terms of the shareholder intention statements were not accurately disclosed to the market, and the timing for acceptance stated in the signed shareholder intention statements did not allow a reasonable time to pass for a superior proposal to emerge, contrary to Guidance Note 23.

Breach of section 606 of the Corporations Act

As to the 20% rule in section 606, the Panel considered that the signed shareholder intention statements constituted a ‘relevant agreement’ between Emerald and Au Xingao and Xinhe which provided Emerald with the power to dispose of, of control the exercise of a power to dispose of, shares in Bullseye. The Panel observed that section 608(2) of the Corporations Act which extends the application of ‘power’ or ‘control’ to include “power or control that is, or can be, exercised as a result of, by means of or by the revocation or breach of” an ‘agreement’, which includes a ‘relevant agreement’.

While the shareholder intention statements were qualified by no emergence of a superior proposal, the Panel was of the view that the circumstances surrounding the negotiation and execution of the shareholder intention statements meant that there had still been a breach of the 20% rule given the breadth of the definition of “relevant agreement” and the application of section 608(2) of the Corporations Act. In particular, the Panel pointed to:

• the shareholder intention statements having been negotiated for a significant period of time;
• the nature of the negotiations (including in the context of the interconnected commercial transaction) meant that the statements went further than normal market practice and evidenced a relevant agreement between the parties; and
• the statements were signed as deeds (including by Emerald).

It was also noted that the fact that Emerald already had control of Bullseye by virtue of its relevant interest in 57.34% of Bullseye shares at the time of entry into the signed shareholder intention statements was a relevant factor. The Panel commented as follows:

““We consider that Emerald’s entry into the Signed Shareholder Statements with shareholders holding 18.20% of Bullseye shares in a bid where it was very unlikely that a superior proposal would emerge, meant that Au Xingao and Xinhe effectively handed over control of the disposal of their shares to a bidder who already controlled Bullseye. We also consider that this is different to shareholder intention statements given to a bidder who does not control a target company at the time of a bid but which intends to obtain shareholder intention statements for the purpose of creating momentum in connection with a bid. It did not appear to us that this was the purpose for Emerald obtaining the shareholder intention statements here, noting the context of the interconnected commercial transaction.”

The Takeovers Panel concluded that, as a result, Emerald acquired a relevant interest in those additional 18.20% Bullseye shares, increasing its voting power to approximately 75.54%, in breach of section 606.

Collateral benefits and net benefit issues

Regarding the issue of collateral benefits, the Takeovers Panel concluded that the settlement of the court proceedings did not contravene the relevant rules in the Corporations Act, as the settlement was agreed before the offer period began under the Emerald takeover bid. However, the Panel considered there was still a risk that the settlement could be a ‘net benefit’ given to Au Xingao and Xinhe contrary to Guidance Note 21 and the equality principles in the takeover rules. This was particularly so given the settlement was part of an interconnected commercial transaction, along with the Emerald offer.

The Panel concluded that, given the circumstances, it was very difficult for it to determine whether a ‘net benefit’ had been given and that an independent expert was better placed than the Panel to assess this. Accordingly, the Panel has ordered that Bullseye commission an independent expert to opine on this issue (and, if the expert concludes that Au Xingao and Xinhe obtained a net benefit as a result of the settlement, the matter is to be referred to ASIC to consider further, with a view to making an application to the Panel).

Based on a supplementary target’s statement released on 9 November 2023, Bullseye is in the process of engaging the independent expert for the purpose of providing the relevant report. Once appointed, the independent expert will have up to 3 months to deliver the report following which, Bullseye will issue the further supplementary target’s statement required by the Panel.

Commentary

The Bullseye proceedings are an important reminder to takeover participants of the Panel guidance in relation to shareholder intention statements and that such statements can result in a breach of the 20% rule in section 606 of the Corporations Act in certain circumstances. In particular, the decision illustrates that, even if a shareholder intention statement is qualified by no emergence of a superior proposal, if the surrounding circumstances indicate that an agreement, arrangement or understanding has been reached, this may evidence a breach of the Corporations Act, particularly where it is unlikely that a superior proposal may emerge.

In addition, the matter highlights the need to carefully consider the implications of any ‘benefit’ given to a shareholder in connection with a bid and whether this may be a ‘net benefit’ (even if not a collateral benefit under section 623 of the Corporations Act). Determining whether there has been a ‘net benefit’ is, in reality, difficult for the Panel (given it is ultimately a matter of weighing up the commercial advantages and disadvantages), and the decision shows the Panel’s willingness to order a target to commission an expert’s report to opine on this where there is a risk that a ‘net benefit’ may have been provided.

1. ^{See Bullseye Mining Limited 03 [2022] ATP 4, Bullseye Mining Limited 04 [2022] ATP 8 and Bullseye Mining Limited 05 [2022] ATP 14.}
2. ^{Bullseye Mining Limited 06 [2023] ATP 11 at [65].}