Defective disclosure of substantial holdings: parties can’t hide behind the passage of time

Summary

• The Northern Iron Limited decision reinforces the Panel’s willingness to take a practical approach in identifying the ‘circumstances’ from which the prescribed time periods for applications commence.
• The Panel’s finding that circumstances were ongoing and that the non-disclosure had a continuing effect is consistent with, and comes soon after, the Federal Court’s recent decision not to interfere with the Panel’s decision in The President Club Limited.
• The Panel also reemphasised the importance of substantial holders obtaining professional advice on a timely basis to ensure compliance with their obligations under Chapter 6.

Overview

The Takeovers Panel’s decision in Northern Iron Limited, arose after a substantial shareholder both failed to make sufficiently fulsome disclosures in substantial holding notices and in its responses to tracing notices.

The decision highlights the Panel’s willingness to point to ongoing circumstances as a basis to overcome time-based procedural barriers that may otherwise prevent applications being considered.

Background Facts

Dalnor Assets Limited (Dalnor), a company incorporated in the British Virgin Islands, acquired approximately 19.95% of Northern Iron over a period of 18 months, commencing in December 2012.

The manner in which Dalnor was owned and controlled was complex. It’s shares were held by a trustee for the benefit of upstream investors, whose investment was managed by a general partner. In December 2012 Dalnor lodged a substantial holder notice which disclosed its relevant interest but did not reveal the relevant interests held by any of the upstream investors or managers. Between December 2012 and May 2013, Dalnor continued to acquire additional shares and lodge fresh substantial holding notices on this same limited basis.

In March 2013 a tracing notice was issued to Dalnor. Dalnor’s response failed to provide the required information, and made no mention of the interests of the upstream investors. Despite some further probing by Northern Iron, no further information was provided by Dalnor over the twelve months that followed.

However, in January 2014 Dalnor requested the appointment of a nominee director to the board of Northern Iron. One can only speculate on the tone of the discussions that followed, suffice to say that Dalnor conceded the existence of the upstream investors and its role as an investment vehicle.

No doubt prompted by this re-engagement, Dalnor finally provided additional disclosure of its upstream ownership in mid-May 2014, shortly before the date of the AGM at which the appointment of its nominee director was to be considered. This additional information confirmed that the upstream investors had a relevant interest in the 18.99% of Northern Iron held by Dalnor at that time.

Northern Iron promptly responded by seeking (and obtaining) interim orders to restrain Dalnor from voting on the upcoming director appointment resolutions. Unsurprisingly, the resolution seeking to appoint the Dalnor nominee failed.

Northern Iron went on to seek a declaration of unacceptable circumstances on the bases that:

• Dalnor had breached the substantial holder notice provisions by not disclosing the details of the holders of the relevant interest, and
• Dalnor had breached the tracing notice provisions by not disclosing the information required.

Northern Iron also sought final orders restraining Dalnor voting in respect of any resolution or motion to elect the Dalnor nominee as a director of Northern Iron for three months (with Dalnor being otherwise allowed to vote on all resolutions).

Overcoming time-based procedural barriers

The Corporations Act requires that applications to the Panel must generally be made within two months of the occurrence of circumstances being complained about. Dalnor submitted that Northern Iron had missed this deadline, because the ‘circumstance’ in question was the lodgement of the defective disclosures in 2013. To this end, Dalnor contended that Northern Iron had unreasonably delayed in making its application, only making the application for the tactical reason of affecting voting at the AGM.

However, the Panel found that the unremedied non-disclosure of information can give rise to ongoing ‘circumstances’ which will continue for as long as the disclosure remains defective.

The Panel rejected the submission that the application was tactical, instead finding that it was brought on by recent developments – namely, the updated information provided by Dalnor in its May 2014 disclosures.

The Northern Iron decision is a strong indication by the Panel of its willingness to apply a practical approach when identifying the ‘circumstances’ (and the relevant time periods) in order to address an ongoing situation. The decision comes fresh on the back of the Federal Court’s decision in Queensland North Australia Pty Ltd v Takeovers Panel. In that case, the Federal Court was unwilling to reverse the Panel’s finding that ongoing circumstances existed that rendered questions of the timing of commencing proceedings similarly irrelevant.

Unacceptable circumstances

In reaching its conclusion, the Panel pointed to the long periods of non-disclosure, the breaches of the Corporations Act, and the multiple iterations of disclosure (which was still considered to be incomplete and which was further updated during the panel process).

On this basis, the Panel found unacceptable circumstances in relation to both the defective substantial holder notices and the defective tracing notice responses. The Panel dismissed Dalnor’s argument that the matter was not material because it went only to the precise identity of the upstream investors and not to the fact or size of the stake itself (which was known to the market by reason of Dalnor’s initial limited disclosures). Instead, the Panel emphasised that proper identification of all persons who control a parcel of shares is material information for the market.

The Panel ordered that:

• Dalnor provide updated (and complete) disclosure as to the nature and relevant interests of the upstream investors, and that it disclose the management agreement pursuant to which some of the upstream investors acquired their relevant interests, and
• Dalnor must not acquire Northern iron shares in reliance on the ‘3% creep’ provisions until six months after the lodgement of this additional substantial holder disclosure.

Mistakes, the need for professional advice, and the award of costs

Dalnor had attempted to contend that its non-disclosure was the result of inadvertence or mistake. However, the Panel reiterated the importance of persons in this position obtaining proper professional advice to ensure that they comply with Australian legal requirements when providing substantial holder notices and responding to tracing notices. The Panel was unimpressed that Australian legal advisers were apparently only brought in late in the process in connection with the May 2014 disclosures.

The Panel also exercised its power to award costs against Dalnor. This power is rarely used and the Panel awards costs generally in circumstances where a party has failed to provide evidence or hindered a review, knowingly engaged in questionable behaviour costing the applicant considerable time and money, or engaged in predictably unacceptable circumstances.

In making a partial award of costs, the Panel found that the non-disclosure by Dalnor was apparent and should not have required the time and expense of a contested Panel intervention.