The primary question for the Takeovers Panel would seem to come down to whether WCB requires the funds being raised under the entitlement offer and is the true purpose behind the entitlements offer being made really to enable Saputo to compulsorily acquire the other WCB shareholdings.
In essence, this is the thrust of Sandon Capital’s key submissions revealed in the Panel’s media release announcing the application. Sandon Capital submits in its application that WCB does not require the funds being raised under the entitlement offer and there is no incentive for shareholders to participate in the offer. It is further submitted that the offer is being inappropriately used as a mechanism to enable Saputo to proceed to compulsory acquisition of the remaining WCB shares and is therefore an abuse of Item 10 of Section 611 of the Corporations Act. On the face of it, WCB’s balance sheet and the existence of, one assumes, a supportive majority shareholder in Saputo, does not scream out the need for a WCB fundraising. WCB does however seem keen to repay debt, which is the principal reason given for the fundraising.
Item 10 of Section 611 of the Corporations Act provides an exemption to the prohibition which otherwise prevents shareholders of listed companies increasing their ownership interest when they already own more than 20% of the company. This exemption allows a company in the position of Saputo to increase its ownership interest, notwithstanding that interest is 87.92% of WCB, if it acquires more shares through an entitlement issue that satisfies a number of conditions listed in Item 10. Those conditions are met in the case of a WCB entitlement offer.
However, the Takeovers Panel’s remit in this case is to decide if unacceptable circumstances exist, notwithstanding compliance with the law. The Panel has, on numerous occasions in the past, found fault with entitlement offers that, notwithstanding compliance with the Item 10 conditions, have an unacceptable effect on the control of a company. This is what Sandon Capital is asking the Panel to find in the case of the WCB entitlement offer. The key question which the Takeovers Panel will need to determine is whether or not the WCB entitlement offer is effectively a device to enable Saputo to move above the 90% ownership level, which would enable it to compulsorily acquire the remaining shareholdings in WCB.
The WCB entitlement offer does include features which the Panel has in the past indicated might mitigate against an entitlement offer being unacceptable, such as the availability of a top up facility under which shareholders can apply for additional new shares in excess of their entitlement (which Saputo itself will not take advantage of) and making the offer renounceable. However, the existence of such features does not ensure that the WCB entitlements offer will pass muster with the Takeovers Panel.
The WCB offer booklet states that Saputo Inc has advised WCB that it has not yet made a decision as to whether it would procure Saputo to proceed with compulsory acquisition of any WCB shares not owned by Saputo. The Takeovers Panel is likely to carefully investigate that statement. Bidders under takeover offers routinely disclose their intentions on whether they will proceed to compulsory acquisition if they achieve the threshold necessary to do so. It certainly challenges conventional logic that Saputo Inc has not yet determined whether Saputo would proceed to compulsory acquisition if able to do so, following the entitlement offer.