CODEWORD

The Panel recently considered an allegation of defensive tactics made by Rubicon Limited in relation to the actions, or inactions, of the directors of Tenon Limited in response to Rubicon’s (successful) partial offer.

The Panel’s determination of the complaint found that Tenon’s directors had not contravened the Code’s prohibition on defensive tactics. The matter highlighted several aspects of the interpretation of rule 38 of the Code, including:

• that “an action” by the directors of a company can include a decision to not act;
• that an action “in relation to the affairs of a Code company” contemplates interference with the ongoing undertaking of a company’s business. This might include selling assets, issuing further shares, declaring an extraordinary dividend or such other initiatives that alter the nature and extent of the business the offeror has taken into account in making the offer. However the scope of the phrase does not extend to a refusal to respond to a requirement that an offeror purports to make under the terms of its offer.

Two of the conditions of Rubicon’s partial offer purported to impose obligations on Tenon’s directors to provide information about aspects of its affairs to Rubicon, or to an expert appointed by Rubicon.

These conditions were “change of control” conditions to address the risk that in the event of a change of control of Tenon:

• no shares, notes options or other securities held or controlled by Tenon would be forfeited, transferred or subject to any right of pre-emption that could have a material adverse impact on the Tenon group’s financial position;
• Tenon’s interests in any concession, lease, grant, permit, license, franchise, timber cutting, farming, mining or growing right etc would not be materially and prejudicially affected.

The conditions required Tenon’s directors to confirm to Rubicon no later than 7 days after the date of the offer that no such adverse outcomes could occur, or, if the directors of Tenon failed to so confirm, that an expert appointed by, but not an associate of, Rubicon would provide the confirmation sought.

Tenon’s directors declined to provide the confirmations sought. In a public release, Tenon told shareholders that it did not intend to provide information to an expert to enable the expert to confirm that the defined adverse consequences would not arise from a change of control of Tenon.

Rubicon alleged that the decision by Tenon’s directors not to assist Rubicon by satisfying the terms of two important conditions of its offer amounted to an action designed to frustrate its offer. Rubicon claimed that this contravened rule 38 of the Code.

The Panel’s view is that the Code’s restriction of defensive tactics does not oblige directors to provide information required by an offeror. The board of the target company should not be manoeuvred by conditions included by an offeror in its offer into a position where it can be suggested it is in breach of the rule 38 prohibition on defensive tactics merely by refusing to provide information or give access to information.

The application of rule 38 should not be influenced by how relatively important any requested information might be to the offeror, or by how relatively innocuous it would be for the target company to comply.

The Panel drew attention to the obligations of target company directors, under general law and various provisions of Schedule 2 of the Code, to provide information to shareholders in the target company statement.

The Panel rejected a proposition by Tenon’s directors that they could somehow “barter” information in the pursuit of the best possible offer or offers for shares in the company. This was particularly so insofar as all relevant information is required to be disclosed under clauses 18(5) and 24 of the Second Schedule of the Code. The Panel noted that it would be improper, and in breach of their duties under the Code, for directors to withhold information that is material to an investor considering the offer because they saw some advantage in negotiating with the offeror for better terms in the offer in return for a greater level of disclosure.

The determination is available on the Panel’s website.