Mobile Asset minority shareholder successfully challenges drag-along provisions before the Takeovers Panel

IN BRIEF

• The Panel has made a declaration of unacceptable circumstances in relation to Mobile Asset Holdings Ltd (Mobile Asset) concerning a resolution put to shareholders to obtain approval to insert new drag-along and tag-along provisions in its constitution.
• The Panel considered that the drag-along and tag-along rights created a mechanism for the acquisition of a 100% relevant interest in Mobile Asset in a manner that circumvented the protections in Chapter 6. It also considered disclosure of the implications was inadequate.
• The decision serves as a reminder that drag-along and tag-along rights in a public company’s constitution are likely to give rise to unacceptable circumstances unless such rights are expressly subject to specific shareholder approval in accordance with section 611, item 7.
   

Background

Mobile Asset is an unlisted Australian public company with approximately 649 shareholders. Approximately 50.86% of its shares are held by its directors and their associated entities. The company proposed a special resolution to insert drag-along and tag-along rights into its constitution which would be enlivened where any person proposes to acquire voting power in excess of 20% or control.

The drag-along and tag-along provisions were to operate so that shareholders with more than 50% of the shares in Mobile Asset (dragging shareholders) could:

• in relation to the drag-along rights, compel minority shareholders to transfer all their shares under a proposed transaction; and 
• in relation to the tag-along rights, agree to sell all their shares, upon which minority shareholders could require majority shareholders to use their best endeavours to cause the acquirer to buy their shares.

Further, the drag-along and tag-along provisions:

• authorised any two directors of Mobile Asset to complete any transfers required under the provisions on behalf of minority shareholders under an irrevocable power of attorney; 
• contained no requirement for a minimum sale price, an independent valuation or fairness opinion; and 
• were not expressly subject to a section 611, item 7 resolution or any ASIC relief. 

What did the Takeovers Panel conclude?

The way in which the proposed provisions had been crafted were found to have inconsistencies which led to different possible applications of the Corporations Act.  However, section 606 of the Corporations Act prohibits acquisitions of relevant interests in voting shares if, as a result of the transaction, a person’s voting power increases from under 20% to over 20%, or increases from a starting point above 20% and below 90%, unless an exception in section 611 applies. Broadly, the Panel found that the drag-along and tag-along provisions created a mechanism for the acquisition of a 100% relevant interest in Mobile Asset in a manner that circumvented the protections in Chapter 6. 

In particular, the drag-along right gave the shareholders with more than 50% of Mobile Asset’s shares (which, importantly, the Board collectively held) the ability to compel minority shareholders to transfer all their shares to an acquirer, without any requirement for disclosure to shareholders, a minimum sale price, a recommendation from an independent board committee, an independent valuation, or a fairness opinion. Most relevantly, Mobile Asset’s submissions in this regard sought to characterise the drag-along right as facilitative and ancillary in nature and arising only from a transaction effected in accordance with Chapter 6. The Panel however identified that the provisions of Chapter 6 which expressly override notions of remoteness, conditionality and how the relevant interest arises in finding a relevant interest (ie power to dispose, or control the exercise of a power to dispose) meant that the arguments by Mobile Asset did not hold.    

In respect of exceptions, Mobile Asset submitted that the exclusion in section 609(7) applied, which states that a relevant interest does not arise where an agreement is conditional on approval of a section 611, item 7 resolution. Mobile Asset pointed to a general statement that nothing in its constitution “requires or permits any shareholders to Transfer Shares or take any action if doing so would contravene Chapter 6 of the Corporations Act or otherwise be unlawful”. Mobile Asset also sought to rely on the Panel’s findings in Ringers Western Limited 02R [2024] ATP 17, where the Panel found that no relevant interest arose by reason of drag-along rights because the drag-along provisions were drafted such that they satisfied the exclusion in section 609(7).

The Panel rejected these arguments, noting that while it agreed with the Panel in Ringers Western that it is possible for drag-along rights in a public company’s constitution not to give rise to a contravention of section 606, the drag-along rights in Ringers Western were expressly subject to a section 611, item 7 resolution. Absent an express requirement to obtain a section 611, item 7 resolution, the Panel could not see how a general statement of compliance with Chapter 6 could satisfy the requirement in section 609(7)(a)(i) that the relevant agreement is conditional on a resolution under section 611, item 7 being passed. Accordingly, the exclusion in section 609(7) could not be read to exempt a relevant interest from arising merely because an agreement includes a general statement of compliance with Chapter 6.

The Panel found that even if the drag-along and tag-along provisions were conditional on a section 611, item 7 resolution, item 7 would not have been available in these circumstances. This is because item 7 provides an exemption where an acquisition is previously approved by a resolution passed at a general meeting, but requires that no votes be cast in favour of the resolution by the person proposing to make the acquisition and their associates, nor the persons from whom the acquisition is to be made. Any shareholder agreeing to be bound by the drag-along and tag-along provisions would be acquiring a relevant interest in all the shares in Mobile Asset and those persons would be “the persons proposing to make the acquisition” under item 7. Absent any ASIC relief, they would not be entitled to vote on the resolution.

The Panel also considered whether section 609(8) applied, which excludes a relevant interest from arising where it would arise merely because the company’s constitution gives shareholders pre-emptive rights on the transfer of securities if all members have pre-emptive rights on the same terms. The Panel found that neither the drag-along nor the tag-along rights were pre-emptive rights within the meaning of section 609(8) because, rather than providing a pre-emptive right of sale and right of first refusal, the drag-along rights compelled a minority shareholder to sell to a proposed acquirer at the initiative of majority shareholders. 

Key takeaways

• For investors: Investors should critically assess proposals to change the foundational settings for control to pass in companies they are invested in and also the constituent documents for growing companies that have recently achieved over 50 shareholders. 
• For companies: Drag-along and tag-along provisions, whilst frequently used in companies with less than 50 shareholders, are rare in 50+ shareholder companies and require very careful calibration, drafting and disclosure to have an opportunity to be enforceable.