AUSTRALIA: Australia Takeovers Panel clarification of bare trustee exemption from Section 606 prohibition

Friday December 14 2012

The Australia Takeovers Panel has accepted an undertaking from Australian Executor Trustees Limited and declined to conduct proceedings on an application from Knights Capital Group Limited in relation to its affairs.

The application concerned whether AET held its shares in Knights as a bare trustee under s609(2) of the Corporations Act and, if not, whether acquisitions of shares in Knights contravened s606. The issue arose in the context of resolutions to be put at Knights` 2012 annual general meeting involving the replacement of two non-executive directors with three new directors.

The Panel concluded there was no reasonable prospect that it would make a declaration of unacceptable circumstances after accepting the undertaking offered by AET which resolved the immediate issue. The Panel also referred to ASIC the broader question of the bare trustee exemption in s609(2). The Panel also considered that the application was not timely. Accordingly, the Panel declined to conduct proceedings.

Circumstances of the case

Knights applied to the Panel for a determination of unacceptable circumstances on the grounds that the acquisition of a 70.7% interest in Knights by Australian Executor Trustees Limited (AET) constituted a prohibited acquisition under section 606. AET held its Knights shares as trustee or custodian for various beneficial owners. Knights submitted that AET’s actions in seeking to remove and appoint directors to the Knights board meant AET was not holding the shares as a bare trustee and therefore could not rely on the section 609(2) “bare trustee” exception to the prohibition in section 606.

At the time of the Panel decision, AET held a 70.7% interest in Knights shares on behalf of various beneficial owners across four categories of funds:

• Kingston Superannuation Trust – AET in its capacity as trustee had full discretion on decisions relating to corporate actions;
• AET Small APRA Fund – AET in its capacity as trustee had to act as directed by the financial advisers of the beneficiaries;
• Portfolio Management Service – AET in its capacity as custodian had to act as directed by the beneficiaries and their financial advisers, including voting the Knights shares at any meeting of Knights as so directed; and
• AET Self Managed Super Fund – AET as custodian had to act as directed by the beneficial holders or their financial advisers.

When acquiring a relevant interest in voting shares in Knights which was greater than 20%, to overcome the prohibition in section 606 AET relied on the exception set out in section 609(2), which provides that no relevant interest will be acquired where a person who would otherwise have a relevant interest acquires the shares as a “bare trustee”.

In June 2012, AET wrote to Knights requesting the removal of a Knights director. AET alleged that Knights’ constitution entitled a shareholder with more than 50% of Knights shares to request a director be removed. Knights did not comply as it had concerns about the validity of the request. AET then requisitioned a Knights shareholders’ meeting under section 249D to remove two non-executive directors and appoint three new directors.

Knights proposed to put the resolutions to Knights shareholders at the 2012 annual general meeting. AET agreed with this proposal and withdrew the requisition notice.

Panel decision

The Panel concluded there was no reasonable prospect that it would make a declaration of unacceptable circumstances after accepting the undertaking offered by AET which resolved the immediate issue. The Panel also referred to ASIC the broader question of the bare trustee exemption in s609(2). The Panel also considered that the application was not timely. Accordingly, the Panel declined to conduct proceedings.

Click on the above link for the Panel decision.