Takeover regulation: A more considered view


Leaving the hyperbole to one side the recent debate and commentary surrounding the comments made by the chairman of the Australian Securities and Investments Commission, Greg Medcraft raises two distinct and interesting issues.

Firstly, and most importantly as a practitioner, is it time to re-examine some of the underlying principles of our system of regulating change of control situations?  Secondly, is Senator Mathias Cormann right to see a connection between the “separation of powers and responsibilities between policy and law makers on one side and regulators on the other,” or is it really just a case of as Justin O’Brien suggests “facilitating a debate rather than attempting to impose rules?”

Australian takeover rules (which we should take to include all change of control scenarios including schemes of arrangement and the fight for control of the board) have served us well for a number of years but they are creaking under the weight of a changing world order and a vastly different world from the late 1960’s when they were originally designed.  Who could then have foreseen the rise of hedge funds, dark pools, private equity and the emergence of schemes of arrangement as a takeover tool of choice let alone high-frequency trading; these new phenomena have changed the landscape in ways that Sir Richard Eggleston could never have imagined. 

What the regulation of takeovers in this country needs is not knee jerk reactions to the story of the day.  What is needed is a systemic and thoughtful review by reference to what can and should be done to improve Australia’s business and company regulation as part of a program to promote business, economic development and employment (as was the case with the Corporate Law Economic Reform Program) although we should probably now add “and Australia's economic engagement with Asia”. 

It is hard not to agree with Senator Cormann on the need for an orderly policy development process in this field.  Clearly there is a need for the wider issues to be debated and considered in a holistic and thoughtful way. 

The last time we explored the big questions was in 1997.  At that time Treasurer Costello initiated a program (Corporate Control: A Better Environment for Productive Investment Paper No. 4) government to consolidated a number of reviews.  CLERP 4 as it became known was  a comprehensive examination of rules governing takeovers by reference to the benefits of takeovers, or the prospect of takeovers, to shareholders, the corporate sector and the economy recognising their important role in promoting improved corporate efficiency and enhanced management discipline, leading ultimately to greater wealth creation.  Where is the current administration on this issue?

Our system of regulating takeovers has plenty of good questions, some of them new and some perennial:

  • Is the 20% statutory threshold still appropriate?
  • Should we persist to produce M&A documents for retail shareholders that routinely run to 500 pages? 
  • What is the value of an independent experts report? 
  • Should the highly successful Takeovers Panel be given a wider remit?
  • Do we need a better system to regulate takeover announcements than our existing continuous disclosure rules as have been discussed on these pages by Greg Golding and Ron Barusch
  • Why should our judges be involved in M&A – are our courts who operate under an adversarial system equipped to carry out the economic and accounting inquisition needed to assess fairness?
  • Do we need to retain complex and prescriptive takeover regulation when as was argued in the Glencore case the Takeovers Panel largely works on “fuzzy law”? 
  • Should we replicate the UK Panel’s rules on lock up devices and the so called “put up or shut up” rule?

These are the big policy issues not the “abuse” of creep provisions tangentially connected to high stakes battles for control of a few high profile boardrooms.  I find my self in agreement with Alan Kohler that “I’m not sure there is a problem to be solved.”

Every now and then a regulator has to have the courage to admit that there are matters that it has no power to regulate likewise ministers need to be prepared to say they are or are not happy with the existing legislation and that if they are not that they plan to do something about it.  Just because a matter is being discussed in the media (especially if it is about the media) doesn’t mean the regulator needs to try to find a voice in the debate.  As a general proposition our regulators need to be above the affray, they must remain an independent adviser to government not a public commentator or campaigner.

The separation of powers doctrine applies when ministerial departments, in this case Treasury, implement legislation made by parliament and are subject to judicial review by the courts.  Since at least 1996 (when Treasurer Costello moved responsibility and staff for business law from the Attorney-General's Department to Treasury) the Commonwealth Government has been well served by a talented group of individuals within Treasury with a strong focus on giving the government of the day informed and impartial advice on corporate law with a strong focus on improving business efficiency and productivity. These policy specialists are in turn supported by a depth of experience that enables them to advise the Commonwealth Government on the appropriate policy response to any given issue.

The executive and legislative branches of government are and should remain the key organs of policy development in takeover regulation. The executive is the source of regulation in two ways: in terms of proposing new laws to parliament and in terms of establishing secondary rules to give effect to primary legislation eg by regulations that are subject to parliamentary disallowance. Parliament has a responsibility to review and enact primary legislation based on the work of the executive. Independent regulators exist at the border between policy formulation, which remains the remit of the elected public authorities under a rule of law, and enforcement of the regulation which is delegated to them, but that does not entitle them to set the policy.  They have an important role to play in providing Treasury with real world feedback and quantitative data that can form the basis for policy development.

Regulatory policy is the development and implementation of government-wide tools and institutions used to shape how governments use their regulatory powers; this is the province of the executive in a Westminster-style parliamentary system. All regulatory policies are based on a mix of economic, legal, and public management principles and it is elected ministers and the parliament who should take the lead on policy making.

Independent regulatory authorities like ASIC are charged with regulating specific aspects of an industry. They exist under autonomous management while their budget may be set by Treasury. However, there is no scope for political or ministerial intervention with the body‘s activities and that is as it should be.  Once they venture outside that model they run the risk of blurring the lines of ministerial accountability.

There is a need for a holistic examination of our system of takeover regulation and how to best achieve an appropriate balance between encouraging efficient management and ensuring a sound investor protection regime, particularly for minority investors.

Let’s get away from grandstanding and get stuck into what we need to do to make sure we have the right policy settings to maximise the return on the capital invested by shareholders.

This article originally appeared online at the University of New South Wales' Centre for Law, Markets and Regulation.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Andrew Lumsden

Partner. Sydney
+61 2 9210 6385