Section 641 in Action: Navigating the Early Stages of a Hostile Takeover

While schemes of arrangement remain the dominant structure used in public M&A transactions, there has been a resurgence of takeover bids in recent years. We expect to continue to see hostile takeovers in circumstances where bidders make ‘opportunistic’ offers in a lower priced market and misalignment between the bidder and target valuation expectations.

Some would say that in a contested takeover, all is fair in love and war. For the most part, the codes of chivalry have been clearly defined by Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act), but there is still room for parties to exceed the bounds of propriety in a hostile takeover. In this article, we explore some of the quirks around section 641 of the Corporations Act (which allows the bidder to request the target’s register of members) and potential pitfalls that targets should be aware of.

Background

An essential preliminary step in any takeover process is to obtain a copy of the target company’s share register. The bidder can avail of the general right to request a copy of the register under section 173 before the bidder’s statement has been served on the target. Once the bidder’s statement has been served, the bidder has a statutory right under section 641 to request the same, allowing the bidder to update its records concerning the identities of holders of shares and other securities in the target.

Under section 641(1), the bidder, having served its bidder’s statement on the target, is entitled to request the following information from the target:

1. the names and addresses of persons who, on a date specified by the bidder, held securities in the bid class or which are convertible into the bid class; and
2. the type and number of each type of those securities held by the person at the specified time.

Under section 641(6), the target must provide the requested information to the bidder by no later than the latest of the following times:

1. the end of the second day after the day on which the bidder requested the information; or
2. the end of the next day after the day as at which the information must be correct; or
3. the time when the target receives the payment of the fee mentioned in section 641(5).

The target is entitled to charge a fee for providing its share register,¹ not exceeding 10 cents for each name and address of a securityholder.² In practice, the bidder will estimate this fee based on the number of securityholders identified through the information obtained under section 173 or by reference to the target’s latest annual report and provide payment at the time that it makes the request. This approach prevents potential delays that the target could cause by relying on section 641(6)(c) of the Corporations Act.

Pursuant to section 641(1B), failure to comply with the bidder’s request within the timeframe specified under section 641(6) is an offence of strict liability.³ According to Schedule 3 of the Corporations Act, the maximum penalty for contravention of section 641(1) is 60 penalty units, which, as of the date of this article, amounts to $18,780.⁴

The bidder’s request under section 641(1) must specify a date by which the information must be accurate. This date can be aligned with the record date for determining the holders who will receive the bidder’s statement for the purposes of section 633(2). Section 633 allows the bidder to set this record date when requesting a list of members from the target under section 641.

Implications for Target Companies

It is not unusual for the section 641 notice to be given by way of service with the physical copy of the bidder’s statement to the target’s registered address. Upon receipt of the bidder’s statement, the target and its advisers are expected to meticulously review the bidder’s statement to identify any deficiencies or misleading or deceptive statements.⁵ As part of the bidder’s strategy, they may choose to serve the bidder’s statement at a less than ideal time, such as late on a Friday, provided they comply with the two-month rule⁶ and other timing requirements under Chapter 6 of the Corporations Act. The target’s objective at this time is to restrain the bidder from despatching the statement until all defects identified by the target have been remedied by a supplementary bidder’s statement.⁷  Although the target has 14 days before the bidder’s statement is despatched to its relevant securityholders, both parties are obligated to make a genuine effort to resolve as many issues as possible before bringing an application to the Takeovers Panel.⁸ Practically, this should be done no later than a week before the despatch date.⁹  Amidst the flurry of activity during this time, it is not uncommon for the target to overlook the section 641 notice that accompanies the bidder’s statement often buried behind the more exciting (and much larger) bidder’s statement.

To mitigate the risk of the section 641 notice being overlooked, or delivered to a registered address which may not be the target’s business address, the target may wish to authorise its legal advisers to accept service of takeover documents electronically on their behalf early on in the takeover process.

If the section 641 notice is served, for example, on a Friday afternoon, specifying the next day as the date at which the register must be accurate,¹⁰ the register must be provided by the end of Sunday. Any non-compliance may be reported to ASIC by the bidder.

It is important to note that a section 641 notice can also be used by the bidder to make further requests during the bid period to ensure an up-to-date list of securityholders. In practice, weekly updates may be sought to account for changes in the register. There is mixed practice regarding whether additional fees are charged for these updates. A less cooperative target may risk facing the aforementioned tactic, so it will be in the target’s interest to agree upfront with the bidder on the proposed timing for the provision of the information each week. Moreover, using up-to-date information benefits both parties by ensuring that all securityholders are treated fairly throughout the takeover process.

Are You Prepared for a Hostile Takeover?

In the evolving landscape of hostile takeovers, it is crucial for both bidders and target companies to navigate the complexities of Chapter 6 of the Corporations Act. Legal and financial advisers should ensure that all regulatory requirements are met promptly and accurately to avoid penalties and delays. If you are involved in a takeover bid, please consult with our experienced team to ensure compliance and to develop a robust strategy that addresses both the legal and tactical aspects of the process.

For more information, please contact Brett Heading, Benny Sham and Peter Williams.

¹Section 641(5) of the Corporations Act.

²Corporations Regulations, Sch 4, item 4.

³Section 641(1A) – (1B) of the Corporations Act were inserted by the Treasury Legislation Amendment (Application of Criminal Code) Act (No 3) 2001. An offence of strict liability is an offence where no fault elements apply to the physical elements of the offence.  Strict liability is described in section 6.1 of the Criminal Code Act 1995 (Cth).

⁴See also sections 1311 to 1311E of the Corporations Act.

⁵Section 643 of the Corporations Act.

⁶Section 631(1)(b) of the Corporations Act.

⁷This would likely be the Takeovers Panel’s response if a successful application is brought before the offer period opens.

⁸See paragraph 10 of Takeover Panel’s Guidance Note 5.

⁹Pursuant to the Guidance Note 5 the parties must afford the Takeovers Panel enough time to consider what course to take before the despatch of the bidder’s statement.

¹⁰Section 641(2) of the Corporations Act provides that the date set by the bidder as at which the information must be correct, must be a date that occurs after the day the bidder makes the request, unless the target agrees to it being the same day as the request.