On 19 April 2021, the Takeovers Panel published its reasons1 for making a declaration of unacceptable circumstances in relation to a special dividend and issue of shares under a dividend reinvestment plan by Thorn Group Limited, an ASX listed group that provides household and commercial leasing and asset finance. The events surrounding the decision, including the disagreement between shareholders over the strategic direction of the company, provides a lesson for directors on when a dividend reinvestment plan will not get a “green light” from the Takeovers Panel.
Over the last year or so a number of major Thorn Group Limited (Thorn) shareholders have been fighting over the strategic direction of Thorn.
In one corner was Forager Funds Management Pty Ltd (Forager), a funds manager, and a separate private investor group, Vaspip 2 Pty Ltd (Vaspip) and in the other was Somers Limited, an investment company, with its investment manager, ICM Limited, together with their associates (Somers).
The dispute came to light by reason of:
- an application by Vaspip in September 2020 to the Supreme Court of Victoria for an order that its requisition to remove 2 of the 4 directors of Thorn was valid; and
- an application to the Takeovers Panel in October 2020 by Forager.
In general terms, Forager and other shareholders were seeking a return of capital by Thorn. In Vaspip’s request for Thorn’s share register it said the “aim of calling a general meeting would be to remove the majority of directors and to simply wind the business up and return all surplus capital to its shareholders”2.
Somers, on the other hand, saw a future in Thorn’s business3. Somers had nominated 2 of the 4 directors to the Board, with one of those nominees being the Chair of Thorn4.
The Board was in a dilemma. They asked the question at their board meeting held on 4 August 2020 – “How do we solve for every shareholder?” They considered a number of options including the option of a large special dividend with a dividend reinvestment plan (or a dividend followed by a capital raising underwritten by a shareholder) and a selective reduction of capital.
As mentioned, during this time5 Vaspip and others put forward a requisition to remove 3 of the 4 Thorn directors6. After taking legal advice the Board determined that the requisition was invalid without giving reasons to the requisitionist. On 14 October 2020 the Supreme Court of Victoria declared that the members’ requisition was not invalid by reason of procedural irregularity. The meeting to consider the member’s requisition was set down for 3 December 2020.
In the meantime, the Board had decided on a course of action – being the declaration of a fully franked special dividend of $0.075 cash per Thorn share (totally $24.2 million)7 with the Thorn’s dividend reinvestment plan (DRP) applying to the dividend with a discount of 2.5%. With this announcement on 12 October 2020 the Board also said it was considering the ability of Thorn to undertake a buy-back of Thorn shares in the order of $15 to $25 million. The dividend was paid on 3 November 2020 with 60,764,233 new shares issued under the DRP.
As a result of its participation in the DRP and some share acquisitions, Somers’ voting power in Thorn increased from 30.75% as at 11 May 2020 to 39.42% as at 5 November 2020. This increased shareholding would have given it more votes at the general meeting scheduled for 3 December 2020 to consider the removal of its directors from the Board.
Separately Forager and Vaspip applied to the Takeovers Panel for a declaration of unacceptable circumstances.
The Panel’s Decision
The Panel determined that applying the DRP to the Special Dividend in the circumstances was unacceptable having regard to the effect or likely effect on the control of Thorn and result in Somers acquiring a substantial interest in Thorn:
- in a market that was not sufficiently efficient, competitive and informed; and
- where Thorn shareholders did not have a reasonable time to consider the DRP and its likely effect and were not given enough information to assess its merits,
contrary to the principles underlying the takeovers regulations set out in section 602 of the Corporations Act.
The Panel ordered that the shares issued to Somers under the DRP to be cancelled and required Thorn to pay Somers their Special Dividend entitlements in lieu of the cancelled DRP shares.
The Panel’s Findings
There is insufficient space to examine all the issues canvassed by the Takeovers Panel in coming to its decision but the Panel noted that the Board was in “red flag” territory8 in determining Thorn strategy in satisfying the different interests of its major shareholders.
Thorn’s and Somers’ main argument to the Takeovers Panel was that the DRP exception9 to the prohibition on the acquisition of relevant interests in voting shares, as set out in section 606 of the Corporations Act, allowed the issue of shares to Somers and its associates under the DRP.
The Panel said that the “unusual combination of factors”10 present in the circumstances before it required it to consider whether the issue of shares under the DRP was unacceptable having regard to its effect on control or potential control of Thorn and having regard to the purpose of chapter 6 set out in section 602.
The unusual combination of factors included:
Size of the Special Dividend
The potential number of shares that could be issued under the DRP represents 35.71% of Thorn’s market capitalization11. The size of the dividend was highly unusual as it is statistically rare for special dividends to exceed even 10% of a company’s market capitalization, and all of Thorn’s past dividends represented no more than 1.67% and 4.15% of the company’s capitalisation.
Known or likely preferences of substantial shareholders
The Panel found that give the size of the Special Dividend, Thorn should have asked its largest substantial shareholders, including Somers, of their intention to participate in the DRP, to determine the potential effect on control of Thorn.
Short period of time given to make an election to participate in the DRP
Though Thorn had complied with the minimum times set out in the Listing Rules timetable setting an election period of 8 days, the Takeovers Panel considered that for the purposes of section 602(b) of the Corporations Act, given the size of the Special Dividend and the potential control effects, insufficient time was given to shareholders to make an election to participate in the DRP.
Additionally, instructions on participating in the DRP were only provided to shareholders on the day before the election period ended. Given the potential control effects of the DRP, the Takeovers Panel expressed that they expected better communication to encourage participation.
Uncertainty about plans for further major restructuring
At the AGM held two months prior to the declaration of the Special Dividend, the Chair of the Board announced plans for a further major restructuring of the company. Thorn did not provide any further public announcement and submitted later that it did not have any plans for further restructuring. Additionally, Thorn did not identify plans for use of the dividend funds.
The Takeovers Panel agreed with Forager that shareholders did not have sufficient information to make an informed decision about reinvesting in Thorn through the DRP, which contributed to a lower DRP participation rate and exacerbated control effects.
Lack of disclosure regarding control effects of the DRP and response, or likely response, of Thorn’s substantial shareholders to the DRP
The Panel considered it appropriate for the Board to disclose to Thorn shareholders the potential control effects if Somers elected to participate in the DRP, as Somers’ voting power would increase significantly (approximately 9%) if no other shareholder participated in the DRP. The Panel was of the opinion that this contributed to the lower DRP participating rate, exacerbating control effects.
Potential effects of a large number of newly issued shares on the voting at a requisitioned general meeting for the removal of directors
The Panel (as well as the ASIC in its submission) expressed concerns as to the appropriateness of Somers acquiring and voting any additional shares prior to the delayed requisition meeting, as the increase to almost 40% voting power “would likely be decisive” at shareholder meetings. The Panel considered that, as part of “the matrix of factors” detailed above, the potential effect of Somers being able to vote at the requisitioned shareholders meeting on the shares issued under the DRP contributed to the application of the DRP in the circumstances being unacceptable.
Key takeaway for Directors
The Thorn decision is another lesson for directors to be on high alert in considering transactions that may have an effect on the control of their company.
In ASIC v Lewski,12 the High Court found that the directors of the trustee of the Prime Trust, in approving amendments to the terms of the constitution of the Trust, had breached several of their duties by not considering: the gratuitous nature of the fees; the subject of the amendments to the constitution; the uncertainty as to whether the amendments could be made; the propriety of making the amendments; and the conflicts inherent in the circumstances. The directors in the Lewski case ignored the “red flags” in front of them.
Clearly directors have to be diligent in order to spot red flag events as they appear. They are usually not accompanied by flashing lights. In the circumstances, directors have to exercise special vigilance and “scrupulous concern… to ensure that any necessary corporate approvals are obtained and safeguards put in place.”13
The Panel’s view in the Thorn Group matter was that “the Board did not adequately consider the potential conflict of interest of directors when considering the potential control effects of the matters announced in Thorn’s 12 October 2020 announcement”14.
The Panel thought that if “the Board had considered the potential control effects of its proposals, then perhaps the position of the two Somers nominees on the Board could have been discussed and managed differently (for example, external legal advice may have been sought on conflicts and the assessment of approaches favouring Somers’ interests)”15.
1. Thorn Group Limited 01 & 02  ATP 29 (Proceedings).
2. Proceedings para 58.
3. Proceedings para 59.
4. On 2 October 2020 Mr Bird, a Thorn director, resigned from the Board, so at the time of the Panel application there were only 3 directors on the Thorn Board.
5. The requisition to hold a meeting to consider the removal of directors was lodged on 31 August 2020
6. 2 of those 3 directors were Somers’ nominees and Mr Bird, who resigned on 2 October 2020.
7. On 31 July 2020 Thorn announced that it had $54.1 million in free cash as at 30 June 2020
8. Proceedings para 104.
9. Corporations Act 2001 (Cth), section 611, item 11.
10. Proceedings para 176.
11. As at the date of declaration of the Special Dividend.
12. ASIC v Lewski  HCA 63.
13. ASIC v Adler  NSWSC 171 at .
14. Proceedings para 141.
15. Proceedings para 142.
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