Takeovers Panel Update: Shareholder Approval Regime Under s 611(7) – Mighty Kingdom

What you need to know

• The recent Australian Takeovers Panel (Panel) decision of Mighty Kingdom Limited [2023] ATP 14 serves as a reminder of the disclosure requirements for a valid shareholder approved acquisition under item 7 of s 611 of the Corporations Act 2001 (Cth) (Corporations Act), (Item 7 Approval).
• The company in the decision, video game developer Mighty Kingdom Limited (ASX:MKL) (Mighty Kingdom) was found, among other things, to have not provided all material information to shareholders in relation to a resolution to approve a proposed acquisition of a controlling stake in Mighty Kingdom.
• While the Panel accepted undertakings by the parties involved and therefore did not make a declaration of unacceptable circumstances, this decision is an important reminder to companies to ensure that all material information is disclosed to shareholders when seeking an Item 7 Approval.

What is the shareholder approval regime under item 7 of s 611 Corporations Act?

• Section 606 of the Corporations Act prohibits the acquisition of an interest which results in a person's voting power in a widely held entity, including Australian listed companies, increasing to more than 20% (or any person's voting power increasing between 20% and 90%) unless an exception applies.
• As one of the exceptions to s 606, item 7 of s 611 Corporations Act allows members to approve an acquisition of a relevant interest in voting shares that would otherwise contravene the prohibition. This requires the approval of a majority of the shareholders who are not party to the transaction.
• A key component of an Item 7 Approval is the requirement to disclose to shareholders all material information that will allow members to make an informed decision about whether or not to approve the acquisition, including specific prescribed information under s 611(7)(b) Corporations Act.
• As stated in ASIC Regulatory Guide 74 (RG 74), the basis of these disclosure requirements is to ensure that the basic rights of members are protected when control of the entity may change.  In particular, these disclosure requirements ensure that members are privy to sufficient information to allow them to assess the merits of a proposal. Directors also have to comply with their common law duties to give full and proper disclosure.

Case: Mighty Kingdom Limited [2023] ATP 14

What was the case about?

• The applicant, Mighty Kingdom, sought a declaration of unacceptable circumstances regarding the actions of its two largest shareholders, Gamestar Studios Pty Ltd (Gamestar) and Imagination Entertainment Pty Ltd (Imagination) (together, the Yeend Entities). 
• On or about 19 January 2023, the Yeend Entities acquired a relevant interest in 32% of the voting shares in Mighty Kingdom, following completion of a two tranche placement of shares to Gamestar under a share subscription agreement (SSA).
• The second tranche of shares issued to Gamestar under the SSA (Stage 2 Shares) was subject to certain conditions, including Mighty Kingdom obtaining an Item 7 Approval, which was received at Mighty Kingdom's annual general meeting held on 28 November 2022 (MK Item 7 Approval). 
• The SSA, as amended, permitted Gamestar's payment of the subscription price for the Stage 2 Shares to be made in instalments, subject to the satisfaction of certain conditions.  On 14 June 2023, Mighty Kingdom announced that the conditions relating to payment for the Stage 2 Shares had been met. However, on 24 October 2023, Mighty Kingdom announced that the SSA had been terminated due to Gamestar's failure to pay the full amount of the remaining instalments for the Stage 2 Shares, as required under the SSA.
• On 15 November 2023, Imagination (an associate of Gamestar, and one of the Yeend Entities) acquired 65,951,623 shares in Mighty Kingdom from Gamestar, representing approximately 13.9% of the voting shares in Mighty Kingdom.
• On 20 November 2023, Mighty Kingdom received a request to hold a meeting of shareholders pursuant to s 249D Corporations Act, from Gamestar, Imagination and another Yeend Entity, and applied to the Panel to seek a declaration of unacceptable circumstances on the basis of various contraventions of the SSA and the Corporations Act, the effect of which was that Gamestar and its associates were able to exert disproportionate control and influence over Mighty Kingdom contrary to the principles of s 602 Corporations Act and the MK Item 7 Approval.
• Mighty Kingdom sought final orders that Gamestar be restrained from disposing or exercising any voting rights attached to the Stage 2 Shares that Gamestar had not paid for under the SSA, receiving any dividends or distributions attached to those shares, or making false or misleading statements to the market.

What did the Panel find?

• The Panel was concerned with the validity of the MK Item 7 Approval and decided to conduct proceedings in relation to certain issues raised by Mighty Kingdom (although it did not investigate or resolve questions of whether the parties to the SSA complied with their respective obligations, as requested by Mighty Kingdom). 
• The Panel was of the view that the Explanatory Statement annexed to the notice of meeting seeking the MK Item 7 Approval (Explanatory Statement), which purported to set out the material terms of the SSA (including in relation to the Stage 2 Shares) and information prescribed by item 7 of s 611 Corporations Act and RG 74, did not include all material information known to Mighty Kingdom and Gamestar relevant to the MK Item 7 Approval.
• In particular, the Explanatory Statement did not include details of negative undertakings provided by Mighty Kingdom under the SSA, which identified certain restrictions on Mighty Kingdom's actions without the prior written approval of Gamestar. It was a condition of completion of the Stage 2 Shares subscription that Mighty Kingdom could not breach these negative undertakings.
• ASIC submitted that the notice of meeting and the Explanatory Statement should have disclosed the negative undertakings, as these undertakings provided Gamestar with "the type of control over the business of Mighty Kingdom that shareholders would expect to fall within the powers of the board" under Mighty Kingdom's constitution. Accordingly, ASIC submitted that shareholders were not provided with all information that was material to the decision on how to vote, contrary to item 7 of s 611 and s 602(b)(iii) Corporations Act.
• On the other hand, Mighty Kingdom submitted that such negative undertakings were not dissimilar to the type of practical control a shareholder with over 30% of a company would practically wield, and as such the non-disclosure of the negative undertakings did not affect the validity of the MK Item 7 Approval. The Yeend Entities also submitted that the negative undertakings were typically found in other agreements such as underwriting agreements and debt facility agreements, and therefore were not unusual or unreasonable.
• The Panel cited Focus Technologies Ltd [2002] ATP 8 and LV Living Limited [2005] ATP 5 stating that if approval obtained under item 7 of s 611 Corporations Act was not given with "adequate and accurate information" or if the resulting acquisition was "materially different to that which the shareholders approved", then it is "open to the Panel to decide that the circumstances of the acquisition would be unacceptable, when and if it occurs".
• The Panel broadly agreed with ASIC's submissions and noted that it would be open to the Panel to find that the Explanatory Statement did not contain all material information known to Mighty Kingdom and Gamestar that was relevant to the MK Item 7 Approval, and therefore the exception in item 7 of s 611 Corporations Act did not apply to the acquisition of the Stage 2 Shares by Gamestar. ASIC and the Panel also had concerns that an amendment to the terms of the SSA, subsequent to the MK Item 7 Approval being obtained, could have enlivened the need for a fresh shareholder approval in line with ASIC's guidance in RG 74, on the basis that the MK Item 7 Approval had become "stale".
• Ultimately, in light of undertakings provided by Mighty Kingdom and Gamestar, the Panel was not required to conclude as to whether the disclosure made in the Explanatory Statement invalidated the MK Item 7 Approval. While the Panel agreed with ASIC's submissions regarding the negative undertakings and the amended terms of the SSA, the Panel accepted undertakings provided by Mighty Kingdom and Gamestar to enter a buy-back agreement in respect of the relevant Stage 2 Shares and restricting Gamestar from dealing with the relevant shares, as an adequate remedy for any unacceptable circumstances in this regard. The Panel also accepted undertakings from the Yeend Entities to provide up-to-date substantial holding disclosure, to address potential prior breaches of the substantial holding requirements in s671B Corporations Act.

Other examples of a potential invalid Item 7 Approval

• The Panel has previously indicated its firm stance on the disclosure requirements for Item 7 Approvals, including in Smoke Alarms Holdings Limited [2020] ATP 2 (Smoke Alarms). The application in Smoke Alarms concerned disclosure and voting exclusions related to an Item 7 Approval to approve the issue of voting shares upon a conversion of convertible notes and exercise of options in Smoke Alarms Holdings Limited by Fast Future Pty Ltd.
• In Smoke Alarms, the Panel did make a declaration of unacceptable circumstances, finding that there were material deficiencies in disclosure related to the Item 7 Approval, including the failure to provide an independent expert's report and "insufficient or misleading information" in the explanatory statement. The Panel made orders that, among other things, the relevant options could only be exercised if a new Item 7 Approval was sought with updated disclosure and an independent expert's report (other than in reliance of the "creep" exception in item 9 of s 611 Corporations Act).

Contravention of procedural rules

• Following the Panel's decision on 15 December 2023 (but before the publication of the Panel's reasons for decision) and prior to an upcoming Mighty Kingdom shareholder meeting requisitioned by the Yeend Entities, the Panel became aware of statements made by Mr Yeend (founder of Gamestar, director of both Gamestar and Imagination and former Mighty Kingdom CEO) on public platforms about the Panel's decision. The statements made certain claims regarding the outcome of the Panel's decision.
• The Panel made enquiries of Mr Yeend, who accepted that his statements did not accurately describe the outcome of the Panel's decision and confirmed that he would make a supplementary corrective statement.
• The Panel found that Mr Yeend's statements contravened Rule 19 of the Takeovers Panel Procedural Rules 2020 (Rules) (which all parties are required to agree to at the start of Panel proceedings) as they caused, either directly or indirectly, the Panel's decision to be misrepresented. The Panel came to this view because the statements did not identify that the parties offered undertakings that were accepted by the Panel in resolution of the proceedings, and because the statements were published before the Panel released its reasons for decision.
• While Mr Yeend published corrective disclosure, the Panel considered that Mr Yeend did not address the Panel's concerns in a satisfactory manner, since the statements made in contravention of the Rules remained on public platforms. The Panel noted that it takes non-compliance with the Rules seriously and left open the possibility of taking further action in response to Mr Yeend's conduct (including public reprimand) if the Panel's ongoing concerns were not addressed. 

What does this mean for me?

• The Mighty Kingdom decision, along with previous decisions of the Panel (including Smoke Alarms), are a timely reminder of the strict disclosure requirements that must be complied with by companies in seeking an Item 7 Approval for a change in control of the company.  
• In particular, companies and advisers assisting must carefully consider the material terms of the acquisition and include appropriate disclosure of those terms to shareholders for an Item 7 Approval. If it does not, or if the terms or circumstances materially change after obtaining an Item 7 Approval but before the relevant acquisition occurs, there is a real risk that the Panel may make a declaration of unacceptable circumstances that the Item 7 Approval is not valid and impose orders to remedy the circumstances (including to unwind the acquisition, or require a buy back or divestment of shares, if the breach has already occurred).
• Mighty Kingdom is also a reminder to market participants of their obligations under the Panel's Rules when participating in a Panel proceeding, including in relation to making media statements, and that the Panel is prepared to take action if parties contravene those Rules.

Author: Ben Stewart, Partner