The man behind the (dressing room) curtain
John Edgar Marshall, the man behind EB Private Equity (EBPE) that recently made and then withdrew a takeover offer for David Jones, was revealed by the Australian Financial Review in its Weekend Edition of July 14-15, 2012 as a mysterious 41 year old recluse who lives in a little council house in a housing estate in Edinburgh and who has ‘form’ for this kind of bogus commercial activity although not on the scale of the David Jones play.
While Mr Marshall may have slipped back into the shadows, at least for the time being, the ramifications of his audacious conduct continue to reverberate in business and regulatory circles.
The bid for David Jones
The opening act of this drama commenced on 28 May 2012 when David Jones received a letter from EBPE that contained a ‘highly conditional, uncertain and incomplete expression of interest in making a bid for the company’. David Jones undertook enquiries about the bid over the next month.
On 28 June 2012, David Jones received another letter from EBPE that contained a further expression of interest in making a bid for the company, this time being expressed as an ‘unconditional offer subject only to legally required due diligence’. Up until this point in time, EBPE had not said how it would fund its $1.65 billion bid or demonstrated any capacity to do so.
At the opening of the market on 29 June 2012, David Jones made an announcement to the market about the bid because it was concerned that parties external to the company knew about the bid and might act on it. At 1:50 pm on 29 June 2012, David Jones made a second announcement to the market identifying EBPE as the bidder and the terms of its bid because this news had become known overseas having been published on a UK blog site.
David Jones communicated further with EBPE about its bid but on 2 July 2012, EBPE informed David Jones by letter that it was withdrawing its proposal because it was concerned about the publicity the bid had received. David Jones sought and was granted a trading halt and subsequently told the market that the bid had been withdrawn.
When the bid was first announced, there was a sharp upward spike in David Jones’ share price that dramatically nosedived when the announcement that the bid had been withdrawn was made. Inevitably, some investors will have been burnt.
The ASX’s Continuous Disclosure Rules
This might have been just another great story for the annals of corporate skulduggery, if it did not have such potentially serious consequences.
It is worth revisiting what Listing Rule 3.1 says:
“Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”
Listing Rule 3.1A provides the exceptions to the rule. It says:
“3.1A Listing rule 3.1 does not apply to particular information while all of the following are satisfied.
“3.1A.1 A reasonable person would not expect the information to be disclosed.
“3.1A.2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential.
“3.1A.3 One or more of the following applies:
- It would be a breach of a law to disclose the information.
- The information concerns an incomplete proposal or negotiation.
- The information comprises matters of supposition or is insufficiently definite to warrant disclosure.
- The information is generated for the internal management purposes of the entity.
- The information is a trade secret.”
As an aid to interpretation, a number of the key words used in the Listing Rule are defined in Chapter 19 of the Listing Rules and its implementation is explained in Listing Rule Guidance Note 8.
The choices facing the Board of David Jones
The EBPE bid came from left field. It was not sponsored by a known merchant or investment bank and was not being represented by a known law firm. While a bid price had been nominated, many other important details of the bid had not been tabled.
News about the bid was getting out. What should the Board do? Hang tough and say that the circumstances were such that Listing Rule 3.1A applied or disclose a bid that was sorely lacking in details?
As we know, the Board erred on the side of caution and made disclosures to the market. A number of commentators and market participants were critical of the David Jones board and, in particular, its Chairman Bob Savage, for the way they handled the bid and its disclosure to the market.
The ASX continuous disclosure rules require listed companies to ensure that the market is fully informed and Listing Rule 3.1B empowers the ASX to require information to be disclosed to correct or prevent a false market. If David Jones failed to disclose the information it had in a timely fashion, it ran the risk of breaching the continuous disclosure rules and being subjected to an infringement notice from ASIC for such a breach under section 1317 DAC (1) of the Act or civil court action under section 674 of the Act, if ASIC formed the view that the breach warranted such a step. Alternatively, if it disclosed too soon, it ran the risk of prematurely announcing to the market incomplete or indefinite matters that might distort the market.
It must also be remembered that the raison d’etre of Australia’s market trading laws is to ensure that a contest for control of a listed company takes place in an ‘efficient, competitive and informed market’ (section 602 (a) Corporations Act 2001 (Act)). The continuous disclosure rules are at the heart of these principles. The EBPE bid failed to honour these principles.
On Tuesday 3 July 2012, ASIC made the following announcement:
“ASIC today said it is examining the proposed takeover offer for David Jones.
“ASIC has been monitoring developments closely since the offer was made public on 29 June 2012 and its withdrawal on 2 July 2012.
Consistent with its usual practice, ASIC is looking at potential issues regarding disclosure and trading in David Jones stock both by domestic and international parties.
“ASIC’s priority is to ensure market integrity is maintained and that markets are fair, orderly and transparent and that, if there has been a breach of the law, those responsible are held to account.”
An investigation by ASIC was inevitable given the circumstances. ASIC has said nothing further about its investigation since the announcement although its Chairman, Greg Meredith, has had a good deal to say about our takeover laws since then, particularly the ‘creep provision’ in section 611 item 9 of the Act, thereby stirring further controversy amongst the commentariat.
Time for a review?
While an investigation into what occurred is important, perhaps it is time to take a fresh look at our continuous disclosure rules (and the infringement notice rules, with which they are intertwined) to see whether they still serve the needs of the market and its participants.
While ‘black letter’ laws that try to capture every conceivable situation and invariably fail to do so, have their downside, the EBPE bid for David Jones perhaps highlights that principles based laws such as our continuous disclosure rules can be equally vulnerable to distortion and circumvention by anyone who is prepared to side step the rules.
For further information, please contact Roger Rothfield, Special Counsel, on (03) 8600 8895 or firstname.lastname@example.org.
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