Prohibition on the acquisition of relevant interests

Section 606 of the Corporations Act 2001 (Cth) (Corps Act) contains a prima facie prohibition against the acquisition of relevant interests in voting shares.

What is a relevant interest?

Relevant interest in relation to securities is defined in section 9 of the Corps Act as taking its meaning from section 608 and section 609.

Section 608 provides that a person has a relevant interest if they:

• are the holder of the securities;
• have the power to exercise or to control a right attached to securities; or
• have the power to dispose of the securities;

Subsections 2 and 3 of section 608 further provide for what is broadly described as “grouping provisions” meaning that for the purposes of determining whether or not a person has a relevant interest, interests controlled through trusts and bodies corporate are included. The remainder of section 608 contains other requirements which, if satisfied will mean that a person has a relevant interest.

What is the threshold that applies?

The prohibition against the acquisition of a relevant interest contained in section 606 applies to:

• listed companies;
• an unlisted public company with more than 50 members;

Therefore, by exception it does not apply to unlisted public companies which have less than 50 members or proprietary limited companies.

Where the person acquires the interest through a transaction in relation to securities and because of the transaction a person’s voting power in the company increases:

• from 20% or below to more than 20%; or
• for a starting point that is above 20% and below 90%.

Note 3 to section 606 of the Corps Act provides that:

“If the acquisition of relevant interests in an unlisted company with 50 or fewer members leads to the acquisition of a relevant interest in another company that is an unlisted company with more than 50 members, or a listed company, the acquisition is caught by this section because of its effect on that other company”.

There is also an implicit part of section 606 which prohibits the entering into a transaction which creates a relevant interest on behalf of a third party.

Exceptions

Section 611 of the Corps Act contains the exceptions to the acquisition of a relevant interest.

There are twenty (20) exceptions, notably subsection 9, known as the “creeping provisions” which allow a 3% creep in 6 months and section 7 which provides for approval by resolution of the general members of the company, subject to certain conditions. Refer to section 611 of the Corps Act for a complete list of exceptions.

Links and further references

Legislation

Corporations Act 2001 (Cth) s606

Cases

Australian Pipeline Limited v Alinta Limited [2007] FCAFC 55 – application for a declaration of contravention of s606

McMillan Properties Pty Ltd v W C Penfold Ltd and Anor [2001] NSWSC 1173 (11 December 2001) – a useful analysis of section 606 is conducted by Young CJ at 15

Viento Group Limited [2011] ATP 1 (13 January 2011)

Further information

If you need advice or further information about acquiring a relevant interest in voting shares, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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