Authors: Dave Filov, Nick Harrison
Earlier this week, the ASX proposed strong action against Hardey Resources Limited (ASX: HDY) (Hardey or Company), proposing to de-list the Company. The move comes following a string of query letters issued by ASX in connection with two recent acquisitions by Hardey of Nelly Vanadium Pty Ltd (Nelly Vanadium) and Vanadium Mining Pty Ltd (Vanadium Mining).
ASX’s queries were in part directed towards the lack of transparency of the identities of the recipients of securities issued in connection with each acquisition, with ASX ultimately determining that Hardey’s responses to ASX’s queries were not acceptable, describing some of them as “less than candid”. ASX also formed the view that it is now difficult to “unscramble the egg” and unwind or seek fresh approvals for the acquisitions, given the various other transactions that have been completed in connection with the acquisitions.
In our latest update, Partner Dave Filov and Associate Nick Harrison discuss ASX’s action and what it means for other listed entities.
On 25 July 2018, the Company issued a notice of general meeting (Notice) seeking shareholder approval for the issue of shares and options to the vendors of Nelly Vanadium and Vanadium Mining in consideration for the acquisition of each entity (Consideration Securities). Consistent with accepted practice, the Notice simply identified the proposed recipients of the Consideration Securities as the “NV Vendors” and “VM Vendors”, and as the “counterparties” to each acquisition agreement. The resolutions contained in the Notice were subsequently passed. The Consideration Securities represented~49% of Hardey’s post-acquisition share capital.
In September 2018, ASX queried the circumstances surrounding a subsequent variation made to each acquisition agreement on 20 August 2018 (prior to the shareholder meeting to approve the acquisitions). The variations were made for the purpose of including additional parties to each transaction as recipients of a portion of the Consideration Securities (Additional Parties).
Following a series of further queries, ASX found that at the time the Notice was released, two directors of the Company were aware that a portion of the Consideration Securities were to be issued to the Additional Parties for the benefit of Adam Blumenthal of EverBlu Capital as an “introduction fee” for introducing the parties to each transaction, rather than to the vendors of each entity. Furthermore, ASX found that at the time the variations to the acquisition agreements were made, the Board would have been aware that this portion of the Consideration Securities would represent approximately 52% and 64% of the Consideration Securities for the acquisition of Nelly Vanadium and Vanadium Mining respectively (representing in total ~28% of the post-acquisition share capital of Hardey – a significant holding).
ASX’s findings and determination
ASX cited the lesser-known Listing Rule 14.6, which provides that an approval of security holders is not effective unless the notice of meeting includes everything the relevant rule requires it to include.
ASX found that, due to the inclusion of the Additional Parties to each transaction, the reference to “NV Vendors” and “VM Vendors” as recipients of the Consideration Securities in the Notice was arguably a failure to comply with Listing Rule 7.3.4 (which requires disclosure of the names of the persons to whom the entity will issue the securities (if known)), which under Listing Rule 14.6, rendered the resolutions in the Notice invalid and consequently, caused the issue of the Consideration Securities to the Additional Parties and the vendors of Nelly Vanadium and Vanadium Mining to be in breach of Listing Rule 7.1.
ASX noted that it would be extremely difficult and of questionable worth to require the Company to take further remedial action, such as passing fresh resolutions under Listing Rules 7.1, 10.1 and 10.11 for the issue of the Consideration Securities, stating that it suspects Hardey’s shareholders “…would feel a degree of compulsion to support [the] resolutions, given the dim prospects that [Hardey] would likely have if the resolutions did not pass“.
ASX also chose not to give a direction to reverse each transaction, stating that it was “…not in a position to determine whether this would be a good or bad outcome for [the Company] and its shareholders”.
ASX concluded, having regard to the nature of the conduct and the actors involved, that the appropriate action to take is to remove the Company from the official list of ASX. Rather than “unscramble the egg”, ASX has chosen to take Hardey off the menu. For the full determination readers should refer to ASX’s release, and Hardey’s announcement of 10 January 2019.
In respect of disclosure of the identity of parties receiving securities, ASX’s message is clear – it requires complete transparency. Listed entities can expect ASX to further scrutinise acquisition announcements and notices of meetings, particularly in relation to the allocation of securities in consideration for an acquisition, as well as for any facilitation or advisory services provided. This position is consistent with ASX’s proposed changes requiring further disclosure of fees to advisors as highlighted in ASX’s current consultation paper.
Where a substantial portion of issued capital is to be issued to a class of parties or their nominees, listed entities should be undertaking thorough due diligence to ensure that counterparties to a transaction provide all details up front with respect to the breakdown of any allocation of securities, as well as details of how those arrangements took place.
Food for thought
For all intents and purposes, where ASX makes findings in respect of breaches of its rules its toolbox is limited to action against the listed entity itself, rather than those standing behind it. This is likely to change with the proposed introduction of ASX’s ability to censure, but such a remedy may be too late for Hardey’s approximate 3,800 shareholders (~1,400 of which hold a marketable parcel) who will no longer be able to trade their shares on market if the removal of Hardey proceeds.
One must wonder in this instance whether the proposed de-listing of Hardey punishes the appropriate class of persons, or whether unassociated Hardey shareholders should be the ones to ultimately decide the Company’s (and potentially its Board’s) fate via a vote on proposed remedial action.
Given the right to appeal a decision by ASX to remove an entity from the official list was abolished in 2015, Hardey’s options to challenge ASX’s decision are limited. Whilst it won a last minute reprieve for ASX to consider Hardey’s proposal for remedial action until Friday, 18 January 2019, if ASX is not satisfied that leaves Hardey with only the Federal Court to turn to.
Read the ASX announcement: 8 January 2019.
Read the Hardey announcement: 10 January 2019.
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