An old rule creeps into the spotlight

Many of the large institutional shareholders that are today protesting that the rules are enabling takeover by stealth and avoiding the need to offer minority shareholders a premium are not even aware of the rationale behind this slightly counter-intuitive provision.

The new-found obsession with cheap control has found voice in the media and in doing so caught the attention of corporate watchdog the Australian Securities and Investments Commission.

The reality is that there was no real logic to their introduction 30 years ago rather they are the legacy of the corporate politics of the day.

And the Liberal Party that was in power at the time led by Malcolm Fraser probably saw no reason to argue it.

There is little to be found among the Canberra archives around any debate on the 3 per cent creep rules.

Those that have a sufficiently long corporate memory (and there are not too many of them) say that it was not controversial.

It was a concession given to business because the broader overhaul of the takeovers law of which the creep provisions were only a small part were more rigorous and the business community was concerned that the new rules would restrict the purchase of shares.

While the pre-1981 corporate law contained a takeover threshold of only 15 per cent, there were exceptions given for, for example, buying in a market that allowed investors plenty of latitude.

By today's standards the corporate takeover rules before 1981 can be seen as a bit more wild west. It was a time before phrases such as shareholder democracy and corporate governance were probably even coined.

Where today the majority of adult Australians have direct or indirect ownership (through superannuation) in the stock market, 30 years ago the listed market was controlled by a smaller elite of companies and high net worth individuals overseen by a club of establishment broker partnerships.

Until a few years ago the creep provisions were more regularly used by investors to top up holdings in companies in which they already had control and their use barely raised an eyebrow.

This all changed in 2008 when Perth media entrepreneur Kerry Stokes seized control of West Australian Newspapers. Having run a ferocious campaign against the directors and their performance from his ownership launch pad of 19.4 per cent, he initially failed to cement control.

Six months later, having bought enough shares to nudge his holding to more than 22 per cent, the WAN board capitulated and Stokes took control, seeing off its chairman, chief executive and a couple of other directors.

Until the Stokes action, the creep was referred to in corporate circles as the glacial takeover and it was far from corporate fashion.

The West Australian experience demonstrated clearly that even the threat of buying stock at 3 per cent every six months would be an effective tool to change the control dynamics of the boardroom.

Former New South Wales Supreme Court judge and corporate law guru Bob Austin maintains the creep provisions are a bit of a collateral issue. He maintains that if the board is resolute it can go a long way to retaining control.

To date Fairfax chairman Roger Corbett has continued to hold the company's stand that its now 15 per cent shareholder Gina Rinehart should not be allowed a board seat unless she adheres to a charter of editorial independence and agrees to address issues around a corporate directors and officers insurance.

On the face of it, awarding Mrs Rinehart two seats out of 10 on the Fairfax board would not give her control, but if existing directors resign (as they did at West Australian Newspapers) she would easily gain this status by default.

The attempts by James Packer for board representation at Echo Entertainment have only further shone a media spotlight on the prospect of takeover by default.

Gaming licence regulations restrict Packer from taking more than a 10 per cent stake in Echo, but he has applied for (and will ultimately probably receive) approval to take that holding to 25 per cent. He has already agitated to place his nominee Jeff Kennett on the Echo board a move that has been successfully fought by institutional shareholders.

The ruckus around these events has been sufficient to catch the eye of the corporate regulator, whose chairman, Greg Medcraft, said changes were being contemplated.

But this is a far cry from the first stage in the process of giving policy recommendations to the government. And it is another large step in getting the government to act on it. Even if Treasurer Wayne Swan is of a mind to consider the abolition of the creep rule, those in corporate legal circles are wary about how the move could be navigated in the business world that is generally negative about increased regulation.

Having said this, the creep rule has been done away with in other jurisdictions such as the UK. But it will take time, and for some minority shareholders the horse would have long bolted.