ASIC takes a principled stance on DJs

Today’s Federal Court ratification of the scheme of arrangement for the $2.2 billion acquisition of David Jones by South Africa’s Woolworths group produced a sensible outcome, with David Jones shareholders getting their handsome bid price, the Australian Securities and Investments Commission making a point of principle and Solomon Lew cleared to get his $200 million of 'collateral benefit'.

ASIC again appeared before the Federal Court, not to urge Justice Kathleen Farrell to reject the scheme, but to again put the issue of Lew’s collateral benefit before the court.

Lew used the leverage of a 9.9 per cent shareholding in David Jones and the threat of blocking the scheme to extract a high-priced bid for Country Road from Woolworths. Lew has had a stake of just under 12 per cent in Country Road since 1997, preventing Woolworths from gaining 100 per cent ownership. He will now get more than $200m for a stake that cost him about $20m.

Given the overwhelming support from David Jones shareholders for their $4 a share offer -- nearly 97 per cent of the votes cast at the scheme meeting last week and nearly 90 per cent of the shareholders who voted were in favour - it was always improbable that Justice Farrell would do anything but approve the scheme.

In fact, at an earlier hearing ahead of the vote, she predicted that the shareholders would vote for the offer even if Lew were to receive a significant collateral benefit.

ASIC would have been well aware of the likely outcome of today’s hearing but appeared before it anyway, which was the right thing for the regulator to do.

One of the core principles of the takeover provisions of the Corporations Act is that all shareholders should have a reasonable and equal opportunity to share in any benefits arising from a takeover offer.

Patently David Jones shareholders other than Lew aren’t going to get the big price Woolworths is offering Lew in Country Road, although Lew and Woolworths were careful not to enter into any understandings or arrangements that might have tripped them up in terms of the law.

So ASIC’s intervention was to uphold and draw attention to that principle rather than to prevent David Jones shareholders getting their hands on Woolworths’ cash.

It may have been an empty gesture but it was a necessary one to demonstrate that ASIC isn’t prepared to simply ignore breaches of the spirit of the law.