THE CONTROL LIMB

The fundamental rule is concerned with transactions that cause a person to become the holder or controller of an increased percentage of the voting rights in a Code company. If the fundamental rule were triggered solely by changes in a person’s holding, this could be easily avoided by property-based arrangements (e.g. by using nominees) or contractual ones (e.g. by voting agreements). Accordingly, the control limb of rule 6(1) is appropriately viewed as the threshold anti-avoidance measure. It ensures that changes in control of a Code company cannot be hidden behind ownership or contractual arrangements.

Example 1. Pedro holds 15% of the shares in Code company Trojan Limited. Pedro proposes to acquire an option over Victoria’s 10% holding in Trojan Limited. Victoria agrees to vote her shares in accordance with Pedro’s instruction. [Note: In all diagrams Trojan Limited is a Code company. Shaded boxes or circles signal non-compliance with the Code.]

Example 1

The transaction will leave Pedro’s holding unchanged at 15%. However, as it will increase Pedro’s control to 25%, Pedro will breach rule 6(1)(a). The control limb is particularly relevant in relation to upstream transactions.

Example 2. Victoria holds all the shares in Nautilus Limited that, in turn, owns 25% of the shares in Code company Trojan Limited. Pedro proposes to purchase Victoria’s shares in Nautilus Limited.

As the Victoria/Pedro transaction will not alter the holdings in Trojan Limited, it does not cause Pedro to become the holder of an increased percentage of voting rights in the Code company. However, the transaction will provide Pedro with absolute control over Nautilus Limited and thus with control over the 25% parcel in Trojan Limited. By reason of the transaction, Pedro will become the controller of an increased percentage (moving from 0% to 25%) of voting rights in Trojan Limited. As Pedro will control more than 20% of the voting rights after the transaction, Pedro will breach rule 6(1)(a).
 
 
Example 2

BROAD DEFINITION OF CONTROL

The net cast by the control limb of fundamental rule 6(1) is a wide one, as rule 2(1) defines control, in relation to a voting right, as having directly or indirectly, effective control of the voting right.

When applied to arrangements involving indirect control of a voting right, the fundamental rule will apply to a variety of potential avoidance strategies, subject only to the constraint that the indirect control of voting rights be effective.

Example 3. Victoria holds 40% of the shares in listed company Nautilus Limited that in turn owns 25% of the shares in Code company Trojan Limited. Pedro proposes to purchase Victoria’s holding in Nautilus Limited.

As Nautilus Limited is a listed company, it qualifies as a Code company under rule 3(1). Accordingly, the proposed transaction implicates fundamental rule 6(1) in relation to the shares in both Nautilus Limited and Trojan Limited. Of interest in the present context is its application to control of the shares in downstream Trojan Limited.

Assume, for the purposes of the example, that Nautilus Limited’s shareholders will approve Pedro’s purchase of Victoria’s holding in Nautilus Limited pursuant to rule 7(c). Now consider the proposed transaction as it bears upon the holding and controlling of shares in Trojan Limited.

Example 3
 
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