Prospect Limited’s acquisition will trigger rule 6(1)(a) if:

a) Xavier Limited and Prospect Limited qualify as associates, i.e. by reason of their debtor/creditor relationship; and
b) Xavier Limited has effective control over Nautilus Limited’s shares in Trojan Limited.

Another important anti-avoidance measure is found in the three deeming provisions in rule 6(2). These provisions address constraints that may otherwise limit the operation of fundamental rule 6(1), particularly in relation to transactions that occur upstream from the Code company.

The Code was drafted on the premise that parties should not be able to use upstream transactions to accomplish objectives that could not be attained by transactions in shares of the Code company itself.

Concert acquisitions can be implemented at either the Code company level or upstream.

Example 8. Victoria owns 60% of the shares in Code company Trojan Limited. Acting in concert only for purposes of the acquisition, four persons each purchase one fourth of Victoria’s holding in Trojan Limited.

While the transaction enables Victoria to transfer control without needing the agreement of the other shareholders, it does not, without more, fall within fundamental rule 6(1) because rule 6(1) as expressed is concerned with the control position after the acquisition.

Taken individually, none of the purchasers acquires more than 20%. If the purchasers qualified as associates after the event, their holdings would be aggregated, thus causing each of them to breach rule 6(1)(a).

However, as the concert action was limited only to the acquisition, it is not clear that the purchasers are associates after the event.

Rule 6(2)(a) ensures that the concert acquisition is caught by the fundamental rule. Under rule 6(2)(a), each of the four purchasers is deemed to become the holder and controller of the 60% stake in Trojan Limited. As a result, each of them contravenes rule 6(1)(a).

Rule 6(2)(a) also applies to concert acquisitions that occur upstream of the Code company.

Example 9. Victoria holds all the shares in Nautilus Limited that in turn owns 60% of the shares in Code company Trojan Limited. Purporting to act in concert only for purposes of the acquisition, four persons each purchase one fourth of Victoria’s holding in Nautilus Limited.

In this situation, the attempt to limit the scope of the concert action is unlikely to be effective as four equal shareholders in a closely-held company are very likely to be, depending on the facts, associates. However, even if the purchasers do qualify as associates, there are other difficulties in applying rule 6(1)(a) directly.

In this upstream example, where each purchaser acquires a minority shareholding in Nautilus Limited, none of them becomes the holder or controller of an increased percentage of voting rights in Trojan Limited, which is the threshold requirement of rule 6(1)(a). Here again, rule 6(2)(a) would apply to bring the upstream transaction under fundamental rule 6(1). The four purchasers are acting in concert together and end up controlling the 60% holding in Trojan Limited. Under rule 6(2)(a), each of them will be deemed to be the holder or controller of that 60% holding. This puts all four purchasers in breach of rule 6(1)(a).