The corporate watchdog will investigate the $1.65 billion mystery takeover offer David Jones received from an obscure UK private equity firm.
The Australian Securities and Investments Commission (ASIC) released a statement on Tuesday saying it had been closely monitoring developments since the offer from EB Private Equity was made public on June 29 and its withdrawal on July 2.
David Jones shares surged when the retailer announced the offer last Friday.
However shares dropped 10 per cent on Monday when David Jones told investors that EB had withdrawn its offer, citing concerns about the massive publicity surrounding the deal.
ASIC said it would examine potential issues regarding disclosure and trading in David Jones shares by domestic and international parties.
"ASIC's priority is to ensure market integrity is maintained and that markets are fair, orderly and transparent and that, if there has been a breach of the law, those responsible are held to account," it said in a statement.
The episode has sparked concerns among some shareholders about whether David Jones should have disclosed the EB offer at all.
David Jones has defended its decision to disclose the unsolicited bid, even though it had doubts about its credibility.
In a letter to the Australian Securities Exchange (ASX) on Monday night, David Jones company secretary Caroline Waldron defended the retailer's handling of the EB bid.
She said that throughout, David Jones ensured it abided by the ASX's continuous disclosure rules.
"The company was concerned to ensure that, at all times, there was not likely to be information in the public domain that would lead to trading based on a false market," Ms Waldron wrote.
She said the department store chain first received a written expression of interest from EB Private Equity on May 28.
However, due to the "highly conditional, uncertain and incomplete expression of interest", David Jones told EB it was unable to consider it.
David Jones received a further expression of interest on June 28 which it again considered incomplete and uncertain.
But, the following day, David Jones became aware that the offer was likely to be known by others and, therefore, made an announcement to the ASX, the company told the exchange.
David Jones said it decided not to name EB Private Equity (EBPE) in its first announcement, because of concerns the offer was dubious.
"The company was concerned not to give more credibility to the approach than was necessary pending receipt of more details from EBPE," David Jones said in its letter to the ASX.
However, David Jones said, it decided to name EB Private Equity after realising various media outlets had, and intended to publish, more details about the offer.
"In the period between the first announcement and the second announcement, the company became aware that international media outlets had details of the EBPE expression of interest as contained on a UK blog site and were intending to publish the details contained on the blog site," it said in the letter.
David Jones' shares were two cents higher at $2.25 at 1248 AEST.