Public mergers and acquisitions in Australia: overview
A Q&A guide to public mergers and acquisitions law in Australia.
The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.
To compare issues across multiple jurisdictions, visit the Country Q&A tool. This Q&A is part of the global guide to mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.
For the 2016 financial year ending 30 June 2016 (FY 2016), the Australian M&A market was characterised by muted investor sentiment in light of the political uncertainty of Brexit and the US election. However, a weak Australian dollar, low inflation, low interest rates, and strong interest from offshore investors kept deal values comparable to the 2015 financial year ending 30 June 2015 (FY 2015). Despite a fall in the number of public deals (from 55 in FY 2015 to 50 in FY 2016), the total value of all announced deals (A$33.2 billion for FY 2016) was slightly higher than the previous year due to the competing Brookfield and Qube proposals for Asciano which contributed A$18 billion.
The following trends emerged during FY 2016:
M&A deal values overstate market strength. Over 80% of total deal value from FY 2016 can be attributed to the year's seven largest transactions. In particular, the infrastructure and real estate sectors have been central to bolstering deal value figures, driven by low interest rates and low inflation, a weak Australian dollar, and strong foreign demand. The Australian M&A landscape continues to be supported by a pipeline of government asset recycling initiatives.
Strong levels of foreign investment. 41% of bidders in FY 2016 came from outside of Australia/NZ, contributing A$14.4bn to the total deal value. A revival in the US economy and a strong US dollar helped prompt an increase in the number of North American bidders from 15% of total bidders in FY 2015 to 27% in FY 2016. In contrast, bids from Asia substantially declined from 25% in FY 2015 to only 6% in FY 2016. The number of bidders from Europe and Africa in FY 2016 remained consistent with FY 2015 levels.
Industries and sectors. The industrials and utilities sectors featured strongly in FY 2016, comprising 30% of public M&A deals and contributing to A$23.3 billion to overall deal value. Key targets included Asciano (rail & infrastructure), Energy Developments (power generation) and Broadspectrum (industrial services). Heavily publicised real estate transactions also played a key role, in particular the unsuccessful A$2.5 billion bid by DEXUS for Investa Office Fund, and the A$295 million takeover battle for the GPT Metro Office Fund between Centuria and Growthpoint. There was a marked decline in the level of M&A in the energy and resources sectors, which reached its lowest level (in terms of deal number and value) since the financial year ended 30 June 2012, at A$1.1 billion in FY 2016 (compared to A$4.9 billion in FY 2015). Energy and resources activity was focused on small-cap and mid-market oil and gas targets, rather than coal, coal seam gas, or uranium targets.
Multiple bidders. FY 2016 has also seen an increase in the level of competition in Australian public M&A, with seven of the 43 targets attracting multiple bidders.
Increased PE presence. Private equity activity in the public M&A space in FY 2016 was consistent with FY 2015 levels. Compared to earlier years, FY 2016 saw PE bidders operate in a broader range of sectors, including consumer staples, financials, energy and resources, and industrials and utilities.
Significant transactions in FY 2016 included the following:
In March 2016, Asciano announced it had accepted a joint proposal from a Brookfield/Qube consortium to acquire Asciano by way of scheme or arrangement (which superseded an earlier proposal from a Brookfield consortium that Asciano had recommended since August 2015). The Brookfield/Qube consortium's scheme was ultimately implemented in August 2016 (value: A$9.05 billion).
In May 2016, Iron Mountain Incorporated, a NYSE-listed leader in storage and information management services, acquired Recall Holdings through a scheme of arrangement. The consideration offered under the scheme was a mixture of cash and scrip, with target shareholders also being offered a capped all-cash alternative (value: A$2.5 billion).
In April 2016, DEXUS Property Group's proposed A$2.5 billion acquisition of Investa Office Fund by way of trust scheme failed to receive the requisite 75% approval from IOF unitholders. If successful, the trust scheme would have seen IOF unitholders receive a mix of cash consideration and new DEXUS securities (value: A$2.5 billion).
In February 2016, Vocus acquired 100% of the shares in M2 by way of scheme of arrangement for scrip consideration. M2 at the time provided retail telecommunications services under various consumer brands including Dodo and iPrimus. The merger created Australia's fourth largest telecommunications company by market capitalisation at the time (value: A$1.949 billion).
In February 2016, Equifax Inc, a leading global information solutions provider, acquired Veda Group, the leading provider of credit information and analysis in Australia and New Zealand. Equifax acquired all of the shares in Veda by way of a scheme of arrangement. Equifax made an initial approach to Veda in relation to the transaction in September 2015 and the parties entered into a scheme implementation deed in November 2015. The scheme was overwhelmingly approved by shareholders and implemented on 25 February 2016. The acquisition provided Equifax with a market-leading presence in Australia and New Zealand (value: US$1.9 billion).
DUET Group, an owner of energy and utility assets in Australia, successfully acquired 100% of Energy Developments on 22 October 2015 by way of scheme of arrangement. Energy Developments at the time was a Brisbane-based owner and operator of remote and clean energy power generation projects located in Australia, Europe and the US. DUET offered all-cash consideration of A$8 per Energy Developments share. The acquisition was funded through a fully-underwritten equity raising by DUET comprising both an institutional placement to cornerstone investors and an accelerated non-renounceable entitlement offer (value: A$1.4 billion).
Acquisitions of Australian companies, as well as Australian-managed investment schemes, listed on prescribed markets in Australia (including those operated by the Australian Securities Exchange (ASX)), and unlisted Australian public companies with more than 50 members, are generally implemented by either:
20% acquisition threshold
A person proposing to increase their voting power from 20% or below to more than 20% (or increase their voting power, if already more than 20%) in a listed Australian company or listed Australian managed investment scheme or an Australian unlisted company with more than 50 members will generally do so via a contractual takeover or scheme of arrangement. This is due to a statutory prohibition that would generally otherwise apply to the acquisition. Breach of the 20% threshold is a statutory offence, rather than a mandatory bid trigger.
The vast majority of Australian takeovers are offmarket bids rather than market bids. This is because of the ability to include conditions in off-market bids.
A bidder's offmarket takeover is an offer to all holders of securities (whether or not listed) in a bid class for either all of their securities or a specified proportion of their securities. Off-market takeovers in Australia can be implemented either by a contractual takeover offer or bid or court approved scheme of arrangement. Off-market takeovers can be subject to conditions, including:
The receipt of regulatory approvals (such as approvals from the Australian Competition and Consumer Commission (ACCC) or the Foreign Investment Review Board (FIRB)) (see Question 4 ( www.practicallaw.com/0-501-4520) ).
For a takeover by contractual offer or bid, receipt of a minimum level of acceptances (although there is no mandatory minimum acceptance condition).
Scheme of arrangement
A scheme of arrangement consists of an acquisition with the consent of the holders of the target's securities according to a courtapproved procedure under Part 5.1 of the Corporations Act 2001 (Cth) (Corporations Act). This process is similar to acquisitions by scheme of arrangement in the UK.
To be implemented, the scheme proposal must be approved by both:
75% by value of offer class securities present and voting at a scheme meeting.
A bare majority (more than 50%) in the number of holders of offer class securities present and voting at the scheme meeting (commonly referred to as the "headcount requirement"). The court has the discretion to dispense with this requirement.
The votes of the offeror and its associates are usually excluded, which can make it difficult to execute a scheme when an offeror already has a substantial stake in the target. A scheme provides "allornothing" certainty that, if approved, the offeror will acquire all of the scheme class securities. Equally, if not approved, it acquires nothing.
Schemes of arrangement apply to companies and certain other entities that are registrable under the law. Listed managed investment schemes can replicate the effect of a scheme by seeking security holder approval to insert scheme-like provisions in their constitutions and for the acquirer to exceed the 20% acquisition threshold (commonly referred to as a "trust scheme").
Market takeover bid
A market bid comprises the acquisition of listed securities by a contractual offer through the relevant stock exchange. A bidder must make an offer to acquire all securities in the bid class. Market bids must be unconditional and made in cash. This makes them less flexible than offmarket takeovers and they are therefore less common. However, they can be significantly faster to implement when possible.
Other types of control transaction
Other exceptions to the 20% acquisition prohibition include:
Acquisitions approved in advance by resolution at a target general meeting where no votes are cast in favour by the acquirer and associates or disposer and associates.
(Creeping) acquisitions in a target made by a person with at least 19% of the votes whose voting power increases by no more than 3% in any period of six months.
Acquisitions by entitlements under a pro rata rights issue or by the underwriter or sub-underwriter to such issue or other fundraising (but potential control effects of dilutive issues can still be subject to a declaration of unacceptable circumstances by the Takeovers Panel (see Question 4, Regulatory bodies: Takeovers Panel)).
Hostile bids are allowed. However, they are less common than recommended offers or schemes due to the diminished possibility of due diligence and the elevated execution risk (including the lack of recommendation from the target's board). It is not possible to implement a hostile bid by a scheme of arrangement.
It is possible to attempt to coerce target boards by announcing nonbinding bids to target security holders with the intention of encouraging them to pressure target management to agree to recommend a proposal (known as a "bear hug" or "virtual bid"). Currently, there is no parallel to the UK "put up or shut up" regime.
A hostile bidder must be prepared to acquire the target without having undertaken detailed due diligence. It is not permissible to make a bid subject to a general due diligence condition. However, it is possible to craft due diligence-type conditions linked to objectively determinable outcomes (such as a requirement that the target maintains a specified minimum cash or net assets position).
Furthermore, a hostile bidder that had originally intended to acquire 100% of the target under a scheme of arrangement will need to be comfortable with the possibility of acquiring less than 100% under a hostile takeover bid if it does not have a 90% minimum acceptance condition, or if it waives such a condition to encourage acceptances.
Regulation and regulatory bodies
Takeovers of Australian companies with more than 50 members, as well as stockexchange listed Australian companies and stock-exchange listed Australian managed investment schemes, are primarily regulated by the following:
For contractual offers: Chapter 6 of the Corporations Act.
For acquisitions by scheme of arrangement: Part 5.1 of the Corporations Act.
The rules and regulations of relevant stock exchanges (such as the Australian Securities Exchange (ASX)) also apply to listed entities.
Takeover principles. The regulation of takeovers is founded on the general principles set out in section 602 of the Corporations Act. This provides that the purpose of the regime is to ensure that:
The acquisition of control of relevant entities takes place in an efficient, competitive and informed market.
The holders of target securities and the directors of the target:
know the identity of any person that proposes to acquire a substantial interest in the target;
have a reasonable time to consider the proposal; and
are given enough information to enable them to assess the merits of the proposal.
As far as practicable, holders of target securities have a reasonable and equal opportunity to participate in the benefits of a proposal.
These principles also inform the general regulation and enforcement policy of the two principal regulatory bodies:
The Australian Securities and Investments Commission (ASIC).
The Takeovers Panel.
See below, Regulatory bodies.
Principal concepts. The principal concepts defined for the purposes of Chapter 6 of the Corporations Act are as follows:
Relevant interest. This concept is defined broadly to extend the scope of the 20% acquisition prohibition beyond simple acquisitions of holdings to also encompass:
other persons with the power to exercise or control the exercise of a right to vote attached to securities; and
other persons with the power to dispose of, or control the exercise of disposal of, securities.
The concepts of "power" and "control" are extended to encompass power and control that is both direct or indirect and exercisable by (or in breach of) trust, agreement, practice or any combination of them, whether or not enforceable. Arrangements, options and rights that can give rise in the future to this power or control also often result in the relevant interest being deemed to exist, even if they are conditional.
Associate. This concept is defined broadly to aggregate the relevant interests of persons that are connected indirectly, encompassing as "associates" (in relation to a particular entity) two persons where:
one controls the other or they are under the common control of another person;
they are parties to an agreement, arrangement or understanding or propose to enter into an agreement, arrangement or understanding (whether or not enforceable) for the purpose of controlling or influencing the composition of the board of the relevant entity or the conduct of the relevant entity's affairs; or
they are acting, or proposing to act, in concert in relation to the relevant entity's affairs.
Voting power. This concept includes all votes attached to issued voting securities that a person and associates have relevant interests in, divided by the total number of votes attached to all issued voting securities in the entity.
ASIC. This is the principal regulator for mergers and acquisitions. The ASIC is an independent statutory body that supervises compliance with the Corporations Act, including its takeover provisions. The ASIC has broad powers under these provisions, including the power to:
Exempt a person from them.
Declare that provisions apply to them as if specified provisions were omitted, modified or varied.
The ASIC can apply to the Takeovers Panel for declarations of unacceptable circumstances in takeover disputes and for consequential remedial orders. However, the Takeovers Panel is the arbitral body for takeovers and the court is the arbitral body for schemes of arrangement.
The ASIC is also the regulator with whom scheme of arrangement documents must be registered and can also appear to present its views in court proceedings either for the convening of scheme meetings or, following those meetings, for the approval of the scheme.
ASX. The rules of the ASX govern a target or bidder if either or both is listed on that exchange, although some companies can also (or instead) be listed on a foreign stock exchange.
In the context of a takeover, the ASX will normally focus on ensuring that ASX-listed entities comply with the ASX Listing Rules, particularly the continuous disclosure obligations. Therefore, each ASX-listed entity must disclose all price-sensitive information once it becomes aware of that information, unless the information falls within a limited exception. ASX-listed entities that are the subject of a confidential takeover approach must be particularly mindful of their continuous disclosure obligations.
Takeovers Panel. The primary arbiter of disputes in relation to Australian takeovers is the Takeovers Panel. Its objective is to determine takeover disputes in an efficient manner by focusing on commercial and policy issues (rather than technical legal points) to determine whether "unacceptable circumstances" exist. The Takeovers Panel can declare circumstances to be unacceptable circumstances if it appears to the Panel that the circumstances are:
Unacceptable having regard to the effect that the Panel is satisfied the circumstances have had, are having, will have or are likely to have on:
the control, or potential control, of a particular company or another company; or
the acquisition, or proposed acquisition, by a person of a substantial interest in a particular company or another company.
Otherwise unacceptable (whether in relation to the effect that the Takeovers Panel is satisfied the circumstances have had, are having, will have or are likely to have in relation to the company or another company or in relation to securities of particular company or another company) having regard to the purposes underpinning the takeovers rules in the Corporations Act.
Unacceptable because they constitute or are likely to constitute a contravention of the takeovers rules in the Corporations Act.
The Takeovers Panel consists of members appointed by the government on the basis of their particular expertise in takeovers. The Takeovers Panel is the primary venue for dispute resolution while takeovers are current.
As a statutory body, the Takeovers Panel's decisions are nevertheless still subject to judicial review by the Federal Court under statute and the High Court under the terms of the Australian Constitution. The review power has been exercised in practice against the Takeovers Panel in the Glencore International AG v Takeovers Panel decisions of 2005 and 2006.
The Takeovers Panel has broad powers in takeovers including:
Declaring unacceptable circumstances, whether or not they constitute a contravention of the Corporations Act (see above). The Takeovers Panel can then make any order it thinks appropriate, including divestment orders and orders affecting third parties.
Reviewing the ASIC's decisions modifying, or exempting persons from, takeover provisions.
Unacceptable circumstances on control (or a substantial interest) can arise in relation to any transaction (not solely contractual takeovers) to which the Takeovers Panel has jurisdiction. In addition to the ASIC, any person (including the target) whose interests can be affected can apply to the Takeovers Panel for a declaration of unacceptable circumstances on control.
The Takeovers Panel has published several guidance notes in order to assist market participants' understanding of the Panel's approach to various matters. Certain acquisitions may also require approval from the:
Foreign Investment Review Board (FIRB). The FIRB is a nonstatutory body that assists the government with the foreign investment regime. For various control transactions, a foreign acquirer can ultimately require the approval of the Treasurer, acting on the advice of the FIRB (see Question 26).
Australian Competition and Consumer Commission (ACCC). The ACCC monitors compliance with the Competition and Consumer Act 2010 (Cth). The ACCC can become involved in control transactions which would, or be likely to, have the effect of substantially lessening competition in a substantial market (see Question 25).
See box, The regulatory authorities.
In a recommended bid, bidders are likely to receive significant confidential information on the target, particularly during the pre-announcement due diligence phase.
There is no "equality of information" rule for competing bidders. Subject to fiduciary duties, the target directors in a takeover contest may feel able to disclose different information to a preferred bidder over a less welcome one.
In hostile takeovers, the bidder is limited to public information. In the case of a target that is listed on the Australian Securities Exchange (ASX), this includes ASX announcements made by the target such as:
Announcements of materially price sensitive information of target.
Periodic reports (for example, annual reports and accounts or half-year or quarterly financial statements).
Disclosure documents for previous takeovers, debt or securities offerings.
Particulars of target share capital and major holders.
Particulars of target directors (if any) and senior management (including their remuneration or security entitlements).
Target constitutional documents.
An ASX-listed entity that is, or becomes, aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities must immediately tell ASX under the continuous disclosure rules. Immediately is interpreted in regulatory guidance as "promptly and without delay".
Information may be excepted for as long as it satisfies each of the following:
One or more of the following five applies:
it would be a breach of a law to disclose the information;
the information concerns an incomplete proposal or negotiation;
the information comprises matters of supposition or is insufficiently definite to warrant disclosure;
the information is generated for the internal management purposes of the entity; or
the information is a trade secret.
The information is confidential and the ASX has not formed the view that the information has ceased to be confidential.
A reasonable person would not expect the information to be disclosed.
Therefore, significant information in relation to ASX-listed entities that is price sensitive and undoubtedly commercially relevant to a bidder can exist but, provided it is confidential, it is not required to be disclosed (for example, internal management forecasts).
Therefore, confidentiality agreements are required to maintain the confidentiality of the incomplete proposal and negotiation exception for the purposes of a recommended bid proposal (see Question 6). They can also contain limited period standstills, which are restrictions on the prospective bidder acquiring target securities so as not to assist a later hostile bid or attempt to build a blocking stake. Limited period standstills also minimise the risk of the target breaching the statutory prohibition on insider trading through the "tipping" offence (that is, the disclosure by a person of inside information to another person when the discloser knows, or ought reasonably to know, that the other person would or would be likely to deal in the relevant securities).
In the past few years there has been a significant overhaul in the regulatory guidance underlying the regime and increased media scrutiny, particularly in the context of allegations of selective disclosure of price sensitive information. Market participants are regularly reminded by the ASX and the ASIC in relation to their compliance obligations.
A takeover proposal is likely to contain price sensitive information that prima facie should be disclosed.
While it remains an incomplete proposal or negotiation, parties can avail themselves of the exception to the continuous disclosure obligation, if confidentiality is maintained. Importantly, parties are not required to do so and recipients and offerors of incomplete takeover approaches can nonetheless announce them for strategic reasons (for example, to initiate a bidding contest or to "bear-hug" a target).
Once confidentiality is lost (for example, through a leak) the target must disclose promptly and without delay (see Question 5, Public domain).
Agreements with shareholders
A bidder can negotiate with significant target security holders pre-bid. The bidder can either acquire their securities (for stake-building, see Question 8 ( www.practicallaw.com/0-501-4520) ) or obtain their agreement ultimately to accept the bid. In either case, the bidder must still comply with the 20% acquisition threshold.
Other legal considerations include:
Confidentiality. Parties can mitigate continuous disclosure obligations arising and avoid a premature announcement by ensuring that appropriate confidentiality agreements are in place. Often this includes provisions to manage association and insider trading issues (see below).
Associates. Bidders may wish to evade inadvertent recharacterisation of parties subject to pre-bid discussions as associates under the Corporations Act. Bidders must avoid the implication of an agreement (whether written or otherwise) between a bidder and target security holders for the purposes of controlling or influencing the composition of target management or conduct of its affairs. Any agreement creating associates will precipitate aggregation of their relevant interests and could possibly be a breach of the 20% acquisition threshold or premature disclosure obligations. Therefore, discussions prior to formal agreement must be emphasised as non-binding or provisional.
Insider trading. The Corporations Act prevents dealing in securities by persons who have information that is not generally available and would reasonably be expected to have a material effect on the price or value of the securities. Bidders commonly prohibit security holders that are involved in pre-bid discussions from dealing in target securities with third parties while having inside information about the bid in order to avoid the bidder committing a tipping offence. Bidders themselves have the benefit of the "own intentions" exception to a dealing offence if the only price sensitive information they have is knowledge they intend to launch a bid.
Collateral benefits. During a bid period, a bidder or associate must not give, offer or agree to give a benefit, if it is likely to induce a person or their associates to accept a takeover offer or dispose of bid class securities, if that benefit is not offered to all holders. Although the statutory offence does not extend to schemes, a collateral benefit can constitute a beneficiary as a separate class for the purposes of voting at the scheme meeting. This can require separate approval and, by excluding the beneficiary, assist dissenters in the principal vote.
If a bidder seeks to build a target stake prior to a takeover offer, possible strategies include:
An on-or off-market acquisition of the target's securities or derivative positions.
Entering into restraints with existing holders (including lock-ups or options).
The aim of building a stake is often to pressurise target management to welcome the bid and (to the extent consistent with the 20% acquisition threshold) deter competitive bids. Considerations relevant to stake-building include the following:
20% acquisition threshold. See the constraints under this rule in Question 2 ( www.practicallaw.com/0-501-4520) , 20% acquisition threshold and the implications of parties being deemed associates in Question 7 ( www.practicallaw.com/0-501-4520) .
Insider trading. See Question 7 ( www.practicallaw.com/0-501-4520) .
Substantial holding. A bidder will have a substantial holding where both:
it has a holding in an Australian company or Australian managed investment scheme listed on an Australian securities exchange; and
the votes attaching to securities in which the bidder or associates have relevant interests are 5% or more of the total votes of all target voting securities.
A bidder that first acquires a substantial holding normally has two trading days to lodge with the relevant market (for example, the Australian Securities Exchange (ASX)) a notice of their holding together with a copy of any agreement by which they have those interests. This is likely to require disclosure of pre-bid agreements involving persons who hold more than 5% of total target voting securities.
Class issues on a scheme of arrangement. A bidder's pre-bid stake can constitute a separate "class" from other holders for scheme meeting voting and consequently be discounted from the numerator and denominator for the required 75% by value vote of remaining holders. This lowers the absolute number of votes required for dissenting holders to impede the scheme. Therefore, a pre-bid stake can actually make it more difficult to execute a bid by scheme.
Raising the offer share price. Target security acquisitions set the pricing floor for a bid in the next four months (see Question 18 ( www.practicallaw.com/0-501-4520) ).
Foreign Investment Review Board (FIRB). A foreign bidder, which can include Australian subsidiaries of foreign groups, can require FIRB approval under various thresholds for acquisition of Australian targets (see Question 26). ( www.practicallaw.com/0-501-4520)
Agreements in recommended bids
A scheme of arrangement normally entails a scheme implementation agreement between the target and bidder. In recommended contractual takeover bids, the bidder and target can also enter into bid implementation agreements.
Australian law generally permits various "offer-related arrangements" and "deal protection measures" to be entered into between the bidder and the target, which are often subject to fiduciary "outs" to permit boards to consider some competitive bids. For break fees, see Question 10 ( www.practicallaw.com/0-501-4520) ).
Takeovers Panel guidance suggests that lock-up devices are not "unacceptable as such". By mitigating an initial bidder's transaction risks, they can secure a proposal that would not otherwise have proceeded. Regulatory treatment depends on the overall intent and effect:
No-shop provisions. No-shop provisions prohibit the target from pro-actively soliciting prospective alternative bidders for the purpose of a rival bid for a certain period. Target directors must consider the consistency of agreeing these provisions with their statutory and common law fiduciary duties. The Takeovers Panel can declare these arrangements unenforceable if they are considered unreasonably anti-competitive or coercive.
No-talk provisions. These extend further than no-shop provisions to prevent the target's management holding discussions with prospective alternative bidders, even if the target has received an unsolicited approach from such persons. Therefore, such provisions require the utmost scrutiny under fiduciary duties and commonly include a "fiduciary out" for unsolicited approaches that are reasonably expected to lead to a superior offer.
No due-diligence provisions. These provisions often complement the other devices to prevent a target allowing third parties to conduct target due diligence in preparing a rival proposal. The Takeovers Panel considers their potential anti-competitive effects similar to no-talk provisions.
Targets can also agree to grant additional rights to bidders, including the right for to be notified of any competitive approaches and matching rights, to enable the bidder to match any competitive proposals before the target is free to recommend them in place of the incumbent bidder's proposal. Depending on their precise drafting, these provisions can equally be considered anti-competitive and the basis for a declaration of unacceptable circumstances.
The target will often agree to pay a break fee in a recommended control transaction (whether by contractual takeover offer or scheme of arrangement) in circumstances where the transaction fails due to the target's board withdrawing its recommendation, often because the target's board has exercised a right in the implementation agreement to recommend a superior competing proposal.
The Takeovers Panel can declare unacceptable circumstances if the size or structure of a break fee poses a disproportionate disincentive to competitive bids or unduly coerces target security holders. The Takeovers Panel considers break fees not exceeding 1% of the equity value of the target "generally not unacceptable" unless payment is subject to excessive or coercive triggers. "Naked no vote" break fees can fall into this category (that is, break fees payable where a bid is rejected by security holders even in the absence of a competing proposal).
It is possible, but less common, for targets to seek a reverse break fee if a transaction fails in certain circumstances, such as where:
The bidder has materially breached the transaction implementation agreement.
The bidder has not obtained regulatory consent for which it was responsible for obtaining.
Australia does not have a "cash confirmation" requirement. Therefore, committed funding of a cash offer is not strictly required by law before an offer is announced. Instead, the bidder must have a reasonable basis to expect that it will have funding in place.
Historically, both the Takeovers Panel and the Australian Securities and Investments Commission (ASIC) advocated that bidders met an objective test as to the reasonableness of their funding expectations in order to avoid being "reckless", in breach of the Corporations Act. They required bidders to have reasonable grounds to expect that funding would be available for accepting shareholders once the offer became unconditional, even if not formally documented, or subject to drawdown conditions, at announcement.
However, in a recent case, the Federal Court departed from the objective test and suggested that a bidder's board would only be reckless if:
It was subjectively aware of a substantial risk that it would not meet its funding obligations if a substantial proportion of offers were accepted.
Having regard to the circumstances known to it, the bidder's board was not justified in taking the risk.
Announcing and making the offer
Making the bid public
Where the target is an entity listed on the Australian Securities Exchange (ASX), a bid for the target is usually made public by taking the following steps:
The bidder sends the ASX a notice of its intention to make a takeover for the target. The ASX then releases a notice on the ASX company announcements platform. In friendly bids, a bidder and target might make a joint announcement or provide separate announcements which are consistent with each other.
The bidder that announces the bid must make the offer within two months, except in very limited circumstances (such as where a bidder could not reasonably be expected to proceed with the takeover bid as a result of a change in circumstances not caused by the bidder (for example, an offer condition being breached or the bidder has been clearly overbid)).
A bid must be open for acceptance for a minimum of one month and no more than 12 months, although once an offer has concluded there is no general rule preventing the bidder from immediately announcing a whole new offer (see Question 21 ( www.practicallaw.com/0-501-4520) ).
It typically takes three to four months to conclude a takeover offer and implement compulsory acquisition. There are certain rules governing the announcement of extensions to a previously announced offer period (up to the 12 month limit) that provide for increased flexibility to extend an offer period if a competing bid is announced.
Market bids must be unconditional and for a whole bid class.
Offmarket bids can be conditional but are prohibited by the Corporations Act from being subject to:
Subjective conditions, the fulfillment of which depend on the bidder's or associate's opinion, belief or state of mind or events in the bidder's or associate's sole control to be fulfilled. This effectively rules out general due diligence conditions in bids.
Maximum acceptance conditions under which the bid terminates or the bid consideration is reduced, if any of the following reaches or exceeds a particular level:
the number of acceptances;
the bidder's voting power in target; or
the bid class securities in which the bidder has relevant interests.
Discriminatory conditions on which the bidder acquires securities from some, but not all, accepting holders.
Off-market bids typically include conditions for:
There is not much regulatory guidance or practice as to the possibilities of invoking a material adverse change condition, but it is expected that the Takeovers Panel would take a stringent view. Bids can be conditional on a minimum level of acceptances but there is no mandatory minimum acceptance condition.
The bidder prepares a bidder's statement with the required information about the bidder and the bid. The bidder's statement usually includes the offer document, which outlines the formal offer terms.
The Corporations Act sets out the content requirements of the bidder's statement, which must include:
The identity of the bidder.
The bidder's intentions regarding the continuation of, or major changes to, the target's business and future employment of its present staff.
(For off-market bids) the fact the statement has been lodged with Australian Securities and Investments Commission (ASIC).
Whether the consideration is cash, details of funding arrangements.
Whether the consideration includes securities, all material normally required for an offer document for them.
The particulars of consideration paid for bid class securities during the four months preceding the bid by the bidder or associates (see Question 4 ( www.practicallaw.com/0-501-4520) ).
(For off-market bids) the bidder's interests and voting power in target.
Any other information that is material to the decision of target security holders whether or not to accept and known to the bidder.
The bidder's statement must be:
Lodged with ASIC.
Lodged with any relevant prescribed market on which target securities are listed (for example, the Australian Securities Exchange (ASX)).
Served on the target.
Between 14 and 28 days after it has been served on the target, the bidder's statement must be sent to target's security holders. The target can consent to the bidder's statement being sent earlier than 14 days after it has been served on the target.
The target must issue a response to the bidder's statement within 15 days. The target's statement must be sent to the bidder and the target's security holders and lodged with the ASIC and any prescribed market on which target securities are listed (for example, the ASX).
The target's statement must include all information that bid class security holders and their professional advisers would reasonably require to make an informed assessment whether to accept the offer. A target's statement must also contain a recommendation by each target director with reasons for the recommendation or why it is not made, if either or both:
The bidder's voting power in the target is 30% or more.
The bidder and the target share a common director.
The target's statement must include or be accompanied by an independent expert's report, but a target can also include one entirely voluntarily to support their position.
Supplementary statements are required if either the bidder or target becomes aware of:
A misleading or deceptive statement in, or an omission of information required from, its respective original documentation.
A new circumstance, arising after the respective original documentation was lodged, that should have been included if it arose before lodgement.
In any event, if the matter is material to the target security holders, the bidder or target (as applicable) must prepare a supplementary statement.
The supplementary statement must be lodged with the ASIC and the ASX (if the securities are listed) and sent to target shareholders if the amendment is considered material. The supplementary statement must be sent to all target shareholders who have not accepted the offer if the company is unlisted.
The bidder can only vary the offer by increasing the bid price or extending the offer period. The bidder must lodge a notice of variation, stating the changes to the bid, with the ASIC, the ASX (if the securities are listed) and the target company. It is common for a notice of variation to be lodged with a supplementary statement.
In a scheme of arrangement, the target sends a notice of meeting and explanatory statement to the target security holders. This documentation contains similar details to the target's and bidder's statements and must be registered with the ASIC and approved by the court before dispatch.
There are no specific statutory requirements for a target's board to inform or consult employees about an offer. If the target is a company, then the bidder must include in the bidder's statement details of the bidder's intentions regarding, among other things, the future employment of target's present employees (see Question 14 ( www.practicallaw.com/0-501-4520) ).
Compulsory purchase of minority shareholdings
The law permits compulsory acquisition by the bidder, if, by the end of the offer period the bidder and associates have:
Relevant interests in at least 90% (by number) of bid class securities.
Acquired at least 75% (by number) of the securities that the bidder offered to acquire under the bid.
This 90% requirement explains one attraction of a scheme of arrangement. 100% ownership can be achieved by a scheme with the votes of merely 75% by value of scheme class securities represented and voted at scheme meetings (for details of schemes of arrangement, see Question 2, Scheme of arrangement ( www.practicallaw.com/0-501-4520) ). Turnout at scheme meetings can often be much less than 100%, so schemes can be secured with the approval of much less than 75% by value of scheme class securities, rather than the inflexible 90% threshold required after a contractual offer for statutory squeeze-out.
Other provisions permit compulsory acquisition within the period of six months after a person becomes a 90% holder in relation to a class of securities.
Restrictions on new offers
A failed bidder is generally only restricted from launching a new offer or buying interests in the target if the failed bidder made statements before the end of the bid that it would not extend the bid. They can be held to these statements by the "truth in takeovers" policy.
A failed bidder launching a new takeover offer within four months after the end of a failed offer must be mindful of the "minimum bid price rule", which would require the offer price under the new offer to be not less than the offer price under the previous offer. Some practitioners suggest that, given this four month rule, bidders should generally not make another bid for the same company less than four months after the end of an earlier bid.
Where there is a compulsory acquisition following a takeover bid (see Question 20), the Australian Securities Exchange (ASX) suspends the quotation of an entity's securities five business days after receiving a copy of the compulsory acquisition notice sent to shareholders. The ASX then removes the entity from listing at close of business on a date decided by the ASX, which is normally the third business day following the date of suspension.
An entity listed on the ASX can request the ASX to de-list it at any time. The ASX is not required to act on an entity's request for removal from the official list, and may require conditions to be satisfied before it does so (such as shareholder approval).
Directors often issue a holding statement to the Australian Securities Exchange (ASX) requesting the target security holders not to take further action as a result of a bid until they have given it detailed consideration. Typical defensive strategies include:
Commissioning an independent expert's report to justify rejection of a bid.
Publicly criticising the commercial adequacy, conditionality or execution risk of a bid.
Transactional defences, such as returns of value, that are likely to require shareholder approval.
Seeking or facilitating a higher rival proposal.
Taking action in the Takeovers Panel against what the target reasonably considers to be unlawful or unacceptable conduct by the bidder.
The target's management can only take defensive measures subject to:
Fiduciary duties. As fiduciaries of the target and its owners, directors must exercise reasonable care and diligence and act honestly and in good faith in the best interests of the target and for a proper purpose. Directors must, before issuing a recommendation to shareholders, exercise skill and due care in making a balanced assessment of bids. To the extent they exercise their powers for an improper purpose (such as preserving incumbent management), they can commit both civil and criminal offences under the law.
Takeovers Panel oversight of frustrating action. The Takeovers Panel can declare target actions that cause a bid to be withdrawn or a potential bid to not be proceeded with (for example, where the action breaches a bid condition) as "unacceptable circumstances", whether or not these are consistent with fiduciary duties. These actions are known as "frustrating actions"'. The Takeovers Panel has issued guidance on when a frustrating action can constitute unacceptable circumstances. Examples from the Takeovers Panel include the target:
making a significant share issue/repurchase, or convertible security or option issue;
acquiring or disposing of a major asset, including making a bid;
undertaking significant liabilities or changing debt terms;
declaring a special or abnormally large dividend; or
making a significant change to company share plans.
The basis for the Takeovers Panel's policy is that shareholders should decide on actions that may interfere with their reasonable and equal opportunity to participate in proposals or inhibit the acquisition of control over their voting shares in an efficient, competitive and informed market. In general, the Panel will not give rise to unacceptable circumstances if a target:
does not facilitate a bid;
recommends rejection of a bid; or
offers shareholders a choice (such as seeking shareholder approval for a frustrating action).
In reviewing frustrating actions, the Takeovers Panel says it considers (among other things):
how long the bid has been open and its likelihood of success;
whether the action is undertaken by the target in ordinary course of business; and
how advanced the frustrating action was when the bid was made or communicated.
The Takeovers Panel considers that a frustrating action is unlikely to give rise to unacceptable circumstances where (among other things):
there is a legal imperative for the frustrating action (for example, a court order or legislative requirement); or
the frustrating action is required to avoid a materially adverse financial consequence, such as insolvency.
ASX rules. Listing rules can also require shareholder approval for defensive transactional responses to takeover bids (for example, for new issues of securities).
Stamp duty is generally not payable on a transfer of shares in a company that is incorporated and/or listed in Australia. However, a sale of shares can trigger landholder duty, which is imposed on certain acquisitions of land-holding entities.
Broadly, landholder duty is imposed in each Australian jurisdiction on acquisitions of interests of 50% or more in unlisted companies that directly or indirectly own land holdings of a certain value in that jurisdiction. Landholder duty is also payable in each Australian jurisdiction (other than the Australian Capital Territory) on acquisitions of interests of 90% or more in listed companies.
A sale of shares is not subject to goods and services tax.
Other regulatory restrictions
The Competition and Consumer Act 2010 (Cth) (CCA) prohibits mergers or acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in any market. The CCA is supervised by the Australian Competition and Consumer Commission (ACCC) (see Question 4, Regulatory bodies ( www.practicallaw.com/0-501-4520) ).
Mandatory or voluntary
There is no compulsory pre-notification requirement for mergers and acquisitions transactions, which is similar to the UK domestic competition regime. Therefore, the decision whether to notify the ACCC is at the discretion of the merger parties based on their view as to whether concerns arise under the merger prohibition in section 50 of the CCA. The ACCC has issued merger guidelines that encourage the merging parties to voluntarily notify the ACCC where both:
The merged firm has a post-merger market share of more than 20% in the relevant market(s).
The products of the merger parties are substitutes or are complementary to each other.
The ACCC can also investigate any merger, regardless of whether the parties have notified the ACCC of their intentions. For example, all Foreign Investment Review Board (FIRB) submissions (see Question 26 ( www.practicallaw.com/0-501-4520) ) are usually notified to the ACCC by the FIRB.
Types of merger assessments
There are three avenues available to having a merger considered and assessed:
The ACCC assesses the merger on an informal basis.
The ACCC assesses an application for formal clearance of a merger.
The Australian Competition Tribunal assesses an application for authorisation of a merger.
Formal clearance has never been sought and applications to the Australian Competition Tribunal for authorisation are rare, although two applications were made during 2014 and one application was made in 2016.
Informal clearance is the process used for the vast majority of transactions notified to the ACCC. If the ACCC clears the merger, it will provide a non-binding letter of comfort to the parties, stating that it does not intend to oppose the acquisition, but reserves the right to do so should new information come to light.
Like the UK domestic merger control approach, the ACCC process is essentially a two stage process:
An initial review (pre-assessment) considers whether the merger raises prima facie competition concerns.
A second stage in-depth review for more contentious mergers.
The ACCC will clear a merger via "pre-assessment", if it considers that the risk of competition issues is low.
If the ACCC determines that a more substantive public review is necessary, the timeframe of the informal clearance process is as follows:
The ACCC conducts two to five weeks of market inquiries during which it actively scrutinises information from competitors, suppliers and customers of the parties, and any other interested persons.
Within six to 12 weeks of the announcement of the acquisition, the ACCC usually decides:
not to oppose the proposed merger; or
to publish a statement of issues outlining the issues identified.
If a statement of issues is published, the ACCC conducts another round of market inquiries. In this case, the clearance process can take an additional six to 12 weeks, or longer.
The ACCC can extend its indicative timelines if:
It identifies potential issues.
It experiences delays in obtaining information.
The acquirer negotiates remedies.
The informal clearance process also affords the merger parties a chance to overcome any competition issues that the ACCC perceives, by offering a court-enforceable-undertaking. Unlike the position in the UK, no strict time limits are imposed on merger parties in offering such undertakings and it remains a relatively fluid and informal process.
Where informal clearance is sought, there is no prohibition on completing the acquisition before the ACCC makes its decision. However, parties generally do not complete until they obtain clearance. If the ACCC has concerns about the acquisition, the ACCC can request that the parties provide undertakings not to complete until the ACCC has completed its review. The ACCC can also seek injunctions from the Federal Court to prevent the completion of an acquisition. If a transaction is completed in breach of this prohibition, the ACCC, as well as any interested party, can bring proceedings seeking divesture orders.
See Question 29 regarding proposed reforms to the ACCC clearance process.
Foreign persons can be required to obtain approval under Australia's foreign investment regime, which is set out in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and its accompanying regulations. For the purposes of the FATA, a "foreign person" includes:
A corporation or a trustee of a trust in which either:
an individual not ordinarily resident in Australia; a foreign corporation or a foreign government that holds an interest of at least 20% in the corporation; or a beneficial interest in at least 20% of the trust's income or property; or
two or more persons (each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government) that hold either: an aggregate interest of at least 40% in the corporation; or an aggregate beneficial interest in at least 40% of the trust's income or property.
General partners of limited partnerships where:
an individual not ordinarily resident in Australia, a foreign corporation or a foreign government that holds at least 20% in the limited partnership; or
two or more persons (each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government) that holds an aggregate interest of at least 40% in the limited partnership.
A foreign government.
The FATA categorises transactions into:
Notifiable actions. If a transaction is a notifiable action, prior approval under the FATA (commonly known as "FIRB approval") must be sought. Failure to do so is a criminal offence. Failure to obtain prior FIRB approval can, if the transaction also constitutes a significant action (which in most cases it will be), give rise to adverse orders by the federal treasurer (such as disposal) if he/she decides that the transaction is contrary to the Australian national interest.
Significant actions. If a transaction is a significant action, FIRB approval can be sought, but failure to do so is not a criminal offence. Failure to obtain prior FIRB approval can give rise to adverse orders by the federal treasurer (such as disposal) if he/she decides that the transaction is contrary to the Australian national interest.
In general terms, foreign persons must notify and gain prior approval before acquiring an interest in, or control of:
20% or more in:
an Australian company or business that is valued above the relevant threshold described below; or
an offshore company whose Australian subsidiaries or gross assets are valued above the relevant threshold described below.
5% or more in a company or business that carries on an Australian media business, regardless of value.
In general terms, for an enterprise or a national of the US, New Zealand, Chile, China, Japan or South Korea, the minimum thresholds (as at February 2017) for notification are:
Non-sensitive businesses: A$1.094 billion.
Sensitive businesses (which include telecommunications, transport and military goods manufacturing): A$252 million.
for Chile, New Zealand and the US only: A$1.094 billion.
for China, Japan, and South Korea only: A$55 million (based on the value of the consideration for the acquisition plus the total value of other interests held by the foreign person and associates in the entity).
For other acquirers, the minimum thresholds (as at February 2017) are generally:
Any business sector (other than media): A$252 million.
Agribusinesses: A$55 million (based on the value of the consideration for the acquisition plus the total value of other interests held by the foreign person and associates in the entity).
Generally, foreign government investors must always notify:
All direct interests in an Australian entity or Australian business. A "direct interest" is generally an interest of at least 10% or an interest of any percentage that gives the acquirer the ability to influence, participate in, or determine, the business' or entity's management or policies.
When starting a new Australian business.
The Foreign Investment Review Board examines proposals and advises on their national interest implications. With the benefit of this advice, the federal treasurer decides whether a proposal is contrary to Australia's national interest.
The federal treasurer will consider a proposal to be either:
Not contrary to the national interest. In this case, the treasurer will issue a "no objection" notification, allowing the acquisition to proceed, subject to any conditions that the treasurer considers necessary.
Contrary to the national interest. In this case, the treasurer will either:
prohibit the proposed transaction; or
if the transaction has already been consummated, order the foreign person to dispose of its interest.
Other FATA limits and requirements apply to acquisitions in land (including on the acquisition of shares in companies which are land-rich (for example, where more than 50% of its assets by value are in the form of Australian land)). Other legislation applies to restrict acquisitions in specific industries, such as banking, transport and telecommunications. Specific advice should be sought before undertaking an acquisition, due to the complexity of the foreign investment framework.
After a bidder makes a takeover offer, another person dealing in target securities must, under Chapter 6C of the Corporations Act, give Australian Securities Exchange Limited and to the target entity a substantial holder notice by 9.30 am on the next business day after:
Beginning, or ceasing, to have a substantial holding (5% or more) (see Question 8 ( www.practicallaw.com/0-501-4520) ).
At least a 1% change in their substantial holding.
A 2012 government paper mooted introducing takeover reforms including "put up or shut up" requirements. However, these are yet to be implemented.
In relation to merger control, the current (2016) federal government supports the 2014 recommendation by the Harper Panel Competition Policy Review that the formal merger clearance and the authorisation processes should be combined. An exposure draft bill was released on 5 September 2016. Submissions on this draft closed on 28 October 2016. The proposed process may involve the Australian Competition and Consumer Commission (ACCC) clearing a proposed transaction if it considers that the transaction does not substantially lessen competition or the public benefits associated with the proposed transaction outweighs the negative aspects. Parties can appeal ACCC decisions to the Australian Competition Tribunal. The informal clearance process will continue as is (although the government has directed the ACCC to consult with the public with the objective of delivery more timely decisions in the informal review process).
*The authors gratefully acknowledge the work of Apoorva Suryaprakash and Charles Ashton in preparing this article.
The regulatory authorities
Australian Securities and Investments Commission (ASIC)
Main area of responsibility. Supervise the registration and operation of companies and managed investments schemes, including supervising compliance with Corporations Act.
Takeovers Panel (Panel)
Main area of responsibility. Primary (but not exclusive) forum for resolving bid disputes.
Australian Securities Exchange (ASX)
Main area of responsibility. Securities exchange.
Foreign Investment Review Board
Main area of responsibility. Regulating foreign investment.
Australian Government Federal Register of Legislation
Description. Website contains official Australian legislation. Website is maintained by the Australian Government which is intended to be kept up-to-date.
Australian Securities Exchange (ASX) website
Description. Website contains ASX Listing Rules, guidance notes and waivers. Website is maintained by the Australian Securities Exchange Limited and intended to be kept up-to-date.
Australian Securities and Investments Commission (ASIC) website
Description. Website contains ASIC regulatory guides. Website is maintained by ASIC and is intended to be kept up-to-date.
Takeovers Panel (Panel) website
Description. Website contains Panel guidance notes and decisions. Website is maintained by Panel and intended to be kept up-to-date.
Foreign Investment Review Board
Description. Website contains FIRB guidance notes. Website is maintained by FIRB and intended to be kept up-to-date.
Vijay Cugati, Partner
Professional qualifications. New South Wales, Australia, Solicitor
Areas of practice. Mergers and acquisitions; capital markets; private equity; head office and governance.
Tom Story, Partner
Professional qualifications. New South Wales, Australia, Solicitor.
Areas of practice. Mergers and acquisitions; capital markets; private equity; head office and governance.
Andrew Wong, Mergers & Acquisitions Counsel
Professional qualifications. New South Wales, Australia, Solicitor
Areas of practice. Mergers and acquisitions; capital markets; head office and governance.