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 PLC multi-jurisdictional guide to mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-mjg.
M&A activity increased significantly in 2011. The value of completed deals involving Australian targets increased by 80.8% from US$71.3 billion in 2010 to US$128.8 billion in 2011 (Thomson Reuters). (As at 1 March 2012, US$1 was about A$0.93.) Significant transactions involving Australian companies completed in 2011 included:
BHP Billiton's US$15.5 billion acquisition of Petrohawk (the largest US-based takeover by an Asia Pacific company on record).
SABMiller's US$12.4 billion acquisition of Fosters Group (proposed as a takeover but converted to a scheme of arrangement (scheme)).
Mitsubishi Development and Rio Tinto's joint A$10.6 billion acquisition of Coal & Allied Industries (proposed as a takeover but converted to a scheme).
Barrick Gold's A$7.1 billion takeover of Equinox Minerals.
A public offer (takeover bid) is the most common way of obtaining control of a listed public company. Recommended takeovers can also be carried out by:
Scheme.
Establishing a dual listed company (DLC) structure.
A scheme requires a proposal to be put by the target to its shareholders and approved by the court. The proposal must be passed by at least 75% of the votes cast on the resolution, and also (unless the court orders otherwise, for example, to counter share splitting) by a majority in number of shareholders who vote. If approved by the court, the scheme is binding on all shareholders.
The proposal is usually that the shareholders give up their shares in the target and receive shares or cash from the bidder. A scheme cannot be used to avoid the application of Chapter 6 of the Corporations Act (Chapter 6) (see Question 4, Chapter 6). However, the Australian Securities and Investments Commission (ASIC) (see box, The regulatory authorities) usually allows a takeover to be made by a scheme as long as the treatment and protection of shareholders is equivalent (although not necessarily identical) to that required by Chapter 6.
The advantages of a scheme over a takeover bid include:
Almost unlimited flexibility in structuring a takeover or merger.
The certainty of obtaining 100% of shares on a specified date, provided the requisite majority and the court approve the scheme.
However, a scheme gives the target control of the process and timing. Also, unlike a formal bid, a scheme does not allow the bidder to adjust the terms of the offer quickly (for example, by increasing the bid price or extending the offer period). Flexibility is important if there are competing bids.
A DLC involves the continuation of separately listed companies, which agree to conduct their businesses as if they were a single economic entity.
Australian DLCs have not involved any substantial inter-company transfer of assets or the introduction of intermediate holding companies. Instead, the listed companies maintain their own distinct shareholders by creating an economic merger between the companies through:
Reciprocal cross-guarantees.
Appointment of identical boards.
Agreements providing for joint voting by both sets of shareholders on some major issues.
If necessary, equalisation of dividends or distributions.
DLCs of this kind require ongoing compliance with two different legal, accounting and tax regimes, and may only be effective in the longer term if the entities involved are of a similar size and have compatible asset profiles.
Hostile takeovers are common. They are usually made through a formal takeover bid under Chapter 6 (see Question 4, Chapter 6).
Takeovers are governed primarily by the Corporations Act. Chapter 6 contains rules that are broadly similar in policy to the UK City Code on Takeovers and Mergers, but contained in detailed statutory provisions.
Responsibility is effectively divided between ASIC and the Takeovers Panel (Panel) (see box, The regulatory authorities):
ASIC. This has primary responsibility for administering the Corporations Act. It can modify the provisions of Chapter 6 and grant exemptions from strict compliance. ASIC issues regulatory guides, giving guidance on when it will grant exemptions and modifications.
The Panel. This is the main forum for resolving takeover disputes. It has a small full-time executive and part-time members drawn from merchant banks, law firms and the business community. The Panel's key features include:
it is established by statute and has broad statutory powers. It can make declarations of "unacceptable circumstances" and wide-ranging consequential orders. These powers must be exercised in the light of the basic policy objectives of Chapter 6;
it decides appeals from ASIC's decisions on modifications and exemptions concerning takeovers; and
its decisions are subject to judicial review by the courts. In 2005, the first challenge of this kind in over five years resulted in a Panel decision being set aside, re-determined by the Panel and set aside again. Subsequent challenges have failed, although two current challenges have yet to be decided. A challenge to the Panel's constitutional validity was rejected by the High Court in 2007.
Chapter 6 regulates the acquisition of direct and indirect interests in both:
Australian companies that are listed or have more than 50 members.
Listed managed investment schemes (Chapter 6 entities).
Chapter 6 prohibits the acquisition of an interest resulting in any person's voting power in a Chapter 6 entity increasing to more than 20% (or any person's voting power increasing between 20% and 90%) (20% threshold prohibition). The definition of voting power is broad, and includes control by persons or their associates over voting or disposal of securities.
There are a number of exceptions to this rule, the most important of which permit the following transactions:
Acquisitions under a formal takeover bid in which all shareholders can participate.
Schemes (see Question 2, Schemes).
Acquisitions with the approval of a majority of the shareholders who are not parties to the transaction.
Acquisitions of no more than 3% of voting power every six months (creep rule).
Downstream acquisitions in Chapter 6 entities that result from upstream acquisitions in bodies listed in Australia or on foreign stock markets approved by ASIC. The upstream acquisition may be unacceptable if it is an "artifice" to gain control of the downstream company, but a recent Panel decision suggests this will be difficult to establish.
The 20% threshold prohibition is broad and catches, for example, the acquisition of more than 20% of voting power in a corporation formed in another jurisdiction (subject to the downstream exception noted above) if that corporation, in turn, has voting power of more than 20% in a Chapter 6 entity.
Non-compliance with Chapter 6 can lead to civil and criminal liability and a wide range of penalties and sanctions. The Panel and the courts can also make a wide range of orders, including orders that:
Cancel or declare voidable an agreement or offer.
Restrain the exercise of voting or other rights attached to securities.
Prevent or require the disposal of securities, or vest securities in ASIC.
Other legislation and requirements of relevance to public takeovers include:
The Corporations Act. In addition to Chapter 6, the following sections are particularly important:
Chapter 6A (compulsory acquisitions);
Chapter 6C (shareholding disclosure requirements) and Chapter 6CA (continuous disclosure);
Part 7.10 (insider trading and other conduct relating to securities);
Part 2D.1, together with case law (duties and powers of directors, especially relevant for the target's directors);
Chapter 6D (fundraising, relevant for scrip bids); and
Part 7.9 (for scrip bids by managed investment schemes).
The Australian Securities Exchange (ASX) Listing Rules, ASIC Market Integrity Rules (ASX Market) 2010 and ASIC Market Integrity Rules (Chi-X Australia Market) 2011 . If either the bidder or the target is listed on ASX, these impose additional requirements.
The Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). If the bidder is non-resident, or is controlled by non-residents, it usually must obtain prior approval from the Federal Treasurer through the Foreign Investment Review Board (FIRB) (see box, The regulatory authorities and Question 26).
The Competition and Consumer Act 2010 (Cth) (CCA). This replaced the Trade Practices Act 1974 from 1 January 2011. Takeovers that would (or are likely to) have the effect of substantially lessening competition in a market are prohibited (see Question 25).
Other legislation. Other legislation includes, for example, legislation dealing with ownership and the transfer of interests in sensitive sectors (see Question 25).
Due diligence enquiries are usually much more extensive on recommended transactions than on hostile bids. This is one of the main advantages of a recommended bid. A target can require potential bidders wishing to undertake due diligence to agree to a standstill, so that the target can run a competitive "sale" process. The Panel has held a potential bidder to a 12-month standstill, which the Panel considered to be commercially justifiable and consistent with market practice.
The extent of the due diligence exercise varies considerably. Several factors must be considered:
The bidder can be prevented by insider trading laws from building a pre-bid stake if it obtains price-sensitive information that is not generally available.
Enquiries can alert the target or the market to the possibility of a bid, resulting in either:
an increase in the share price;
the target implementing defensive measures.
In several cases, the Panel has considered bid conditions that require the target to provide, or allow confirmation of, certain information. The Panel has indicated that these types of conditions are not necessarily unacceptable, but it will not usually interfere with the target's directors' decision as to whether to provide the information.
A range of corporate information concerning the target is publicly available from ASIC, including:
Constitutional documents.
Audited financial statements.
Annual reports (including information on capital structure and options granted).
Information about office holders of the company.
If the target is a listed company, additional information is available from ASX, including:
Substantial holding notices, giving details of the interests of persons with voting power of 5% or more in the target.
The names of the 20 largest shareholders.
Any target announcements to ASX, which should provide all material price sensitive information known to the target (apart from confidential information, of certain types, that a reasonable person would not expect to be disclosed) (see Question 6).
The bidder can inspect the target's registers giving details of:
Members (registered holders, rather than beneficial owners).
Holders of options over unissued shares.
Debenture holders.
Tracing notice information (giving limited information on beneficial owners, provided in response to notices issued by the relevant listed entity or ASIC).
The bidder can obtain copies, but (other than for tracing notice information) must make an application stating its purposes.
Insider trading laws may prevent a potential bidder communicating its intentions to persons likely to purchase shares, unless there is an applicable exception.
ASX Listing Rule 3.1 imposes a general obligation on listed companies to keep the market properly informed.
If a company becomes aware of any information that a reasonable person would expect to have a material effect on the price or value of its securities (such as receipt of notice of intention to make a bid), the company must provide that information to ASX immediately.
However, ASX Listing Rule 3.1 does not apply if all of the following are satisfied:
A reasonable person would not expect the information to be disclosed.
The information is confidential and ASX has not decided that the information has ceased to be confidential.
One or more of the following applies:
it would be a breach of law to disclose the information;
the information concerns an incomplete proposal or negotiation;
the information consists of matters of supposition or is insufficiently definite to warrant disclosure;
the information is generated for internal management purposes; or
the information is a trade secret.
If ASX considers that there is (or is likely to be) a false market, a company must give ASX any information it requires to correct or prevent that false market. ASX will consider a false market likely if all of the following criteria are met:
A company is withholding confidential information (see above).
There is reasonably specific rumour or media comment in relation to the company that has not been confirmed or clarified by a market announcement.
ASX considers that rumour or comment is likely to affect the company's share price.
In general, incomplete takeover negotiations do not require notification to ASX while they remain confidential. However, media comment or speculation, and a share price movement, is likely to prompt an ASX query. ASIC can issue infringement notices (imposing a fine of A$100,000 for larger companies) if it believes an entity has not complied with its continuous disclosure obligations. In one case, ASIC issued a notice to a target that delayed an announcement for half a day after a merger proposal leaked.
Undertakings by key shareholders to accept the offer (pre-bid acceptance agreements) have become increasingly common in recent years. However, these agreements increase the bidder's voting power for the purposes of the 20% threshold prohibition (see Question 4). Even an informal agreement to acquire shares counts toward the 20% threshold prohibition. As a result, a bidder sometimes enters into a pre-bid acceptance agreement as to 19.9% of shares held by a key shareholder, leaving that shareholder free to deal with the remainder of its holding as it sees fit.
If, as a result of a pre-bid acceptance agreement, the bidder's voting power in the target is 5% or more, disclosure is required (see Question 8), and a copy of the agreement must be provided with the notice.
A bidder cannot acquire more than 20% of the target's shares before announcing a bid (see Question 4). Shareholdings (and other interests giving control over voting or disposal of the target's securities) held by the bidder's associates (including concert parties) must be aggregated for this purpose.
A foreign bidder cannot generally acquire more than 15% of the shares in an Australian target without FIRB approval (see Question 26). However, agreements to acquire up to 20% of the shares, subject to FIRB approval as a condition precedent, are permitted.
A potential bidder that, together with its associates, acquires an interest in shares carrying 5% or more of the voting rights in a listed company must give notice of its holding to the target and ASX within two business days. Subsequent changes of 1% or more must also be notified. Once the bidder's statement has been given to the target (see Question 12), notices must be given by 9.30 am on the next trading day.
Where there is a control transaction or a substantial interest is acquired, the Panel requires disclosure of long derivative positions that give a combined holding (taken with any shares held) of 5% or more, or movements in such a holding of 1% or more. Short positions are not netted out, and should also be disclosed where a person's long position exceeds 5%. The Panel is generally not concerned with derivative positions that have little to do with control, but may still examine such cases if a long position exceeds 5%.
The Panel's powers were extended in 2007 to overcome the effects of a successful court challenge to a previous attempt by the Panel to require disclosure of derivatives.
Bidders should be careful when entering into agreements with third parties that are conditional on a bid succeeding (such as arrangements for on-sale of target assets or joint-bid arrangements) since this can give rise to association and the need to disclose the relevant agreement in full.
It is common to have a formal agreement between bidder and target where a recommended transaction occurs through a scheme or DLC (see Question 2). A merger agreement for a scheme is likely to include provisions concerning the parties' obligations to effect the merger, conditions, warranties or indemnities, conduct of business, access to information, announcement and exclusivity. Similar, but shorter, agreements are becoming increasingly common in recommended takeover bids.
A target board may agree to enter into either:
A no-shop agreement, where the target agrees with the bidder not to solicit another offer for a specified period.
A no-talk agreement, which prohibits the target from negotiating with another bidder, even if that bidder's approach is unsolicited.
The Panel considers no-talk agreements to be more anti-competitive than no-shop agreements, and that such agreements must contain a fiduciary carve out to allow the target's directors to discharge their fiduciary and other duties. Obligations to notify details of competing approaches may also need to be subject to a fiduciary out.
Even with a fiduciary out, the period of restraint under a no-talk agreement must still be limited and reasonable.
Break fees are now common in takeover bids. Most are agreed by targets (often to induce competing bids) or by both the bidder and the target in the case of schemes, but break fees have also been agreed by major shareholders.
The Panel's Guidance Note on break fees and other lock-up devices (which also applies to schemes) indicates that:
Break fees are not necessarily unacceptable.
Lock-up devices (including break fees) will be unacceptable if they have a substantial:
anti-competitive effect against current or potential bidders; or
coercive effect on the target's shareholders.
A break fee of 1% of equity value or less is generally not unacceptable in the absence of other factors (such as coercive triggers). Where a break fee is given by a shareholder, the 1% cap is calculated on the value of the shares held by the shareholder.
Other relevant factors include:
whether the fee was agreed after a transparent public process to elicit proposals;
whether the fee is less than the bid premium; and
the cost, effort or risk involved in making the proposal.
Any lock-up device should normally be disclosed no later than when the transaction is announced, or earlier if continuous disclosure requires disclosure of the lock-up device itself.
The Panel does not determine the legality of these arrangements. Therefore, directors should consider whether agreeing a break fee involves a breach of directors' duties or related requirements. Claims that directors breached their duties in agreeing to a break fee have failed on the rare occasions the courts have considered them, but the strength of such claims will depend on the particular facts.
The Panel has suggested that target adviser success fees may be analogous to break fees, and may be subject to similar constraints.
A bidder publicly proposing to make a bid commits an offence (subject to limited defences) if it is reckless as to whether it will be able to perform its obligations on acceptance of a substantial proportion of its offers. There is no explicit requirement to have committed funding. However, the Panel has issued a Guidance Note indicating that the bidder must have a reasonable basis to expect that it will have funding in place to pay for all acceptances when its bid becomes unconditional. If the arrangements are not formally documented when the bid is announced, the bidder may still have a reasonable basis if it has a sufficiently detailed binding commitment in place.
Although it is optional, a bidder typically makes a public announcement of the terms of a proposed bid before its launch. Any announcement should include all the proposed conditions and the consideration offered. ASIC applies a "truth in takeovers" policy which applies, for example, to bidders' statements suggesting the offer price is final.
(Similar principles apply to the announcement of proposed schemes. In one case the Takeovers Panel prevented reliance on an undisclosed termination right in a scheme implementation agreement. The Panel has also recently confirmed that 'truth in takeovers' principles apply to schemes, although their application may differ from a takeover bid context.)
Once the takeover is announced, the bidder must dispatch offers within two months, on terms not substantially less favourable, unless an unforeseeable change in circumstances makes it unreasonable to expect the bidder to proceed.
There is no obligation to notify the target before announcing a bid. However, the target's chairman is usually informed as a matter of courtesy, shortly before the announcement.
A foreign bidder typically makes an off-market bid (the most common type). The timetable for an off-market bid is set out below. In an off-market bid, the bidder makes a written offer on the same terms to all shareholders. An off-market bid can be a partial bid. However, partial bids are rare and must be in the form of an offer to buy the same specified proportion of the shares held by each shareholder.
First mandatory step. The bidder must lodge a bidder's statement and offer document with ASIC. The bidder's documents must give full particulars of the bid, including, in addition to specified information (see Question 14), both:
All material information known to the bidder.
The terms of the offer.
The bidder must send the documents to the target and to ASX within 21 days after the day they are lodged with ASIC.
The bidder must dispatch the documents to the target's shareholders within 14 to 28 days after they are sent to the target, unless the target's board agrees to an earlier date. They must also be sent to the shareholders within two months after the announcement of the offer (see above, Announcement).
The offer must remain open for at least one month, and no more than 12 months, after dispatch of the bidder's documents to shareholders.
If, during the last seven days of the offer period, the bidder improves the consideration offered or the bidder's voting power in the target increases to more than 50%, the offer period is automatically extended for 14 days after that event.
The bidder cannot withdraw an offer once it has been accepted. Unaccepted offers can only be withdrawn with ASIC's consent.
Off-market bids can be conditional. However, Chapter 6 prohibits certain types of conditions, including:
Maximum acceptance conditions (for example, terminating an offer when a specified level of acceptances is reached).
Conditions that depend on the opinion of the bidder, or an event in the control of the bidder to be satisfied (see Question 13).
The target's shareholders generally cannot withdraw their acceptance of the offer (whether or not conditional), unless the offer period is extended so that payment is postponed for more than one month.
Generally, a bidder can only declare an offer free from a condition if it notifies the target and ASX (or ASIC if the bid securities are not quoted) not less than seven days before the close of the offer. If a remaining condition is not satisfied when the offer closes, all acceptances are void. However, a bidder has three business days after the end of the offer period to free the offer from certain specified conditions that relate to serious events (prescribed occurrences) (see Question 13), such as the issue of new shares or the appointment of a liquidator or administrator.
An announcement of a competing bid does not alter the timetable for the first bid, except in relation to the closing phase of a conditional bid (see below, Closing phase).
The target must prepare its own disclosure document (the target's statement) (see Question 14) and send it to the bidder, ASIC, ASX and its shareholders within 15 days after dispatch of the bidder's documents to shareholders.
Most shareholders are reluctant to accept a conditional offer before the last week of the offer period, when the status of the conditions becomes known. Bidders sometimes seek to encourage acceptance of a conditional offer by means of an acceptance facility, under which an agent holds acceptances that can be withdrawn at any time before a trigger event (such as satisfaction or waiver of a minimum acceptance condition). In most successful takeovers, the conditions are removed before the last week to encourage shareholders to accept and to avoid the possibility of a minor breach of condition making the offer void (see above, Declaring the offer free from conditions).
The bidder can extend the offer period to a maximum of 12 months. However, if the extension delays payment by more than one month, shareholders who have accepted are entitled to withdraw their acceptances.
If all the conditions are removed, the offer period can be extended (or the offer price increased) at any time before it ends. However, if the offer is still conditional it cannot be extended during the closing phase (generally the last week) unless one of the following occurs:
A competing bid is announced, lodged, dispatched or improved.
The offer is increased, or the bidder's voting power in the target increases above 50%, in the last seven days (in which case there is an automatic 14-day extension).
In some cases (such as BHP Billiton's bid for WMC Resources and Toll's bid for Patrick Corporation) bids have remained conditional in the closing phase to require shareholders to accept or risk losing the bid, but that strategy failed unexpectedly in APA's unsuccessful bid for Qantas.
An increase in the offer price must be passed on to all shareholders who accept an off-market bid, even if they accepted before the price increase.
The timetable for formal bids applies both to hostile and recommended bids. However, in a recommended bid, the bidder's documents and the target's statement are often sent to shareholders bound together or in one envelope.
A different timetable applies to market bids. In a market bid, the bidder announces publicly to ASX that it has appointed a broker to stand in the market for a certain time period and buy any of the target's shares tendered at a particular price. The bidder must offer cash consideration only. The bid price can be increased during the offer period, but not in the last five trading days. There is no requirement to pass on price increases to shareholders who have already sold their shares.
Market bids must be completely unconditional, although unaccepted offers can be withdrawn if there is a prescribed occurrence (see Question 13) when the bidder's voting power is 50% or less. Takeovers by foreign companies are typically conditional on at least the Treasurer's approval (see Question 26), so market bids are not usually available to foreign companies.
There is no mandatory minimum acceptance condition. Conditions vary greatly, and can be quite detailed and restrictive (or seek information (see Question 5)). Common conditions include that:
The bidder receives acceptances in relation to more than a specified percentage of shares, usually either 50% or 90% (90% is required for compulsory acquisition (see Question 20)). This condition is often waived before the bidder reaches 50%.
None of the events referred to in sections 652C(1) or (2) of the Corporations Act (prescribed occurrences) occurs in relation to the target (or its subsidiaries).
As a condition precedent, the bidder receives the approval of the Australian Treasurer under the FATA (see Question 26).
The bidder receives all other necessary regulatory approvals.
No regulatory action is taken or threatened that might prevent acceptance of the offer or require divestiture by the bidder.
No material adverse change occurs, is announced or otherwise becomes public in respect of the target.
There are no material acquisitions, disposals or transactions by the target.
The Corporations Act prohibits offers under a takeover bid from being subject to a condition if the fulfilment of the condition depends on the bidder's (or the bidder's associate's) opinion, belief or other state of mind, or on the happening of an event that is within the sole control of, or is a direct result of action by, the bidder (or associate of the bidder).
A breach of condition is not usually required to be material for the bidder to rely on it. However, the Panel may impose a materiality test in broad or vaguely drafted conditions (such as a broadly worded force majeure condition) to avoid uncertainty.
Unless the bid is a partial bid (see Question 12, Timetable for off-market bids), the bidder must offer to acquire all securities in the bid class, but there is no regulatory requirement that the bidder must receive a certain percentage of acceptances.
Maximum acceptance conditions (for example, providing that the offer terminates if acceptances reach a certain level) are prohibited.
Offers are not normally announced subject to pre-conditions to dispatch of the offer. However, BHP Billiton's bid for Rio Tinto was announced on a pre-conditional basis with the benefit of ASIC relief from the requirement to dispatch offers within two months of announcement (see Question 12, Announcement).
The bid documents must contain certain information, including:
The terms of the proposed takeover offer.
The source of any cash consideration offered by the bidder.
The bidder's intentions in relation to the target's business and employees.
Anything else known to the bidder that is material to a shareholder in deciding whether or not to accept the offer.
The target's statement must include all information known to the target's directors that the target's shareholders and their professional advisers reasonably require to make an informed decision on whether to accept the offer (to the extent that it is reasonable for them to expect to find that information in the statement).
Specifically, the statement must include a recommendation by each director, with reasons for the recommendation, or reasons why a recommendation has not been made. Panel guidance requires that any recommendation must be soundly-based and reasonable and should make clear the reasons for any express or implied statement that the offer undervalues the target.
The target's statement must be accompanied by an independent expert's report if one or both of the following applies:
The bidder's voting power in the target at the outset is 30% or more.
There is a common director on the boards of the bidder and target.
The report must state whether, in the expert's opinion, the offer is fair and reasonable.
The expert must not be an associate of the bidder or the target. ASIC regulatory guides set out the criteria for preparing these reports.
The Panel has said that target directors can rely on an expert's report and valuation in the absence of factors indicating a reasonable basis for disagreeing with a material aspect of the expert's conclusion.
Supplementary statements must be prepared by the bidder or target in the following cases if the matter is material from the point of view of a holder of bid class securities:
The bidder or target becomes aware of a misleading or deceptive statement in, or of an omission of required information from, its original documents.
The bidder or target becomes aware of a new circumstance, arising after the original documents were lodged, that would have had to have been included if it had arisen before the documents were lodged.
The supplementary statement must be sent to the bidder or target, as the case may be, as soon as practicable, and given to ASIC and ASX (or to the shareholders, if the target is not listed).
There are no such requirements. However, from an industrial relations perspective, it may be prudent to keep employees informed about the offer. The Corporations Act requires the bidder to include, in its bidder's statement, details of its intentions regarding the future employment of the target's present employees.
Australian law does not distinguish between mandatory and voluntary offers. Unless an exception to the 20% threshold prohibition applies (see Question 4), a bidder can only exceed 20% through a formal takeover bid.
The consideration for the target's shares can be in the form of cash, securities or a combination of these. Shareholders can be given a choice.
If the bidder offers securities in itself, its holding company or a body under its control as consideration, the bidder's documents must include all the material that would be required in a prospectus relating to the securities. The bidder's documents replace the prospectus. If the securities offered as consideration have been quoted continuously on ASX for more than 12 months, the prospectus requirements are less onerous.
In recent years, some bidders have offered complex and novel forms of consideration involving cash or scrip maximisers and/or utilising target assets in some form. However the Panel has found the offer of a top-up note, under which a bidder agreed to match any subsequent higher offer from a competing bidder, to be unacceptable.
In the case of scrip bids, capital gains tax rollover relief may be available to selling shareholders who hold their shares on capital account if the bidder ends up with 80% or more of the voting shares in the target. If the relief applies, a selling shareholder can defer paying capital gains tax until it sells the bidder scrip. Partial rollover relief is available if the bidder offers a combination of shares and cash as consideration. Recent changes to the scrip for scrip rollover rules may provide greater flexibility in structuring some transactions (particularly schemes).
Where rollover relief is available, the tax cost to the bidder of its newly acquired shares in the target company may vary according to the circumstances of the bid. It usually corresponds to the shares' market value at the time of the transaction. However, the tax cost may differ:
For some "reverse takeovers" (especially if the target represents 80% or more of the combined value of the companies).
Where a particular selling shareholder is a "significant stakeholder" or there is a "common stakeholder" for the arrangement. The significant and common stakeholder rules focus on whether an entity (including associates) holds at least 30% or more (significant) or 80% (common) (or more in the target and also, post-bid, the bidder).
During the offer period, a bidder can increase or add a new form of consideration, subject to both of the following:
The bidder must pay any increase in consideration in an off-market bid to all selling shareholders, including those who accepted the offer before the increase.
If the bidder offers a new form of consideration, or makes an improvement to one form of consideration and does not make an equal improvement to another, all selling shareholders can choose again which consideration they wish to receive. The bidder must pay the improved consideration immediately.
During the offer period, neither the bidder nor any of its associates can give a benefit to a holder of bid class securities or their associate, if it is likely to induce acceptance of the bid or disposal of bid class securities, unless the benefit is offered to all holders of bid class securities. In addition, "collateral benefits" falling outside this prohibition may be found unacceptable by the Panel, which has issued guidance on this issue.
Pre-bid stake building fixes a minimum bid price. The consideration offered under a bid (whether cash or scrip) must be equal to, or greater than, the highest value paid for securities in the bid class by the bidder or its associates during the four months preceding the bid.
After the bidder has served its bid documents on the target, any cash acquisition of bid class securities that it makes outside a formal off-market bid can have an impact on the formal bid consideration, as follows:
The level of consideration for any cash offers or contracts is automatically raised to the highest price paid by the bidder outside the bid.
If the formal bid does not already include a cash alternative, one will be added automatically. Any of the target's shareholders who have already accepted the non-cash offer are entitled to claim cash in place of the consideration they accepted originally.
A foreign bidder offering securities is subject to the restrictions listed in Question 18 and its bid documents must satisfy prospectus content requirements. Foreign currency may be offered, but is likely to make acquisition of shares outside the formal offer impracticable.
After a bid, the bidder can compulsorily acquire the outstanding shares (on the terms that applied under the bid) if the bidder and its associates have both:
Relevant interests in at least 90% of the bid class securities.
Acquired at least 75% of the securities that the bidder offered to acquire under the bid.
Any remaining shareholders can object by applying to the court. The court must be satisfied that the consideration is not fair value before it can order that the objectors' securities not be acquired.
Compulsory acquisition can also be carried out in the following ways:
A person who (with related bodies corporate) has full beneficial interests in at least 90% (by number) of a particular class of securities, can compulsorily acquire the remaining securities in that class for cash consideration within six months of acquiring the 90% holding (whether during the course of a bid or otherwise).
All outstanding securities in the target (that are shares or securities convertible into shares) can be acquired compulsorily by a person who holds:
90% (by value) of all securities (shares or securities convertible into shares) in the target (that is, owns 90% of the fully diluted equity); and
at least 90% of the voting rights.
In both these cases, the fairness of the cash sum offered must be assessed by an independent expert. Court approval is needed for the compulsory acquisition if 10% of the holders of the securities object.
If the initial bid fails, there is nothing to prevent a bidder from launching a new bid or, subject to the 20% threshold prohibition, buying shares in the target. However, a further bid could be challenged before the Panel in certain circumstances (for example, if the bidder stated during its initial bid that it would not make a subsequent bid).
ASX can, at any time, remove a company from the official list at its request, but it is not obliged to, and may require the satisfaction of conditions (for example, approval by an ordinary resolution of shareholders) before doing so.
Where a bidder obtains 90% and proceeds to compulsory acquisition (see Question 20), no request is necessary. ASX will suspend quotation five business days after receiving a copy of the notice of compulsory acquisition, and has discretion in deciding the time for removal. The ASX Listing Rules state that de-listing usually occurs on the third business day after suspension. However, ASX considers the timing requirements of bidders when determining the time for removal and, in the majority of cases, de-listing occurs after this time.
The ability of the target's board to defend a bid is subject to the:
Directors' duties under company law.
Panel's power to make a declaration of "unacceptable circumstances" (see Question 4, Regulators).
ASX Listing Rules (in the case of listed targets).
These requirements can prevent a target from using poison pills and other defensive tactics.
In theory, a company can implement a range of structural defences before a bid. In practice, it is rare for listed companies to do so. However, they may take measures in pursuit of other objectives that have the effect of discouraging or complicating a hostile bid. These include:
Issuing shares and options to executives and other employees.
Providing benefits for directors and executives (subject to statutory limits on termination benefits, which have recently been tightened, and to an ASX Listing Rule that prohibits benefits being triggered by a change of control).
Accepting change of control provisions in major contracts. However, the Panel has found that it would be "unacceptable circumstances" for the holder of an undisclosed pre-emptive right to exercise the right because of a change of control of the grantor.
Adopting provisions in the company's constitution that require shareholder approval for a proportional bid (but these bids are not common).
Establishing a share buyback scheme (within statutory limits) to support a depressed share price.
Making a bid for another entity (which could result in a reverse takeover if it involves a scrip bid for a larger entity). Shareholder approval for the bidder is generally not required if both the bidder and target are listed. However, Panel policy and a recent Panel decision indicate that, in some cases at least, a reverse takeover bid should be subject to bidder shareholder approval or a condition that no superior proposal emerges for the bidder.
The range of defensive measures available to the target is more limited once a bid has been announced (or the target's directors have become aware of a proposed bid). General company law requirements and the ASX Listing Rules usually preclude the issue of securities after the bid has been announced.
In addition, frustrating action by the target (for example, an action that triggers a commercially critical bid condition) can give rise to "unacceptable circumstances" and can be challenged before the Panel. The Panel's Guidance Note on the issue says that whether frustrating action will be unacceptable depends on its effect on shareholders and the market. For example, a frustrating action is less likely to be unacceptable where:
It creates a choice between proposals for shareholders.
There is a commercial or legal imperative for the action.
The action is part of the ordinary course of the target's business, or involves carrying out previously announced agreements.
The target has rejected a proposed scheme or a potential bid that the bidder indicated would only proceed if recommended.
The target notifies a potential bidder that it intends to take the action if a proposed bid is not formally announced within a reasonable time (normally two weeks).
The most important post-bid defensive measures are:
Seeking a white knight.
Seeking support of major institutional shareholders.
Release of any unannounced positive information.
Appeal to the regulatory authorities (such as the Australian Competition and Consumer Commission (ACCC) and FIRB) (see Questions 25 and 26, and box, The regulatory authorities).
Stamp duty on transfers of securities quoted on ASX or certain other recognised stock exchanges was abolished on 1 July 2001, subject to certain exceptions.
Stamp duty is still payable in New South Wales and South Australia on transfers of securities in unlisted companies at the rate of 0.6% of the greater of the purchase price or the unencumbered value of the securities.
For an unlisted company incorporated in Australia, duty is payable if the company is registered in New South Wales or South Australia. For an unlisted corporation incorporated outside Australia, duty applies if the securities being transferred are held on an Australian register kept in New South Wales or if it has its registered office in South Australia. This will be abolished from 1 July 2012.
A higher rate of ad valorem duty (as high as 6.75%) may be payable if the shares being acquired are in a company that is land rich or a landholder. The test of whether a company is land rich or a landholder varies in each jurisdiction. Land rich/landholder duty is calculated on the value of the underlying land (and in some cases, goods). In Tasmania and until 30 June 2012 in Victoria, it applies only to unlisted companies.
Landholder duty applies to both listed and unlisted companies in the following states:
Western Australia.
New South Wales.
The Northern Territory.
South Australia.
ACT.
Queensland.
Victoria (from 1 July 2012).
Landholder duty is imposed on acquisitions of 90% or more of listed companies and 50% or more of unlisted companies that are landholders.
Mergers or acquisitions are prohibited if they would (or would be likely to) have the effect of substantially lessening competition in a market (section 50, CCA). Following amendments in November 2011, it is now clear that "market" means any market (including local markets).
Notification. While it is not compulsory to notify the ACCC of a proposed merger or acquisition, the ACCC's Merger Guidelines 2008 (Merger Guidelines), recommend that parties approach the ACCC in relation to a proposed merger or acquisition, on a voluntary basis, before completion of the transaction, where both of the following elements apply:
The products of the parties are either substitutes or complements.
The merged firm will have a post-merger market share of greater than 20% in the relevant market(s).
Transactions lacking these elements rarely require investigation by the ACCC, but the existence of the Merger Guidelines does not prevent the ACCC from investigating and taking action against such transactions.
The ACCC also encourages parties to approach it voluntarily where the ACCC has indicated to a firm or industry that notification of mergers by that firm or in that industry would be advisable.
It is common practice in Australia for one or more parties to a takeover to make an informal (and even confidential) approach to the ACCC to discuss the ACCC's likely view. The ACCC gives informal clearance to many mergers and takeovers in this way.
As well as the informal clearance process, there is also an optional formal notification procedure, under which the parties may apply to the ACCC for formal clearance. Under the formal clearance process, parties must provide the ACCC with a significant amount of information about the transaction, ancillary arrangements and market dynamics. It is also a more public process than the informal clearance process.
The main advantage to parties under the formal clearance process is that parties are able to apply to the Australian Competition Tribunal (ACT) for review "on the papers" of a decision by the ACCC.
Another option available to the parties is an application to the ACT for authorisation of the merger. Despite any contravention of section 50 of the CCA, the ACT can grant authorisation if it is satisfied that the merger would, or would be likely to, result in such a public benefit that it should be allowed to occur and that authorisation is otherwise appropriate in the circumstances.
If a foreign company with no pre-existing business interests in Australia proposes to take over an Australian company, it is unlikely that the ACCC will be concerned (as to FATA requirements, see Question 26). However, the CCA constraints should be noted if the target, under the foreign company's control, or the foreign company itself, intends to make further acquisitions in Australia.
The ACCC's approach. The ACCC's analytical framework for all merger assessments is contained in the Merger Guidelines. It first analyses the overlap between the goods and services supplied by the merging parties, to identify the market or markets affected by the merger and determine an appropriate market definition.
It then considers the level of market concentration, with reference to market shares, concentration and the Herfindahl-Hirschman Index (HHI). In particular, the ACCC may be less likely to identify horizontal competition concerns when the post-merger HHI is less than 2,000, or greater than 2,000 with a delta less than 100. However, the HHI analysis is not determinative of the ACCC's assessment, and is not a substitute for its recommended notification threshold.
If the ACCC decides to undertake further inquiries, it then considers the height of barriers to entry, including whether there is a likely threat of timely and sufficient new entry into the relevant market.
The ACCC then ascertains whether actual or potential competition from imports would provide an effective constraint on the merged firm. The ACCC has stated that imports are most likely to provide such a constraint where independent imports represent at least 10% of total sales in each of the previous three years, and where other criteria relating to the viability, sustainability and independence of import competition are satisfied.
The ACCC also looks at the structure of the local market and whether there are any local factors that are likely to impact post-acquisition pricing activity, including:
The availability of substitutes for the merged entity's products (including the level of rivalry in the market and any barriers to expansion by the merged entity's competitors).
Whether there is downstream countervailing power.
The dynamic characteristics of the market, including market growth, innovation, product differentiation and technological changes.
Whether the transaction would remove a vigorous and effective competitor.
The nature and extent of any vertical integration or relationships in the market.
If the ACCC considers that an acquisition would (or would be likely to) have the effect of substantially lessening competition, it can apply to the Federal Court for an interlocutory injunction to prevent the acquisition proceeding until the issue is determined at a final hearing or otherwise resolved. However, the target cannot apply for an injunction; it can only seek to persuade the ACCC to do so.
Time limits. The procedure for informal merger clearances is set out in the ACCC's Merger Review Process Guidelines 2006 (Informal Process Guidelines).
The ACCC has provided the following indications of deadlines it expects to comply with (indicative timeline) when considering applications for informal clearance:
Initial assessment: shortly after receipt of the application.
Market inquiries: two weeks.
Internal consideration: two to three weeks.
In practice, this first phase of investigation can take up to six to eight weeks (Informal Process Guidelines).
If the ACCC concludes that the proposed merger is likely to substantially lessen competition, it will issue a statement of issues, setting out its concerns, which is placed on a register and on its website.
The process then enters a second phase in which the parties to the proposed merger seek to address the concerns raised by the ACCC (generally by negotiating undertakings) and market participants can make further submissions to the ACCC about the proposed transaction. There is no deadline for the ACCC's second-phase investigations, but it generally expects to complete them within 12 weeks of the beginning of its initial market inquiries.
The procedure for formal merger clearances is set out in the ACCC's Formal Merger Review Process Guidelines 2008 (Formal Process Guidelines).
When considering applications for formal clearance, the ACCC must make a decision within 40 business days of receiving the application (unless this period is extended). The ACCC will be taken to have refused to grant the clearance if it does not make a decision within the initial or extended period.
The ACCC provides the following indicative timeline for its consideration of applications for formal clearance if the 40 business-day period is not extended:
Initial assessment: six business days.
Market inquiries: 14 business days.
ACCC releases statement of concerns (where applicable): 15 business days.
ACCC determination: five business days.
The ACT must make a decision on an application for authorisation of a merger within three months of receiving the application, unless it extends that period. If the ACT does not extend the period, and does not make a decision within that period, it will be taken to have refused the application for authorisation.
Other regulatory consents are required in certain industry sectors. For example, federal legislation imposes restrictions on ownership and transfer of interests in the banking, insurance, media and telecommunications sectors. In addition, federal or state approval may be required for a change of control in the holders of certain licences (such as mining licences), concessions or grants. Generally the receipt of necessary approvals will be a condition of the bid (see Question 13) and approvals will be sought once the bid has been announced.
A foreign person (including an Australian incorporated subsidiary of a foreign company) must apply to the Federal Treasurer for approval under FATA (see Question 4, Other relevant legislation) before acquiring a shareholding of 15% or more (or 40% or more in aggregate with other foreign investors) in an Australian company valued at, or with total assets of, more than A$244 million.
In the case of US acquirers, the US Free Trade Agreement provides for a higher indexed screening threshold of A$1,062 million, except in certain sensitive sectors (including media, telecommunications, transport, uranium extraction and defence), where a threshold (for 2012) of A$244 million applies.
In the case of investment by foreign governments or their related entities, approval is required, regardless of value, for any direct investment having the objective of establishing a lasting interest and strategic long-term relationship. (An interest of less than 10% may still be a direct investment in some cases.) A related entity of a foreign government includes entities in which the foreign government has more than a 15% interest or which it controls. The Australian government has also identified certain factors that are considered in determining whether particular investments by foreign governments and their agencies are consistent with Australia's national interest.
The Treasurer has 30 days from receipt of the application to make a decision, unless an interim order is made to allow up to a further 90 days to decide. The Treasurer can make an order prohibiting the acquisition if satisfied that it would be contrary to the national interest or can apply conditions to ensure that the acquisition is not implemented in a manner contrary to the national interest. Often these conditions are the subject of negotiation.
In considering applications, the Treasurer is advised by FIRB. FIRB consults all relevant government departments and agencies, and the target, before making a recommendation. The Treasurer usually decides not to prohibit an acquisition, unless there are unusual circumstances that affect Australia's vital interests and development.
It is possible to apply to the Treasurer for approval of a proposed acquisition before the proposal is made public. FIRB will endeavour to keep the proposal confidential, but the consulting process does increase the risk of leaks. Therefore, the bidder usually applies to the Treasurer only when the proposed takeover is announced, or even later, and the announcement states that the takeover is subject to the Treasurer's approval. However, as the Treasurer typically approves acquisitions, the market does not generally view this as a likely impediment to the takeover.
In addition to FIRB's approval for general acquisitions, FIRB's policy and other legislation (see also Question 25) impose foreign ownership restrictions on certain sensitive industries, such as:
Banking.
Insurance.
Media.
Residential property.
Telecommunications.
Transport (including civil aviation and airports).
FATA has been amended, with effect from 12 February 2009, to ensure that it applies equally to all foreign investments irrespective of the way they are structured. The amendments ensure that any investment, including through instruments such as convertible notes, are treated as equity for the purposes of FATA.
Most foreign exchange transactions are effectively free from regulation and repatriation of profits is not directly regulated. However, under the Banking (Foreign Exchange) Regulations 1959 (Cth), authorisation of the Reserve Bank of Australia is required before payments can be made to entities subject to restrictions or prohibitions under various UN charters.
The bidder can make on-market acquisitions if its voting power (see Question 4, Chapter 6) is below 20%, but off-market acquisitions during the offer period of a conditional bid may breach the prohibitions on collateral benefits (see Question 17, Benefits outside the bid).
Once a bidder making an off-market bid has acquired voting power of above 20% (including as a result of acceptances), the bidder is usually only able to acquire shares outside the bid if it does so on-market, in the ordinary course of trading, and the bid is both:
For all voting shares (that is, not a partial bid).
Unconditional, or conditional only on prescribed occurrences (see Question 13).
The ASIC Market Integrity Rules require the bidder to announce its intention to buy on-market if the price is different from the bid price.
Acquisitions by a bidder can fix or increase the minimum level of consideration (see Question 17).
A bidder must not dispose of bid class securities after giving its bidder's statement to the target.
All persons (whether or not parties) must disclose the acquisition of 5% or more of the voting rights in a listed company, and subsequent changes of 1% or more, and during the bid period must do so by 9.30 am on the next trading day (see Question 8, Disclosure requirements).
ASIC has released a consultation paper calling for submissions on relief for downstream acquisitions (see Question 4, Chapter 6).
In April 2008, the Australian government announced a review of appropriate disclosure requirements for equity derivatives. An issues paper was released in June 2009.
In December 2009, the Corporations and Markets Advisory Committee (CAMAC) reported to the Australian government on the use of schemes to effect takeovers. CAMAC made recommendations to improve the operation of the scheme provisions, without making fundamental changes, including:
Removing the majority in number "headcount" requirement in the approval threshold.
Abolishing the prohibition on the use of schemes to avoid Chapter 6.
Extending the provisions to managed investment schemes (trusts).
Nothing has yet eventuated from these reviews.
Main area of responsibility. ASIC administers the Corporations Act 2001 (Cth), which is the main legislation governing company law, including public takeovers (see Question 4).
Main area of responsibility. The Panel resolves takeovers' disputes and decides appeals from decisions of the Australian Securities and Investments Commission (see Question 4).
Main area of responsibility. FIRB examines proposals by foreign interests to undertake direct investment in Australia and makes recommendations to the government on whether those proposals are suitable for approval under the government's policy.
Main area of responsibility. The ACCC promotes competition and fair trade in the market place to benefit consumers, business and the community. It also regulates national infrastructure services. Its primary responsibility is to ensure that individuals and businesses comply with the Commonwealth competition, fair trading and consumer protection laws.
T +61 3 9679 3264
F +61 3 9679 3111
E marie.mcdonald@ashurst.com
W www.ashurst.com
Qualified. Australia, 1984
Areas of practice. M&A; companies and securities law; joint ventures.
Recent transactions
T +61 2 9258 6122
F +61 2 9258 6999
E nick.terry@ashurst.com
W www.ashurst.com
Qualified. Australia, 1995
Areas of practice. M&A; companies and securities law; joint ventures.
Recent transactions
T +61 2 9258 5727
F +61 2 9258 6999
E bill.koeck@ashurst.com
W www.ashurst.com
Qualified. Australia; UK
Areas of practice. M&A equity capital markets; corporate and securities law.
Recent transactions
T +61 3 9679 3413
F +61 3 9679 3111
E bruce.dyer@ashurst.com
W www.ashurst.com
Qualified. Australia, 1987
Areas of practice. M&A; corporate governance, government/regulatory.
Recent transactions
