Australia: Mergers & Acquisitions

The key rules/laws are the Corporations Act 2001 (Cth) (Corporations Act) and the Corporations Regulations 2001 (Cth) (Corporations Regulations). These must be considered together with relevant Australian Securities and Investments Commission (ASIC) Regulatory Guides and Takeovers Panel Guidance Notes. ‘Public’ company takeovers and schemes (see Q5) are highly regulated. Private company M&A transactions are implemented under negotiated agreements.

If the acquirer, seller or target is listed on a prescribed financial market in Australia, such as the Australian Securities Exchange, the rules of that market will also be relevant. Other rules/laws may be relevant depending on the transaction, such as the Foreign Acquisitions and Takeovers Act 1975 (Cth) (if the acquirer is a foreign person), the Competition and Consumer Act 2010 (Cth) (if the parties are competitors) or other specific industry rules/laws.

The key regulatory authorities are ASIC, ASX Limited (ASX) and the Takeovers Panel. ASIC is Australia’s corporate, markets and financial services regulator. It facilitates, oversees compliance with and provides relief from the Corporations Act. The Takeovers Panel is a specialist tribunal which is the main forum for resolving disputes about takeover bids. ASX operates Australia’s primary securities exchange and oversees compliance with its listing and operating rules.

If the transaction involves foreign persons acquiring interests in businesses, securities or assets and meets certain thresholds, the Foreign Investment Review Board (FIRB) may need to be notified of, or approve, the transaction. If the transaction involves a merger of competitors which may be anti-competitive, notification to and/or approval from the Australian Competition and Consumer Commission (ACCC) may be required. Other regulatory authorities (such as industry bodies) may become involved depending on the particular transaction.

Australia’s M&A sector is strong and active. The Australian economy has weathered the worst of the COVID-19 pandemic and as the economy recovers and borders reopen, companies and investors are seeking growth opportunities through M&A. Companies have significant cash reserves to deploy, interest rates remain low making debt attractive and superannuation (pension) funds have large holdings to invest.

Niche players in the cyber security sector are busy consolidating their positions by making bolt-on acquisitions to deepen and/or broaden their service offerings with transactions involving local and overseas participants. There is also a high level of prospective activity by private equity firms checking out strategic acquisitions in select manufacturing and distribution businesses which have been stressed by the COVID dislocations but have potentially attractive prospects as the economy recovers.

We expect:

• acquirers to remain bullish given high levels of capital in the market and low interest rates for borrowing funding, and increased business confidence once COVID-19 restrictions ease;
• targets to be open to acquisition offers, given increasing inflation, potential upcoming interest rate rises, and recent experiences with supply chain and other COVID-19 related disruptions.

Takeovers of Australian listed public companies and non-listed public companies prohibit the acquisition of any interest in such companies which result in the voting power of any person increasing to more than 20%, other than in accordance with the exceptions provided for in the Corporations Act.

A publicly traded company may be acquired by:

• ‘takeover offer’ to acquire voting shares in listed companies or unlisted companies with more than 50 members by making ‘on-market’ bids by acquiring shares on-market from shareholders wishing to sell, or ‘off-market’ bids which require selling shareholders to provide acceptance forms to the acquirer; or
• ‘scheme of arrangement’ to acquire securities in companies which are recommended by the target’s directors, approved by shareholders and the court.

Takeovers must comply with Chapter 6 of the Corporations Act and schemes must comply with Part 5.1 of the Corporations Act.

Off-market takeover bids are more common than on-market bids as they allow the acquirer flexibility to make offers for some (rather than all) of the target’s securities, and impose conditions on the bid and offer non-cash consideration. If, by the end of the bid period, the acquirer has ‘relevant interests’ in at least 90% (by number) of the securities in the bid class and has acquired at least 75% (by number) of the securities that the acquirer offered to acquire under the bid, it can compulsorily acquire the remaining securities in that class.

Schemes guarantee the acquirer 100% ownership of the target if the scheme is approved by shareholders and the court. The shareholder approvals required are more than 50% (by number) of the members of the class present and voting and 75% of the votes cast on the resolution.

To undertake a takeover:

• the acquirer prepares a bidder’s statement, lodges it with ASIC, ASX and the target, and despatches it to the target’s shareholders. This statement provides the target’s shareholders with information on the offer and other information known to the acquirer that is material to a shareholder’s decision whether to accept the offer. It may need to include an independent expert’s report if the consideration offered is not wholly cash;
• the target prepares a target’s statement, lodges it with ASIC, ASX and the acquirer and despatches it to the target’s shareholders. This statement contains the target’s response to the bid and must contain each director’s recommendation on whether to accept the bid and all other information that shareholders require to make an informed assessment whether to accept the offer under the bid. It may need to include an independent expert’s report opining on whether the bid is fair and reasonable if the acquirer is connected with the target;
• the target’s shareholders decide whether to accept the offer;
• the offer closes and the acquirer acquires securities; and
• if the acquirer has achieved the compulsory acquisition thresholds, it can commence compulsorily acquiring the remaining securities in that class.

To undertake a scheme:

• the acquirer and the target enter into a Scheme Implementation Agreement which contains the terms of the scheme including the consideration payable and any conditions to the scheme;
• the target announces the scheme;
• the target prepares the scheme booklet which contains information that is material to the making of a decision by the target’s shareholders whether to approve the scheme. A formal scheme of arrangement document, which sets out the terms of the scheme between the target and its shareholders, and a deed poll, which sets out the acquirer’s undertaking to perform its scheme obligations such as pay the target’s shareholders their consideration, are both annexed to the scheme booklet. The booklet may need to annex an independent expert’s report opining on whether the scheme is in the best interests of the target’s shareholders if the acquirer is connected with the target;
• the target lodges the draft scheme documents with ASIC and ASIC has 14 days to review the documents;
• the first court hearing is held where the court approves the scheme booklet and orders that a meeting of the target’s shareholders be convened to consider the scheme;
• the shareholder meeting is held to approve the scheme;
• if shareholders approve the scheme, the second court hearing is held where the court approves the scheme;
• the scheme completes and the acquirer acquires securities; and
• if the target was listed, it is delisted.

Listed companies must publicly disclose price sensitive information to the market on a continuing basis. They must also disclose their annual and half-yearly financial reports, corporate governance information and other material information.

A target is not obliged to disclose non-publicly available information to a potential acquirer.  Information that is so disclosed may need to be disclosed in a bidder’s/target’s statement or scheme booklet to satisfy the Corporations Act disclosure requirements.

This depends on the acquirer’s requirements. In legal due diligence, the acquirer’s lawyers typically:

• review documents such as the target’s constitution and material contracts;
• conduct searches of the target on various public registers ; and
• request the target to identify issues such as breaches of laws and current disputes.

It the acquirer offers scrip consideration (see Q14), the target will undertake due diligence to confirm the value of those securities.

The key decision-making organ of the target company is its board of directors.

In a takeover, each shareholder has the right to accept or reject the offer and in a scheme, shareholder approval is required to undertake the scheme (see Q5); however, reluctant shareholders may be forced to sell (see Q27). In a private M&A transaction, shareholders may have ancillary approval rights under law (e.g. financial assistance (see Q19)), or under the company’s constitution or shareholders’ agreement if those documents state that shareholder approval is required to undertake the transaction.

Directors’ primary duties to act in good faith in the best interests of the company and for a proper purpose.

Directors should remain open to rival offers which are in the best interests of shareholders (‘superior proposals’) and only support/recommend offers which they consider to be in shareholders’ interests in the absence of a superior proposal. If a target gives an acquirer exclusivity (see Q12) or other protections (see Q13), directors must ensure they are subject to appropriate carve-outs which recognise their duties.

Controlling shareholders do not have fiduciary duties to the company; however, minority shareholders have certain protections under corporations laws if they are oppressed (see Q26). A private company’s constitution or shareholders’ agreement may impose duties/obligations on controlling shareholders and/or rights on minority shareholders, such as requiring special resolutions of shareholders to proceed with M&A transactions.

Not generally, although employees and other stakeholders, such as suppliers, customers, landlords or regulators, may have specific approval, consultation or other rights if they are conferred under their contracts with the target company, laws or rules. For example, a target’s contract with a supplier may require it to obtain the supplier’s consent before implementing an M&A transaction.

Other than on-market takeover bids, which must be unconditional, all acquisitions are commonly conditional.

Common conditions for off-market takeover bids include ‘minimum acceptance conditions’ that require a minimum amount of offers to be accepted, conditions prohibiting the target from making changes to its capital structure, conditions requiring the acquirer to obtain regulatory approvals and conditions relating to material adverse changes to the target. Bids cannot include ‘maximum acceptance conditions’ that allow the acquirer to stop acquiring securities or reduce the consideration once a certain level of acceptances/shareholding is reached.

Common conditions for private M&A transactions include obtaining regulatory approvals and change in control consents from material customers/suppliers, and there being no material adverse change to the target.

An acquirer can request exclusivity from the target company. If it agrees, the parties will enter into an exclusivity arrangement which may contain ‘no-shop’, ‘no-due-diligence’ or ‘no-talk’ restrictions (see Q13).

An acquirer may require the target to pay a ‘break fee’ if certain events occur which prevent the acquirer’s offer from proceeding, such as the target accepting a superior proposal or breaching the scheme implementation agreement. The Takeovers Panel generally considers a break fee not exceeding 1% of the equity value of the target acceptable.

An acquirer may require the target to agree to ‘no-shop’ restrictions, where the acquirer cannot solicit alternative offers, ‘no-due-diligence’ restrictions, where the acquirer cannot give alternative acquirers access to due diligence information or ‘no-talk’ restrictions, where the acquirer cannot negotiate with alternative acquirers. These mechanisms should be drafted in accordance with the Takeovers Panel’s guidance on lock-up devices and have carve-outs for superior proposals (see Q9).

Consideration can include cash and/or non-cash consideration. Non-cash consideration can include securities in the acquirer (‘scrip’).

An acquirer must disclose its ownership in a listed company once it acquires a ‘substantial holding’ in the company, being an actual or deemed ‘relevant interest’ in at least 5% of the votes attached to voting shares in the company.

Public disclosure is required once negotiations are complete and the discloser has either entered into a legally binding agreement or is otherwise committed to proceeding with the transaction. The discloser may be required to disclose earlier if the transaction leaks to the market. The discloser may voluntarily disclose earlier for strategic reasons, such as if it wishes to encourage further offers.

No; however, the parties may agree that the acquirer has a limited period of time to complete negotiations/due diligence after which either or both parties may terminate negotiations/due diligence.

In a takeover, the minimum price the acquirer can offer is at least equal the maximum consideration that the acquirer or an associate provided, or agreed to provide, for a security in the bid class in the four months before the date of the bid.

In a private M&A transaction, the target company’s shareholders’ agreement may set minimum price requirements.

Yes, provided that either:

• giving the assistance does not materially prejudice the interests of the target company or its shareholders, or the target’s ability to pay its creditors; or
• the target’s shareholders approve it; or
• it falls within section 260C of the Corporations Act.

The target’s or acquirer’s place of incorporation.

In a takeover, the acquirer must produce a bidder’s statement. In a scheme, the acquirer must assist with producing a scheme implementation agreement, scheme booklet and associated documents (see Q5).

A share transfer form that complies with the Corporations Act and Corporations Regulations must be signed and delivered to the company with the existing share certificates for cancellation. If the shares are quoted on a securities exchange, such as ASX, they are typically transferred electronically via a prescribed clearing and settlement facility.

There are no transfer duties imposed on transfers of shares in listed public companies in Australia. There may be on “land rich” non-listed company share transfers.

Australian taxation laws with respect to capital gains or losses and revenue gains or losses will apply, depending upon the individual taxation position of the respective sellers and acquirers of shares.

No. As targets are not compelled to provide acquirers with due diligence information or recommend such offers, hostile acquisitions are less common than friendly acquisitions.

If a target company receives a hostile approach, provided they comply with their directors’ duties (see Q9), its directors may:

• recommend that shareholders reject the offer as inadequate;
• disclose positive information about the target;
• solicit superior proposals from other potential acquirers; or
• refer the bid to the Takeovers Panel if there are unacceptable circumstances involved.

Yes, other than:

• acquisitions with the approval of a majority of the shareholders who are not parties to the transaction;
• acquisitions of no more than 3% of the voting rights every six months (creep rule);
• acquisitions under rights issues and underwriting arrangements,

where a buyer proposes to acquire a relevant interest in more than 20% of a public company’s voting shares it is compelled to make a bid for all of the voting shares in the company.

Minority shareholders with at least 5% of the votes in the target have rights to compel meetings or resolutions to be proposed at meetings. Minority shareholders may also have rights under a private company target’s constitution or shareholders’ agreement, such as ‘tag along rights’ to tag along with a subsequent sale of shares in the target by the acquirer or special voting rights.

If minority shareholders consider themselves oppressed by majority shareholders, they may apply to the court for remedial orders such as orders requiring or restraining persons from doing certain things.

In a public M&A context, an acquirer can launch a takeover and, if the acquirer reaches the compulsory acquisition thresholds, it can compulsorily acquire minority stakes, or acquire 100% ownership if it successfully completes a scheme of arrangement (see Q5).

In a private M&A context, the target company’s shareholders’ agreement may contain ‘drag along’ provisions which allow majority shareholders to force minority shareholders to sell their shares to the acquirer.