Our Gold Coast corporate lawyers advise on corporate takeovers and provide their expertise on a range of takeover-related concerns. Corporate takeovers are one of the most well-known and high-profile forms of corporate law and are inevitable in a market economy that consistently strives to achieve increased efficiencies, synergies and economies of scale. Takeovers involve one company purchasing another company via a share acquisition substantial enough to empower it with a controlling interest in the voting shares of the acquired entity. There is, however, a general prohibition that prevents an entity from acquiring in excess of a 20% interest in the voting power of an acquired entity, unless certain procedures are followed.
THE TAKEOVER RULES
In Australia, where one company seeks to acquire part or all of a company, the takeover provisions contained in the Corporations Act 2001 (Cth) become relevant. The takeover provisions prevent a person from acquiring voting shares or an interest that exceeds 20% of the total shares of the company, unless it is an exempt transaction.
A ‘relevant interest’ as contemplated by the takeover rules includes voting shares in a company (so long as the rights are in a listed company or an unlisted company with more than fifty (50) members) or voting interests in a listed managed investment scheme where the newly acquired rights cause an individual’s voting power in the particular company to exceed twenty percent (20%).
There are also specific provisions that relate to agreements relating to target securities entered into with a target holder, and the ability for effective voting power to be increased via total votes in the target company in which a person and his or her associated have a relevant interest.
VARIATIONS OF TAKEOVER BIDS
Takeover bids can be divided into off-market bids and market bids. An off-market bid is one where offers for unquoted or quoted securities are sent directly to the target shareholders, whereas a market bid involves a bidder’s broker offers to buy quoted securities through the relevant stock exchange. The form of the takeover bid, whether off-market or market in nature, can relate to voting or non-voting shares, options on shares or other securities and convertible notes and debentures.
Market bids have become relatively uncommon as they cannot be made on a conditional basis, which is generally unacceptable for bidders. The more common alternative to an off-market bid, where it is determined to be undesirable, is to utilise a scheme of arrangement. A scheme of arrangement allows a bidder to exceed the typical 20% voting power limitation that would otherwise apply. Schemes of arrangement are generally utilised where the transaction is friendly in nature rather than hostile. The decision as to which option is ultimately pursued depends on a number of factors including:
THE TAKEOVER RULES
- (a) The consideration provided and the form it will take (such as cash or securities in the bidding company, interests in a managed investment scheme, convertible notes or options or a combination of some or all of these alternatives);
- (b) The speed with which the transaction needs to take place to effect the bidders intention (for example, a market bid is the quickest method to adopt to acquire above 20% as the acquisition of securities can occur on the date of the announcement while an off-market bid prevents a bidder from acquiring shares about the 20% threshold until the offers are unconditional or subject to certain prescribed occurrences relating to factors such as share capital quantities, solvency statutes, business or property. Similarly shares can only be acquired under a scheme where the scheme is approved and implemented.);
THE TAKEOVER RULES
- (c) Whether conditions must or should apply, noting that an offer with conditions can only be made via an off-market bid or scheme. Conditions may be an important feature where a bidder seeks to acquire a 90% majority in order to be able to effect a compulsory acquisition to acquire the remainder of the share, or alternatively to ensure the entity does not radically change during the bidding period;
- (d) The payment to be given to the target holders and the time at which they receive payment (i.e. under a market bid target shareholders receive payment in accordance with a stock exchanges ordinary settlement rules whereas under a conditional off-market bid, payment is generally not required until one (1) month after the offers become unconditional. Furthermore, under a market bid, a person accepting an offer will not receive any subsequent price increase whereas under an off-market bid the target holders obtain the benefit of any increase in the bid price, whether they have previously accepted an offer or not;
- (e) The costs associated with the bid (i.e. brokerage is not payable in an off-market bid or scheme and transfer duty is generally not payable on traders of quoted securities, while a target with significant land holdings may be liable for transfer duty at asset transfer rates calculated on the value of the land or land-related assets held either directly or indirectly by a target entity;
- (f) Proportional offers (i.e. under an off-market bid or scheme a bidder can offer to buy all or a specified portion of the securities held by each target hold whereas under a market bid the bidder must offer to buy all of the securities held by target holders); and
- (g) Significant ownership thresholds as outlined in the legislation.
In many takeover cases bidders prefer to acquire a pre-bid stake of up to the twenty percent (20%) threshold to position the bidder ideally to defend any competing bidder from attempting to achieve the ninety percent (90%) threshold requirement to command compulsory acquisition authority, to reduce the number of shares upon which the bidder has to bid, to lower the bidder’s average acquisition price and to give momentum to the action. There are a number of methods which can be utilised in order to acquire a pre-bid stake, ranging from directly purchasing securities to entering into a pre-bid agreement with particular security holders or acquiring call options over target securities.
THE ACQUISITION VEHICLE
Our Gold Coast corporate lawyers can advise you on the optimal legal structure to action your corporate takeover, whether it be a company incorporated domestically or internally or a special purpose or pre-existing entity, as the circumstances may demand. In any event, it is essential that any individuals that acquire special knowledge of a bid before it is publicly announced must be mindful to avoid insider trading laws that prevent trading based upon the communication of price-sensitive information not available to the wider market.
Part of the deliberation process prior to undertaking a corporate takeover is whether the takeover will be conducted as friendly or hostile. In simple terms, a friendly takeover bid is one that is presented to the Board while a hostile takeover bid can occur without the involvement of the target. Sometimes the terms negotiated between a bidder and the acquisition target will be contained in a bid implementation agreement that outlines the bid price, any attaching conditions, provisions of dispatch offers, board transition arrangements and any restrictions that apply (typically these are called “lock-up devices” and seek to restrict the target entity from sourcing a higher bid). Note that if the takeover takes the form of a scheme that the document utilised will be a merger implementation agreement.
Further issues to consider prior to announcing the bid include the minimum bid price as set by any purchases by the bidder in the four (4) months prior and any cash consideration that will form part of the bid. If any securities are offered as consideration under the bid or scheme, then the bidder must provide in their bidder’s statement or scheme booklet must contain prospectus-standard disclosure that outlines the rights and responsibilities attaching to the shares and the financial status of the acquiring entity. One advantage of capital gains tax relief is the ability for the target holders in a bid to acquire shareholding increasing the total shareholding to eighty percent (80%) where similar securities are offered then capital gains tax relief is available (this is generally referred to as a “scrip for scrip” takeover).
SCHEMES OF ARRANGEMENT (FRIENDLY TAKEOVERS)
Schemes of arrangement are utilised when a takeover is considered “friendly” due to the certainty they provide. Under a scheme of arrangement there is the added certainty of an “all or nothing” outcome, a more definitive time line and a lower approval threshold to meet as opposed to achieve 100% ownership. Schemes are regulated under the Act and allow a company to reorganise capital structures to achieve the desired ends. A scheme is initiated by the target entity (c.f. the acquiring entity as is the case for a bid), meaning that the bidder’s role is confined to negotiations beforehand and providing input regarding the content of the explanatory documents that must be provided to target holders. Court approval is also required in order to affect a scheme. Our corporate lawyers can assist you in drafting any necessary scheme documents and negotiating the terms of the initial merger implementation agreement.
Following the obtaining of Court approval, a meeting of shareholders is convened to vote on the proposal. The lowered threshold that applies to schemes involves ensuring that there is a simple majority of voting shareholders (i.e. over 50%) and that at least 75% of the total number of votes cast. Once the scheme is approved by shareholders, the scheme is passed on to the Court who retains discretion to approve or decline to approve the scheme – though it will refrain from making a commercial assessment in substitution of the finding of target holders.
ISSUES ARISING DURING THE OFFER PERIOD
In circumstances where the acquisition method adopted is an off-market bid, a bidder can purchase target securities on the stock exchange after the bidder’s statement has been given to the target, even if the bidder’s voting power in the target exceeds the twenty percent (20%) threshold so long as the bid is unconditional (or has certain prescribed occurrence conditions) and the securities are purchased in an on-market transaction.
If cash is not offered as consideration via an off-market bid, the result is that an on-market purchase will require the bidder to offer a cash alternative under the bid. In the case of an on-market purchase, purchases are allowable as soon as the announcement has been made provided it is in the ordinary course of trade.
A bidder may also increase the bid under an off-market bid by increasing the cash sum or securities on offer or through the provision of additional consideration, which then enables all target holders to consider or reconsider (as the case may be) which form of consideration they would prefer to adopt in exchange for the target shares.
If new information arises, our corporate lawyers can assist you in preparing the necessary disclosure documents in order to inform the market of substantive changes in order to thwart any potential allegations of misleading or deceptive conduct.
COMPETITION LAW CONCERNS
Pursuant to the Competition and Consumer Act 2010 (Cth), Australia’s competition laws prohibit the acquisition of shares or assets that would or likely would substantially lessen competition in a particular industry within Australia. The competition law regulator, the Australian Competition and Consumer Commission (‘ACCC’) has provided guidance that whenever a proposed acquisition becomes a real likelihood that the ACCC should be informed where the products offered by both the acquirer and the target are substitutes or complements of one another and the result of the takeover would be a total market share in excess of twenty percent (20%).
FOREIGN INVESTMENT RULES
Unique foreign investment rules apply where an acquiring entity seeks to take ownership of an Australian target entity as per the Foreign Acquisitions and Takeovers Act 1975 (Cth). The process that must be undertaken involves providing notification for any designated transactions that may result in foreign ownership exceeding prescribed levels in the Australian businesses or companies. Our Gold Coast corporate lawyers can assist foreign entities in determining the exact application and relevance of the foreign investment rules (including whether any threshold exemptions apply, for example for US acquirers) for their particular takeover proposal and ensure compliance with Australian regulations.
The Takeovers Panel is utilised as the primary dispute resolution mechanism regarding takeovers and proposed takeovers. The Takeovers Panel has within the scope of its jurisdiction the ability to make declarations of unacceptable circumstances relating to whether there has been (or is likely to be) a breach of takeover provisions. The Takeovers Panel can also make a determination that, even where there has been no breach, that there are unacceptable circumstances given the effect or likely effect. Should the Takeovers Panel feel it is necessary, it can create a series of orders designed to protect various interests, including the capacity to command the divesting of shares or halting the acquisition or transfer of shares (or other securities).