Soul Patts–Brickworks $14 billion merger: scheme of arrangements finally unwind a 56-year cross-shareholding

Diversified investment house, Washington H. Soul Pattinson & Co. (Soul Patts) and building products manufacturer, Brickworks Limited (Brickworks) have proposed to merge under two separate and inter-conditional schemes of arrangement, using well-established corporate law processes, including a proxy-based buy-back and scrip-for-scrip rollover to unwind Australia’s longest-standing cross-shareholding in a tax-efficient, shareholder-friendly way.

What is the significance of the Soul Patts–Brickworks transaction?

For over 56 years, Soul Patts and Brickworks have been tied together through a unique cross-shareholding structure. Soul Patts holds approximately 43% of Brickworks and Brickworks holds approximately 26% of Soul Patts. The arrangement began in 1969 to provide stability and opportunities for growth and to protect both entities from unwanted takeovers and to stabilise share registers at a time when corporate raiders were active.

This arrangement, adopted under the guidance of the Millner family, long-time stewards of both companies provided stability but also meant neither company could be easily acquired. Over the decades, there have been multiple attempts to challenge or unwind the structure, including:

• On 2 May 2000, Guinness Peat Group Plc made a takeover bid for all of the ordinary shares in Brickworks with the intention of breaking up the cross-shareholdings between Soul Patts and Brickworks. As a result of the cross-shareholding, GPG’s bid could not have been successful unless Soul Patts accepted the bid for its shares in Brickworks or sold its shares in Brickworks to persons who accept the bid.

• Since 2011, Perpetual Investment Management Limited made five proposals with the objective of unwinding the cross-shareholding structure. Then in 2014, Perpetual commenced proceedings against both companies in the Federal Court, claiming the maintenance of the cross-shareholding was oppressive to minority shareholders. However, all proposals proved unsuccessful, and the Federal Court dismissed Perpetual’s oppression claim in 2017.

Soul Patts and Brickworks have since formed the view that the cross-shareholding structure no longer serves their best interests and have agreed that the proposed merger is the most effective way to unwind it.

How the merger works

The merger of Soul Patts and Brickworks will be implemented via two inter-conditional schemes of arrangement, one for Soul Patts and one for Brickworks.

A new holding company (TopCo) has been established to serve as the merged parent. Under the schemes, a wholly-owned subsidiary of TopCo will acquire 100% of the shares in both Brickworks and Soul Patts, and in exchange TopCo will issue new TopCo shares to all participating Brickworks and Soul Patts shareholders at the agreed merger ratios.

A scheme of arrangement is one of the most powerful corporate tools in Australian law. It is court approved and binds all shareholders if passed by the requisite majorities. This makes it particularly useful when 100% control is required, as here, where both companies’ entire share capital must be acquired to fully unwind the cross-shareholding.

Schemes are also flexible. For instance, they can include conditions that ordinary takeover bids cannot accommodate. For example, the transaction can embed voting exclusions (so that neither company votes its cross-held shares on the other’s scheme) and tie both schemes so that neither proceeds unless the other does.

The cross-holding and how it is dealt with

A key structural challenge in this merger is how to address the significant cross-holdings. Soul Patts holds approximately 43% of Brickworks, while Brickworks holds approximately 26% of Soul Patts. If these shares were simply exchanged for shares in the new holding company, TopCo, they would create a circular ownership structure in which TopCo would indirectly hold shares in itself.

To avoid this outcome, the transaction uses two distinct legal approaches, tailored to each side of the cross-holding.

Exclusion mechanism for Brickworks’ stake in Soul Patts

Brickworks’ shares in Soul Patts do not get exchanged for new TopCo shares at all. This portion is effectively carved out when the new TopCo shares are issued, ensuring that Brickworks’ interest in Soul Patts does not translate into an equivalent interest in TopCo.

Proxy and buy-back mechanism for Soul Patts’ stake in Brickworks

For Soul Patts’ stake in Brickworks, a different approach is used. Soul Patts will receive new TopCo shares in exchange for its Brickworks shares. To avoid ending up with TopCo effectively owning part of itself, these new TopCo shares are then cancelled through a selective buy-back.

To ensure this buy-back can proceed efficiently, every new TopCo shareholder under the schemes automatically grants an irrevocable proxy upon implementation. This proxy authorises the TopCo secretary to vote those shares in favour of the selective buy-back resolution at a TopCo shareholders’ meeting, eliminating the need for a separate shareholder approval process after the schemes take effect. This proxy arrangement is built into the terms of the schemes and takes effect once the schemes are implemented, subject to an “opt-out” right which shareholders may exercise if they wish.

Once shareholders approve the buy-back by special resolution, the relevant TopCo shares are cancelled. This removes any circular ownership and ensures that Soul Patts’ cross-holding in Brickworks does not carry through into the new structure.

By combining the proxy mechanism with the buy-back, the companies achieve a clean unwinding of the cross-holding. Brickworks’ stake in Soul Patts is dealt with by not issuing new shares in TopCo, and Soul Patts’ stake in Brickworks is dealt with by issuing and then cancelling the shares, all under proper shareholder approvals.

This integrated proxy and buy-back structure is a well-established legal tool that has been refined in earlier Australian schemes of arrangement (including the St George–Advance Bank merger) and remains an efficient solution for unwinding entrenched cross-shareholdings. By binding all shareholders under both schemes of arrangements, the companies ensure that the circular interests are eliminated cleanly, under court supervision, and fully in line with the Corporations Act’s requirements for selective buy-backs and shareholder approvals.

Tax rollover relief and conditions precedent

From a shareholder perspective, a critical aspect of the deal is its tax efficiency. Normally, exchanging shares in a merger or takeover can trigger a capital gains tax (CGT) event, an unwanted surprise for long-term shareholders sitting on large unrealised gains. Recognising this, Soul Patts and Brickworks have structured the merger to qualify for Australia’s “scrip-for-scrip” CGT rollover relief.

The effect of this is that eligible shareholders can choose to defer any capital gain that would otherwise arise from swapping their old shares in either Brickworks or Soul Patts for new TopCo shares. The companies will seek advance approval from the Australian Taxation Office (ATO) that the Commissioner of Taxation is prepared to issue binding class rulings to allow CGT rollover for qualifying shareholders. In other words, if qualified, Australian resident investors will not face an immediate tax bill on completion of the proposed merger, they can roll over their cost base into the new TopCo shares, and only crystallise any capital gain when those TopCo shares are ever sold.

Securing this tax rollover relief was so important that it has been built in as a condition precedent to the merger. The implementation of the schemes will only proceed to final court approval if the ATO rulings are obtained and remain satisfactory.

New capital raising: fresh capital for a fresh start

A notable aspect of the merger is a substantial equity raising by TopCo to support the balance sheet from day one. On Monday, 7 July 2025, Soul Patts and Brickworks announced that TopCo has secured all required equity funding, with total commitments of around A$1.4 billion through the issue of about 34 million new shares. This includes an initial $550 million placement (fully underwritten) and an additional $220 million in new commitments at no discount to Soul Patts’ last closing price.

The proceeds will be used to pay down Brickworks’ existing debt, retire or reduce Soul Patts’ $450 million convertible bonds, and cover transaction costs such as stamp duty. All shares were placed at market price, reflecting strong demand without the need for a discount.

With this funding secured before the scheme votes, TopCo will have a stronger financial position and a simpler balance sheet from day one.