Takeover laws

Last updated: July 2018

Introduction

The Australian takeover rules under the Corporations Act regulate acquisitions of interests in Australian companies or managed investment schemes, including Australian real estate investment trusts (REITs) listed on the Australian Securities Exchange (ASX) and unlisted Australian companies with more than 50 members (regulated entities). While the rules can be technical, the acquisition process is usually quite straightforward, and fundamentally the same methods of acquisition have been used in the last 20 or so years.

Takeover rules

A person is prohibited from acquiring (except pursuant to a limited number of exceptions) a relevant interest in a regulated entity if, because of the transaction, any person’s voting power in the regulated entity increases:

from 20 per cent or below to more than 20 per cent, or
from a starting point that is above 20 per cent and below 90 per cent.

A person’s voting power is broadly their relevant interest plus their associates’ relevant interests in voting securities in the regulated entity.

The 'relevant interest' concept is broad. Basically a person has a 'relevant interest' in securities if they hold the securities, or have the power to control the exercise of votes attached to those securities or the disposal of the same. It can be traced through corporate groups and arrangements with third parties.

The takeover rules apply to acquisitions whether by Australian residents or foreign investors. Offshore acquisitions can have downstream Australian takeover consequences, particularly where the overseas target has, directly or indirectly, voting power of more than 20 per cent in an Australian regulated entity (underlying control principles).

The rules are designed to ensure that the market for control of regulated entities is efficient, competitive and informed, and that all security holders are afforded reasonable and equal opportunities to participate in proposed acquisitions and are given adequate information and time to consider proposals under which a person may acquire a substantial interest in a regulated entity.

There are a number of exceptions to the takeover prohibition. These include off-market and on-market takeover bids, court approved schemes of arrangement, target shareholder approved acquisitions, selective reductions of capital and 3 per cent acquisition creep every six months. In addition, the Australian Securities and Investments Commission (ASIC) has power to exclude or modify the operation of the takeover rules.

If 100 per cent control is the objective, there are two types of compulsory acquisition (leaving aside a scheme of arrangement or a selective reduction of capital which are by their nature compulsory), but generally these minority squeeze-outs do not apply until the acquirer has a minimum of a 90 per cent relevant interest in relevant classes of the target’s shares.

Acquisitions of voting power in a listed regulated entity of, or beyond, 5 per cent also require disclosure to the ASX and the relevant entity. The Takeovers Panel also generally expects disclosure of economic interest held through derivatives, in the context of a control transaction, where the physical position is less than 5 per cent but combined with the derivative exceeds 5 per cent, or the derivative alone exceeds 5 per cent.

The most common means by which to affect a takeover in Australia is through an off-market takeover bid or a court approved scheme of arrangement.

An off-market takeover bid is an offer for all, or a proportion, of the securities in a listed company, with consideration taking the form of cash, securities in the bidding company, or a combination of both. The process, terms and key documents of the off-market takeover bid are regulated by Chapter 6 of the Corporations Act.
A scheme of arrangement in the present context is a transaction pursuant to which all of the shares in a target company will be compulsorily transferred to an acquirer. Once a scheme of arrangement is approved by the shareholders (75 per cent by value of shares and 50 per cent by number of shareholders voting) and by the court, it is binding on all shareholders, and as a consequence, all of the shares in the company are transferred to the acquirer.

Regulatory oversight

The regulatory bodies involved in the takeover process are:

ASIC, which regulates compliance with the Corporations Act and has power to modify and grant exemption from compliance with provisions of the Corporations Act. ASIC can post vet bidders’ and targets’ statements and reviews scheme documents and statements made in the conduct of a takeover under its Truth in Takeovers policy (a policy which requires market participants to meet publicly released statements as to their future intentions).
the Australian Takeovers Panel which is responsible for reviewing conduct during takeovers both in terms of whether the conduct complies with the letter of the law or is otherwise unacceptable (ie. offends the underlying control principles). It has power to make a broad range of orders if it determines that unacceptable circumstances exist. Its powers may be exercised on the application of ASIC, a shareholder or an interested party but not by the Panel of its own volition.
the ASX, which, in part, regulates what listed entities are permitted to do.
the Foreign Investment Review Board (FIRB) / Treasury, which considers applications for foreign investment approval.
the Australian Competition and Consumer Commission (ACCC), which regulates antitrust laws.

ASIC and the ASX also monitor compliance by listed entities with their continuous disclosure obligations. Under these obligations, an entity must notify the market immediately if it becomes aware of any information that a reasonable person would expect would have a material effect on the price or value of the entity's securities.

Tax – scrip relief

In relation to Australian income tax, target security holders who would otherwise be subject to capital gains tax (CGT) in Australia on selling their shares may qualify for CGT roll-over relief (scrip for scrip relief) where they receive equivalent securities in the purchasing entity in exchange for their target securities.

This scrip relief effectively means that the target security holders will defer any capital gains tax liability until they dispose of their securities in the purchasing entity. One of the key requirements for scrip for scrip relief to apply is that the purchasing entity must, as a result of the arrangement, acquire 80 per cent or more of the voting securities in the target entity.