Other takeovers issues

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Other takeovers issues which commonly arise or need consideration include:

whether foreign investment approval is required;
whether competition clearance is required;
ASIC’s truth in takeovers policy which requires persons to be bound by their public statements in relation to a takeover; and
the acquisition or cancellation of target options and other convertible securities.

Below is a sample of other takeovers issues which commonly arise or need to be considered. This is by no means an exhaustive list.

12.1 Foreign investment approval

Australia has a foreign investment approval regime that regulates acquisitions by foreign persons of equity securities in Australian companies and unit trusts, and of Australian businesses and Australian real property assets. The regime is set out in the Foreign Acquisitions and Takeovers Act 1975 (Cth) and accompanying regulations. This section 12.1 contains a brief overview of the regime. A more detailed overview is available on Allens' website. A foreign person is generally:

an individual that is not ordinarily resident in Australia;
a foreign government or foreign government investor;
a corporation, trustee of a trust or general partner of a limited partnership where an individual not ordinarily resident in Australia, foreign corporation or foreign government holds an equity interest of at least 20%; or
a corporation, trustee of a trust or general partner of a limited partnership in which two or more persons, each of which is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate equity interest of at least 40%.

A transaction that is subject to the mandatory approval requirements in the foreign investment approval regime should not be implemented unless the Australian Treasurer has 'approved' the transaction via the issuance of a no-objection notice. Therefore, a transaction that needs approval should be conditional upon the receipt of that approval.

In deciding whether to approve a proposed transaction, the Treasurer has the benefit of advice from the Foreign Investment Review Board (FIRB). The Treasurer can block proposals by foreign persons that are contrary to the national interest or to national security (depending on the type of proposal), or alternatively approve proposals on an unconditional basis or subject to conditions. Whether a proposed transaction is contrary to the national interest or national security (as applicable) is assessed on a case-by-case basis. There are no fixed national interest rules but the Australian Government typically considers these factors: national security, competition, other Australian Government policies (including tax), impact on the economy and community, and character of the investor. Additional factors are taken into account where the target entity is in the agricultural sector or the proposed acquisition is of residential land or the acquirer is a foreign government investor.

Applications for foreign investment approval (commonly referred to as 'FIRB approval') to acquire an entity's securities are submitted to FIRB. Once a FIRB application has been lodged (and FIRB confirms that the relevant application fee has been paid) there is a statutory time period for the Treasurer to make a decision and, if no decision is made, then no further orders can be made (that is, the Treasurer cannot prohibit or unwind a transaction if a decision is not made in time). The general rule is that the Treasurer has 30 calendar days to make a decision and a further 10 days to notify the applicant. However, there are several ways that this timeframe can be extended:

if the Treasurer requests information and documents from a person in relation to the application, the clock stops until the request has been satisfied;
the Treasurer may also make an interim order (which is publicly available) which has the effect of prohibiting a transaction on a temporary basis (up to 90 days), effectively extending the time for the Treasurer to make a final decision; or
the Treasurer can unilaterally extend the timeframe by up to 90 calendar days (and this is in addition to the power to make an interim order); or
an applicant can request that the timeframe be extended. The usual circumstances in which an applicant will request an extension is where FIRB indicates that it requires further time to assess an application and asks that the applicant consider requesting an extension – this is a common occurrence. In that situation an applicant will usually agree to make an extension request to avoid a public interim order being made or the application being rejected.

Despite the statutory time period there is no certainty that FIRB approval will be given by a particular time given that either the Treasurer or the applicant may take steps that extend that timeframe.

In the vast majority of cases, FIRB approval is not a takeover completion risk – approval is granted for the overwhelming majority of applications. However, conditions can be imposed in FIRB approvals, such as standard tax conditions.

The rules regarding when ‘FIRB approval’ is required are complex. There is a layered system of categories, exceptions and multiple thresholds.

In the context of an acquisition of securities in an entity, and where no special rules apply (there are many – see further below):

(a) a foreign person needs FIRB approval to acquire a direct interest (generally 10% plus equity interest) if the target operates a 'national security business' (generally one which is involved in or connected with a ‘critical infrastructure asset’, telecommunications, defence or a national intelligence community (of either Australia or a foreign country), or their supply chains) and in such cases a nil FIRB approval monetary threshold applies; and

(b) a foreign person needs FIRB approval to acquire a substantial interest (20% plus equity interest) if the target is:

(i) an Australian company carrying on an Australian business;

(ii) an Australian unit trust; or

(iii) a holding entity of either of them,

where the target is valued above the following thresholds:

Investor

Agreement country investors – an entity that is an enterprise or national of an ‘FTA Country’ (Canada, Chile, China, Hong Kong, Japan, Mexico, New Zealand, Peru, Singapore, South Korea, USA and Vietnam) but excluding:

acquisitions by their subsidiaries incorporated elsewhere, including an Australian subsidiary;
foreign government investors (who are subject to more stringent rules – see below); and
acquisitions of targets which operate a national security business or which operate in sensitive sectors (which include media, telecommunications, transport and various military applications).

Threshold

A$1,216 million, indexed annually

How calculated

The higher of: the total asset value for the entity; and, the total value of the issued securities of the entity

Investor

Agreement country investors – where the target is carrying on a sensitive business (which includes media, telecommunications, transport and various military applications) but excluding:

acquisitions by their subsidiaries incorporated elsewhere, including an Australian subsidiary; and
foreign government investors (who are subject to more stringent rules – see below).

Threshold

A$281 million, indexed annually

How calculated

As above

Investor

Foreign persons who are not agreement country investors or foreign government investors (the latter being subject to more stringent rules – see below).

Threshold

A$281 million, indexed annually

How calculated

As above

Special rules apply in a number of situations, including as follows.

Foreign government investors There are different rules for investments by a foreign government investor compared with a private investor. Foreign government investors are subject to more rigorous screening than other investors – generally there is no monetary threshold that applies before FIRB approval is required. Many commercial investors that operate independently are counted as foreign government investors – not only sovereign wealth funds, public sector pension funds and state owned enterprises, but also many entities that have part government ownership upstream.
Agribusiness All foreign persons making a direct investment (which is generally 10% but may be less depending on the circumstances) in an agribusiness for consideration of A$60 million or more (including the value of any existing investment in that agribusiness) must obtain FIRB approval before proceeding. An agribusiness entity is one that:

derives earnings from carrying on one or more businesses in a prescribed class of agricultural businesses which represent more than 25% of the entity’s EBIT; or
uses assets in carrying on one or more such businesses and the value of the assets exceeds 25% of the total asset value of the entity.

Media sector Any acquisition by a foreign person of 5% or more in an Australian media business requires FIRB approval.
Land-rich entities Any acquisition by a foreign person of securities in an Australian land corporation or trust (being a corporation or trust where interests in Australian land account for more than 50% of the entity's total assets by value) requires FIRB approval where the value of the securities acquisition exceeds the applicable land monetary threshold. There is a nil monetary threshold if the Australian land corporation or trust has 'national security land', which is generally land which is defence premises or where it is publicly known (or could be known upon the making of reasonable enquiries) that a national intelligence agency has an interest in the land. Other monetary thresholds could apply depending on the type of Australian land interests held. There are FIRB approval exceptions (in general terms) for acquisitions of less than 10% (for listed target entities) or 5% (for unlisted target entities) where there is no influence over management or policy.

Even where an acquisition of equity securities in an Australian company or unit trust does not trigger the mandatory FIRB approval requirements, the acquisition might still be considered a 'reviewable national security action' such that, if voluntary FIRB approval is not obtained, the acquirer is subject to the risk that at any time before the end of 10 years after the acquisition the Treasurer exercises his/her call-in power to review the acquisition and make orders on national security grounds. If the acquirer decides to voluntarily seek FIRB approval, the receipt of FIRB approval should be a condition precedent to completion of the acquisition.

12.2 Competition clearance

Australia has a competition regime which is aimed at prohibiting anti-competitive trade practices and protecting consumers. The regime is set out in the Competition and Consumer Act 2010 (Cth) (the CCA) which is administered by a government regulator called the Australian Competition and Consumer Commission (the ACCC).

Section 50 of the CCA prohibits acquisitions of shares and/or assets that would have the effect or be likely to have the effect of substantially lessening competition in a market in Australia.[2] There are no minimum turnover or other thresholds, and acquisitions of any size (including of minority interests) could potentially be captured by the provisions. Section 50 applies to all acquisitions of shares or assets, regardless of whether they deliver ‘control’ of the target firm, if the acquisition leads to a substantial lessening of competition. Section 50 may therefore apply to minority acquisitions where there is reduced competitive tension or the potential for coordination in the market. The CCA contains a non-exhaustive list of factors that determine whether an acquisition may have that effect. These include:

potential constraints on the merged firm, such as the degree of import competition, the height of barriers to entry, and the degree of countervailing power; and
the characteristics of the market – such as the nature and extent of vertical integration and the likelihood that the acquisition will result in the removal of a vigorous and effective competitor.

There is no compulsory notification requirement under the CCA. However, the ACCC expects to be notified of takeover and merger proposals in advance where the products of the relevant parties are either substitutes or complements and the merged group will have a post-merger market share greater than 20 per cent in the relevant market. In addition, where a takeover proposal will, or is likely to, raise competition concerns (eg. because it may raise horizontal, vertical or conglomerate effects concerns), the relevant parties should seek Australian competition clearance for the takeover. Foreign-to-foreign mergers can be captured by Australia's merger control regime, however, a local effects or nexus is required.

The ACCC can investigate a merger even where a party has not notified it of the takeover or merger proposal. The ACCC has the power to apply for a court injunction to prevent a proposed transaction from proceeding. Where a transaction has been completed in breach of s50 of the CCA, the ACCC can also apply to the Federal Court for a range of remedies including a divestiture order, pecuniary penalties, director disqualification orders and/or an order declaring the transaction void. Third parties may also seek damages.

There are two processes by which clearance can be sought from the ACCC:

Informal clearance

An informal clearance system has developed in Australia under which parties proposing to acquire shares or assets may approach the ACCC on an informal (and sometimes confidential) basis for clearance. It is the dominant method of obtaining clearance in Australia. There is no set timeframe within which the ACCC must reach a decision. As a general guide, if the ACCC decides that the takeover proposal does not raise any competition issues and does not require the ACCC to conduct market enquiries, the parties may be advised of this conclusion within about 2 to 8 weeks (depending on the complexity of the transaction). Reviews that require market consultation and are subsequently found not to raise competition concerns will normally be completed within 6 to 12 weeks from the date the ACCC initiates this phase. When reviews require subsequent market inquiries to consult on a statement of issues (which outlines the basis and facts on which the ACCC has come to a preliminary view that a proposed merger raises competition concerns that require further investigation) or remedies, the total review process is likely to be completed within 6 to 12 weeks after the statement of issues is published, although may take longer in complex cases. Although informal clearance decisions are not legally binding on the ACCC, it will not, as a general rule, subsequently contest a merger which it has cleared, unless clearance was granted on the basis of false or misleading information or relevant information was otherwise withheld. The informal clearance process can be used for proposed as well as completed transactions.

Merger authorisation

There is a merger authorisation procedure that is also conducted by the ACCC, which combines the previously separate formal ACCC clearance process and the Australian Competition Tribunal authorisation process. The ACCC may authorise a transaction if it determines that a merger is unlikely to substantially lessen competition, or where the public benefits of the transaction outweigh any public detriment. Where the ACCC authorises a merger and any conditions attached to the clearance are complied with, an action cannot be brought by the ACCC or third parties on the basis that the acquisition contravenes s50 of the CCA. If the ACCC makes a determination not to authorise the transaction, the parties may appeal to the Australian Competition Tribunal. The Tribunal can only review the ACCC’s determination on the information that was originally before the ACCC, subject to limited rights to introduce new material. The ACCC has a 90 calendar day time limit to deal with an application for formal clearance, with the option to extend this period multiple times by agreement. If no decision is made within this period, the ACCC is taken to have refused to grant the merger authorisation. There is no compulsory notification requirement under the CCA. However, the ACCC expects to be notified of takeover and merger proposals in advance where the products of the relevant parties are either substitutes or complements and the merged group will have a post-merger market share greater than 20 per cent in the relevant market. In addition, where a takeover proposal will, or is likely to, raise competition concerns (eg. because it may raise horizontal, vertical or conglomerate effects concerns), the relevant parties should seek Australian competition clearance for the takeover. Foreign-to-foreign mergers can be captured by Australia's merger control regime, however, a local effects or nexus is required.

The following table contains an overview of key differences between the informal review and merger authorisation processes.

Effect of filing

Informal review

Voluntary and non-suspensory

Merger authorisation

Voluntary and suspensory

Legal test

Informal review

Substantial lessening of competition

Merger authorisation

Substantial lessening of competition or overwhelming public benefit

Timing

Informal review

No statutory deadlines. ACCC provides its own indicative timelines:

Pre-assessment: 2-4 weeks
Phase 1: 6-12 weeks
Phase 2: 6-12 weeks

Merger authorisation

90 calendar days (can be extended in limited circumstances).

Outcome

Informal review

Merger opposed
Merger not opposed
Merger not opposed subject to court enforceable undertakings.

Merger authorisation

The ACCC is required to publish reasons for its decision to grant or refuse merger authorisation.

Publicity

Informal review

Transactions cleared in pre-assessment can be cleared confidentially.

If there is a public review, a summary of the transaction will be published on the ACCC's website. The ACCC will consult with market participants for their views. Decisions to oppose or clear a merger are published (including conditions).

Merger authorisation

The application, all third party submissions and the ACCC's decision are published, subject to some limited ability to request excisions for confidential / commercially-sensitive information.

Effect of decision

Informal review

No statutory immunity from third party challenges but ACCC is not likely to challenge if clearance

Merger authorisation

Statutory immunity from ACCC and third party actions

Appeal rights from refusal / opposition

Informal review

No appeal from informal ACCC decision, but the parties may seek a Federal Court declaration that the transaction does not contravene section 50 CCA or seek authorisation

Merger authorisation

Limited merits review of the ACCC's decision by application to the Australian Competition Tribunal

Although there is no requirement for the parties not to complete a transaction when seeking informal clearance from the ACCC, parties generally do not proceed with transactions that are being considered by the ACCC until they obtain clearance. Takeover proposals which are the subject of an authorisation application cannot be completed until a decision has been made by the relevant authority. The authorisation application must be accompanied by a court-enforceable undertaking that the applicant will not complete the proposed acquisition until the ACCC’s assessment is complete. Although there is no requirement for the parties not to complete a transaction when seeking informal clearance from the ACCC, parties generally do not proceed with transactions that are being considered by the ACCC until they obtain clearance.

12.3 Truth in takeovers policy

A feature unique to the Australian takeovers market is ASIC’s ‘truth in takeovers’ policy. The policy is that where a market participant makes a public statement (known as a ‘last and final statement’) in the course of a takeover bid that they will or will not do something in relation to the bid, ASIC expects that the market participant will adhere to that statement unless they have clearly and expressly qualified it at the time of making it.[3] The Takeovers Panel generally expects likewise, although in practice it may grant alternative remedies to requiring strict adherence to a last and final statement (see below). A common example of a last and final statement is a statement by a takeover bidder that it will not increase its offer price or will not extend its bid. The policy only refers expressly to takeover bids, but ASIC and the Takeovers Panel regard it as extending to schemes of arrangement.

The truth in takeovers policy is unique because it is not founded on any specific rule that persons are bound by their public statements. Rather, the regulators consider that a person’s departure from a last and final statement could be in breach of the misleading or deceptive conduct provisions of the Corporations Act. The rationale is that buyers and sellers of securities are entitled to rely on unqualified statements that a bidder, target or major shareholder will do or not do something in relation to the bid, and should not be exposed to loss if that party subsequently acts contrary to the statement. For example, if a bidder makes a statement that it will not increase its offer price and subsequently departs from that statement by announcing an increased offer price, a shareholder who has sold on-market following the statement will have missed the opportunity to participate in the increase. Likewise, if a bidder makes a statement that it will not extend its bid and subsequently does so, a shareholder who has sold on-market may on the basis of the statement may lose the opportunity of an increased offer during the extended period.

The Takeovers Panel has shown a readiness to ‘enforce’ the policy and make declarations of unacceptable circumstances where a bidder has departed from a last and final statement. In particular, the Panel has in two cases declared unacceptable circumstances where a bidder has publicly stated that it would not increase its offer price but subsequently did so. In both cases, the Panel allowed the increased bid to proceed but ordered the bidder to compensate certain shareholders who traded in shares following the last and final statements. The Panel’s decisions in those cases reflect a tension between upholding the truth in takeovers policy and ensuring that shareholders are not deprived of the best possible price for their shares.

The forum in which a last and final statement is made does not matter. An off-the-cuff comment by the CEO of a bidder to a journalist which is then published in a newspaper can attract the policy as much as a statement in an ASX announcement. Therefore, bidders, targets, major shareholders and other persons who play a significant role in a takeover proposal need to be careful in the public statements they make, and should seek legal advice before making any last and final statements.

12.4 Options and other convertible securities

Many ASX-listed Australian companies have employee incentive plans which involve the granting of share options or rights to executives. A person seeking to acquire ownership of all of a company’s shares should make arrangements to acquire, or have cancelled, any options, rights and other securities convertible into shares. This is to avoid the highly undesirable situation where a bidder has acquired 100% of the company’s shares but there remain options or rights on issue which, if exercised, would result in the issue of shares to the options or rights holders and the bidder ceasing to own 100% of the company. This is an issue because in that situation the company’s directors would need to take into the account the interests of the minority shareholders, and the company would be subject to the related party transactions restrictions in the Corporations Act. Furthermore, the exercise of the options or rights may, depending on the circumstances, cause the target to exit the bidder’s Australian tax consolidated group.

The common methods for acquiring or cancelling options and rights (and other convertible securities) are as follows:

if the control transaction proceeds via a takeover bid:

the bidder making a simultaneous takeover bid for each class of convertible securities; or
the bidder entering into contractual arrangements with each convertible securityholder and the target under which the convertible securities are to be transferred to the bidder or cancelled if the bidder obtains a relevant interest in more than 50% of the target’s shares and the bid is unconditional; and

if the control transaction proceeds via a scheme of arrangement:

the bidder proposing a simultaneous scheme of arrangement for each class of convertible securities; or
the bidder entering into contractual arrangements with each convertible securityholder and the target under which the convertible securities are to be transferred to the bidder or cancelled if the scheme becomes effective.

To avoid any collateral benefit or unequal treatment issues, the consideration provided for the acquisition or cancellation of convertible securities should be no greater than market value. For this purpose it is usual to undertake a Black-Scholes or other valuation of the convertible securities.

An alternative method of eliminating convertible securities is to compulsorily acquire them. In general terms, a person can compulsorily acquire a company’s convertible securities if the person’s voting power in the company is at least 90% and the person beneficially owns at least 90% by value of all the shares and convertible securities in the company. The consideration payable is normally the fair market value of the convertible securities.

[2] The definition of ‘market’ includes a market for goods or services in Australia or in a region, territory or state of Australia, and can include local markets. The ACCC also recognises that markets can be global or regional in nature, and in such cases will examine the effect on competition on the global or regional market that exists within Australia.

[3] Statements of intention (eg that a shareholder will accept a takeover bid) can lead to a Takeovers Panel declaration of unacceptable circumstances for reasons independent of whether the statement is adhered to.

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