6.3 Other structures

There are a number of alternative structures by which a person can obtain control of an ASX-listed Australian company or trust. These include the following.

(a) Selective capital reduction (for a company only)

This structure can be used to enable a person to acquire 100% of a company’s shares. It involves a reduction of the target company’s share capital through the cancellation of all issued shares other than those held by the ‘bidder’, in exchange for consideration from the company that is usually funded by the bidder. The transaction requires target shareholder approval under the capital reduction provisions of the Corporations Act.

As with a scheme of arrangement, this structure provides the benefit of an all-or-nothing outcome, but without the requirement for ASIC sign-off and court approval. However, the structure is not frequently used as it has certain limitations and risks, such as the following.

• Shareholder approval thresholds A selective capital reduction must be approved by two shareholder resolutions:

• first, a special resolution at a meeting of all shareholders (ie. at least 75% of votes cast voting in favour), with no votes being cast in favour of the resolution by any shareholder who is to receive consideration as part of the reduction; and
• second, a special resolution at a meeting of only those shareholders whose shares will be cancelled (ie. at least 75% of votes cast voting in favour).

None of the ‘minority’ shareholders can vote in favour of the first resolution but they can vote against. This means that the bidder needs to ensure it holds a sufficient number of shares to overcome any ‘no’ votes by minority shareholders. For instance, if the bidder holds 15% of the shares, shareholders who hold only 5% in total can block the proposal (assuming no other shareholders vote in favour).

• Requirement for capital A selective capital reduction can only occur to the extent that the target company has sufficient share capital. Often the proposed aggregate consideration is higher than the share capital recorded in the target’s accounts.

• Form of consideration In most cases the form of consideration for the reduction can only be cash. This is because a person cannot be compelled to accept shares – under Australian law there is a requirement that a person must consent to becoming a member of a company. Where the bidder proposes to offer its own shares as consideration, a scheme of arrangement will be required because only under a scheme structure will all target shareholders be deemed to have consented to acquiring bidder shares (except in certain circumstances where the target company’s constitution contains a deemed consent provision).
• Additional requirements imposed on targets A company can only reduce its share capital if it is fair and reasonable to the shareholders as a whole, and if it does not materially prejudice the company’s ability to pay its creditors. If challenged in a court, the company bears the onus of establishing that the requirements have been complied with. These requirements are not imposed on targets in the bid or scheme structures. There is some support, but no definitive law, for the view that the fair and reasonableness requirement is satisfied if the consideration falls within an independent expert’s valuation range.
• Tax consequences There is always a question of whether the payment of consideration to minority shareholders is treated as capital (such that shareholders will pay capital gains tax on any gain, as with the consideration received under a bid or scheme), or whether the Australian Taxation Office (the ATO) will determine that part or all of the consideration should be treated as an unfranked dividend. For a minority shareholder it is usually preferable for the consideration to be treated as capital (as any capital gain can be offset by capital losses, or the shareholder can take advantage of the capital gains tax discounting rules) rather than as an unfranked dividend (as that will be treated as income which is taxed at the shareholder’s marginal income tax rate). An ATO ruling is usually necessary to confirm the position.

(b) Securityholder-approved transaction (for a company or trust)

This structure can be used to enable a person to acquire a majority, but not 100%, of the issued securities in a company or trust. It involves the bidder being issued with, or acquiring from an existing securityholder, such number of target securities so as to result in the bidder obtaining a majority interest. The transaction must be approved by target securityholders under section 611 item 7 of the Corporations Act (which is an exception to the 20% rule).

The reason why a person cannot use the s611 item 7 structure to acquire 100% ownership is because of the voting restrictions on the transaction. A s611 item 7 transaction must be approved by an ordinary resolution of securityholders, with no votes being cast by the bidder or any person whose securities are to be acquired, or by any of their respective associates. So if the bidder sought to purchase 100% of the target securities there would no securityholders qualified to vote in favour of the resolution. ASIC policy is generally not to grant relief from these voting restrictions.

The s611 item 7 structure is rarely used for transactions involving the transfer of existing securities as securityholders are usually unlikely to approve a change of control where they receive no direct benefit. The structure is more commonly used for significant equity injections which result in the issue of new securities.