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Transaction structures

  • The most commonly used takeover structures are: an off-market takeover bid (for either a company or trust), a scheme of arrangement (for a company) and a trust scheme (for a trust).
  • The majority of friendly deals are effected via a scheme of arrangement or trust scheme, largely because of their ‘all-or-nothing’ outcomes.
  • Other, less commonly used takeover structures include: a selective capital reduction (for a company) and a securityholder-approved transaction (for a company or trust).

6.1 Commonly used structures

By far the most common structures which are used to acquire control of an ASX-listed company or trust are:

  • an off-market takeover bid, in the case of either a company or trust (discussed in section 7);
  • a scheme of arrangement, in the case of a company (discussed in section 8); and
  • a trust scheme, in the case of a trust (discussed in section 9).

An off-market takeover bid can be used for either a friendly or hostile deal, whereas a scheme of arrangement and trust scheme can only be used in a friendly deal. A friendly deal is one that has the support of the target’s board of directors. In Australia the majority of friendly deals are effected via a scheme of arrangement or trust scheme, rather than a takeover bid, largely because of its ‘all-or-nothing’ outcome. If the relevant scheme is approved, the bidder will acquire 100% of the target but, if it is not approved, the bidder will not acquire any target securities. In contrast, under a takeover bid, the bidder can only be certain of obtaining 100% if it reaches the 90% compulsory acquisition threshold, but to get to that stage it is usually necessary to declare the bid unconditional first.

A number of ASX-listed entities (predominantly in the property trust sector) trade as stapled entity structures. These structures comprise one or more entities which are run as a combined economic unit and the securities of which are quoted jointly. Such securities are known as ‘stapled securities’. The common form of stapled entity structure consists of a company and a unit trust, where each share issued by the company is stapled to each unit issued by the trust such that they cannot be traded separately – hence the term stapled security. Other forms of stapled structures which are currently (or have previously been) listed on the ASX include two or more unit trusts, and two or more unit trusts plus a company.

A person seeking to acquire control of a stapled entity structure needs to acquire all entities within the structure. This can be achieved via simultaneous and inter-conditional takeover bids for all entities within the stapled structure, or simultaneous and inter-conditional scheme(s) of arrangement and/or trust scheme(s). It is not feasible to make a simultaneous takeover bid for one entity within a structure, and to propose a scheme of arrangement or trust scheme for another.

6.2 Bid vs scheme structure

The following table contains an overview of the differences between an off-market takeover bid and a scheme of arrangement as the structure for acquiring 100% of the shares in an ASX-listed Australian company. For simplicity, the table looks only at company targets (rather than trust targets as well). The table does not canvass all the differences between the bid and scheme structures, but focuses on those which are likely to be decisive in choosing between the two approaches. It does not address taxation or accounting differences.


Off-market takeover bid

Bidder’s initiative and control, subject to the terms of any bid implementation agreement with the target.

Written offer by bidder to purchase all shares held by target shareholders.

Can be conditional (ie. to produce an ALL OR NOTHING result), or unconditional to get as many target shares as bidder can, then subsequently seek to move to compulsory acquisition thresholds.

Scheme of arrangement

Target’s initiative and control, subject to the terms of a scheme implementation agreement with the bidder.

Target shareholder-approved and court-approved arrangement between target and its shareholders to either transfer shares to bidder in exchange for specified consideration or have their shares cancelled in exchange for specified consideration.

ALL OR NOTHING proposition: compulsory acquisition irrelevant.


Off-market takeover bid

Compulsory acquisition requires:

  • 90% relevant interest in target shares; and
  • acquisitions of 75% of non bidder–held shares by close of bid.

Assuming that bidder commences with no target shares, 90% relevant interest test is the only relevant threshold.

Inaction (eg dead and lost shareholders) = Rejection

Scheme of arrangement

Approval by a vote of shareholders by at least:

  • 75% of votes cast; and
  • a majority by number of all target shareholders present and voting (in person or by proxy).

Bidder is usually treated as a separate class, assuming it owns target shares. Court has discretion to waive the majority by number test.

Inaction = Acquiescence (ie less support required at shareholder meeting)

A scheme involves a lower target shareholder ‘approval’ threshold than a takeover bid, because of the 75% voting requirement versus the 90% compulsory acquisition threshold plus the fact that voter turnout at a scheme meeting is often substantially less than 100%.

Role of regulators and court

Off-market takeover bid

No court involvement unless a challenge to bid by ASIC. All other challenges to Takeovers Panel, not courts. ASIC has no formal review role.

Scheme of arrangement

Two court hearings: first, to order the convening of the target shareholder meeting and to approve despatch of the scheme booklet; and second, to approve the scheme itself after the shareholder meeting.

ASIC has formal review role and is required to confirm to court whether it has any objections to scheme.


Off-market takeover bid

Bidder prepares the offer document called a Bidder’s Statement, which includes offer terms, funding sources, intentions for target and all other information known to bidder which is material to target shareholders.

Target responds with a Target’s Statement which contains the target directors’ recommendation and all information known to the directors which target shareholders would reasonably require to make an informed assessment whether or not to accept the takeover offer.

Scheme of arrangement

Target prepares scheme booklet (with notice of court-ordered meeting): must contain certain prescribed information. ASIC demands same level of disclosure as a Bidder’s Statement and Target’s Statement combined.


Off-market takeover bid

Bid may be subject to conditions, though there are restrictions on what conditions can be imposed (eg a condition cannot be within bidder's control). Typical conditions include minimum acceptance condition (eg 90% compulsory acquisition threshold), no material target transactions, no 'prescribed occurrences’ in relation to the target, and receipt of regulatory approvals.

Scheme of arrangement

Courts are reluctant to approve schemes that are conditional. However, it is permissible and usual for a scheme implementation agreement between a bidder and target to be subject to conditions that must be satisfied or waived before the scheme is approved by the court.

Expert’s report

Off-market takeover bid

Target's Statement only required to include independent expert’s report if bidder has 30% or more of target shares, or bidder and target have one or more common directors.

Scheme of arrangement

Independent expert’s report practically always included in scheme booklet, and ASIC and the court expects inclusion of report.

Different treatment among holders

Off-market takeover bid

All target shareholders must be treated equally.

Scheme of arrangement

Target shareholders can be treated differently if this is disclosed, though this could create separate shareholder classes requiring separate votes.

Flexibility of structure

Off-market takeover bid

Less flexible than a scheme in that related transactions cannot be incorporated, and that the offer can be varied only to increase offer price and/or extend offer period. However, increase to offer price or extension of offer period is a straightforward process.

Scheme of arrangement

More flexible than a takeover bid in that related transactions can be incorporated, and deal can be varied in any manner. However, any variation following despatch of shareholder documents normally requires court approval.


Off-market takeover bid

Minimum of about two to three months.

Scheme of arrangement

Minimum of about two to three months.

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.

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