Context: Pressures driving consolidation

Small and medium authorised deposit‑taking institutions (ADI) in particular are grappling with increased competition from alternative (often digital) financial services providers and the rising cost of doing business, driven by regulatory compliance and technology costs and the increasing ease by which customers can change between products. Consolidation aims to generate enhanced efficiencies for the merged entity, maximising financial performance and allowing it to invest more in the business (e.g. IT systems) and to price more competitively.

The competition challenges facing small and medium-sized banks is recognised by Government. On 8 July 2024, the Federal Treasurer requested the Council of Financial Regulators (CFR), in consultation with the Australian Competition and Consumer Commission (ACCC), to conduct a review of the small and medium-sized banking sectors to examine their role and state in providing competition, the regulatory and market trends affecting their competitiveness and the current and potential future sources of and barriers to competition. Their final report is expected to be submitted by 1 July 2025.

While legislative reform resulting from the review may assist some banks, it is likely that consolidation in the sector will continue given the number of small and medium sized banks in the market and the other pressures they are facing.

The Transfer Act merger regime

The Transfer Act enables a full or partial transfer of the members, employees, assets and liabilities of one ADI (the 'transferring entity') to another (the 'receiving entity'). APRA must approve the use of the regime, and it is typically not used for larger transaction. The regime is also often used for mutual mergers in the life insurance industry.

Mergers under the Transfer Act regime have characteristics that differ from traditional M&A transactions, including:

• APRA and Treasurer approvals: APRA oversees and ultimately must approve any merger under the Transfer Act. Engagement with APRA in relation to proposed mergers should occur early, and in an open, cooperative and constructive manner. APRA is likely to be closely involved in reviewing and commenting on draft merger documentation and post-merger plans. Certain information to be provided to APRA is prescribed by regulatory instrument, including details that must be set out in a series of letters to APRA. Approval of the Treasurer is also required under other Commonwealth legislation.
• Merger statement approved by APRA: The merger is documented in a formal statement, which upon approval by APRA gives statutory effect to the matters specified in the statement. Those matters are taken (by force of law) to happen or be the case, in accordance with the statement. The statement will contain standard provisions to facilitate the merger e.g. overriding contractual restrictions on assignment or change of control or any contractual requirements to give notice of the merger to third parties, and specifying that members of the transferring entity become members of the receiving entity. The statement can also deal with matters specific to the transaction, such as providing that constitutional provisions are amended in a particular way.
• Member approval: The merger may require approval by 75% of the members of each ADI. Prior to the meeting, each ADI must issue a member information booklet, approved by APRA, which (among other things) sets out details of the proposed merger. It is therefore important to have in place an appropriate member engagement, communication and consultation strategy.
• Certificate of transfer issued by APRA: Once APRA approves the transfer, it must issue a certificate of transfer which sets out details of the merger. The transfer is deemed complete once the certificate of transfer comes into force, at which point the receiving entity assumes ownership of the transferring members, assets and liabilities of the transferring entity. If the transferring entity is left without any assets or liabilities, it is typically wound up.
• Purpose of due diligence: Reciprocal due diligence by each merger party is critical to ensure each party understands the other's business (and any risks) so as to properly assess the impact the merger will have, whether it is in best interests of the entity and any strategies or plans that should be put in place post-merger. Unlike traditional M&A, depending upon the proposed deal structure, parties that are proposing to merge in this way may be less able to address issues identified in diligence by way of an adjustment of transaction value or terms – in many ways, this sharpens the focus of the due diligence exercise. It is critical to develop a risk-based due diligence scope that is aligned to commercial and strategic objectives. The role of the merger statement in addressing certain issues identified in due diligence is also key.
• Regulatory and tax requirements: The regulatory compliance and tax position of the merged entity must be considered in light of the merger mechanics, including in relation to Australian financial services licensing and Australian credit licensing requirements. Regulatory engagement is critical. For example, the Australian government has recently introduced legislation to overhaul Australia's merger control regime – MinterEllison's Competition team summarised those reforms. The regime specifically addresses transactions under the Transfer Act. In particular, the Transfer Act will be amended to provide that a transfer of a business, shares or internal transfer certificate under the Transfer Act is an acquisition for the purposes of the new mandatory merger control regime (it will continue to be the case that compulsory transfers under the Act do not need to be notified). Assuming the reforms are passed and the regime commences on 1 January 2026, parties will need to consider whether the transaction is required to be notified to the ACCC.
• Selection of appropriate merger partner: Given the effect of a Transfer Act merger in creating a truly merged entity, particular factors require consideration when selecting an appropriate merger partner that differ from traditional M&A deals:

Relative size: What is the relative size of the merger partner? While historically many mergers involved larger entities absorbing smaller players, this has changed in recent years and now many mergers are mergers of equals (with reference to their size).

Values: Does the merger partner share similar or complementary corporate and social values? Choosing a partner that shares similar or complementary values means that the merged entity is more likely to be cohesive and successful in achieving its strategic objectives.

Potential for scale and growth: Are the business synergies such that the value proposition of the merged entity will be enhanced?

Operational alignment: Careful consideration must be given to how the merged entity will be run in a practical sense to ensure there is alignment, including:

head office location(s);

representation on the governing board and senior management team; and

branding; and

strategic objectives

A merger between a non-mutual and a mutual would raise additional issues, in particular as to potential demutualisation.

Key implications

Before investing in the development of a detailed merger proposal it is important to have clarity of your own commercial and strategic objectives, including the key attributes required of a merger partner.

The transaction strategy must be designed having regard to the particular legal process and nature of a merger under the Transfer Act, which differs from traditional M&A transactions. The legal mechanics involved impact transaction structuring, due diligence, transaction documentation and stakeholder engagement strategies. It is important to obtain legal advice early in the process.

Early and ongoing regulatory engagement with APRA, ASIC, the ACCC and ATO is critical.

Please reach out at any time to discuss how these issues may impact your organisation.