Acquisitions of shares and businesses in Australia are regulated by:
- the Corporations Act;
- the Foreign Acquisitions and Takeovers Act (FATA);
- the Competition and Consumer Act;
- the Listing Rules of the ASX; and
- legislation affecting the relevant industry of the corporation or business being acquired.
Depending on the method of acquisition, several issues may need to be considered when acquiring shares or businesses in Australia.
For Australian companies with less than 50 shareholders, it is possible to effect an acquisition by way of private agreement or treaty, usually in a share sale agreement) between the selling shareholders and the purchaser. The document will typically set out the shares in the target being sold, the price to be paid, the conditions of sale, warranties and indemnities in favour of the purchaser and restraints of trade.
Acquisitions of substantial interests in Australian companies are regulated by the takeover provisions of the Corporations Act. Subject to a few exceptions (including unlisted companies with 50 or fewer members), if a person wishes to acquire a ‘relevant interest’ in more than 20% of the issued share capital of a company, that person must make a takeover bid (unless otherwise via a scheme of arrangement or with the approval of target shareholders). The concept of ‘relevant interest’ covers a broad range of direct and indirect interests in securities and a person can reach the 20% threshold without becoming a registered holder of securities.
If a person acquires interests in more than 90% of the voting shares of a company under a takeover offer, the compulsory acquisition provisions may be used to acquire the balance, if certain criteria have been met. Compulsory acquisition provisions can be used in other circumstances where thresholds are met.
Schemes of arrangement
As an alternative to a takeover bid, it is common for Australian public companies to merge by way of scheme of arrangement. These schemes are highly regulated including the requirement for shareholder and Court approvals.
A scheme of arrangement is a statutory contract between the target company and its shareholders (and in some cases, option holders and creditors) to reconstruct the company’s share capital, assets or liabilities.
A scheme can be used to acquire a target company either by transferring all shares in the target to the bidder or cancelling all shares in the target except those held by the bidder.
A scheme cannot be effected without the target’s cooperation and for this reason, schemes are only used for friendly transactions. The target is required to produce the scheme booklet and convene the necessary meetings.
There is a recent trend in Australia for friendly transactions to be structured as a scheme of arrangement owing to the certainty it can provide. If target shareholders and the court approve a scheme, 100% control will pass to the acquirer by a fixed date. On the other hand, if the scheme fails, the target's current ownership structure continues.
Schemes also require a lower shareholder approval threshold (i.e. a majority of shareholders holding at least 75% if the votes voting in favour) to achieve full control, compared to the 90% compulsory acquisition threshold required for a takeover bid.
Reduction of capital
Sometimes a change of control may be achieved through a reduction of capital. Reductions of capital are regulated under the Corporations Act. A reduction of capital requires shareholder approval and must be fair and reasonable for creditors.
Other matters for consideration
There are other restrictions that may apply to a particular transaction.
Under the Corporations Act, substantial shareholding notices must be lodged with both the company and with the ASX when a 5% threshold is reached and updated notices must be lodged whenever the holding increases or decreases by 1% or more. The threshold relates to the number of votes attached to shares in which a person and their associates have a relevant interest. It may be reached before shares are actually acquired or transferred.
Under the Listing Rules of the ASX, there are provisions regulating various activities, including the sale of a company’s main undertaking or the issue of shares over a prescribed level which require shareholder approval and compliance with certain ASX requirements.
The Corporations Act also regulates the circumstances in which a company may financially assist a person to acquire shares in itself.
A company can only do this if:
- the financial assistance does not materially prejudice the company, the shareholders or the company’s ability to pay its creditors;
- or if the shareholders give their advance approval to the financial assistance.
Trading in securities while in possession of information that is not generally available to the public and that, if it were available, would have a material effect on the price of the securities is prohibited by the Corporations Act under insider trading provisions.