Australian takeover laws are essential for the healthy functioning of equity markets and the Australian economy. This article explains the main principles and basic concepts underpinning takeover laws in Australia. The article also covers the key features of the most common types of control transactions.
Main principles underpinning Australian takeover laws
Australian takeover laws govern the acquisition of control of listed Australian companies, managed investment schemes and unlisted Australian companies with more than 50 members.
Australian takeover laws are set out in the Corporations Act, primarily Chapter 6.
These are designed to further three main takeover principles:
- the acquisition of control takes place in an efficient, competitive and informed market;
- target shareholders have a reasonable time to consider a control proposal and know the identity of the proponent, and
- target shareholders are all treated equally under any control proposal.
The basic concepts
The Corporations Act uses a number of basic concepts to apply the three main principles underpinning Australian takeover laws.
The '20% rule' or 'general prohibition' is the first basic concept and the most important.
The 20% rule provides that a person cannot acquire voting securities if that acquisition would result in that person's, or any other person's, voting power in the company or managed investment scheme exceeding 20%, unless the acquisition is through one of the exceptions.
The 20% rule is a broad prohibition with a number of anti-avoidance elements.
The second basic concept is known as 'voting power'.
Voting power is the percentage of all votes attaching to voting securities in which a person and all of their associates have a relevant interest.
The 20% rule uses the concept of voting power to extend its application to not just a single person, but to groups of people acting together or who control or are controlled by the other.
The third basic concept is known as a 'relevant interest'.
A person will have a relevant interest in voting securities if they have some form of direct or indirect control over voting or disposing of those securities, including if they:
- own the securities;
- have the power to exercise, or control the exercise of, a right to vote attached to the securities; or
- have the power to dispose of, or control the exercise of a power to dispose of, the securities.
The 20% rule uses the concept of a relevant interest to extend its application beyond simply owning voting securities and to measures of control outside of ownership.
The fourth basic concept is known as 'association'.
Associates are broadly all persons who are acting together in relation to control of a company or managed investment scheme, including:
- entities in a single corporate group;
- persons acting, or proposing to act, in concert in relation to the affairs of the company or managed investment scheme; or
- persons who are party to an agreement for the purpose of controlling or influencing the board or the affairs of the company or managed investment scheme
The concept of association is used when calculating voting power and is one of the ways in which the 20% rule extends its application to not just a single person, but to groups of people acting together.
Exceptions to the 20% rule
The basic concepts described above effectively force someone who wants to acquire control of a company or managed investment scheme to only do so through one of a limited number of exceptions.
Those exceptions are designed to ensure that the three main principles are followed.
The three most common exceptions to the 20% rule that are relied on by persons who want to acquire control of a company or managed investment scheme are
- an on-market takeover bid;
- an off-market takeover bid; and
- a scheme of arrangement.
In common language, all three of these types of control transactions are described as a 'takeover'.
There are other exceptions to the 20% rule, including target securityholder approval, 'creeping' acquisitions of no more than 3% voting power in a six month period, and acquisitions as a result of rights issues or underwriting arrangements. However, those methods are less effective in reaching 100% ownership.
Key features of an off-market takeover bid
Under an off-market takeover bid, the bidder makes individual offers directly to all target securityholders to acquire their securities.
The offers must all be on the same terms, including the offer price.
The offers are contained in a document that is mailed to target securityholders called a 'bidder's statement'.
The bidder's statement generally contains all information known to the bidder that is material to a target securityholder's decision whether to accept the offer, as well as specified information including:
- information about the bidder;
- how the bidder will fund any cash consideration;
- details of the bidder's intentions regarding the target's business, assets and employees; and
- details of any acquisitions of target securities by the bidder or its associates in the previous four months.
The target must respond to the bidder's statement in a document that is mailed to target securityholders called a 'target's statement'. The target's statement contains the target directors' recommendation on whether to accept the offer, and usually an independent expert report valuing the target securities.
Other key rules applicable to an off-market takeover bid include:
- the offer price may consist of any form of consideration including cash, listed or unlisted securities, or a combination of these;
- the offer price cannot be lower than the price the bidder or any of its associates paid to acquire a target security in the previous four months;
- the offer price may be increased after the offer is made and, if increased, those who have already accepted the offer are entitled to be paid the increased price;
- an off-market takeover bid can be made for a listed or unlisted (public) target company or a managed investment scheme;
- the offers can be subject to conditions, although some conditions are prohibited such as a maximum level of acceptances or conditions that rely on the bidder's subjective opinion or that can be controlled solely by the bidder; and
- the offer period must be at least 1 month and not more than 12 months; and
- unless the target consents otherwise, the offers cannot be sent to target shareholders and open for acceptance until 14 days after the bidder's statement is first given to the target (which commonly occurs on announcement of the offer).
Key features of an on-market takeover bid
Under an on-market takeover bid, the bidder appoints a stockbroker to stand in the market on ASX and purchase target securities on behalf of the bidder.
The rules concerning the content of bidder's statements and target's statements for an on-market takeover bid are basically the same as for an off-market takeover bid.
Most of the other key rules concerning an on-market takeover bid are the basically same as for an off-market takeover bid. However, there are some critical differences:
- on-market takeover bids rely on the ASX trading system, therefore they cannot be used to acquire unlisted target companies;
- as purchases take place on ASX, the offer price must be all cash;
- the offer cannot be subject to any conditions;
- the offer price may be increased after the offer is made however, if increased, those who have already accepted the offer are not entitled to be paid the increased price; and
- the offer is immediately open for acceptance after the bidder's statement is publicly announced by the bidder (there is no 14 day waiting period).
Those differences mean that on-market takeover bids are far less common than off-market takeover bids. But the speed in which an on-market takeover bid can be launched and opened is superior.
Key features of a scheme of arrangement
Under a scheme of arrangement, a target company seeks the approval of its shareholders and the Court for the compulsory transfer of all target shares to a bidder in return for consideration paid by the bidder to the target shareholders.
Under a scheme, the target (with the assistance of the bidder) prepares a disclosure document known as a 'scheme booklet'. The scheme booklet generally contains all information known to the target and the bidder that is material to a target shareholder's decision as to how to vote on the proposed scheme.
Broadly speaking, the scheme booklet contains all of the information that is typically included in both a bidder's statement and a target's statement, and an independent expert report valuing the target shares.
The target lodges a draft of the scheme booklet with ASIC for review, following which the target seeks the Court's approval to mail the scheme booklet to all target shareholders and to convene a meeting of target shareholders to vote on the scheme.
For the scheme to be approved, a resolution in favour must be passed at meetings of each class of target shareholders by both:
- 75% of the votes cast on the resolution; and
- more than 50% in number of the target shareholders voting on the resolution (in person or by proxy).
The bidder and its associates usually refrain from voting on the resolution to approve the scheme.
If target shareholders approve the scheme, the target will then seek Court orders approving the scheme, following which the scheme is implemented by the transfer of all target shares to the bidder in return for payment of the consideration.
Other key features of a scheme of arrangement include:
- a scheme has an 'all or nothing' outcome, meaning that the bidder has certainty that it will either reach 100% ownership if the scheme is approved or not acquire any target shares under the scheme if it is not approved;
- the voting approval thresholds for a scheme are generally considered lower thresholds than the 90% of all securities required to reach compulsory acquisition (and therefore 100% ownership) following an on-market or off-market takeover bid;
- as a scheme is a target-driven process requiring the co-operation of the target, it is only suitable for a 'friendly' acquisition of a target company;
- a scheme can be used to acquire a listed or unlisted target company, but cannot be used to acquire a managed investment scheme;
- a scheme is subject to fewer prescriptive rules than a takeover bid, allowing greater flexibility to include ancillary features such as asset transfers and capital reductions, or to treat different target shareholders differently (but this gives rise to separate classes in voting to approve the scheme and is uncommon);
- a scheme can be subject to conditions, and whilst the same rules regarding conditions prohibited in off-market takeover bids do not strictly apply to schemes, it is uncommon to see conditions in schemes that rely on the bidder's subjective opinion or that can be controlled solely by the bidder;
- a scheme has a different timetable to a takeover bid, but overall there is little difference in the timing to reach 100% ownership, with a scheme offering a more certain timetable;
- it is more difficult to make changes to the terms of a scheme (such as increasing the consideration in response to a rival offer) than under a takeover bid. Changes in terms generally require to Court approval, an adjournment of scheme meeting, and supplementary disclosures;
- if the bidder already holds a large percentage of target shares, this may be a disadvantage under a scheme because those shares will not be voted to approve the scheme and therefore enlarge the effective vote of all other target shareholders on the scheme resolution, potentially making it more difficult to pass by the requisite majorities; and
- ASIC is indifferent as to whether a takeover is effected through a scheme or a takeover bid, but ASIC has an enhanced role in a scheme as the Court may not approve the scheme unless ASIC has given the Court a statement that ASIC does not object to the scheme.
Those features mean that schemes of arrangement are becoming increasingly more popular in recent years as the preferred way in which 'takeovers' of Australian listed companies are effected.