Safe Harbour for Downstream Acquisitions
Safe Harbour for Downstream Acquisitions
The Corporate Law Economic Reform Programme Act 1999 involved some rationalization of anomalies in the Takeovers Code provisions (see also Government Overhauls Takeover Law).
One of the changes relevant to international merger and takeover activity was the widening of the exemption to the primary takeover prohibition of downstream acquisitions. Prior to the act, the exemption was limited to acquisitions made under a takeover scheme or takeover announcement made in accordance with the Takeovers Code, and the upstream company had to be a listed Australian body. The rationalization has expanded the exemption to include an acquisition of shares in an upstream corporation wherever it is incorporated, provided that it is listed on a foreign stock exchange approved in writing by the Australian Securities Investment Commission (ASIC), as the body responsible for administering the Corporations Law.
The reasoning behind the expansion of the downstream acquisition exemption was based largely on:
- international comity considerations;
- an emphasis on Australia's participation in international capital markets; and
- the view that a downstream acquisition which is merely incidental to the main objective of acquiring the upstream body corporate should not inhibit the upstream acquisition.
Prior to the introduction of the act, and until January 30 2001, the acquirer of shares in the foreign upstream corporation needed to make an application to ASIC to convince it to use its discretionary power to modify the Corporations Law in order to avoid the upstream acquisition resulting in a breach of the Takeovers Code. ASIC's policy regarding downstream acquisitions is set out in ASIC Policy Statement 71.
On January 30 2001, nearly 11 months after the introduction of the act, ASIC issued a statement setting out which foreign stock exchanges it has approved for the purpose of the new expanded downstream acquisition exemption. The 14 foreign bodies that it has approved are:
- New York Stock Exchange Inc;
- American Stock Exchange LLC;
- NASDAQ Stock Market Inc;
- London Stock Exchange plc;
- Tokyo Stock Exchange;
- Deutsche Borse AG (Frankfurt Stock Exchange);
- Paris Bourse SA (Paris Stock Exchange);
- Toronto Stock Exchange Inc;
- Swiss Stock Exchange;
- Euronext Amsterdam NV (Amsterdam Stock Exchange);
- Italian Exchange SpA (Milan Stock Exchange);
- Stock Exchange of Hong Kong Limited;
- Singapore Exchange Limited; and
- Kuala Lumpur Stock Exchange.
As a result of ASIC's approval, if a person acquires shares in a foreign upstream corporation and those shares are listed on the main board of the stock markets conducted by the above foreign bodies, the acquirer of the shares need not worry about obtaining relief from ASIC if the target has downstream interests in Australian corporations.
The only qualification to this new exemption is that an acquirer falling within the strict construct of the exemption may still risk a declaration of unacceptable circumstances by the Corporations and Securities (Takeovers) Panel if (i) the shares in the downstream company comprise a substantial part of the assets of the upstream body (eg, over 50%), or (ii) control of the downstream company is the main purpose of the upstream acquisition (ASIC believes that a recent unsuccessful takeover bid for shares in the downstream company may indicate such a purpose).
In such circumstances, the upstream acquisition could be viewed as a method of gaining control of the downstream company while avoiding compliance with the Australian takeovers legislation. If the Corporations and Securities (Takeovers) Panel finds that the upstream acquisition does amount to unacceptable circumstances, it would then be able to use its powers to make a range of orders (for detailed information see Government Overhauls Takeover Law).
ASIC has stated that the approval of the above foreign bodies is on an interim basis pending public consultation and further experience administering the exemption. ASIC will review its policy on approving foreign bodies conducting a stock market after six months.
ASIC has left the door open for other foreign bodies that conduct stock markets to apply for approval. Prospective bidders may also apply, although the assistance of the foreign body that conducts the relevant stock market is recommended. ASIC will consider applications on a case-by-case basis and will take into account whether the body:
- is a member of the the International Federation of Stock Exchanges;
- is internationally recognized (ie, it has concessional treatment and recognition from other jurisdictions);
- has rules which meet the Australian Stock Exchange Limited's listing and quotation, market information, regulatory and trading, and settlement principles;
- is a key world trading centre; and
- is overseen by a government regulatory authority.
The introduction of ASIC-approved foreign bodies has not removed the ability of an acquirer of shares in a foreign upstream corporation whose shares are not listed on a stock market conducted by an approved body to seek specific relief in accordance with the principles set out in ASIC Policy Statement 71. This includes where:
- control of the downstream company is not one of the main purposes of the upstream acquisition;
- the shares in the downstream company do not comprise a substantial part of the assets of the upstream body;
- the acquisition is legal in the jurisdiction in which it takes place; and
- regulations apply to the upstream acquisition that are comparable to Australian takeover regulations.
The approval by ASIC of the foreign bodies that conduct stock markets has given some certainty to acquirers of shares in overseas jurisdictions which have a downstream acquisition effect in Australia. Not only will this avoid the need to make specific applications to ASIC (thereby avoiding added time and expense), but it also gives effect to the concept of international comity. At the same time, however, ASIC has made it clear that the exemption is not to be used as a mechanism to avoid complying with the terms and spirit of the Takeovers Code.
For further information on this topic please contact Jamie Restas or Linda Morris at Atanaskovic Hartnell by telephone (+61 2 9777 7000) or by fax (+61 2 9777 8777) or by e-mail ([email protected] or [email protected]). The Atanaskovic Hartnell web site can be accessed at www.ah.com.au.
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