The past year has seen a large volume of merger and takeover activity including a number of significant individual takeovers. This activity has affected all industries, in particular the banking and insurance sectors, and has been primarily fuelled by the perceived need by market participants to rationalize their industry and expand their market share in order to survive in the global market place.

This high level of activity is expected to continue in the short term if not increase, particularly in light of the proposed capital gains tax changes announced by the federal government on September 16 1999 in relation to 'scrip for scrip' takeovers and mergers. Currently, capital gains tax is levied on the disposal of the target's share even though no cash is received by target shareholders. The proposed changes will, however, provide capital gains tax rollover relief on the disposal of the target's shares by them.

The most notable takeover that occurred in Australia over the last 12 months was the A$3.4 billion takeover offer made by insurer and financial services giant, AMP in late 1998 for fellow insurer GIO Australia.

The AMP/GIO takeover was arguably one of the more bitterly fought takeover battles in recent history. Legal proceedings brought by GIO against AMP in the federal court claiming a defective takeover documents delayed the takeover process for a few months. Once AMP's amended takeover documents were sent to GIO shareholders, GIO's board of directors strongly recommended to GIO shareholders that they reject the bid. This recommendation was supported by an independent expert report which valued GIO's shares above the bid price.

AMP eventually acquired only 57% of GIO's shares (not 100% as it originally set out to do) and has yet to realize the synergistic benefits that it believed it would obtain from the transaction.

However, the 1998/1999 results of GIO's reinsurance division, released 7 months after the takeover was completed, revealed losses of up to A$800 million, in stark contrast to the profits that that division was forecast to make by the board of GIO and as set out in the independent expert report. These results, as could be expected, caused both the AMP and GIO share price to fall dramatically, at one point reaching an all time low.

The interesting twist to this saga is that an unprecedented class action has recently been commenced by those GIO shareholders who did not accept the AMP offer against the GIO board members and their independent expert. Their claim, in broad terms, is that the directors engaged in misleading and deceptive conduct because they did not have reasonable grounds for making the relevant profit forecasts. The launching of this class action, irrespective of the outcome, will clearly make directors nervous when making recommendations to reject takeover bids in the future.

And in any case, it is likely that the combination of the tax changes mentioned above and the class action will make it easier for hostile scrip takeover bids in Australia to succeed, whereas in the past, they have had much more limited success than their cash counterparts.

For further information on this topic please contact Danny Simmons or Mark Pistilli 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]).
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