The rules are at times technical, but the acquisition process is usually quite certain.
The Australian takeover rules under the Corporations Act regulate acquisitions of interests in Australian companies or trusts listed on the ASX and unlisted Australian companies with more than 50 members (regulated entities). While the rules are at times technical, the acquisition process is usually quite certain and fundamentally the same methods of acquisition have been used in the last 20 or so years.
A person is prohibited from acquiring (except pursuant to a limited number of exceptions) a relevant interest in a regulated entity if, because of the transaction, any person’s voting power in the regulated entity increases:
- from 20 percent or below to more than 20 percent; or
- from a starting point that is above 20 percent and below 90 percent.
A person’s voting power is broadly their relevant interest plus their associates’ relevant interests in voting securities in the regulated entity.
The “relevant interest” concept is broad. Basically a person has a “relevant interest” in securities if they hold the securities, or have the power to control the exercise of votes attached to those securities or the disposal of the same. It can be traced through corporate groups and arrangements with third parties.
The takeover rules apply to acquisitions whether by Australian residents or foreign investors. Offshore acquisitions can have downstream Australian takeover consequences, particularly where the overseas target has, directly or indirectly, voting power of more than 20 percent in an Australian regulated entity.
The rules are designed to ensure that the market for control of regulated entities is efficient, competitive and informed, and that all security holders are afforded reasonable and equal opportunities to participate in proposed acquisitions and are given adequate information and time to consider proposals under which a person may acquire a substantial interest in a regulated entity.
There are a number of exceptions to the takeover prohibition. These include off-market and on-market takeover bids, court approved schemes of arrangement, target shareholder approved acquisitions, selective reductions of capital and three percent acquisition creep every six months. In addition, ASIC has power to exclude or modify the operation of the takeover rules.
If 100 percent control is the objective, there are two types of compulsory acquisition (leaving aside a scheme of arrangement or a selective reduction of capital which are by their nature compulsory), but generally these minority squeeze-outs do not apply until the acquirer has a minimum of a 90 percent relevant interest in relevant classes of the target’s shares.
Acquisitions of voting power in a listed regulated entity of, or beyond, five percent also require disclosure to the ASX and the relevant entity. The Takeovers Panel also generally expects disclosure of economic interest held through derivatives, in the context of a control transaction, where the combined swap long position and physical position exceeds five percent.
A number of regulatory bodies are involved in the takeover process:
- ASIC, which regulates compliance with the Corporations Act and has power to modify and grant exemption from compliance with provisions of the Corporations Act. ASIC can post vet bidders’ and targets’ statements and reviews scheme documents and statements made in the conduct of a takeover under its Truth in Takeovers policy.
- The Takeovers Panel (based on the UK Takeover Panel), which is responsible for reviewing conduct during takeovers both in terms of whether the conduct complies with the letter of the law or is otherwise unacceptable (ie. offends the spirit of the takeover rules). It has power to make a broad range of orders if it determines that unacceptable circumstances exist.
- The ASX, which, in part, regulates what listed entities are permitted to do.
- The Foreign Investment Review Board (FIRB)/Treasury, which considers applications for foreign investment approval.
- The Australian Competition and Consumer Commission (ACCC), which regulates our anti-trust laws.
ASIC and the ASX also monitor compliance by listed entities with their continuous disclosure obligations.
Tax – scrip relief
In relation to Australian income tax, target security holders who would otherwise be subject to Australian capital gains tax on selling their shares may qualify for CGT roll-over relief (scrip for scrip relief) where they receive equivalent securities in the purchasing entity in exchange for their target securities.
This scrip relief effectively means that the target security holders will defer any capital gains tax liability until they dispose of their securities in the purchasing entity. One of the key requirements for scrip for scrip relief to apply is that the purchasing entity must, as a result of the arrangement, acquire 80 percent or more of the voting securities in the target entity.