• In an important and welcome decision in the context of public M&A transactions, the Court of Appeal confirms that the mere fact that target shareholders vote in favour of a scrip scheme of arrangement does not make those shareholders ‘associates’ – something more is required.
  • Reverse takeovers will not necessarily result in a change of control of the bidder.
  • The Takeovers Panel should issue a guidance note confirming the circumstances in which bidder shareholder approval may be required in relation to a reverse takeover.


In 2009, IOOF Holdings Ltd (IOOF) acquired Australian Wealth Management Ltd (AWM) by way of a reverse takeover, which was effected by an all-scrip scheme of arrangement.

Before the scheme of arrangement, IOOF had an ‘open register’ – its only substantial holder (Bendigo and Adelaide Bank Ltd) had a 13.2% stake and AWM itself had a 2.1% stake in IOOF.

Following the successful implementation of the reverse takeover:

  • 70% of the enlarged share capital of IOOF was held by (former) AWM shareholders, and
  • there were only two substantial holders in IOOF: Bendigo and Adelaide Bank whose stake was diluted to 7.8% and a former AWM shareholder with 12.11%. 

IOOF was a party to a 2006 share sale and purchase agreement under which IOOF had acquired outright ownership of Perennial Investment Partners Ltd (PIPL). That agreement contained an ‘earn out’. The PIPL vendors were entitled to an accelerated payment if a ‘change of control’ of IOOF occurred. The ‘change of control’ trigger was expressed as follows:

In relation to the shareholding in IOOF where a person and that person’s Associates together become entitled to more than 40% of the voting shares in IOOF.

The PIPL vendors argued that a change of control of IOOF had occurred as a result of the reverse takeover of AWM by IOOF. This was despite the fact that no one shareholder, or group of shareholders, had control of IOOF before or after the reverse takeover.

Specifically, the PIPL vendors argued that all of the AWM shareholders who had voted in favour of the scheme of arrangement (the Voting Members) were, merely by virtue of so voting in favour, ‘associates’ and that, as they held in aggregate 48% of the enlarged share capital of IOOF, this triggered the change of control provision (noting also that AWM itself held 2.1% of the IOOF shares).

New South Wales Court of Appeal decision

The New South Wales Court of Appeal unanimously rejected the argument that AWM and the Voting Members were associates and that the reverse takeover resulted in a change of control.

The Court of Appeal concluded there was no basis for suggesting that AWM and the Voting Members had entered into, or proposed to enter into, the scheme of arrangement for the purpose of controlling or influencing the conduct of IOOF’s affairs (as required by one limb of the definition of ‘associate’ in the Corporations Act2001 (Cth)).

In this regard, the Court of Appeal concluded that:

  • the only purpose of AWM was, as required by the scheme implementation deed between AWM and IOOF, to seek authority to transfer its members’ shares to IOOF for the scheme consideration, and
  • in the case of the Voting Members, it was not established that their purpose was other than to act in what they perceived as their self-interest as recommended by their directors and the independent expert.

The Court of Appeal also concluded that there was no basis for suggesting that the Voting Members and AWM were acting in concert in relation to IOOF’s affairs or in relation to the acquisition by the Voting Members of IOOF shares (as required by a separate limb of the definition of ‘associate’ in the Corporations Act2001 (Cth)).

In this regard, it was noted that there was no evidence of any communication of voting intentions by any of the Voting Members to AWM in advance of the vote being cast and the Voting Members had nothing to do with any of the steps taken by AWM in advance of the scheme meeting.

The Court of Appeal stated:

The role of each Voting Member was complete after his, her or its vote had been cast, and that vote was not known by AWM until it was cast or until the member’s proxy was appointed.1


The decision should put to rest the misconception that an all-scrip reverse takeover that results in former target shareholders emerging with more than 50% of the shares in the bidder will constitutea change of control of the bidder.

Instead, for such a reverse takeover to result in a change of control of the bidder, it is necessary to identify a block of shareholders who are acting in concert, or who have an agreement, arrangement or understanding which enables them, to control the bidder.

The decision of the Court of Appeal is an important one, particularly given that, following the 2009 decision of the Review Panel of the Takeovers Panel in relation to the Gloucester/Whitehaven transaction2, it appears to be the Panel’s position that, if a reverse takeover would result in a change of control of the bidder, the transaction should be conditional on approval by the bidder’s shareholders.

Reverse takeovers are more common than some may think. Since 1 January 1998, there have been more than 30 announced deals involving the acquisition by a smaller ASX listed company of a larger ASX listed company.

The decision of the Court of Appeal serves as a timely reminder that the Takeovers Panel has yet to issue definitive guidance on exactly when it expects bidder shareholder approval to be sought in relation to a reverse takeover. Such guidance would be most welcome by the Australian takeover community.