In brief

  • The Panel has rejected an application seeking to force a bidder for a foreign target to make a mandatory downstream bid for an Australian company controlled by the foreign target.
  • Although there is an applicable exemption from the 20% rule for such acquisitions, the Panel and ASIC have previously indicated that they will override the black letter of an exemption if a party’s purported reliance on it offends the spirit of the exemption.
  • Despite the Australian company comprising a substantial part of the assets of the foreign target, the Panel was not satisfied the proposal to acquire the foreign target was an artifice to obtain control of the (downstream) Australian company.  

In the recent Leighton Holdings Limited decision, the Review Panel of the Takeovers Panel has rejected an application which sought an order requiring a bidder for a foreign target to make a downstream takeover bid for an ASX-listed Australian company which was controlled by the foreign target.


HOCHTIEF AG (Hochtief), a German company listed on the Frankfurt Stock Exchange, holds 54.48% of the shares in Leighton Holdings Limited (Leighton). Relevantly, this holding represents a substantial part of the assets of Hochtief. Hochtief and Leighton have a number of corporate governance protocols in place between them, including in relation to information sharing, management and shareholding and decision making.

In March 2007, Actividades de Construcción y Servicios SA, a Spanish company listed on the Madrid Stock Exchange (ACS), became a substantial holder in Leighton when it acquired 25% of the shares in Hochtief.

ACS has announced an intention to acquire just over 50% of the shares in Hochtief either under a takeover bid or through on-market acquisitions. ACS has said it does not intend to vary the governance protocols between Hochtief and Leighton.

The Takeovers Panel application

Hochtief applied to the Panel for an order requiring ACS to make a takeover bid for Leighton at a fair cash price determined by an independent expert.

Leighton also applied to the Panel. It sought orders effectively committing ACS to maintain Leighton’s independence either through:

  • binding governance undertakings
  • limiting ACS’s voting power in Leighton to 20% (increasing by 3% every six months in accordance with the ‘3% creep exemption’), or
  • the same order as was sought by Hochtief.

The downstream acquisition exemption

The Corporations Act contains a relevant exemption to the restriction on acquiring an interest in more than 20% of the shares in an Australian company listed on the ASX. This exemption operates where the interest in the (downstream) Australian company is acquired as a result of the person acquiring shares in an upstream company listed on a prescribed foreign exchange (which includes the Frankfurt Stock Exchange) (the Downstream Acquisition Exemption).

As noted by the Panel in the Australian Pipeline Trust decision in 2006, the effect of the Downstream Acquisition Exemption is that control of a downstream company may pass with a change of control of an upstream company without the shareholders in the downstream company being given the usual takeover protections under the Corporations Act. Despite this, the Panel went on to caution that it is clear that Parliament was concerned that this exemption not be abused and the intent of Chapter 6 not be avoided.

Like many of its takeover policies, ASIC’s policy in relation to downstream acquisitions has not been updated since the significant CLERP reforms to Australia’s takeover laws back in 2000. Nevertheless, ASIC’s policy was that it would grant unrestricted relief (essentially in the same form as today’s Downstream Acquisition Exemption) if, among other things:

  • the shares in the downstream company did not comprise a substantial part of the assets of the upstream company (ASIC’s view being that a ‘substantial part’ normally meant more than 50% by value), and
  • control of the downstream company was not one of the main purposes of the takeover of the upstream company (ASIC’s view being that if the market value of the shares in the downstream company constituted more than 50% of the assets of the upstream company, it was likely that the proscribed purpose existed).

ASIC goes on to indicate that, if the above criteria are not met and the downstream shares represent more than 50% of the shares in the downstream company, ASIC would normally only grant the relief if the bidder for the upstream company makes a takeover bid for the downstream company.

Interestingly, the Panel indicated that it endorsed the tenor of ASIC’s policy during the 2009 Cape Lambert MinSec decision (noting that that decision involved quite different facts to the Leighton Holdings Decision).

Initial ASIC application

Before applying to the Panel, Hochtief applied to ASIC to seek to require ACS make a takeover bid for Leighton. ASIC declined this application on the basis that:

  • it would not grant relief to reverse the usual and intended effect of the Corporations Act. ASIC said it would not meet that intention to create an uncertain exemption, particularly in circumstances where ACS had already relied on the Downstream Acquisition Exemption when acquiring its initial 25% stake in Hochtief, and
  • it considered the Panel the appropriate forum to consider the issues raised.  

The Panel’s decision

The Initial Panel rejected the applications by Hochtief and Leighton. Hochtief (but not Leighton) appealed the Initial Panel’s decision to the Review Panel. That appeal was unsuccessful. In summary:

  • the Review Panel was not satisfied that ACS's proposal to acquire Hochtief was an artifice to obtain control of Leighton
  • although Hochtief’s market capitalisation is often less than the market value of its shareholding in Leighton, Hochtief has a substantial portfolio of other businesses which are material to its business portfolio
  • if successful, ACS's proposal will expose it to the risks associated with all of Hochtief's assets, including Leighton
  • ACS decided to proceed with the proposal principally in order to obtain financial consolidation of Hochtief and to obtain international business diversification into Germany, North America and the Asia-Pacific region
  • ACS has had a relevant interest in more than 50% of the Leighton shares since 2007 (due to its shareholding in Hochtief) and Hochtief has had its substantial holding in Leighton for a considerable time, and
  • ACS formally undertook to Leighton that, to the extent within its control as a majority shareholder in Hochtief, it would ensure that the existing governance arrangements between Hochtief and Leighton continue, including that:
    • Hochtief does not intend to increase its shareholding in Leighton beyond 55%
    • Hochtief only has the right to appoint 4 out of 12 Leighton directors
    • Hochtief will maintain the structure of the Leighton group, and
    • Hochtief will support Leighton management in developing Leighton, on the basis of existing business plans, into a multi-disciplined group.