Company Takeovers – Mergers & Acquisitions

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Did you know that Australia prides itself on maintaining a competitive business market?

It does this through the use of specific legislation that limits the effect that some mergers or acquisitions of businesses may have on market competition. By maintaining a diverse market of businesses for services, products and goods, competition is improved and the flourishing economy is supported fiscally speaking.

A merger is a legal consolidation of two business entities into one, whereas an acquisition occurs when one entity takes ownership of another entity’s stock, equity interests or assets. They may be completed to expand a company’s reach or gain market share in an attempt to create shareholder value.

Generally speaking, the distinction between the two becomes a little less clear as both types of transactions may result in consolidation of business (and thus a shrinkage in market availability of diversity) but both are legally defined and structured to do different things. They may also have different requirements to be adhered to when it comes to legal compliance.

General Regulations

To ensure that there is not total market domination with regard to ownership of the primary businesses, Australia’s Competition and Consumer Act (CCA) prohibits those mergers that would diminish the competition (or have the effect thereof) in the business market. Under its merger guidelines, the ACCC encourages merger parties to notify the Australian Competition and Consumer Commission in advance if completing a transaction if

  • The products of the merger parties are either substitutes or complements and
  • The merged company will have a post-merger market share in those products of greater than 20% in any Australian market.

The Corporations Act regulates the acquisition of direct and indirect interests in both Australian listed companies and companies with more than 50 members and listed managed investment schemes (usually unit trusts, like REITs). In particular the laws prohibit the acquisition of an interest which results in any person’s voting power in a Widely Held Entity increasing to more than 20% (or any person’s voting power increasing between 20% and 90%). There are exceptions to this rule, including:

  • acquisitions under a formal takeover bid in which all target shareholders can participate
  • schemes of arrangement
  • acquisitions with the approval of a majority of the shareholders who are not parties to the transaction
  • acquisitions of no more than 3% of the voting rights every six months (known as the creep rule)
  • acquisitions under rights issues and underwriting arrangements
  • “downstream” acquisitions of shares in Australian companies that result from “upstream” acquisitions in companies listed on the Australian Securities Exchange (ASX) or on certain foreign stock markets approved by the Australian Securities and Investments Commission (ASIC).

The ACCC may seek injunctions to prevent closing or penalties and divestiture orders for completed transactions if acquisitions contravene the competitive diversity of the market established thus far.

Foreign Investment Regulation

The Foreign Acquisitions and Takeovers Act (FATA) contains complex provisions regulating the acquisition directly or indirectly by foreign persons of, among other things, shares in australian companies. Foreign investment must be consistent with australia’s national interest, otherwise it may not pass the clearance requirements.

Civil penalties can be imposed if a foreign person undertakes certain transactions without first obtaining the relevant clearance. The general rule is that a foreign person needs approval to acquire a “substantial interest” (20% or more) in an Australian corporation (or holding company of an Australian corporation) where the target is valued above certain thresholds.

If you are looking to acquire another company, organisation or business in the field, but are uncertain about your clearance for doing so, speak with us today. We can assist you in ascertaining whether or not you may be legally able to do so.