TAKEOVERS + SCHEMES REVIEW 2021 | Chapter 9
Chapter 9 of Gilbert + Tobin’s 2021 Takeovers + Schemes Review explores the priorities of the FIRB, the Takeovers Panel, ASIC, ACCC and APRA in 2020.
Foreign investment regulation in Australia and FIRB
2020 was a watershed year for foreign investment and foreign investment regulation in Australia.
Review times were already slowing at the start of 2020, as a result of the government’s distraction by severe bushfires and its simultaneous increased focus on national security issues.
Then the COVID-19 pandemic hit.
Due to concerns that foreign investors may engage in predatory behaviour in the wake of significant economic uncertainty, the Treasurer announced that, as of 10:30pm on 29 March 2020, all monetary thresholds for all kinds of regulated actions under the Foreign Acquisitions and Takeovers Act 1975 (FATA) would be immediately reduced to zero. This resulted in significant delays as the system became clogged with low value applications. The Treasurer also extended the statutory period for the review of applications and the making of a decision from 30 days to up to six months. While few transactions would take the full six months to review, nevertheless, the review process generally became much slower.
Difficulties for Chinese acquirers
Notably, a number of transactions with Chinese acquirers did not obtain Foreign Investment Review Board (FIRB) approval. This included relatively small foreign investments in mining companies such as a proposed $20 million investment by Chinese state owned Baogang Group in Northern Minerals and a $14 million minority investment by Yibin Tianyi Lithium in AVZ Minerals (the main asset of which was not even in Australia but in the Democratic Republic of Congo). The latter deal was restructured to avoid the need for FIRB approval (ie smaller and the acquirer did not gain a board seat).
However, in perhaps a larger surprise, China Mengniu Dairy (a Hong Kong listed company which has Chinese government owned COFCO as a 16% shareholder) was reportedly advised that it was unlikely to gain FIRB approval for its proposed $600 million acquisition of Lion Dairy and Drinks. Following this advice, the parties abandoned the sale and Lion subsequently sold the business to Bega, an ASX listed company, in an auction sale reportedly comprising Australian and Canadian bidders only.
Revamped FIRB processes
In response to the greater demands on the system, FIRB and its supporting bureaucracy significantly revamped their processes, drafted in extra resources and introduced new streamlined exemption certificates. To FIRB’s credit, by the last quarter of the 2020 calendar year, review times for most applications had come down to more normal levels, and the government was responsive in particular on international deals that had hard 31 December closing deadlines.
Notwithstanding this, parties in many global deals took advantage of “warehousing” transactions (where Australian subsidiaries of global targets would be temporarily sold to Australian buyers) in order to ensure their global deals could complete by year end.
1 January 2021 changes and guidance
The government’s increasingly expansive views on national security have been evident for some time through the foreign investment review process. If there was any doubt that national security was the key focus, the government announced midway through 2020 that FATA would receive a significant overhaul. The centrepiece of which was the introduction (effective 1 January 2021) of new regulated actions and new powers on the part of the Treasurer relating to national security risks. While the zero monetary threshold was scrapped as of 1 January 2021 and the thresholds returned to the usual levels, the changes to the law and FIRB focus mean ongoing scrutiny of foreign investment transactions will continue to be intense.
From a national security perspective, these amendments give the Treasurer the power to:
- block, divest or impose conditions in relation to “notifiable national security actions” if the Treasurer considers them to be contrary to national security – this broadly covers a foreign person starting a national security business, acquiring an interest of 10% or more (and in some cases less than 10%) of a national security business or acquiring an interest in national security land and can capture offshore entities even when there is no Australian subsidiary;
- “call in” for review a broad range of transactions (including ones that are not otherwise caught by FATA) for a period of 10 years after completion, in order to determine if they are contrary to national security; and
- re-review previously approved transactions, if the Treasurer becomes aware that the application was misleading or that changed circumstances may give rise to national security risks.
In conjunction with these amendments, the government released a guidance note (see FIRB National Security Test) relating to national security risks. The note provided detailed and unusually candid sectoral guidance on national security risks across a number of sectors, including banking and financial services, communications, commercial construction, commercial real estate, critical minerals, critical service providers and suppliers, critical technologies, defence providers, education, energy, health, information technology, nuclear power, space and transport.
With the benefit of that guidance, the recent Probuild decision, where the government effectively rejected the acquisition of Probuild by China State Construction Engineering Corporation is perhaps not particularly surprising (noting the transaction will not show up as a rejection in official statistics, as the acquirer withdrew the application before a rejection could be issued). The real question for 2021 will be the extent to which any companies are able to successfully navigate the national security review in these sectors. It is to be expected that some kinds of acquirers are likely to be seen as posing more security risk than others.
Compounding these changes has been the simultaneous introduction into Parliament of new legislation to amend the Security of Critical Infrastructure Act 2018 (SOCI Act). The Government says the objective of the proposed law is “to amend and build on the existing regulatory regime created by the SOCI Act, to enhance security and resilience of critical infrastructure assets and systems of national significance. Expansion of the concepts to include systems of national significance is intended to widen the regime to address threats such as natural disasters and cyber-attacks.” That bill has been referred to the parliamentary Joint Committee on Intelligence and Security. It is likely that during 2021, the scope of the SOCI Act will be greatly expanded beyond its current focus (certain ports, water, gas and electricity assets), which will in turn feed back into the definition of “national security business”, and therefore the transactions that remain subject to review regardless of value, under FATA.
March 2020 marked the 20th anniversary of the Takeovers Panel.
The milestone was cause for reflection to consider if the Takeovers Panel has achieved its objectives of efficient, effective and speedy resolution of takeover disputes. In this respect, almost all commentators regard the Panel as being a tremendous success over its 20 year life with efficient and cost effective decision making. It has also developed policy in a number of areas including frustrating action, 1% break fee, disclosure of derivatives over 5% and enhancing the Truth in Takeovers policy in many respects. These developments have been generally well accepted.
Indeed, the Panel’s success is reflected in the ongoing demand for its services!
Application activity at the Takeovers Panel was high in 2020 with over 35 applications being made (the second highest on record). A relatively large number of these applications resulted in proceedings being conducted and declarations being made. This, combined with a number of requests to vary and enforce Panel orders, meant that 2020 was arguably the busiest year in the Panel’s history.
Some key Takeovers Panel cases and developments in 2020 included:
The extraordinary four way bidding war for Cardinal Resources between Shandong Gold, Nord Gold, Engineer and Planners Co and Dongshan Investments gave rise to seven Takeovers Panel applications (one of which was also appealed).
Perhaps the most interesting application involved ASIC’s Truth in Takeovers policy being put to the test.
The takeover battle began in June 2020 when Shandong Gold announced an agreed recommended bid by Shandong Gold at $0.60 per share. Nord Gold made a competing bid and, following a series of bid increases, Shandong Gold made a last and final statement that its bid price of $1 per share was “best and final in the absence of a higher competing offer”.
Nord Gold shortly thereafter increased its bid to $1 per share and also made a last and final statement. It asserted that its increased bid was not a competing higher offer and therefore Shandong Gold could not increase its bid. That is, while the Nord Gold bid matched the Shandong Gold bid it was not a higher offer.
Following the last and final statements, the Cardinal share price consistently traded above $1 per share showing that the market did not believe the statements.
Cardinal Resources and Samson Rock, a substantial shareholder of Cardinal, both applied to the Takeovers Panel seeking orders releasing the bidders from their last and final statements.
Samson Rock submitted that with the identical bids there was a real prospect of a stalemate meaning that control of the company would not be resolved and there had ceased to be an efficient, competitive and informed market for control. Cardinal and Samson Rock argued that the Truth in Takeovers policy was being used as a sword against a rival bidder by exploiting a technicality in the Shandong Gold last and final statement and not as a shield for market integrity. They said that allowing both bidders to depart from their last and final statements in “an appropriate and structured manner” would promote a fully informed and competitive market.
Both Cardinal and Samson Rock proposed that any shareholders who had suffered a detriment, for example by selling on-market after the last and final statements, could receive compensation.
The Takeovers Panel declined to conduct proceedings to resolve the deadlock, on the basis that Shandong Gold’s qualification that its offer was best and final “in the absence of a higher competing offer” was not ambiguous. Nord Gold matching the Shandong Gold offer and seeking to hold Shandong Gold to its last and final statement was not a misuse of the Truth in Takeovers policy. Notwithstanding that the auction between Shandong Gold and Nord Gold has been stalled, there was no material to suggest that the market was inefficient or uninformed.
However, the debate became academic, as a third party Engineers & Planners Co, a Ghanaian mining company, announced a conditional off-market bid for Cardinal at $1.05 per share. This “higher competing offer” allowed Shandong Gold to increase its bid to $1.05. A fourth party Dongshan Investments, from the UAE, subsequently announced an intention to make a conditional off-market bid for Cardinal at $1.20, however the bid was never made on the basis that Shandong Gold had acquired over 50% of Cardinal, which would have defeated Dongshan Investments’ minimum acceptance condition. Shandong Gold ultimately acquired control of Cardinal Resources in January 2021.
The Takeovers Panel has over its years seen some frequent users of the dispute resolution forum. A few of them collide in Keybridge Capital which has now had 14 Panel matters (11 in 2020). Some of the parties involved in the case relating to this company include Wilson Asset Management, Bentley Capital and Australian Style Group.
This Review clearly cannot do justice to the ins and outs, and strategies involved in the competition for control of Keybridge but, suffice it to say, the 14 matters have covered a lot of territory including in relation to bid conditions, funding arrangements, frustrating action, incorrect acceptances, insider participation, reviews of ASIC decisions and associations. It does show the Takeovers Panel’s efficiency in dealing with matters quickly and cost effectively, although with 14 matters, perhaps it is too cost effective!
Cash settled swaps / derivatives disclosure
The Takeovers Panel proposed a revised guidance note 20 on disclosure of equity derivatives, issuing a public consultation paper on the matter in 2019. The policy is in essence similar to the current position for disclosure of substantial shareholdings above 5%. That is, holdings of physical shares and derivative holdings of more than 5% in aggregate need to be disclosed (as do changes of 1% or more).
However, a key change in the proposed revisions to the guidance note is to require this disclosure even where there is no control purpose and no control transaction on foot. This would bring the Australian approach in line with that of many other jurisdictions.
The rewrite of the guidance note was completed in 2020, with only minor changes announced in May 2020. However, given that was in the midst of the first wave of the COVID-19 pandemic, the Panel stated that there would be a transitional period before the new guidance note took effect. As such, the revised guidance note 20 will only come into effect upon the Panel giving market participants three months' notice, which it is still to do.
2020 presented challenges to many and it was not smooth sailing for ASIC.
As the nation’s corporate, markets, financial services and consumer credit regulator, ASIC played a crucial role in managing Australia’s response to the COVID-19 pandemic. ASIC responded rapidly and strategically to the challenges created by COVID‑19 and focused on ensuring that the Australian financial system, although under stress, continued to be strong and efficient. In the background, ASIC faced a whirlwind of internal and external pressures. This included public scrutiny of ASIC’s remuneration and procurement practices and calls from some quarters for changes to ASIC’s governance model in response to the loss of some high-profile litigation (recall the landmark "wagyu and shiraz" responsible lending case against Westpac). We think it’s safe to say ASIC has been a rock caught in a hard place in 2020, attempting to uphold its ‘why not litigate’ approach after being critiqued for not being tough enough in the Royal Commission and then being pilloried throughout the year when it brought unsuccessful actions. The federal government also expressed concerns that ASIC has become a quasi-policymaker through regulatory interventions and speeches by commissioners on areas such as responsible lending, financial services and climate change.
Speaking at the AFR Banking and Wealth Summit on 18 November 2020. Federal Treasurer Josh Frydenberg said
“It is the Parliament who determines who and what should be regulated. It’s the role of regulators to deliver on that intent, not to supplement, circumvent or frustrate it.”
ASIC recalibrated its regulatory priorities allowing it and the entities it regulates to focus on the impact of the COVID‑19 pandemic. The temporary changes ASIC made to its priorities included the deferral of some activities and the redeployment of staff to address issues of immediate concern, including protecting vulnerable consumers, maintaining the integrity of markets and supporting businesses.
ASIC continued to respond to the impacts of COVID-19 by extending the reach of its existing exemptions and 'no action' positions on AGMs and financial reports, providing new guidance and deferring the commencement of reforms. ASIC also adapted its administrative processes, facilitating electronic signing, lodgement of documents, including shareholder meeting materials and applications for relief, via its online regulatory portal and permitting electronic distribution of takeover documents (such as bidders and targets statements and scheme booklets).
While pursuing pandemic related priorities, ASIC has remained committed to continuing its enforcement work, and in particular its Royal Commission related enforcement work. ASIC recorded 11 criminal and 49 civil financial services actions before the Courts as at 1 July 2020 including four civil penalty cases against large financial institutions. Additionally, in the six months to June 2020, ASIC announced that it was able to enforce a total of $12 million in civil penalties imposed by the courts.
ASIC’s report on M&A activity and ASIC intervention during COVID-19 released on 16 September 2020 stated that
“As the uncertainty around the COVID-19 pandemic eases, we expect M&A activity to increase. We recognise that upcoming deals may incorporate novel structures and terms to deal with the risks of the COVID-19 pandemic so we encourage companies to talk to us early in the planning phase of these deals.”
ASIC is due to get a new chair in 2021, and the Treasurer has also foreshadowed that there will be changes to ASIC’s governance structure. Whoever is appointed will be taking on a challenging role at a complex time. That said, we do not expect the identity of the new appointment to materially change ASIC’s approach to M&A regulation.
The following provides a high-level overview of some of the key developments in M&A in 2020.
Stub equity offers restricted by ASIC to maintain investor protection
ASIC has now settled its approach to stub equity offers in takeovers and schemes, releasing formal guidance confirming which Australian companies can be used for stub equity offers. Importantly, ASIC has decided not to ban the use of custodian structures in control transactions.
A stub equity offer is when scrip consideration is offered as an alternative to cash in a transaction that typically involves a private equity bidder. This enables the target shareholders to retain economic exposure to the underlying business of the target company through holding scrip in the bidding or holding vehicle (HoldCo). The purpose of stub equity transactions is to take the ownership of the target entity into a private structure, allowing the private equity firm to take advantage of market opportunities for the business, to act swiftly and to have full control over decision-making during the life of the investment and in relation to exit at the same time as giving shareholders the opportunity to participate in future returns from the business.
In mid-2019 ASIC invited submissions on a proposal to modify the Corporations Act to:
- prevent stub equity offers of scrip in a propriety company; and
- prohibit the use of custodian structures to hold stub equity scrip.
ASIC highlighted that its proposals were not intended to prohibit stub equity arrangements, but were to ensure that if stub equity is offered, it does not involve investors foregoing substantive protections under Australian law. Shareholders of proprietary companies are not entitled to the same level of periodic financial disclosure nor is there any prohibition on “related party transactions”, which can have a significant impact on minority holders.
Custodian structures involve the issue of stub equity to a custodian who holds legal title to the stub equity on behalf of the accepting shareholders. This structure ensures that the number of registered shareholders in HoldCo remains below 50, the limit at which the takeovers provisions of the Corporations Act are triggered. ASIC decided not to proceed with its proposal to prohibit the use of custodian structures, which means that it is possible to offer stub equity without exits from the target subsequently being regulated by the takeover laws which apply to ASX-listed companies and companies with more than 50 shareholders. ASIC recognised that additional regulation of custodian structures would likely result in bidders using an offshore vehicle rather than an Australian entity, resulting in less protection for Australian shareholders.
ASIC has pushed ahead with its first proposal, altering the Corporations Act to ban stub equity offers of scrip in a proprietary company being made to a large quantity of retail target holders during schemes of arrangement and takeover bids. The change, instrumented by the ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734, responds to concerns that retail investors are not afforded the same rights and protections as shareholders in public companies if the bidder is able to use a proprietary company as the Holdco vehicle to make an offer of stub equity scrip to target shareholders. The new instrument also includes anti-avoidance measures to ensure that public companies do not simply convert to proprietary companies once the takeover has been completed.
We consider that ASIC’s approach, and its decision not to ban custodian structures, is measured and appropriate. ASIC’s approach is unlikely to result in an increase in the use of foreign company bid vehicles and will not discourage bidders from offering stub equity in control transactions, which is increasingly important in negotiating public to private transactions as some institutional and sophisticated investors are often reluctant to lose their exposure to the target’s future success. ASIC’s new instrument sufficiently balances the need for investor protection with the ability for retail investors to fully participate in the offer, while ensuring offers of stub equity continue to be a useful transaction structure and feature of the Australian market.
Share transfers using section 444GA
ASIC updated its guidance under Regulatory Guide 6 (Takeovers: Exceptions to the general prohibition). The update intends to formalise ASIC policy when it comes to providing relief from the operation of the takeover restrictions in the Corporations Act for compulsory share transfers under a deed of company arrangement.
Section 444GA of the Corporations Act allows for the transfer of shares in a company that is in administration to be transferred as part of a deed of company arrangement by an administrator.
The updated guidance outlines that before Chapter 6 relief will be provided for share transfers made under section 444GA, ASIC generally requires that:
- shareholders are to be provided with explanatory materials which include an independent expert report that is prepared on a non-going concern basis in accordance with Regulatory Guide 111 (Content of expert reports) and that demonstrates that the shareholders have no residual equity in the company; and
- the independent expert report is prepared by an independent expert in accordance with Regulatory Guide 112 (Independence of experts).
ASIC’s move to require an independent expert’s report to be prepared on a non-going concern basis is a welcome development. This is because providing shareholders with a going concern valuation where a company is in administration and subject to a deed of company arrangement takeover is likely to confuse shareholders and increase the risk of shareholders being misinformed. A going concern valuation may also create a false assumption that the company could continue as a going concern and provide ammunition for shareholders to oppose the takeover in court.
Statement of no objection in creditors’ schemes
ASIC has emphasised that when creditors’ schemes of arrangement are used to affect a control transaction, they must align with the principles and protections underpinning the takeover provisions in the Corporations Act (for example providing shareholders with an opportunity to vote, or participate in, a control transaction). ASIC also reiterated that companies should consider how shareholders are affected during the creditors’ scheme.
In the matter of Tiger Resources Ltd v International Finance Corporation (2019) 141 ACSR 203, the shareholders’ shares were valueless and ASIC therefore accepted that the protections of Chapter 6 of the Corporations Act could be displaced on policy grounds. ASIC accepted that shareholders may not require an opportunity to vote (where such approval is not required for other reason), provided they have enough information about the control proposal and are informed of their rights in relation to the scheme.
ASIC intervention in M&A transactions – some key areas of focus
Consideration on contingent events
ASIC has warned that where an acquisition structure provides that additional consideration becomes payable on a contingency, additional time may need to be built into the transaction timetable.
This was the case in the acquisition of Village Roadshow by BGH Capital via scheme of arrangement where Village Roadshow shareholders were able to elect whether they received cash or scrip consideration depending on scale back arrangements. The scheme also included consideration that was subject to an uplift if certain conditions were satisfied prior to the scheme meeting. These conditions included:
- the absence of border control measures imposed by the Queensland Government relating to NSW and Victoria (preventing travel to theme parks based in Queensland);
- a majority of the cinemas business locations (representing 75% of cinemas business revenue in FY19) being open to the public for five business days and there being no significant changes to the expected movie slate for the remainder of FY21; and
- the Movie World and Sea World theme parks being open to the public for five business days.
ASIC insisted that the scheme timetable be revised so that shareholders were given enough time to submit proxies after the announcement of the indicative consideration election results and the announcement about whether contingent consideration is payable. The scheme timetable was pushed back 11 days as a result. ASIC noted the importance of scheme timetables being structured carefully so that shareholders to have enough time to assess the consideration offered and determine how they will vote.
Material delay in regulatory approvals
COVID-19 has undoubtedly created delays in processing times for regulatory approvals (for example, obtaining FIRB approval of many transactions has taken longer given the removal of monetary thresholds increasing FIRB’s workload), making it increasingly difficult to achieve commercial deadlines.
ASIC took action in relation to the Nzuri Copper / Xuchen International scheme of arrangement, where there was delay in receipt of regulatory approvals by Xuchen in China which was a condition precedent to the scheme. This condition precedent was due to be satisfied by 15 July 2019, however it was not satisfied until 20 January 2020, with the second court hearing being adjourned seven times. Xuchen had also informed Nzuri that for commercial reasons, its preference was to at least partially fund the scheme consideration by way of third party loan. ASIC was concerned that the shareholders’ vote had become stale because of the delay and adjustments to the funding of the scheme consideration. Addressing this concern, Nzuri reissued its scheme booklet and held a ratification meeting providing shareholders with the opportunity to either ratify their previous approval of the scheme or vote against it.
ASIC has recommended that companies consider whether they should provide supplementary disclosure and seek confirmatory approval where there has been a lengthy delay between the shareholders voting at the scheme meeting and court approval. To alleviate risks associated with such delay, ASIC has suggested that where possible, approvals for conditions precedent to the implementation of the scheme which are dependent on obtaining third party approvals be obtained before commencing the scheme process. We question the practicality of this suggestion given that doing so would add further time to transaction timetables and so would contribute, even further, to the risk of deals not being able to be executed due to the passage of time.
Recommendations from conflicted directors
ASIC has reiterated its expectation that conflicted directors generally refrain from making a recommendation to shareholders.
ASIC flagged to the market in September 2020 that it had intervened in one scheme in 2020 to ensure that the views of an independent board committee were prominent enough relative to a recommendation of conflicted directors. ASIC emphasised that whether conflicted directors make a recommendation is an issue that should be contemplated at the time a scheme implementation agreement is executed, and conditions relating to director recommendations should be crafted appropriately. There continues to be a split in judicial approaches to the question, but ASIC remains clearly of the view that conflicted directors should not provide a recommendation and bidders and targets should ensure they are aware of this position.
We continue to believe that the preferable way to manage this is for the director receiving a benefit to still provide a recommendation but with fulsome and prominent disclosure of the benefits to be received so as to put that recommendation into context.
ACCC open for business during COVID-19
2020 was a testing time for all organisations across the private and public sector. In late March 2020, as measures to respond to the pandemic were implemented across the country, the ACCC communicated with the competition law community to reassure practitioners that the ACCC would continue to review existing applications for merger clearance and continue to accept new applications.
The ACCC’s published statistics for merger reviews, including pre-assessments and full public reviews show that there was only a slight drop-off in the number of transactions notified to it in the first half of 2020 compared with previous years and the number of full reviews undertaken by the ACCC was slightly up from the same period the previous year.
The vast majority of reviews conducted by the ACCC (~90%) continue to be cleared through the pre-assessment process. The outcomes of the 29 full public reviews that were completed by the ACCC in 2020 are shown in the following chart. As this shows, of the minority of transactions that progressed to a full review, around 60% were cleared with no conditions, while around 30% were withdrawn (either in the face of ACCC opposition or due to commercial considerations) and the remainder were cleared by the ACCC subject to undertakings to divest specific assets or brands.
Interestingly, the ACCC had issued a “red light” statement of issues in relation to two of the transactions that it unconditionally cleared in 2020 (Pacific Magazines / Bauer Media and Connective Group / Australian Finance Group). A “red light” statement of issues is a strong statement of preliminary concerns by the ACCC at the end of its first round of review and the ACCC has generally only cleared transactions with conditions after issuing such a statement. Whether these transactions are an aberration, or an indication of a greater willingness by the ACCC to consider and ultimately accept the arguments of the merger parties after a statement of issues remain to be seen.
ACCC assessment of complex undertakings
Over the course of 2020, the ACCC assessed four complex undertakings that were offered by merger parties to address concerns that were expressed by the ACCC, all of which were in transactions involving parties represented by Gilbert + Tobin. These transactions were:
- Asahi’s acquisition of Carlton and United Breweries, which the ACCC cleared after accepting a divestiture package of a number of beer and cider brands (including Stella Artois, Becks and Strongbow);
- Elanco’s acquisition of Bayer’s animal health business and Mylan’s proposed acquisition of Upjohn, both of which were part of broader global transactions resulting in a range of divestments following regulatory scrutiny, including in Australia; and
- Google’s acquisition of Fitbit, where the ACCC announced in late December 2020 that it would not accept the behavioural undertaking offered at that time by Google, which broadly reflected the conditions which had been accepted by the European Commission in clearing the transaction.
The ACCC’s review of Google’s acquisition of Fitbit will now extend into 2021, with a provisional decision date of 25 March. It will be one of the most closely watched transactions of 2021, given the focus of the ACCC and regulators globally on competition and social issues relating to digital platforms and use of data.
ACCC to push for merger law reform in 2021
In our 2020 review, we noted the significant amount of merger litigation which had played out in the Federal Court over the course of 2019 and 2020.
One high profile merger matter being litigated concluded in February 2020, when the Federal Court rejected the ACCC’s position that the proposed merger between TPG Telecom and Vodafone would substantially lessen competition. The Court rejected the ACCC’s arguments that the mobile market would be more competitive if possible future competition between TPG and the existing mobile networks operators were given a chance to occur, finding instead that “it is not for the ACCC or this Court to engineer a competitive outcome.”
The final chapter of another significant matter concluded in late 2020, with the High Court in December rejecting the ACCC’s application for special leave to appeal from the Full Federal Court’s decision in May 2020 that Pacific National’s acquisition of the Acacia Ridge terminal from Aurizon would not be likely to substantially lessen competition. This represents the conclusion of a process which commenced all the way back in 2017, when the ACCC commenced its review of the transaction.
However, the conclusion of the legal process is unlikely the final word from the ACCC on this subject. These judgments both represented comprehensive losses for the ACCC in contested merger litigation and raised questions about the ACCC’s continued willingness to take action on the basis of what courts have ultimately found to be speculative theories of harm. Rod Sims, chair of the ACCC had already started a push for merger law reform before the High Court’s decision and he re-iterated his concerns in the ACCC’s Media Release 259/20 responding to that decision:
“The ACCC faces challenges in contested merger cases where a forward looking merger test is applied. The nature of the test, and the inherent uncertainties in predicting the future, make it difficult to prove that a change in the market structure after the merger will substantially lessen competition in the future.”
“This task is further complicated by the need to prove that competition is likely to be substantially lessened compared to a hypothetical future in which the acquisition did not occur,” Mr Sims said.
“These challenges raise important issues for the consideration of whether Australia’s current merger laws are fit for purpose.”
This followed on from a speech given by Mr Sims at the National Press Club in October 2020 entitled “Tackling market power in the COVID-19 era”. In that speech, Mr Sims noted that the ACCC had not won contested merger litigation since a change in law in 1992 and stated that
"We will put forward ideas for changes to our merger laws in 2021. This will trigger an important debate.”
Watch this space - the ACCC has a long history of using defeats in hotly contested litigation as the basis of a push for law reform, often successfully.
Steering the prudential ship through COVID-19
A common theme amongst regulators during 2020, APRA postponed a number of planned activities in 2020 to generate the necessary capacity (both within APRA and regulated entities) to address the challenges arising from COVID-19.
As APRA Chair Wayne Byres noted in his remarks to the Board of the International Banking Federation in May 2020, APRA spent most of the first half of 2020:
- granting ‘operational relief’ by easing the operational burden on firms by postponing some activities and granting additional time to satisfy some supervisory requirements;
- providing selective temporary concessions to assist in facilitating the broader package of economic and financial support being offered by the government, the Reserve Bank of Australia and industry; and
- making it clear that the industry’s financial resilience has been built up to be utilised in times such times of crisis.
With the immediate impact of COVID-19 hopefully behind us, APRA has returned to more BAU matters and has re-engaged on important prudential policy issues.
New powers to oversee changes of control of superannuation trustees
Investors in superannuation businesses will need to add an additional regulatory approval to the list. Prior to July 2019, APRA did not have any ability to prevent entities that it regarded as unsuitable from acquiring stakes in licensed trustees of APRA-regulated superannuation funds.
Under the Superannuation Industry Supervision Act 1993 (Cth) (SIS Act), a person cannot be a trustee of a registrable superannuation entity (RSE) (most relevantly, superannuation funds that are not self-managed) unless it has been granted an RSE licence by APRA. APRA will only grant an RSE licence if it is satisfied that the applicant will comply with its various duties and prudential obligations.
Amendments to the SIS Act that commenced in July 2019 have given APRA new powers to supervise changes of control of RSE licensees after an RSE licence is granted. Where the RSE licensee is a body corporate, an investor must now apply to APRA for approval before acquiring a ‘controlling stake’ in the RSE licensee. A controlling stake is more than 15%, including the acquirer’s direct and indirect control interests and the direct control interests held by any ‘associates’ of the acquirer. Holding a controlling stake in an RSE licensee without APRA approval is a criminal offence of strict liability, with a penalty of 400 penalty units (currently $222, so $88,800) for each day on which the person holds the stake without approval.
This brings APRA’s powers in relation to superannuation in line with other financial services such as banking and insurance. Under the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA), APRA has power delegated by the Treasurer to approve stakes of more than 20% (previously also 15%) in a bank or insurer. Failure to seek approval is also an offence with a maximum fine of 400 penalty units (currently $88,800).
Build in time for the change of control approval process
APRA has 90 days to decide an application, unless APRA:
- requests the applicant provides more information, in which case the clock stops and the 90-day period starts again; or
- extends the decision period in writing, by up to 30 days.
If APRA has not decided an application by the end of the applicable period, it is taken to have refused the application.
APRA can only approve an application if it has no reason to believe that the proposed ownership structure would mean the RSE licensee may be unable to satisfy one or more of its trustee covenants imposed by the SIS Act. These include covenants that the RSE licensee will:
- perform its duties and exercise its powers in the best interests of beneficiaries (however, a Bill currently before Parliament proposes to change this to the best financial interests of beneficiaries);
- give priority to the duties to and interests of beneficiaries over the duties to and interests of other persons where there is a conflict; and
- not enter into any contract or do anything else that would prevent the trustee from properly performing or exercising its trustee functions and powers.
The SIS Act also imposes specific covenants relating to, for example, the entity’s risk strategy, investment strategy and insurance arrangements.
One approval so far: IOOF / OnePath
In December 2019, APRA announced that it had approved applications from IOOF Holdings Ltd and a wholly owned subsidiary to hold a controlling stake in OnePath Custodians Pty Limited and Oasis Fund Management Limited (together One Path), which were owned by ANZ.
As part of its decision to approve the application, APRA considered the additional RSE licence conditions it had previously imposed on IOOF in relation to its existing RSE licences, and noted that it had made progress in strengthening its governance structures and managing conflicts within its existing RSE licensees since then. In its announcement, APRA noted that IOOF had:
- “appointed a majority of independent directors to its RSE licensee boards”;
- “moved to legally separate its dual regulated entities”; and
- “implemented a dedicated business function to support IOOF’s APRA-regulated entities.”
It considered that these changes would provide IOOF’s RSE licensees with “the necessary framework to operate independently within the IOOF group”, and that they would enhance the RSE licensees’ ability to comply with their obligations.
Superannuation trustees to have no other role
From 1 July 2021, a condition will be imposed on each RSE licence held by a body corporate that the RSE licensee must not have a duty to act in the interests of any other person, other than a duty that arises in the course of performing the RSE licensee’s duties or exercising its powers, or providing personal advice.
The effect of this change is that an RSE licensee cannot also be the responsible entity of a managed investment scheme or hold another similar role. Financial services groups with entities holding dual roles will need to significantly restructure their operations in order to comply.
This change was recommended by the Financial Services Royal Commission, which found that a potential conflict of duties arises where the trustee ‘wears two hats’ in this manner. This is because a dual licensed entity is required to act in the best interests of the beneficiaries of the registrable superannuation fund, and is also required to act in the best interests of the members of the managed investment scheme.
The Commission’s purposes behind recommending such a broad prohibition, was for RSE Licensees to avoid the potential for conflicts (by holding both responsibilities), rather than implementing policies which may be ineffective in managing the conflict.