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

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. 

APRA

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.