Chapter 9 of Gilbert + Tobin’s Takeovers + Schemes Review 2023 (below) explores regulatory updates, and priorities for the regulators of public mergers and acquisitions including the Foreign Investment Review Board (FIRB), the Takeovers Panel, the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC).
- Key Highlights - An analysis of Australian public mergers & acquisitions in 2022
- Chapter 1 - Market activity: M&A activity stabilises in 2022 after all time high of 2021
- Chapter 2 - Sector analysis: exploring the sectors of interest in 2022
- Spotlight - technology public M+A
- Chapter 3 - Public M&A: schemes, takeovers and pre-bid stakes – trends in 2022
- Chapter 4 - Involvement of foreign bidders in public M&A in 2022 & FIRB considerations
- Chapter 5 - Public M&A: consideration types and sources of funding in 2022
- Spotlight - decarbonisation and M&A
- Chapter 6 - Success factors in public M&A in 2022
- Chapter 7 - Transaction timing in public M&A in 2022
- Chapter 8 - Implementation agreements and bid conditions in public M&A transactions in 2022
- Chapter 9 - Regulator influence, trends and developments in public M&A in 2022
Deals involving foreign bidders in 2022 accounted for $26 billion, down from a record $61.9 billion in 2021 (which represented a high since we commenced publishing this Review over 10 years ago). That said, if we exclude the $39 billion Afterpay / Block, Inc outlier deal from 2021’s numbers, the aggregate value of foreign bids in 2022 was $3.1 billion higher than 2021.
For the first time since 2017, foreign interest in Australian ASX listed companies increased. Foreign bidders were involved in 46% of the total number of transactions, up from 32% in 2021. This is evidence of an increasing willingness for foreign investment as borders and markets continued to open following the prolonged disruptions resulting from the COVID-19 pandemic.
The value of foreign bids remained a driving force in the Australian market, with 58% of total deal value derived from foreign bidders. This included two of the three biggest transactions for the year, being Blackstone Inc’s $8.9 billion acquisition of Crown Resorts and HOCHTIEF AG’s $6.8 billion acquisition of the CIMIC Group (albeit starting with a ~78.6% controlling pre-bid stake).
The foreign interest was predominantly from North America and Europe. No formal bids were made by Asian companies in 2022.
We explore the main themes of foreign investment regulation and foreign bids in 2022 as follows.
Critical infrastructure assets
In 2022, foreign investors felt the full force of the December 2021 amendments made to the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act). The definition of “national security business” in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) is tied in part to the definition of “critical infrastructure asset” in the SOCI Act, so these amendments had the effect of broadening the national security business categories from owners and operators of specified assets in the electricity, gas, ports and water / sewerage sectors to include owners and operators of additional specified assets in aviation, banking, broadcasting, data processing, data storage, the defence industry, domain name systems, education, energy market operators, financial market infrastructure, food and grocery, freight infrastructure, freight services, hospitals, insurance, liquid fuel, public transport, superannuation and telecommunications sectors. While the specific assets covered are relatively narrow, the breadth of the sectors meant more transactions were caught by the zero dollar threshold in 2022 as compared to 2021 (although still less than 2020, when the $0 thresholds applied across the board).
Of particular concern are those “critical infrastructure assets” which do not have embedded in their definitions any kind of materiality thresholds – for example, critical aviation assets and critical telecommunications assets, which both capture a broad range of assets that are not actually “critical” in any plain English sense of the word, and those which are poorly defined and could benefit from further guidance, such as critical data storage and processing assets.
Applications and fees
FIRB has been stepping up its compliance function for many years. 2022 saw both a higher incidence of interactions with the FIRB compliance team within Treasury than was previously the case and the first civil penalties issued.
The new Labor government has also scrapped any pretence that the application fees do not have a function beyond cost recovery, with the government following through on a little focused on election promise to double application fees in July 2022 as a budget repair measure. The fees now range from a low of $4,000 to the very significant amount of $1,045,000. The higher fees have meant fewer parties willing to lodge “voluntary” applications and also fewer applications to test the boundaries of unclear legislation. That said, FIRB has shown a willingness to voluntarily refund fees where experimental applications were lodged and it was concluded that FIRB did not have jurisdiction. The higher fees have also meant that in competitive bid processes for high value assets, buyers are reticent to comply with the seller’s preference for binding bids to be made with all necessary regulatory approvals, as the risk of the high FIRB filing fee becoming a sunk cost for an unsuccessful bid almost always outweighs any potential timing benefit from an early application.
Impact on tech start-ups
Another interesting trend has been the extent to which FIRB has been discussed by deep-tech start-ups. The possibility that:
- FIRB could knock back prospective investors in the future, however low the risk; or
- a prospective investor might have to pay “extra” in the form of legal and application fees in order to invest in the start-up,
is now a real consideration when founders consider where to set up shop. This is because future growth might be impeded by any factor that could prove to be a headwind in relation to a capital raising round, and has to be factored into their strategic planning. This is particularly the case if the start-up is involved in a sensitive sector (like a national security business or healthcare where they may have government clients or handle significant amounts of data) and prospective investors fall into the broad category known as “foreign government investors” (which includes not just sovereign wealth funds but also things like public pension funds).
Application withdrawals and FIRB rejections
As always, while the vast majority of transactions are still approved, the true scale of rejections cannot be determined because of the practice of quietly withdrawing applications after preliminary determinations have been made that the transaction is contrary to the national interest (or national security, where applicable).
While FIRB does report on the number of withdrawals (and is to be commended for introducing quarterly reporting in recent months), there are also other reasons to withdraw applications, making those statistics difficult to interpret. However, rejections appear to be increasing.
No Chinese public M&A bids
The government’s tougher stance on national security has led to changes in business behaviour, with Chinese bidders continuing to opt out of processes that involve national security businesses on the basis that approval is unlikely. It is too soon to tell whether the recent easing in geo-political tensions between the Australian and Chinese governments will encourage more Chinese bidders to enter the Australian public M&A market, and in any event, there is unlikely to be any change in the short to medium term, particularly when it comes to Chinese investment in national security sectors.
The Takeovers Panel had a very busy year in 2022, with its case load being consistent with that of 2021 as well as revising some important guidance notes (more on that below) and dealing with the prior government’s consultation paper on potential takeover law reforms.
The Panel received 24 applications in 2022 (including three review applications). Six applications resulted in a declaration by the Panel of unacceptable circumstances and the Takeovers Panel declined to conduct proceedings in 13 cases.
The following chart shows the number of Panel applications received between 2012 and 2022.
Takeovers Panel applications (2012-2022)
Activity levels in the market were generally down from 2021. Only 17% of transactions were hostile; while this is up from 13% in 2021, it is still significantly down from 26% in 2020. This likely accounts for the generally consistent case load of the Takeovers Panel over 2021 and 2022. In addition, schemes of arrangement continued to be the preferred structure for deals over $50 million, with 68% of all transactions in 2022 taking that form.
As is usual, the Takeovers Panel received applications on a variety of topics including deal protection devices, breaches of disclosure requirements, deficiencies in bidder and target statements and association and control matters.
Some key Takeovers Panel cases and developments in 2022 are summarised as follows.
Nitro Software proceedings
Potentia Capital applications
In early January 2023, the Takeovers Panel received an application from Potentia Capital in relation to the affairs of Nitro Software, a company that was the subject of competing control proposals by Potentia Capital and Alludo.
By way of background, on 28 October 2022, Potentia Capital announced an off-market takeover bid for Nitro Software at $1.80 cash per share, which was rejected by the Nitro Software board. Nitro then announced that it had entered into a process deed with Alludo after receiving a non-binding offer from Alludo to acquire 100% of Nitro Software by way of a scheme of arrangement at $2.00 cash per share, or alternatively, via an off-market takeover bid (with a 50.1% minimum acceptance condition) also at $2.00 cash per share. Nitro Software and Alludo entered into an implementation deed to this effect.
Potentia Capital’s application to the Takeovers Panel made submissions on a long list of issues, many of them related to the use of a concurrent scheme of arrangement / takeover bid structure and the Nitro board’s failure to facilitate due diligence access for Potentia Capital. The concurrent scheme/takeover structure has been used on four occasions in recent times to facilitate bidding competition where the target has a major shareholder (particularly one who is also seeking to acquire control of the target) who may be able to defeat a vote on a scheme of arrangement, despite the recommendation of the target board.
This is the second transaction in 2022 that involved a concurrent scheme and takeover structure, with the other being CapVest’s proposal for Virtus Health (before it was defeated by BGH Capital).
On 24 January 2023, the Takeovers Panel announced that it had declined to make a declaration of unacceptable circumstances in response to Potentia Capital’s application. In coming to its decision (see Nitro Software Limited  ATP 2), the Panel considered the following:
- the Nitro Software board’s decision not to grant due diligence to Potentia Capital was not unacceptable, referring to the long line of Panel decisions in which the Panel has declined to second guess the judgement of the target board in deciding which parties to provide due diligence to and on what terms;
- the concurrent scheme / bid structure used in the Alludo transaction was not unacceptable due to excessive complexity, being anti-competitive or not valid (each of which was argued by Potentia Capital), but cautioned that it may be advisable in the future for further guidance to be provided by ASIC or the Courts in relation to this transaction structure;
- it was not minded to second guess the Nitro Software board’s recommendation that it was in the best interests of Nitro Software shareholders to accept the Alludo takeover offer at the same time as voting in favour of the Alludo scheme; and
- the different treatment, and risks to retail shareholders, of accepting the Alludo takeover offer early (which may preclude them from accepting a higher competing offer, unlike institutional shareholders who had the benefit of an institutional acceptance facility from which their acceptance could be withdrawn) had been adequately disclosed and in the circumstances did not give rise to unacceptable circumstances.
Of particular note is the Panel’s consideration that the concurrent acquisition structure did not constitute unacceptable circumstances, even though it was considered a complex structure. The Panel ultimately agreed with submissions made by ASIC (as well as Nitro and Alludo) that (among other things):
- the Corporations Act 2001 (Cth) (Corporations Act) does not expressly prohibit a bidder and target agreeing to conduct a scheme of arrangement and takeover bid at the same time or in circumstances where one is conditional on the other; and
- the provision of a combined transaction booklet to target shareholders (i.e. one that covers both a scheme and a takeover) had some use in reducing duplication of information.
On the second point, the Panel noted that it has jurisdiction to order further disclosure in relation to a takeover bid if it considered that a lack of disclosure would lead to unacceptable circumstances (and therefore any risk of insufficient disclosure could likely be mitigated where required), and that it is in fact desirable to have all the information relating to a transaction in a single document.
ASIC also noted that it considers these structures closely on a case-by-case basis to ensure that they are consistent with regulatory considerations.
In terms of the competitive effect that a concurrent structure may have, the Panel opined that the availability of a scheme / takeover bid structure in this case was pro-competitive as it enabled a competitive auction for the benefit of Nitro shareholders.
This decision (noting ASIC’s submissions as well) means that the validity of the concurrent scheme and takeover structure has been reaffirmed. Indeed, it is an important tactic to facilitate competition for control of the target where a significant shareholder or rival bidder seeks to stymie bidding with its pre-bid shareholding. Care will still need to be taken to ensure that the actual structure used in any particular circumstances does not adversely impact the market for control of the target to be efficient, informed and competitive.
Potentia Capital sought a review of the Panel’s decision with the Review Panel reaffirming the initial Panel’s decision.
Alludo also made an application to the Takeovers Panel in early January 2023, seeking a declaration of unacceptable circumstances in relation to the deficient disclosure Potentia Capital provided in relation to its funding arrangements for its takeover offer. While the Takeovers Panel declined to make the declaration, Potentia Capital did agree to issue detailed supplementary disclosure in relation to its funding arrangements.
Virtus Health proceedings
As discussed in the 2022 edition of the Takeovers & Schemes Review, an application by BGH Capital was made in relation to its takeover of Virtus Health and the competing bid by CapVest. BGH Capital made an application to the Panel seeking a declaration of unacceptable circumstances alleging that the process deed entered into by Virtus Health and CapVest failed to meet the minimum standard of conduct required of participants to preserve an efficient, competitive and informed market for the acquisition of control of Virtus.
The Panel considered that certain aspects of the exclusivity arrangements in the process deed, taken together, had an anti-competitive effect. The Panel made a declaration of unacceptable circumstances and made orders that:
- Virtus Health and CapVest were prohibited from entering into a scheme implementation agreement and CapVest was prohibited from making a takeover bid for Virtus Health, for 10 business days; and
- some of the exclusivity arrangements in the process deed were to be amended to ensure it is clear that the fiduciary out is effective and that the equivalent information provision contains an exception for bidder sensitive information.
See Chapter 9 of the 2022 edition of Takeovers + Schemes Review for further details regarding this decision.
Following those orders in February 2022, numerous further applications were made to the Takeovers Panel in relation to Virtus Health. The Takeovers Panel ultimately declined to conduct proceedings in relation to the majority of those applications.
However, the Takeovers Panel did decide to conduct proceedings in relation to an application made by CapVest in April 2022 relating to a disclosure under the heading “ASIC Market Integrity Rule 5.13.1 Disclosure” in BGH Capital’s bidder’s statement. At the time, BGH Capital held 19.99% of the shares in Virtus Health. CapVest submitted that, among other things, even though an acquisition by BGH Capital on market would automatically increase BGH Capital’s bid price under the Corporations Act, the requirements of Market Integrity Rule 5.13.1 were not met by BGH Capital’s disclosure.
CapVest’s view was that the Market Integrity Rule requires that a market announcement that the bid price is to be increased be made before any on-market acquisition at a price variation from the bid price. The basis of CapVest’s submissions was ultimately that BGH Capital’s disclosure and its interpretation of the Market Integrity Rule deprived the market of information as to the increased bid price and “results in the trading of Virtus shares and for Chapter 6 purposes, the acquisition of control of Virtus, taking place in a market that is not ‘efficient, competitive and informed’” (see Takeovers Panel media release).
Ultimately, the application concerned whether the acquisition of control of Virtus Health would take place in an efficient, competitive and informed market if BGH Capital carried out its intention to acquire Virtus Health shares on-market during the bid period at prices above the bid price (which would increase the bid price under their bid) and to then follow that with a market announcement.
On 11 April 2022, the Panel made interim orders in response to CapVest’s application. The interim orders effectively prohibited BGH Capital from acquiring on-market any Virtus Health shares above its bid price unless and until it made a market announcement that the bid price was to be increased (and the amount of that increase).
Following the interim orders, on 22 April 2022, the Panel accepted an undertaking from BGH Capital and declined to make a declaration of unacceptable circumstances in response to CapVest’s application. BGH Capital’s undertaking was aimed at allowing BGH Capital to place an on-market order at a higher price than the bid price and, if the order resulting in ASX matching sellers to it at a higher price than the bid price, then BGH Capital must immediately make an announcement. The Panel accepted that the undertaking did not undermine the existence of an efficient, competitive and informed market.
ASIC has since indicated that its expectations with respect to Market Integrity Rule 5.13.1 differ from that of the Takeovers Panel. In Issue 143 of its Market Integrity Update, ASIC noted that where a bidder wishes to make an on-market acquisition of securities at a higher price than the bid price, it expects that bidder to make an announcement before commencing its acquisition. ASIC also stated in its update that it intends to undertake future consultations on a proposal to amend the rule to ensure that its expectations are clear to participants.
After a few rounds of applications by various parties to the Panel and a hostile competitive bid process, BGH Capital was ultimately successful in its acquisition of Virtus Health. The case has brought exclusivity arrangements and lock up devices into the spotlight (as well as reaffirming the importance of adequate disclosure during control transactions) and continues to have great influence over market practice with respect to those matters. See further below on the Takeovers Panel’s revised guidance.
Bullseye Mining proceedings
In two decisions, the Takeovers Panel made declarations of unacceptable circumstances in relation to the affairs of Bullseye Mining, an unlisted public company, which was the subject of a takeover bid by the ASX listed Emerald Resources NL and later a competing bid by Au Xiango Investments.
Some of the key takeaways from the Panel’s decision in Bullseye Mining Limited 03 are as follows:
- public unlisted companies need to be more careful to provide timely, clear and prominent information to shareholders which do not have the benefit of continuous disclosure or the ASX announcements platform;
- when assessing a bid, target directors need to fully disclose the basis on which they consider it is appropriate to make a premium comparison in respect of unlisted and illiquid stocks; and
- disclosure requirements for a target’s statement are the same for listed and unlisted companies, meaning that target directors may need to prepare information for inclusion in the target’s statement that they would not otherwise have an obligation to provide to shareholders in an unlisted company (for example, JORC compliant disclosure).
This Takeovers Panel’s decision has important implications for unlisted public companies that are subject to a control transaction in the future.
Deal protection and lock up devices
On 14 December 2022, the Takeovers Panel released a consultation paper seeking public comment on the proposed revisions to Guidance Note 7 in relation to lock up devices (or deal protection devices). The existing Guidance Note was issued on 11 February 2010.
Following the Panel’s decision in AusNet Services and Virtus Health (both of which were discussed in Chapter 9 of the 2022 edition of our Takeovers & Schemes Review), the Panel is proposing to revise the Guidance Note to clarify its views on deal protection devices including its approach to ‘hard’ exclusivity arrangements.
In summary, the proposed changes are to:
- reformulate the policy basis for the Guidance Note and clarify its scope. Interestingly, the name of the Guidance Note is proposed to be changed from “lock up devices” to “deal protection” perhaps reflecting the market’s acceptance of the legitimacy of the various tools to protect a first bidder’s position to a limited extent;
- recognise the complexity in, and dynamic nature of, the target board’s role in responding to a control transaction proposal. This includes a particular focus on the Panel’s expectation that target boards will reject deal protection devices that individually or in aggregate have the effect of reducing meaningful competition for control;
- clarify what the Panel considers to be an effective ‘fiduciary out’;
- provide guidance on the Panel’s approach to ‘hard’ exclusivity arrangements (i.e. ‘no talk’ commitment without a fiduciary exception) entered into in respect of non-binding proposals including to allow, in limited circumstances, a period of ‘hard’ exclusivity of no more than four weeks in which exclusive access to non-public due diligence is provided;
- clarify the Panel’s position on break fees in respect of non-binding proposals; and
- require the disclosure of deal protection arrangements which include a notification obligation entered into in respect of a non-binding proposal.
These proposed changes provide welcome clarity to the Panel’s approach in relation to exclusivity arrangements, particularly in relation to non-binding proposals, following much debate and challenge in the market in recent times. Indeed, we congratulate the Panel on threading the needle on competing views that hard exclusivity should not be allowed in any circumstances versus the desire to give a target company’s board of directors primacy to do what is in the best interests of the company to obtain a binding takeover proposal. While the final policy positions are subject to the feedback received during the public consultation process (which closed on 28 February 2023), there is no doubt that the market will welcome updated guidance from the Panel on these matters, which are an issue in many transactions in the current environment.
Insider participation in control transactions
In December 2022, the Takeovers Panel also released a consultation paper on proposed revisions to Guidance Note 19 concerning insider participation in control transactions.
The original Guidance Note was issued in June 2007 in the context of private equity bids. Since then, there has been a significant increase in private equity backed transactions. That, as well as issues of management of conflicts outside of private equity deals, meant a reconsideration of the Guidance Note was timely. Ultimately, the Panel is concerned that participating insiders may affect the consideration and management of a bid so that decisions would not be free from influence. This has the effect of preventing shareholders and directors from receiving sufficient information to allow them to assess the merits of a proposal.
The Panel is proposing to revise Guidance Note 19 to broaden the definitions of “insider” and “participating insider”, as well as clarify and fine tune the Takeovers Panel’s expectations regarding when the insider should disclose an approach to the board.
In summary, the proposed changes are to:
- explicitly articulate the policy basis for the Guidance Note and clarify its scope;
- broaden the definition of “insider” to capture a shareholder with material non-public information obtained through its nominee on the target board;
- broaden the definition of “participating insider” to include an insider who is a bidder or potential bidder or who has a relationship with a bidder or potential bidder;
- clarify the Panel’s expectations as to when an insider should disclose to the board or relevant sub-committee any approach that might lead to a control proposal; and
- provide a non-exhaustive list of factors that the Panel will consider when determining whether unacceptable circumstances exist based on recent Panel decisions.
The Panel undertook a consultation process (which closed on 28 February 2023) and we expect that the final revised Guidance Note will be released in the second half of 2023.
The role of the Takeovers Panel in takeovers and schemes
On 30 April 2021, the now former Treasurer announced that the former Coalition Government would “conduct a public consultation process to consider broadening the role the Panel plays in control transactions, including potentially giving advance rulings and expanding the Panel’s remit to include members’ schemes of arrangement”. (See Chapter 9 of the 2022 edition of the Takeovers + Schemes Review for further background information.)
Following that announcement, a consultation paper was released in April 2022 seeking feedback as to:
- the operation of takeovers and schemes generally, and whether they are meeting the broader policy objectives in respect of control transactions in Australian law;
- the role of the Takeovers Panel and ASIC in regulating takeovers generally; and
- the role of the court, the Takeovers Panel and ASIC in regulating schemes generally.
In relation to the Takeovers Panel specifically, the Treasury requested feedback on whether the Takeovers Panel’s powers should be expanded to include approval of schemes of arrangement by transferring some or all the functions of the courts, such as reviewing scheme documentation, convening members’ meetings and providing final approval of the scheme.
The consultation process closed on 3 June 2022, shortly after the Labor government was elected. In November 2022, Treasury advised that the new government would not examine whether there is merit in pursuing changes to the takeovers regime canvassed in the consultation paper and that stakeholders broadly did not support the central policy proposition to shift powers from courts to the Takeovers Panel to handle schemes of arrangement.
It was noted by Treasury that submissions which had been made to improve the current regime (including by rationalising ASIC class orders and other legislative instruments) and streamlining and simplifying current processes would be considered as part of usual Treasury processes and in line with broader government priorities. It is hoped that the government and ASIC do so, as there are definitely improvements that can be made.
Chair Longo gets on with the job
In 2022, ASIC Chair Joseph Longo began delivering on his commitment to steer ASIC’s focus away from assisting businesses and consumers to recover from the economic impacts of the COVID-19 pandemic, and instead address regulatory and consumer protections arising from the changed economic environment.
Following a period of focus upon implementation of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry recommendations, ASIC has made it clear that it is now committed to using its expanded regulatory toolkit to take action against misconduct which poses significant harm to consumers and the broader community. In particular, ASIC’s strategic enforcement areas and priorities going forward will be focused upon scams, sustainable finance practices, crypto-assets, design and distribution obligations, breach reporting, cyber and operational resilience, financial accountability regime and digital technology and data. Interestingly, regulation and enforcement of laws in M&A does not seem to be a high priority for ASIC. This most likely reflects limited resources and greater needs elsewhere.
That said, ASIC generally remained active in its enforcement work, conducting 60 new investigations (with 148 still ongoing) and charging 27 individuals or companies in criminal proceedings between 1 January and 30 June 2022. In this period, the courts also imposed $145.8 million in civil penalties arising from ASIC proceedings. As of 1 July 2022, ASIC had 40 civil financial services-related matters still before the courts.
The newly established Financial Regulatory Assessment Authority (FRAA) undertook its first assessment of ASIC’s effectiveness and capability, finding that ASIC was effective and capable in areas relating to strategic prioritisation, planning and decision-making, surveillance and licensing. The review was informed by public consultations, surveys of ASIC staff and discussions with key stakeholders. Whilst its findings were positive, FRAA identified key growth opportunities for ASIC moving forward, the implementation of which would require cultural change at ASIC. Meanwhile, Joseph Longo has recently announced he is set to reveal a plan to restructure ASIC in a move to streamline enforcement and quicken decision-making in a change some in the media have portended will be the “biggest shakeup of ASIC in 15 years”. The overhaul of the structure comes just prior to a period of renewal of ASIC’s five-person commission itself. The proposed restructure involves cutting its number of divisions, allocating more of ASIC’s funding to technology and prioritising the enforcement areas outlined above.
Whilst the regulation of public M&A in Australia was not the primary focus for ASIC in 2022, ASIC still maintained an active presence by providing several regulatory updates on key areas of focus, through supervision of corporate control transactions (particularly schemes of arrangement) as well as by consulting on ASIC’s takeover-related class order regulatory relief, with the majority of these class orders due to expire on 1 October 2023 (as further discussed on page 58).
Key developments in ASIC’s regulation of public M&A transactions
ASIC has recently provided public views on material adverse change conditions (so-called ‘MAC conditions’) which are included in control transactions. If triggered, MAC conditions give a bidder the right to terminate the control transaction. ASIC said it expects these conditions to contain objective and quantifiable standards by which the parties to a transaction, and their securityholders, can determine whether a material adverse change has occurred (and therefore whether a change of control transaction may be terminated). ASIC observed that recently it has seen a trend of uncertain MAC conditions in control transactions, where a ‘material adverse change’ is circularly defined as an event or circumstance having a ‘material adverse change’ on, for example, the target’s assets, liabilities or financial performance.
In light of this trend, ASIC has reiterated that:
- an uncertain MAC condition which contains subjective or unclear thresholds poses a material risk that the condition may contravene section 629 of the Corporations Act (which, while not strictly applicable to schemes, is relevant to the court’s assessment of whether to approve a scheme since a scheme cannot be used to avoid the application of the takeovers provisions); and
- inherent uncertainty also means the risks associated with the triggering of these conditions may not be able to be adequately disclosed, contrary to the principle in section 602 of the Corporations Act requiring the acquisition of control to place in an “informed market”.
It has been established market practice in Australia for MAC conditions to include both quantitative and qualitative thresholds to ensure one party is not forced to complete a transaction in circumstances that are materially different to those upon entry into a contract. In this context, we consider ASIC’s commentary to be surprising. Qualitative or general MACs are used the world over with little regulatory concern.
The impact of ASIC’s new position with regard to qualitative thresholds is yet to be determined. The market will watch ASIC’s actions closely to see if the comment was a one-off or indicative of a permanent shift in focus which alters the manner in which this bidder protection mechanism is used within control transactions throughout 2023 and beyond. Ultimately, we expect that it will continue to be possible to include qualitative MACs (for example, which are triggered upon the occurrence of specified events, such as a serious cyber ransomware attack or a (minor) breach of an anti-bribery and corruption law that results in material loss of reputation or trust) provided that additional disclosure explaining the potential for uncertainty and disputation over whether a MAC has been triggered is included in the scheme booklet.
Matching periods in control transactions
In 2022, ASIC made note of, and highlighted, a transaction implementation agreement that extended a five-business-day matching period by a further three business days to provide the bidder with a second opportunity to put forward an equivalent or superior proposal to a competing bidder. The bidder was also a substantial shareholder of the target.
ASIC considered that this was likely to be an unacceptable lock-up device which may inhibit the acquisition of control taking place in an efficient, competitive and informed market.
ASIC reminded target directors that they should be satisfied of the commercial and competitive benefits to shareholders before entering into any agreement for a control transaction and that ASIC will continue to intervene where it appears transaction agreements are being used as unacceptable lock-up devices in control transactions. This has been further reinforced by the Takeovers Panel in their revised draft Guidance Note 7 that is currently the subject of a public consultation process (and mentioned in further detail above), which states that a matching right cannot be for a duration that removes any practical likelihood that a potential competing bidder will be prepared to put a proposal to the target. The Panel considers the duration of such right should be no more than five business days and often shorter, depending on the circumstances.
Ensuring investors are given information to make informed choices in control transactions
In 2022, ASIC continued to intervene in corporate control transactions to prevent what it said was a risk to investor harm by improving the standard of information that entities undertaking control transactions provide to investors.
For example, in April 2022, ASIC outlined that it had reviewed the information provided to investors for a scheme of arrangement under which investors were offered a combination of cash and scrip consideration. All investors would receive the same cash consideration but could choose to receive scrip consideration in either one of two entities. However, the board’s recommendation and the independent expert’s report opining on whether the scheme is in the best interests of investors considered only one form of scrip consideration offered.
ASIC said that its expectation is that the board and the expert will consider each of the alternative forms of consideration when making their recommendation or providing an opinion.
Disclosure of relevant agreements relating to a substantial holding
ASIC made clear that it considers it generally inappropriate to redact documents attached to substantial holding notices. This highlights that the substantial holding disclosure requirements promote the underlying principle of the takeover provisions in Chapter 6 of the Corporations Act that the acquisition of control should take place in an efficient, competitive and informed market. Unfortunately, the quality and timeliness of substantial holder disclosure is subject to great variations. Non-compliance often goes undetected (or at least not in a timely manner). That said, it is very difficult for any regulator, with limited resources, to effectively police transgressions. Nevertheless, it would seem that the Corporations Act provisions on, and ASIC’s approach to enforcement of breaches of, the substantial holder provisions could do with some reconsideration.
ASIC consultation of takeover class orders expiring in 2023
ASIC has modified the operation of the takeovers provisions in the Corporations Act in a number of “class orders”, with the majority of these due to expire on 1 October 2023. In November 2022, ASIC released a consultation paper seeking market feedback on remaking ASIC class orders on takeovers, compulsory acquisitions and relevant interests.
The consultation paper proposes changes to a number of class orders, most of which are aimed at incorporating minor and mechanical amendments necessary to remake the class orders in light of their upcoming expiry (or ‘sunset’) dates. In general, these changes do not raise significant new policy issues or concerns.
However, beyond incorporating merely minor changes, a number of more substantial changes have been proposed in relation to the following class orders:
- Class Order [CO 13/520] Relevant interests, voting power and exceptions to the general prohibition, relating to voluntary escrow arrangements and amendments to the money lending exception for certain lenders which has the potential to create some practical issues on its implementation in certain situations if implemented as proposed;
- Class Order [CO 13/521] Takeover bids, to expressly cover derivatives (which convert into bid class securities) and certain types of performance rights; and
- Class Order [CO 13/522] Compulsory acquisitions and buyouts, to clarify that securities that are acquired on market will go towards the bidder’s ability to satisfy the threshold for compulsory acquisition.
Consultation ended in January 2023 and ASIC has indicated that commencement of the remade instruments will occur between April and October 2023.
Overview of ACCC clearances
FY 2022 was another big year for ACCC merger reviews, with the highest number of transactions assessed since statistics started being reported in this way (437 in total). However, continuing a well-established trend from previous years, the vast majority of mergers assessed by the ACCC (94%) went through the “pre-assessment” process and only 26 reviews progressed to a full public review. Of the 26 public reviews which concluded in FY 2022:
- 15 were unconditionally cleared by the ACCC;
- seven were cleared subject to undertakings (EG’s acquisition of various liquor stores, Waterlogic / Culligan, Link / Dye & Durham, Apollo Tourism & Leisure / THL, One Rail / Aurizon, Betrola / Zoetis and Suez / Veolia);
- one was opposed outright (the proposed network sharing and spectrum arrangement between Telstra and TPG, discussed below); and
- the ACCC’s process was discontinued in the face of preliminary statements of concerns by the ACCC in a further three cases (Hume / Forestry Corporation of NSW, Port of Geelong / Spirit Super and Palisade and Konecranes / Cargotec).
These figures show that of the 437 deals notified to the ACCC, more than 99% were ultimately cleared with only four being either opposed or withdrawn in the face of ACCC opposition.
Mergers assessed by ACCC, FY10 - FY2022
In 2022, on average, it took the ACCC 109 days (~16 weeks) to complete a public merger review, being:
- an average of 79 days (~11 weeks) for less complex “phase 1” assessments; and
- an average of 218 days (~31 weeks) for the three more complex “phase 2” decisions which were concluded in 2022, each of which involved negotiation of undertakings.
These time frames were in line with timing over recent years. However, given the relatively low number of transactions that are publicly reviewed, the figures in any particular year can be skewed by a small number of outlier decisions.
Timing of public reviews assessed by ACCC, CY2010-2022
A big year for merger authorisations
The vast majority of mergers notified to the ACCC are dealt with by way of the “informal” merger clearance process.
However, it has also been possible to approach the ACCC and seek formal merger authorisation ever since changes to the law were made in 2017 following the Harper Review into competition policy. Unlike the case with ACCC’s decisions on informal merger clearances, the ACCC’s decisions in the formal merger authorisation process are able to be reviewed by the Australian Competition Tribunal.
The ACCC received three merger authorisation applications in 2022. This was an unprecedented number and equal to the total number of applications received in the previous four years since the process was first introduced. This shows that parties are increasingly seeing merger authorisation as an attractive process for seeking approval for the most complex and difficult transactions. Gilbert +Tobin is very familiar with this process, having advised parties seeking authorisation in four of the six applications to date, including two in 2022.
The first of these applications was by Telstra (represented by Gilbert +Tobin) and TPG, who entered into three interrelated agreements to facilitate access to Telstra’s mobile network by TPG in regional Australia. The parties submitted an application for authorisation in May and, on 21 December 2022, the ACCC decided not to grant authorisation to Telstra and TPG. The ACCC determined that it was not satisfied that the proposed arrangements would not be likely to substantially lessen competition, nor was it satisfied that the likely public benefits from the arrangements would outweigh the likely public detriments. Telstra and TPG have now sought review of the ACCC’s decision in the Tribunal, with a decision due to be handed down by June 2023.
The second application was by Armaguard and Prosegur Australia Holdings (represented by Gilbert +Tobin), the two largest suppliers of cash-in-transit services in Australia. In September 2022, Armaguard and Prosegur sought ACCC authorisation for the merger of their cash-in-transit services, ATM device monitoring and maintenance and ATM businesses in Australia. The parties submitted that high fixed costs for providing cash-in-transit services and declining cash use mean that neither is able to operate a financially viable business. The parties believe that without the merger, one of them is very likely to cease supplying cash-in-transit services.
On 21 December 2022, the ACCC released a statement of preliminary views regarding the merger’s potential effects on competition and potential public benefits and detriments. The ACCC is considering whether it will likely affect competition for the supply of cash-in-transit services, particularly to customers who require the full suite of these services. The ACCC is also considering whether more than one major supplier would continue to supply these services in the counterfactual without the proposed merger. If so, the ACCC’s preliminary view is that there will be a significant difference in the level of competition in the relevant markets with the merger as compared to a future without the merger in which more than one supplier would continue to operate.
The ACCC’s final decision will likely be announced in late March 2023.
The third application was by ANZ in relation to its proposed acquisition of the banking arm of Suncorp. The merger authorisation application was received by the ACCC in December 2022 and the ACCC has commenced the formal process of considering whether the transaction will substantially lessen competition, or that the public benefits outweigh the public detriments. The ACCC’s decision is scheduled for early June 2023.
Return of the failing firm
Many mergers occur against the background of disruptive change in an industry or financial distress by one of the merger parties.
The ACCC is often sceptical about accepting an argument that it should allow a merger between two competitors in a concentrated industry because one of the firms is failing and so competition between the merger parties will not be continuing in any event. The ACCC calls these “failing firm” arguments and in assessing these mergers, the ACCC looks to confirm whether:
- the firm is in imminent danger of failure and is unlikely to be successfully restructured without the merger;
- in the absence of the merger, the assets associated with the relevant firm, including its brands, will leave the industry; and
- competition would be better maintained by allowing the failing firm to exit and have its customers move their business to alternative sources of supply.
Having regard to these stringent criteria, the ACCC rarely approves mergers solely on the basis of failing firm arguments. However, in 2022 the ACCC did unconditionally clear IVE Group’s proposed acquisition of Ovato. IVE and Ovato were the two largest suppliers of heatset web-offset printing, which is used to produce a range of printed materials in Australia, including magazines and retail catalogues. Ovato has been in voluntary administration since 21 July 2022. In quickly approving this transaction, ACCC accepted that Ovato was unlikely to be able to successfully restructure without the merger, that IVE was the only viable purchaser of Ovato and that there were no preferable competitive alternatives to the transaction.
The ACCC is also being asked to assess a form of failing firm argument in relation to the Prosegur / Armagard authorisation application, where the parties are arguing that neither party is able to maintain a viable cash handling business without the merger. It remains to be seen which way the ACCC will go in that case.