Chapter 9 of Gilbert + Tobin’s 2022 Takeovers and Schemes Review (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), the Australian Competition and Consumer Commission (ACCC) and the Australian Prudential Regulation Authority (APRA).
The Australian government’s increasingly expansive views on national security have been evident for some time through the foreign investment review process, but 2021 was the year that they expanded to a new high.
The initial step involved amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) (effective 1 January 2021) which created new regulated actions and new powers on the part of the Treasurer relating to national security risks. While the zero monetary threshold was mostly scrapped as of 1 January 2021 for many transactions, it continued for transactions where the target conducted any national security business.
From a national security perspective, the initial tranche of 2021 amendments gave 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.
Identifying whether a business is publicly known to be, or could be known following reasonable enquiry to be, carrying on business in Australia in whole or in part in one of the identified national security categories has proven to be a headache.
For starters, there are no hard and fast rules as to when a non-Australian entity is carrying on business in Australia – although FIRB has now provided some non-exhaustive guidance on this front. Moreover, it is only necessary for the target (whether Australian or not) to be carrying on a small amount of business in one of the national security categories to be caught, meaning significant amounts of due diligence may have to be done before a determination can be made about whether a target business is caught by the zero dollar thresholds.
In addition, many of the terms used are vague (such as, “critical” goods, services or technology) which, even with the benefit of guidance on FIRB’s website, can be uncertain. Understanding whether a target stores classified information (defined to include information that has been classified as “protected” or higher within the Australian Government Protective Security Policy Framework (PSPF)), for example, will require a detailed understanding of the PDSF and the ability to make necessary inferences from other data that may become available in due diligence as to the likelihood or not that stored information is so classified. And finally, the government has set a very high bar for what constitutes “reasonable enquiries” – merely asking the target is insufficient.
All of this has been compounded by amendments made to the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act), which came into effect in December 2021. The definition of national security business in FATA is tied to the definition of “critical infrastructure asset” in the SOCI Act, so these amendments have 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 suggests that a lot more transactions will be caught by the zero dollar threshold in 2022.
In conjunction with these latest amendments, the government has released an updated guidance note relating to national security risks. The note provides detailed and candid sectoral guidance on national security risks across a number of sectors. It is not surprising that a number of sectors described in earlier versions of that note as sensitive are, as a result of the December 2021 amendments, now “notifiable national security actions” and subject to the zero dollar thresholds.
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, there are also other reasons to withdraw applications, making these statistics difficult to interpret. Nevertheless, rejections appear to be increasing. In addition, the government’s tougher stance on national security has led to changes in business behaviour, with Chinese bidders more likely to opt out of processes that involve national security businesses, on the basis that approval is unlikely.
The Takeovers Panel had another busy year in 2021 albeit interestingly the case load was materially lower than the 2020 numbers.
The Panel received 20 applications in 2021, which was significantly down on the prior two years which had well over 35 applications in each year. Nevertheless, 20 is consistent with the years before 2019-2020. Perhaps one reason for the lower number of applications in 2021 was a lower percentage of hostile bids (13% in 2021, down from 26% in 2020) and a greater proportion of schemes of arrangement (79% in 2021 compared with 50% in 2020) reflecting market conditions more conducive to agreed takeovers / schemes as compared to the market value dislocation in 2020 with the initial upheaval caused by COVID-19.
Nevertheless, the Takeovers Panel applications together with various other active matters including the potential for takeover law reform (more on that below) and consideration of new or revised regulatory guidance made it another busy year for the Panel executive team.
As is usual, the Takeovers Panel received applications on a variety of topics including bidder’s statement disclosure, offer conditions, exclusivity arrangements, underwriting for capital raisings impacting control, association matters, breaches of the 20% rule and transactions impacted by decisions by conflicted directors.
Some key Takeovers Panel cases and developments in 2021 included:
Exclusivity arrangements - AusNet Services and Virtus Health
This matter concerned one of the largest public company transactions in 2021 which involved competing bids by Brookfield and APA for AusNet Services (AusNet).
AusNet received various non-binding indicative proposals from APA and Brookfield to acquire AusNet via a scheme of arrangement. Following several of these proposals, Brookfield increased its proposal to an indicative price at $2.50 cash per share on the condition that AusNet enter into a confidentiality and exclusivity deed with Brookfield which provided for Brookfield to conduct due diligence and for the parties to negotiate a scheme implementation deed on an exclusive basis for at least eight weeks. AusNet entered into such a deed. Shortly thereafter, APA made a further proposal at $2.60 per share payable in cash and scrip. Importantly, the exclusivity arrangement with Brookfield did not include a fiduciary exception for AusNet to consider any higher proposal during an eight week period following signing. The confidentiality deed also contained a $5 million cost reimbursement or break fee arrangement for the benefit of Brookfield if Brookfield diligently pursued the proposal and AusNet ceased to do so.
APA made an application to the Panel seeking a declaration of unacceptable circumstances alleging that the eight week exclusivity period without a “customary” fiduciary out hindered the acquisition of control in an efficient, competitive and informed market and denied AusNet shareholders an opportunity to participate in the benefits of the control proposal.
AusNet (and Brookfield) made submissions to the effect that the circumstances were not unacceptable as:
- the AusNet board decided in good faith that acceptance of the proposed exclusivity arrangements was necessary to secure Brookfield’s cash proposal and therefore in the best interests of AusNet’s shareholders; and
- APA had not been significantly disadvantaged as AusNet would be free to provide APA due diligence access at the end of the exclusivity period if the circumstances justified it.
Having regard to all the facts and circumstances of the matter, the Panel decided in Ausnet Services Limited 01  ATP 9 that the arrangement had or was likely to have an anti-competitive effect given, among other matters:
- the no-talk exclusivity restriction prevented the AusNet board from responding to any competing proposal, including an unsolicited proposal or a proposal that had been publicly announced;
- there was no ‘fiduciary out’ to the no-talk restriction;
- the length of the exclusivity period of eight weeks;
- AusNet did not conduct an effective auction process before entering into the exclusivity arrangement; and
- AusNet delayed in disclosing the full terms of the exclusivity arrangements, noting the cost reimbursement provision was not disclosed by AusNet.
The Panel made orders:
- permitting AusNet to engage with competing proposals, including APA’s proposal, if these proposals are considered superior; and
- ensuring that the market, and potential competing bidders, are aware of all material terms of the exclusivity arrangements.
APA had also sought a further order (which the Panel declined to make) preventing AusNet and Brookfield entering into a scheme implementation agreement for five weeks after the end of the exclusivity period in order to allow it to “catch up” to Brookfield.
Interestingly, the order and declaration of unacceptable circumstances were made 26 days, say four weeks, after the exclusivity arrangement was entered into. In any public company transaction, before a counter-bidder can get due diligence access it would need to agree a confidentiality deed with the target, that might take a further week or two. In this context, regardless of Brookfield’s eight week exclusivity arrangement being found to be unacceptable, Brookfield gained an important four to six week head start over any counter-bidder.
Indeed, Brookfield ultimately entered into a scheme implementation deed a couple of weeks after the Panel’s orders at $2.65 cash per share (having increased its prior proposal in the face of competition from APA) and was successful in acquiring AusNet.
The AusNet board will feel they achieved a strong outcome for shareholders which was made possible via the exclusivity arrangements.
It was perhaps then a pyrrhic victory for APA at the Takeovers Panel. The matter shows that even though APA was successful in gaining access to due diligence earlier than it would have had the Brookfield exclusivity period been upheld, it wasn’t able to match Brookfield’s final bid in its binding offer, nor a major shareholder’s preference for cash, and so was ultimately unsuccessful.
It wasn’t long after the decision in AusNet Services before the issue of exclusivity agreements in relation to indicative proposals was back before the Panel in relation to competing proposals by BGH Capital and CapVest Partners to acquire Virtus Health (Virtus).
In December 2020, BGH acquired a 19.9% stake in Virtus by an aftermarket share raid for 10% and a swap over 9.9%. BGH then made a non-binding indicative proposal to the Virtus board seeking to acquire Virtus by scheme of arrangement at a price of $7.10 per share.
While Virtus was considering the BGH proposal, it received a further non-binding indicative proposal from CapVest to acquire Virtus by scheme of arrangement at a price of $7.60 per share. CapVest also indicated that, if the scheme failed, it would be willing to make a takeover offer with a 50.1% minimum acceptance condition at $7.50 per share. The CapVest proposal was only received after Virtus agreed to enter into a process deed with CapVest which provided for CapVest to conduct due diligence and for the parties to negotiate a scheme implementation deed on an exclusive basis for nine weeks. The exclusivity arrangement included a standard fiduciary out which only applied three to four weeks after the deed was signed. During this initial period, Virtus was not able to consider any superior proposal. The process deed also contained other common exclusivity arrangements these as notification rights, matching rights and provision of equivalent information. The deed also contained a break fee arrangement for the benefit of CapVest (of either $2 million or $4 million, depending on the trigger).
BGH made an application to the Panel seeking a declaration of unacceptable circumstances alleging that the process deed and the circumstances in which it had been entered into 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.
Virtus submitted that the circumstances were not unacceptable and had not hindered, but had in fact promoted, competition for the acquisition of control of Virtus. Virtus submitted that its board had carefully considered each of the elements of the process deed, as well as its overall effect, and decided that the protections given to CapVest under the process deed were necessary and reasonable in the context given the opportunities for an auction for control had been significantly reduced as a result of BGH tabling its proposal immediately after acquiring a 19.99% pre-bid stake. Virtus submitted that these were reasonable protections to agree to so as to create contestability for control when it otherwise might not have existed and given the price proposed by CapVest was a significant premium to the price proposed by BGH and, based on the valuation work undertaken by Virtus, sufficient to justify endorsement.
The Panel considered that the exclusivity arrangements, considered as a whole, and having regard to the factual matrix of this matter, inhibited or were likely to inhibit the acquisition of control of Virtus taking place in an efficient, competitive and informed market (see Takeovers Panel media release).
The Panel considered that the following aspects of the exclusivity arrangements in the process deed, taken together, had an anti-competitive effect:
- the fiduciary out did not apply during a period of approximately one month;
- the effectiveness of the fiduciary out was unclear in certain circumstances and was limited by the notification obligation;
- the equivalent information provision was not subject to any exception for sensitive information of a bidder; and
- the duration of the exclusivity arrangements and the fact that they were granted at the indicative proposal stage where there is no guarantee that Virtus shareholders would receive a binding bid.
The Panel made orders that:
- Virtus and CapVest were prohibited from entering into a scheme implementation agreement and CapVest was prohibited from making a takeover bid for Virtus, for ten business days (on the basis that the one month period during which the fiduciary out applied had already expired by the time that Panel made its orders); 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.
As a result of these two decisions, it appears that entering into exclusivity arrangements (without a fiduciary exception) in response to indicative, non-binding proposals is likely to be susceptible to being declared unacceptable, even where target boards believe that the arrangements, in all the circumstances, either promote competition or are otherwise in the best interests of shareholders.
Dividend reinvestment plan: Thorn Group
This was an application made and determined in 2020 albeit the reasons for the decision were released in 2021 (see Thorn Group Limited 01 & 02  ATP 29). The matter is interesting as it is the first time the Panel had to consider the impact of a dividend reinvestment plan (DRP) on control of a company.
Thorn Group was a company with a significant amount of cash and its board was considering the company’s future business opportunities and / or a return of cash to shareholders. Its major shareholder, Somers, owned 30.6% of Thorn. Two of the three Thorn board members were nominees of Somers. The second largest shareholder and other significant shareholders were critical of Thorn and its governance and were seeking a change of the board by a requisitioning a shareholders meeting and proposing member resolutions. Thorn considered that the proposed meeting and member resolutions were invalid. Litigation soon followed.
During this time, Thorn announced a large special dividend in relation to which the DRP would operate (with a relatively short time for elections to participate in the DRP to be made) and the potential for a future significant buy-back.
Shareholders holding only 39% of the issued capital, including Somers, participated in the DRP. Following the DRP, Somers’ shareholding increased to 39.4% in reliance on item 11 of section 611 of the Corporations Act (an exemption for an increase in voting power via a DRP).
The second largest shareholder made an application to the Panel for a declaration of unacceptable circumstances which the Panel made for a number of reasons including:
- lack of disclosure at the time of announcing the DRP of the potential control effect;
- lack of information about the merits of reinvesting in the company given the company had not identified future use of its cash funds and uncertainty over future business plans;
- short time to closing date for elections in the DRP (eight days after announcement);
- potential effect on control and lack of communication with shareholders;
- incongruence between the DRP followed by a large share buy-back;
- potential conflicts at the board at the time it made its decision to proceed with the special dividend and the DRP; and
- potential to impact the voting and outcomes of the resolutions concerning changes to the board requisitioned by shareholders.
In making its decision, the Panel said that the DRP exception is “to allow shareholders to reinvest back into a company to fund continuing operations and future growth. Its purpose is not for passing control to a shareholder at a discount using the company’s own funds” and, in the Panel’s view, “the size of the special dividend and the existence of substantial shareholders on Thorn’s register, together with the contributing factors described above made it inevitable that applying the DRP to the special dividend could have a significant effect on control that was inconsistent with the purposes” of the DRP exception and the takeover provisions.
Most dividend reinvestment plans will not require scrutiny for the purpose of relying on the item 11 exception. In this matter, it was an unusual combination of factors that led to the circumstances being unacceptable including the failure to consider the control effects of the large special dividend particularly in light of the known or likely preferences of Thorn’s major shareholders, the failure to disclose the potential control effects, the issue of DRP shares before the requisitioned meeting to replace Somers’ nominees on the Board (and this meeting had not been held by the date it was required to be held) and the failure of the Thorn board to consider the potential conflicts of interest of directors when considering the potential control effects.
The Takeovers Panel made orders cancelling the shares issued to Somers under the DRP (other than the number of shares that would allow Somers to retain its pre-DRP percentage shareholding) and requiring Thorn to pay the dividend in cash to Somers.
The decision may not have wide reaching effect as most DRPs will not require scrutiny that the facts of this case demanded. That said, it is an interesting example of the difficulties that may arise from the decisions of directors who may be subject to conflicts of interest.
Truth in takeovers - shareholder statements
After seemingly much internal deliberation, ASIC decided not to go ahead with its comprehensive review of ASIC Regulatory Guide 25 known as “Truth in Takeovers” (RG25) which requires that bidders, targets and substantial shareholders be held to public statements. This is somewhat disappointing given RG25 is essentially good regulatory policy but has not been updated for almost 20 years since it was first issued in which time the market has significantly developed in reliance on the policy. Still, perhaps market participants may not have liked some revisions which we understand ASIC to have been contemplating so maybe this is a good outcome overall. Best not to mess with something that is not fundamentally broken.
But is it broken?
Most would say the policy works well insofar as public statements by bidders are concerned ensuring bidders cannot deviate from last and final statements about bid price and closing dates.
However, one area of concern in recent years is whether or not the policy should apply to shareholders, and in particular retail shareholders? These shareholders may not even know about RG25 or be sophisticated enough to realise the consequences of their statements or how bidders and targets may use statements made by them (including by aggregating with statements made by others).
In particular, a number of recent Takeovers Panel cases have arisen out of ambiguous statements by shareholders including Finders Resources 02 and 03R (2018) and Cardinal Resources 02 (2020) and some years before that in BreakFree Limited 03 and 04 (2003) and Bullabulling Gold (2014). Some of these matters also involved bidders and targets surveying, collecting and / or “harvesting” intention statements from shareholders to accept or reject bids which were then summarised in bidders or targets statements.
ASIC RG25 expressly applies to substantial shareholders but does not expressly state if it applies to other shareholders. Separately, ASIC has previously said that it discourages securing and disclosing shareholder intention statements. The market seems to be disregarding this ASIC commentary as seeking shareholder intention statements is quite commonplace in most takeover bids and schemes and it is clear that these statements can be influential to other shareholders when they consider whether or not accept a bid.
The Takeovers Panel generally expects substantial shareholders to be bound by public statements of intent. However, the Panel has not generally applied RG25 to non-substantial shareholders albeit the position often depends on the circumstances and facts of the matter. Of course, adopting different approaches for different shareholders is unfair and perhaps applying the policy to substantial shareholders in itself may be too restrictive or unfair particularly if the facts or circumstances concerning a takeover transaction change.
Then, of course, what about statements made by target directors who will often hold shares? It is not uncommon for director statements recommending acceptance or rejection, and accompanying statements about the directors’ intention in respect of their own shareholdings, to be repeated without qualifications. Should target directors be held to these unqualified statements? Should they be in a different category from other shareholders?
Given the various uncertainties, it seems that shareholder statements is an area where the market would benefit from some clear regulatory guidance. ASIC has seemingly vacated the area, at least for now. It remains to be seen if the Takeovers Panel will venture further into this space, noting it has already done so once in Guidance Note 23 in respect of qualifications of shareholders statements, consent for these statements to be published and related disclosure matters.
Takeover law reform
On 30 April 2021, the Treasurer announced that the 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”. In doing so, he noted that the Takeovers Panel was a “regulatory success story” and the Government wanted to explore how its role could expanded to further reduce the costs of M&A.
Advance rulings power
Currently parties to a takeover can discuss uncertain points of law or practice or facts giving rise to a potential Takeovers Panel matter with the Panel executive. However, these discussions, while helpful, would not bind a sitting Panel.
In this context, it would seem that giving the Takeovers Panel an advance rulings power, which could operate in a manner similar to ASIC’s waiver and exemption power, must be a positive development which would assist in providing certainty in takeovers (and thereby reduce costs).
That said, the technicalities in the approach to exercising this power would not be without some difficulties which might reduce the cost and efficiency benefits. For example, all parties affected by any advance ruling would want to be consulted. In addition, one might expect the availability of an appeals process from decisions concerning the exercise of this power (noting the Panel itself has power to hear appeals from ASIC decisions to exercise its waiver power). Nevertheless, the existence of a binding advance ruling power, with appropriate safeguards, would surely be a positive development.
A greater role for the Takeovers Panel in schemes of arrangement?
Perhaps, more controversially, the consultation is also exploring the possibility of moving the role of the Courts in approving schemes of arrangement to the Takeovers Panel.
The desire to do so is borne out of a view that the Court process is cumbersome, expensive, time consuming and antiquated.
Of course, some have a very different view, believing the Court supervision adds integrity and fairness to the process and is best placed to apply relevant legal principles that have evolved in case law over many many years. With respect to those views, these are matters that a well respected specialist regulatory body like the Takeovers Panel could easily undertake.
There are, of course, other potential models that could be tested or tried including:
- maintaining the role of the Courts, or a modified version of it, but have the Takeovers Panel replace ASIC in its review role and in assisting the Court, as has been done in New Zealand; or
- retaining Court approval for schemes of arrangement for those parties who wish to seek Court approval of the acquisition for whatever reason but creating a new, additional, regulatory model for acquisitions of public companies involving shareholder approval but with no court approval. Shareholder approval could be by way of 75% of votes cast by independent shareholders (ie the 50% headcount test applying in schemes could be avoided). This new approach could leverage off existing disclosure requirements in bidder and target statements (and / or scheme booklets). The Takeovers Panel could regulate disputes in relation to this mode of acquisition in much the same way as it does for takeover bids.
This new approach would in effect provide a third mainstream way to acquire Australian public companies in addition to schemes and takeover bids. It could be said to be analogous with US regulation which allows mergers and takeovers to take place in this manner.
Where to next?
It is not clear how far the Government or Treasury has progressed in its considerations of these matters and if they have concluded on a preferred way forward. However, with a federal election due by May 2022 and parliamentary sitting dates limited (with those to come to be taken up with the budget), any proposed legal reform of this nature, if it is to proceed, will have to wait until post-election.
Takeover law reform is, of course, not a key electoral issue and so it seems we will need to wait until the second half of 2022 to see if these worthy reform initiatives are picked up by a re-elected Liberal government or a new Labor government. One suspects if Labor wins the election, these initiatives might be further down the list for a first term new government.
Back to the future…with an eye on recovery?
Amid the ongoing COVID-19 pandemic, the golden age (… for law firms) of ‘why not litigate?’ is seemingly coming to an end. The hypervigilant response to the Banking Royal Commission’s criticism that ASIC was underutilising civil penalty litigation when dealing with misconduct has seemingly run its course. After several public and high-profile losses, ASIC has now changed tack, with new leadership and its ‘Corporate Plan 2021-25’ excluding all mention of the ‘why not litigate?’ approach and instead favouring a focus on economic recovery. We expect this approach to have little impact on the regulation of M&A in Australia.
The new enforcement approach focuses upon matters involving the most significant harm to the community. Whilst this shift in enforcement approach suggests the Royal Commission’s diminishing influence, it recognises that ASIC will better serve the public by focusing its litigation resources on instances of serious misconduct while using its other powers to efficiently and effectively respond to less severe, yet still unlawful or undesirable corporate behaviour.
ASIC’s Corporate Plan and its accompanying ‘Statement of Intent’ responds to the Federal Government’s ‘Statement of Expectations’ for ASIC. This statement begins with the expectation that ASIC will “identify and pursue opportunities to contribute to the Government’s economic goals, including supporting Australia’s economic recovery from the COVID pandemic”. Other focuses include that ASIC will “work closely with the Government and Treasury” and “consult with the Government and Treasury in exercising its policy-related functions”. This represents a significant shift in Government attitudes with the 2018 Statement of Expectations emphasising the importance of ASIC’s independence in maintaining confidence in the regulatory framework. The previous iteration also highlighted ASIC’s enforcement role and directed the regulator to target financial sector misconduct. It remains to be seen whether the government’s desire to put a bridle on ASIC’s policy-making functions will have any impact on the refresh of the numerous modifications to the Corporations Act 2001 (Cth) which ASIC has made historically to help facilitate M&A transactions, and which is due to occur later this year (more below).
In June 2021, the Government announced new ASIC leadership, with Mr Joseph Longo appointed as Chairperson and Ms Sarah Court as Deputy Chairperson. Mr Longo has a background as a corporate lawyer, in-house counsel at an investment bank and national director of enforcement at ASIC. Ms Court has previously served as an ACCC commissioner, where she was responsible for enforcement matters. The new Deputy Chairperson has flagged that enforceable undertakings, which the Royal Commission criticised, were appropriate in certain circumstances and would be a priority for ASIC alongside faster investigations.
In June 2021, the Financial Regulator Assessment Authority Act 2021 (Cth) was introduced in response to the Royal Commission. This legislation established the Financial Regulator Assessment Authority (FRAA), which is tasked with assessing the effectiveness and capability of ASIC and the Australian Prudential Regulation Authority (APRA). In November 2021, Federal Treasurer Josh Frydenberg announced the launch of the FRAA’s review of ASIC. This review will focus on assessing ASIC’s strategic prioritisation, planning, decision-making, surveillance, and licensing functions. The report is due to be delivered by the end of July 2022.
Albeit a change in approach, ASIC was still active in its enforcement work, concluding 50 financial services enforcement matters between 1 January and 30 June 2021. In this period, the Courts imposed $29.6 million in civil penalties. Moreover, as of 1 July 2021, ASIC recorded 26 criminal and 18 civil financial services-related matters still before the Courts.
Regulatory changes / guidance in public M&A
‘Canvassing’ shareholder intention statements
ASIC has been closely inspecting shareholder intention statements that arise in schemes of arrangement. The regulator highlighted the fine line that a bidder walks between ‘canvassing’ an existing shareholder and obtaining a relevant interest that would be in breach of relevant interest limits in section 606 of the Corporations Act.
In one example, ASIC requested that the scheme company tag a substantial holder’s votes at a scheme meeting after they reversed their stated intention to vote against the transaction. The reversal coincided with an increase in consideration offered by the bidder. ASIC was concerned that an agreement, arrangement, or understanding had been reached impacting voting rights. Ultimately, no objection to the scheme was lodged as the tagged votes did not impact the outcome of the scheme. This is a timely reminder that a prospective bidder must consider the relevant interest limitations before engaging with a significant shareholder.
Disclosures outside of the scheme booklet
ASIC has reiterated that it regularly monitors transactions, including disclosures made outside of a scheme booklet. The regulator may intervene in situations where disclosure does not meet the same standards that would be expected in the scheme booklet.
On one occasion, an acquirer under a proposed scheme of arrangement was questioned by ASIC for providing conflicting disclosures to shareholders about an offer. The bidder planned to contact shareholders by phone, email and letter in relation to the scheme. ASIC was concerned as the communications were in conflict with information in the scheme booklet and included reference to an offer premium without balanced disclosure.
ASIC discussed its concerns with the bidder, and the communications were amended. It is important to remember that ASIC may request a copy of any relevant communications between a scheme proponent or bidder and shareholders when monitoring a scheme of arrangement transaction, which may include call scripts, emails, or letters.
Stub equity in control transactions
ASIC has continued to provide further guidance around stub equity offers, typically made by private equity bidders, to ensure that protections are maintained for retail investors. A stub equity offer is when scrip is offered in a special purpose vehicle which owns the target company post-implementation. ASIC has advised that it is expected that company directors and independent experts provide opinions on scrip consideration for control transactions, where stub equity is offered as one of the alternative forms of consideration. ASIC has recommended best practices for stub equity transactions which include:
- an expert valuation and opinion on the scrip offered;
- target directors’ recommendation on the scrip option; and
- both of the above to be displayed clearly and prominently in the scheme booklet.
ASIC has recommended that disclosure in a control transaction that includes stub equity should also include:
- the terms of the stub equity, including any mandatory custodial arrangements and securityholder agreement;
- the rights and protections which will be available to target holders who elect to receive stub equity, compared with the rights and protections currently available (as a target shareholder); and
- the risks associated with accepting stub equity consideration.
Market integrity - leaking or mishandling of information
Market integrity continues to be a significant focus for the corporate watchdog. ASIC has stated that it closely monitors trading around important market announcements to uncover insider trading and other unscrupulous market behaviour. In a control transaction, ASIC has emphasised that all parties have a role to play in managing information about the transaction. This includes:
- requiring external contractors and consultants to enter confidentiality agreements;
- having an explicit approach towards handling of inside information (for instance, the implementation of a protocol); and
- recording who, and when an individual, received the inside information.
ASIC Intervention in schemes - GetSwift
ASIC continued its pursuit of former market darling GetSwift, opposing a proposed scheme for re-domiciliation to Canada.
ASIC had commenced proceedings against GetSwift and its directors Mr Hunter, Mr Eagle and Mr Macdonald in February 2019 for making misleading statements and breaching continuous disclosure obligations in market announcements between February and December 2017.
While these civil proceedings were still progressing, GetSwift entered a Scheme Implementation Deed with a Holdco in September 2020 to re-domicile through a “top-hat” scheme. All of the issued GetSwift shares would be transferred to Holdco, and GetSwift shareholders would be given one Holdco share for every seven GetSwift shares. At the same time, the Holdco would then be re-listed on the NEO Exchange in Canada.
ASIC appeared in GetSwift Ltd (No.2)  FCA 1733 on behalf of the Commonwealth and in its own right as a contingent creditor in anticipation of its civil action against the company. In particular, ASIC opposed the scheme anticipating that GetSwift would be liable for potential fines and investigating costs stemming from the civil action.
The Federal Court approved the scheme conditional on an undertaking from GetSwift to alleviate the concerns that ASIC raised. GetSwift entered into a deed poll with the Holdco that Holdco would provide sufficient funds to the company to ‘discharge its liabilities to the extent that GetSwift is unable to…in respect of the ASIC proceedings.’
In November 2021, ASIC was successful in its subsequent Federal Court action against GetSwift and three of its directors. ASIC is currently seeking pecuniary penalty orders against GetSwift and these directors.
Expiry of takeover class orders in 2023: watch this space
ASIC has noted it will begin seeking feedback and consulting on updates to a number of class orders (including [CO 13/521] Takeover bids) with respect to takeovers and control transactions that are due to expire in 2023. This is the first time stakeholders will have had an opportunity to comment on the class orders for a decade and the consultation process is likely to begin in early 2023.
ACCC court action to restrain IVF clinic transaction
The ACCC, under the leadership of Mr Rod Sims (more on the ACCC leadership below…), continued to take an aggressive approach to merger enforcement in 2021.
In last year’s Review, we noted the significant amount of merger litigation which had played out in the Federal Court over the course of 2019 and 2020. Virtus Health’s attempted acquisition of Adora Fertility from Healius is an example of this trend towards merger litigation continuing into 2021. The transaction was ultimately discontinued following court intervention by the ACCC, which reflects the ACCC’s growing sensitivity about parties notifying their deals to the ACCC and providing the ACCC with what it considers to be sufficient time to conduct a public review.
Virtus Health and Adora Fertility are providers of IVF services with fertility clinics in Brisbane, Sydney and Melbourne. Virtus Health notified the ACCC of its intention to acquire Adora Fertility on 30 August 2021, but the transaction was not conditional on ACCC approval. On 21 September 2021, the ACCC commenced a public review of the transaction.
In early October, the merger parties advised the ACCC that they would complete the transaction on 15 October 2021. The ACCC filed proceedings in the Federal Court on 13 October seeking an urgent injunction to stop the proposed completion. The Federal Court granted the ACCC a final interlocutory injunction on 25 October 2021, restraining completion of the transaction until the proceedings brought by the ACCC were finalised. The parties subsequently elected to discontinue the transaction, bringing the court action to an end.
At the time of the court action, the chair of the ACCC, Mr Rod Sims, stated that the parties had “shown complete disregard for the usual merger assessment process”.
Post-closing enforcement investigations
In addition to commencing litigation over Virtus / Adora, the ACCC launched two post-merger enforcement investigations into transactions – Fitbit / Google and Newcastle Agri Terminal / Qube – which completed before the ACCC had completed its review of the transaction. In the case of Qube and Newcastle Agri Terminal, the ACCC stated that the parties had “not provided sufficient time or information” to allow the ACCC to assess the competitive impact of the transaction. Given these situations, and the ACCC’s broader push for changes to the merger clearance process which are discussed below, a key strategic consideration for parties contemplating any form of transaction involving a competitor with material competitive overlap in 2022 will be the timing and manner of notification of potential transactions.
ACCC assessment numbers and time periods
Consistent with the record high of M+A activity discussed throughout our Review, the ACCC’s published statistics for merger reviews show that 2021 had the highest number of transactions assessed by the ACCC since at least 2009/10, when current records began.
Mergers assessed by ACCC, FY10 – FY21
However, the number of more in-depth public reviews undertaken by the ACCC was down by ~30% from the previous year, reflecting the fact that the ACCC pre-assessed a record 95% of transactions that were notified to it (the highest since records began).
During 2021, the average time taken to complete a public merger review was 78 days (~11 weeks) for investigations that did not progress to a “phase 2” review following publication of a statement of issues and 194 days (~28 weeks) for investigations that did proceed to phase 2. These timeframes are similar to long-term averages. The ACCC does not publish statistics for timing of pre-assessments, but based on Gilbert + Tobin’s experience, the pre-assessment process took an average of about four weeks in 2021.
In 2021, no transactions which were publicly reviewed by the ACCC were outright opposed and only one was which was cleared subject to undertakings (Veolia / Suez).
Two transactions were notified and subsequently withdrawn, including the proposed merger of Aon and Willis Towers Watson which had been the subject of a “red light” statement of issues. Overall in 2021, the ACCC published five Statements of Issues, including two “red light” (Aon / Willis Towers Watson and Cargotec / Konecranes) and three “amber light” transactions, which were ultimately cleared unconditionally.
ACCC push for merger law reform
Following long-standing concerns about difficulties it has faced in enforcing merger laws in court, Mr Sims outlined far-reaching potential reforms to the merger control regime in Australia in 2021. However, the future of these potential reforms remains uncertain under the current government and the forthcoming change in leadership at the ACCC.
In a speech on 27 August 2021, Mr Sims identified a range of concerns that the ACCC has with the existing regime for merger notification and reviews. Australia’s current regime is a voluntary, non-suspensory judicial enforcement model. To prevent a merger, the ACCC must go to Court and prove that the future anti-competitive effects of a transaction are “likely”. Some, including Mr Sims, consider this to be too high a bar for the competition regulator.
In light of concerns with the existing process, Mr Sims proposed three key potential reforms:
- A formal mandatory, suspensory clearance-based model. This system would require mandatory notification to the ACCC for transactions above specified thresholds before completion. This is similar to the system that operates in the US, EU, China and a number of other jurisdictions. The ACCC’s clearance decisions would be subject to limited merits review in the Australian Competition Tribunal.
- Changes to the substantive merger test. These changes would include updating the merger factors to focus on the structural elements of competition that are changed by the acquisition, amending the definition of “likely” to clarify the degree of probability of the substantial lessening of competition (SLC) to be established, adding a deeming provision that transactions involving a merger party with substantial market power will SLC and allowing consideration of the competitive effects of other agreements between merger parties.
- Reforms to deal with acquisitions by large digital platforms.
The future of these options for reform remains uncertain. Treasurer Josh Frydenberg has shown little appetite for the proposals, responding to Mr Sims speech by stating that “matters of merger law policy rest with the government” and “I do not want to put more regulatory barriers in front of business”.
Change in ACCC leadership
We remind readers that there will also be a change in leadership at the ACCC in 2022. We are delighted that Gilbert + Tobin’s very own Ms Gina Cass-Gottlieb will be taking over from long-standing chair Mr Sims. This position has historically been highly influential in determining priorities of the ACCC. We look forward to seeing what impact this change of leadership has on the ACCC’s position on merger law reform and assessment of mergers more generally.
Whatever that may prove to be, we have no doubt the approach will be well considered. We are also sure that the administration and enforcement of competition law in Australia will be in good hands with Gina.
APRA’s policy and supervision priorities reflect a returned focus to its longer-term prudential agenda
Following a period focussed on addressing the challenges arising from COVID-19, ARPA’s recently announced policy and supervision priorities place a heightened emphasis on “new and emerging financial risks, practices and business models that are testing traditional regulatory boundaries and supervisory practices”, including rapid digital evolution. Taking heed of the learnings from the pandemic, APRA is also focussed on bolstering regulated entities’ ability to withstand unexpected financial or operational shocks.
Key policy and supervisory priorities include (amongst others):
- a multi-year plan to modernise APRA’s prudential architecture to ensure it remains fit for purpose taking into account new risks, practices and business models;
- improving crisis preparedness;
- working with Treasury and ASIC to implement the Financial Accountability Regime, which expands to the Banking Executive Accountability Regime to insurance and superannuation;
- rectifying substandard industry practices and unacceptable product performance in superannuation; and
- cyber risk preparedness and responsiveness across banking, insurance and superannuation.
Increased focus on superannuation performance with implementation of Your Future, Your Super reforms
The Government’s broad-reaching Your Future, Your Super reforms came into effect in July 2021. APRA’s implementation of the reforms involves an annual performance test for MySuper products, enhancing standards on investment governance and reporting on findings from a thematic review on expenditure management.
The purpose of the annual performance tests is to hold superannuation funds accountable for underperforming products and to increase member awareness about the performance of their fund.
This has significant consequences for underperforming funds. If a MySuper product fails the first performance test, the trustees of the fund must inform members that the fund has failed the test and provide members with information about the YourSuper comparison tool which will be administered by the Australian Taxation Office and allow members to compare performance and fees of all MySuper products. Products that fail the test two years in a row are prohibited from accepting new members until their net investment performance improves, with the intention being that flows of contributions into these funds will be stemmed and members will be better protected. Trustee directed products will also form part of the annual performance tests from this year.
APRA released the results of its first MySuper product performance test in August 2021. While 84% of MySuper products passed the performance test, APRA identified 13 products that had failed.
As implementation of the reforms continues, APRA will continue to be focussed on underperformance in superannuation.
APRA exercises new approval powers in superannuation
As we have previously flagged, amendments to the Superannuation Industry (Supervision) Act 1993 (Cth) (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 $88,000) 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), APRA has power delegated by the Treasurer to approve stakes of more than 20% (previously 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).
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.
APRA has now approved three change of control applications using its approval powers, all arising from the sale by the major banks of parts of their wealth management businesses:
- in December 2019, APRA approved applications from IOOF Holdings and a wholly owned subsidiary to hold a controlling stake in OnePath Custodians and Oasis Fund Management, which were owned by ANZ;
- in May 2021, APRA approved another application from IOOF Holdings Limited to hold a controlling stake in NULIS Nominees (Australia) (known as NULIS), part of NAB’s MLC wealth management business;
- in November 2021, APRA approved KKR’s acquisition of a 55% stake in Colonial First State from CBA.
As the trend towards industry consolidation in superannuation continues, applications to APRA under the approval power may increase going forward, depending on the structure of the transactions.