General overview

What legislation governs M&A activity in your jurisdiction?

In Australia, Chapter 6 of the Corporations Act 2001 (Commonwealth) regulates the acquisition of shares in companies that are listed on the Australian Stock Exchange (ASX) or have more than 50 members.

Chapter 6 also regulates the acquisition of interests in trusts and other investment vehicles listed on ASX.

The provisions of Chapter 6 are supplemented by guidance issued by the primary regulators: the Australian Securities and Investments Commission (ASIC) and the Takeovers Panel.

If either the bidder or the target is listed on ASX, the ASX Listing Rules apply. The ASX Listing Rules regulate transactions involving:

• the acquisition of a listed entity's main undertaking;
• a listed entity's acquisition/disposal of substantial assets from/to a shareholder holding more than 10%; and
• non-pro rata issues of equity by a listed entity without shareholder approval.

Other relevant legislation includes:

• Foreign Acquisitions and Takeovers Act 1975 (Commonwealth) (FATA). If a bidder is non-resident, or controlled by non-residents, it generally must obtain approval prior from the Federal Treasurer, through the Foreign Investment Review Board (FIRB).
• Trade Practices Act 1974 (Commonwealth) (TPA). Takeovers that would (or would be likely to) have the effect of substantially lessening competition in a market in Australia are prohibited. Bidders usually seek informal clearance from the Australian Competition and Consumer Commission (ACCC), which administers the TPA.
• Industry-specific legislation, which restricts ownership and transfer of interests in companies in particular industry sectors, including banking, insurance, media and telecommunications, and in certain companies, including Telstra and Qantas.

What impact have recent legislative changes had on the nature and amount of M&A activity?

The Australia-US free trade agreement, which increased foreign ownership screening thresholds for US acquirers from January 1 2005, might encourage greater US investment.

What have been the most significant M&A transactions in your jurisdiction over the past year?

The $6.8 billion takeover of WMC Resources by BHP Billiton was Australia's largest-ever cash takeover bid. Several hostile bids were made, including Toll's bid for Patrick Corporation, Foster's bid for Southcorp and Transurban's bid for Hills Motorway Group. Also notable was San Miguel's successful competing bid for National Foods.

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated/restricted?

Under the FATA, a non-US foreign person (including an Australian incorporated subsidiary of a foreign company) must apply to the Commonwealth Treasurer for approval before acquiring a shareholding of 15% or more in an Australian company valued at, or with total assets of, more than A$50 million ($37 million). In the case of US acquirers, this screening threshold is increased to an indexed threshold of (for 2006) A$831 million, except in certain sensitive sectors (including telecommunications, transport and defence) where the 2006 threshold is A$52 million.

The Treasurer has 30 days from receipt of the application to make a decision, unless an interim order is made to allow up to a further 90 days to decide. The Treasurer can make an order prohibiting the acquisition if the Treasurer is satisfied that it would be contrary to the national interest. In considering applications, the Treasurer is advised by FIRB. The Treasurer approves almost all acquisitions.

The industry specific legislation referred to above restricts foreign investment in certain sectors.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

Takeover bids

The bid documents (bidder's statement) must contain prescribed information, including:

• the terms of the proposed takeover offer;
• the source of any cash consideration offered by the bidder;
• the bidder's intentions regarding the target company's business and employees; and
• anything else known to the bidder that is material to a shareholder in deciding whether or not to accept the offer.

The target's statement must include all information known to the target's directors that target shareholders and their professional advisers reasonably require to make an informed decision on whether to accept the offer (to the extent that it is reasonable for them to expect to find that information in the statement).

The statement must include a recommendation by each director, with reasons for the recommendation, or reasons why a recommendation has not been made.

The statement must be accompanied by an independent expert's report if the bidder's voting power in the target at the outset is 30% or more, or if the boards of the bidder and target share a common director.

Supplementary statements must be issued if the bidder or target becomes aware of:

• a misleading or deceptive statement in, or an omission of required information from, its original documents; or
• a new circumstance, arising after the original documents were lodged, that would have had to be included if it had arisen before lodgement.

Schemes of arrangement

The scheme of arrangement mechanism is described below. Generally, the information that the target company must provide to its shareholders is the same as the aggregate of the information required in a bidder's statement and a target's statement. There will usually be an implementation agreement between the bidder and the target pursuant to which the bidder agrees to provide information to the target, to enable the target to prepare the information memorandum accompanying the notice of meeting to approve the scheme.

Negotiated acquisitions (trade sales)

Unless the ASX Listing Rules require shareholder approval, there are no specific disclosure requirements. The extent of disclosure will be determined by agreement between the buyer and the seller. If shareholder approval is required, directors' duties require, generally, that all material information must be provided to shareholders. In some instances, the ASX Listing Rules require an independent expert's report.

To what extent do disclosure requirements achieve market transparency?

It is generally accepted that there is extensive market transparency in public M&A transactions in Australia.

In addition to the above requirements, if an entity is listed on ASX, the ASX Listing Rules require the entity to keep the market informed of any information it becomes aware of that a reasonable person would expect to have a material effect on the price or value of its securities. The entity must provide that information to ASX immediately. If the information is confidential and a reasonable person would not expect the information to be disclosed, the disclosure requirement does not apply in certain circumstances, for example, if the information concerns an incomplete proposal or negotiation. This exception to the disclosure requirement does not, however, override the obligations of bidders and targets to disclose all material information in their takeover documents.

Where ASX considers that there is likely to be a false market in a listed entity's securities, it can request the information needed to correct or prevent the false market. ASX will consider a false market likely if, among other things, reasonably specific rumour or media comment in relation to the company has not been confirmed or clarified by a market announcement.

How significant an issue is prospectus liability in a typical M&A transaction?

If the bidder offers, as consideration, securities in itself, its holding company or a body under its control (that is, the bid is a scrip bid), the bidder's statement must include all the material that would be required in a prospectus relating to the securities. The bidder's statement in effect replaces the requirement for a prospectus. Liability for misleading information contained in, or material omissions from, a bidder's statement for a scrip bid is similar to liability under a prospectus.

If the securities offered as consideration have been quoted continuously on ASX for more than 12 months, the prospectus requirements are less onerous.

How have recent M&A transactions and/or current legislation dealt with the issue of material adverse change clauses?

Takeover bids

It is common for takeover bids to include as a condition that there be no material adverse change to the business or prospects of the target. In accordance with Chapter 6, such a condition is permissible as long as it does not depend on the opinion of the bidder, or an event within the control of the bidder. Accordingly, a material adverse change clause must be expressed in objective terms.

Schemes of arrangement

A material adverse change clause that entitles a bidder to withdraw from a scheme need not be expressed in objective terms, but target company directors will normally seek to ensure that the clause is drafted tightly and extends no longer than necessary.

Negotiated acquisitions (trade sales)

The terms of a material adverse change clause in a negotiated acquisition are solely a matter for negotiation between buyer and seller.

What are the key unresolved issues in your jurisdiction?

The Takeovers Panel and ASIC have provided guidance on many issues, but questions remain on matters such as:

• acceptable triggers for break fees (especially for schemes) where no superior proposal prevails;
• the circumstances in which a bidder can make an increase and/or extension of its bid conditional on events such as achieving a specified level of acceptance;
• the enforceability of pre-emptive rights or change of control provisions that are triggered by a takeover bid and have not previously been disclosed to the market;
• the circumstances in which a bidder can enter into transactions with a target shareholder conferring benefits not offered under the bid.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

The legislative and regulatory regime governing takeovers is described above.

Responsibility for regulating takeovers is effectively divided between ASIC and the Takeovers Panel.

ASIC (in the style of the Securities and Exchange Commission in the US) has primary responsibility for administration of the Corporations Act. It has broad powers to modify the provisions of Chapter 6 and give exemptions. ASIC issues policy statements, which clarify its interpretation of Chapter 6 and its position on granting exemptions.

The Takeovers Panel is modelled loosely on the London Panel, and has a small full-time executive and part-time members drawn from merchant banks, law firms and business. It is the main forum for resolving takeover disputes, rather than the courts. The Panel can make declarations of unacceptable circumstances and wide-ranging consequential orders. These powers must be exercised in the light of the basic policy objectives of Chapter 6. The Panel also decides appeals from ASIC's decisions on exemptions concerning takeovers.

The Panel's decisions are subject to judicial review by the courts. In 2005, the first challenge of this kind in over five years resulted in a Panel decision being set aside.

What are the various methods by which a takeover can be achieved?

Takeover bids

A takeover bid is the most common way of obtaining control of a listed public company.

Schemes of arrangement

A scheme of arrangement requires a proposal to be put by the target company to its shareholders and approved by the court. The proposal is binding on all shareholders if a majority in number of shareholders voting at a meeting agree to it, provided the majority holds at least 75% of the shares voted.

A scheme cannot be used to avoid the application of Chapter 6. However, ASIC will normally allow a takeover to be effected by a scheme if it is satisfied that:

• shareholders will receive all information necessary for them to make a decision;
• shareholders will receive reasonable and equal opportunities to share in the benefits provided under the scheme; and
• meetings will be conducted properly.

A scheme has advantages over a takeover bid, including almost unlimited flexibility in structuring a takeover or merger and the certainty of obtaining 100% provided the requisite majority and the court approve the scheme.

However, a scheme gives the target control of the process, and does not offer the flexibility of a takeover bid to adjust the terms of the offer quickly, for example, increasing the bid price, or extending the offer period. Flexibility is important if there are competing bids.

Negotiated acquisitions (trade sales)

A takeover can also be achieved in effect if the bidder acquires the target's business (including all relevant assets and liabilities) pursuant to an agreement entered into between the bidder and the target. If the target is an entity listed on ASX, the transaction will require the approval of the target's shareholders.

DLCs

Several mergers between Australian and foreign entities have been effected by creating a dual listed company structure (DLC). A DLC involves the continuation of separately listed companies that agree to conduct their businesses as if they were a single economic entity. An economic merger between the companies can be effected through reciprocal cross-guarantees, appointment of identical boards, agreements providing for joint voting by both sets of shareholders on some issues and (if necessary) equalization of dividends or distributions.

How differently do the legislation/regulations treat hostile and voluntary takeover bids?

There is no difference in treatment between hostile and voluntary (friendly) takeover bids. However, given that the target's cooperation is required as a practical matter to give effect to a scheme of arrangement, negotiated acquisition or DLC, hostile takeovers are usually made by way of a takeover bid.

What penalties are imposed for parties that violate takeover regulations (or equivalent)?

Non-compliance with Chapter 6 can lead to civil and criminal liability and to the imposition of a wide range of penalties and sanctions. The Takeovers Panel and the courts can make a wide range of orders, including orders that:

• cancel or declare void an agreement or offer;
• restrain exercise of voting or other rights attached to securities; or
• prevent or require the disposal of securities or vest securities in ASIC.

What are the thresholds for disclosing bids and offers?

All bidders

A bidder is prohibited from acquiring more than 20% of the target shares before making a bid. Shareholdings (and other interests, such as options, giving control over voting or disposal of target securities) held by the bidder's associates (including parties acting in concert) must be aggregated for this purpose. Even an informal agreement to acquire more than 20% will breach the prohibition.

Substantial holding disclosure

A potential bidder that, together with its associates, acquires an interest in shares carrying 5% or more of the voting rights in a listed company must give notice to the target and ASX within two business days. The Panel is likely to expect disclosure of cash-settled equity swaps and similar derivatives as if they were shares. Bidders should also be careful when entering into agreements with third parties that are conditional on a bid succeeding (such as arrangements for on-sale of target assets or joint-bid arrangements) because this can give rise to association and the need to disclose the relevant agreement.

Foreign bidders

A foreign bidder may not acquire more than 15% of the shares in an Australian target, unless it obtains FIRB approval. However, agreements to acquire up to 20% of the shares, subject to FIRB approval as a condition precedent, are permitted.

Competition/Antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

A bidder whose merger or acquisition proposal could substantially lessen competition in a market will usually approach the ACCC for informal clearance.

In 2005 the Australian government proposed two changes to the merger process, which were the subject of parliamentary debate:

• creating a formal procedure, in addition to the informal clearance procedure; and
• providing for applications for authorizations for proposed mergers to be made directly to the Australian Competition Tribunal (at present, applications for authorization must be made to the ACCC). The authorization process is different from informal clearance as it requires an assessment of the likely public benefits of a proposed merger against the possible anticompetitive detriment.

It is unclear whether these proposed changes will be reintroduced into parliament.

How are the competition/antitrust regulations enforced in your jurisdiction?

Section 50 of the TPA prohibits a merger or acquisition transaction that would (or would be likely to) substantially lessen competition in a market. If the ACCC considers that an acquisition would have this effect, it may apply to the Federal Court for an interlocutory injunction to prevent the acquisition proceeding until the issue is determined at a final hearing or otherwise resolved.

Neither the target nor a competitor can apply for an injunction, they can only seek to persuade the ACCC to do so.

How do legislation and regulations approach the issues of abuse of dominant position?

In Australia the test for acceptability or otherwise of a merger or acquisition proposal is whether the transaction will substantially lessen competition in a market. The merger test does not expressly consider the notion of abuse of a dominant position or misuse of market power as it is known in the Australian legislation. However, in the ACCC's published merger guidelines, one of the thresholds used by the ACCC when considering whether to undertake a detailed enquiry into a proposed merger is whether the post-merger market share of the parties will be greater than 40%, that is, whether the merged entity could, by virtue of the merger, attain a position of substantial market power.

Section 46 of the TPA prohibits a person who possesses a substantial degree of market power taking advantage of that power for a proscribed anti-competitive purpose.

In addition to the 40% threshold, the ACCC, in its merger guidelines, states that it will undertake a detailed investigation of a proposed merger if the merger will result in a post-merger combined market share of the four (or fewer) largest firms of 75% or more with the merged firm having a market share of at least 15% of the relevant market (that is, that the market is concentrated).

To what extent are parties to an M&A transaction subject to prior notification requirements?

Prior notification is not mandatory, but it is common practice in Australia for one or more parties to a takeover to make an informal (and even confidential) approach to the ACCC to discuss its view on possible concerns related to compliance with section 50. The ACCC's informal merger review normally takes between six to eight weeks (this includes public market enquiries conducted by the ACCC).

If the ACCC concludes, after its (initial) review, that the proposed merger raises competition concerns it will then release a (public) statement of issues, which will trigger a second phase investigation of the proposed merger, and provide the parties with the opportunity to rectify the concerns identified by the ACCC (that is, negotiate appropriate undertakings).

The ACCC states that it seeks to establish, by agreement with the parties, a timeline for this second phase.

A bidder required to obtain ACCC clearance will normally include a regulatory approvals condition. If the ACCC is not prepared to give clearance to a proposed takeover, it is possible to offer undertakings to the ACCC to reduce or eliminate the concerns it might have.

If a proposed takeover might contravene section 50 of the TPA but is likely to have significant efficiency or other benefits, one or both parties can seek authorization from the ACCC under the TPA. To obtain authorization a public benefit test must be satisfied, and the process (which is public) can take some months.

Author biographies

David Williamson Blake Dawson Waldron David Williamson is head of Blake Dawson Waldron's corporate group. He specializes in mergers and acquisitions, and equity capital markets. Williamson has been the transaction lead on a number of Australia's biggest ticket and landmark M&A transactions. Most recently, he led the firm's team in Australia's largest ever contested takeover and cash bid, advising BHP Billiton on its recommended A$9.2 billion ($6.8 billion) bid for WMC Resources. The deal was awarded INSTO Deal of the Year and M&A Deal of the Year for 2005. Williamson also led the firm's team on the multi-award winning A$5.4 billion acquisition by ANZ Banking Group of The National Bank of New Zealand and its associated A$3.6 billion rights issue. This is the largest ever trans-Tasman transaction to date and its associated rights issue is Australia's largest ever rights issue. This transaction won FinanceAsia's Best M&A Deal and Best Secondary Offering of 2003, Asiamoney's M&A Deal of the Year, INSTO Equity Issuer of the Year and CFO's Best Secondary Equity Deal of the Year. Clients that Williamson has represented as lead partner include ANZ Banking Group, AWB, BlueScope Steel, BHP Billiton, GE, North, Sodexho, UBS and Zinifex. Marie McDonald Blake Dawson Waldron Marie McDonald is joint practice head of Blake Dawson Waldron's national mergers and acquisitions team. She specializes in mergers and acquisitions (both public company takeovers and private acquisitions), as well as corporate reconstructions. She is a part-time member of the Australian Takeovers Panel, which adjudicates on disputes during a takeover bid. McDonald has been the lead partner on a number of high-profile recent transactions, including San Miguel Corporation's successful takeover bid for National Foods (A$1.9 billion), Alinta's acquisition of Duke Energy's Australasian assets (A$1.7 billion) and subsequent IPO of those assets, and Alinta's acquisition, together with AMP, of Aquila's Australian assets, including the acquisition of United Energy by scheme (A$4 billion). She has also been responsible for the conducting a number of successful and novel proceedings before the Takeovers Panel and Courts. McDonald has a Bachelor of Science (Hons) and Bachelor of Laws (Hons), both from the University of Melbourne. Bill Koeck Blake Dawson Waldron Bill Koeck is joint practice head of Blake Dawson Waldron's national mergers and acquisitions team. He advises on public company takeovers, schemes of arrangement, large capital raisings and the associated due diligence exercises, corporate restructuring of businesses, acquisitions, disposals, ASX listings, foreign investment, joint ventures, share buy-backs, corporations law compliance and strategic advices. He has been the lead partner on a number of high-profile transactions, including representing Goodman Fielder directors on its initial public offering and demerger from Burns Philp (A$2.5 billion); the board of AGL in relation to demerger of AGL Infrastructure/AGL Energy (A$7.5 billion); Ramsay Health Care on its acquisition of Affinity Health Care (formerly Mayne Hospitals) for A$1.42 billion and divestments including 14 hospitals to Healthscope (A$490 million); and Centennial Coal on its scrip takeover of Austral Coal (A$400 million) including seven Takeovers Panel applications and three Federal Court proceedings involving Glencore International. Koeck is the author of The Guide for Company Secretaries issued by the Institute of Chartered Secretaries and Guidebook on Company Meetings issued by the Institute of Chartered Secretaries. He has a Masters in Law (Hons) from Sydney University (first prize in public companies law and securities law) and a Diploma in Applied Corporate Finance from the Securities Institute of Australia. He lectures in corporate law (equity financing) in the Masters of Law course, at the University of Sydney. He is admitted as a barrister and solicitor in England and Wales, and the states of NSW, Victoria and Western Australia.