[Last updated: 1 June 2022, unless otherwise noted]

4.1 Structure of acquisitions in Australia

A key strategic decision to make, for both the bidder and the target company in a control transaction, is which acquisition structure to use. It is possible to acquire the entire issued share capital of an Australian public company by two principal means: a takeover bid (the off-market version of which is like a "tender offer" in other jurisdictions) or a scheme of arrangement (which is like a "merger" in other jurisdictions).

4.2 Takeover bids

A takeover bid is essentially a regulated offer to buy target company shares which is made on identical terms to each target company shareholder.

There are two types of takeover bids in Australia: off-market bids and on-market bids. The key differences between these two methods are as follows:

An off-market takeover bid is more commonly used than an on-market bid as it allows for flexibility in the offer structure, particularly due to the conditions that a bidder may impose.

1. Rules applicable to all takeover bids

   Both types of takeover bid share a number of common characteristics, including the following:

   • Announcing a bid – Once a bidder publicly announces a proposal to make a takeover bid, it must make takeover offers within two months on terms no less favorable than the announced terms.
   • Offer period – The takeover offer must be open for at least one month. Either kind of bid can be extended one or more times by the bidder up to a maximum offer period of 12 months. An extension of a conditional off-market offer by more than one month (in total) will give shareholders who had already accepted the offer a right to withdraw their acceptance. In some circumstances, the offer will be automatically extended by up to 14 days by operation of the Corporations Act.
   • Offer price – The same price must be offered to all shareholders, and the bidder may increase the price during the bid. Under an off-market bid, the increased price must be paid to all shareholders who accept the offer, even those who accepted before the bid price was increased. However, under an on-market bid, the increased price is paid only to those shareholders who accept the offer after the price has been increased.
   • Disclosure documents – The offers, when made, must be accompanied by a disclosure document called a Bidder's Statement. The target company responds with its own disclosure document called a Target's Statement.
   • Selective benefits – There is a restriction on providing benefits during the offer period to some target company shareholders without extending the benefits to all shareholders.
   • Sale of shares by bidder – The bidder is not permitted to dispose of any target company shares during the bid period, unless another non-associated bidder makes or increases a competing takeover bid for the target company.
   • Compulsory acquisition – Following a bid, the bidder will generally be able to compulsorily acquire the shares held by the remaining minority shareholders at the bid price if it achieves at least a 90% holding in the target.
2. The bid price

   The bid price must equal or exceed the highest price paid (or agreed to be paid) by the bidder or any of its associates during the four months before the date of the bid. If two or more alternatives are offered (for example, cash or scrip), then the value of each alternative must comply with the minimum price rule.

   In the event that the bidder acquires shares in the target company on the market (as permitted by the Corporations Act) during the offer period and the consideration for shares purchased on the market is higher than under the takeover offer, the offer to all other target shareholders is increased and the additional amount is payable to those who have already accepted the offer.

3. Conditions precedent in a takeover offer

   Off-market takeover bids may be subject to conditions precedent. On-market bids, however, must be unconditional. Off-market bids are usually subject to a number of conditions, including a minimum acceptance condition (generally either 50.1% for control or 90% for compulsory acquisition), a condition that the target does not announce any material adverse change in its financial position during the bid period, and a condition that all necessary regulatory approvals are obtained. Bids can also be conditional on external events, such as a fall in a specified market index.

   However, the Corporations Act provides that conditions of the following kind cannot be included:

   • a maximum acceptance condition (for example, a condition that the bidder is not obliged to proceed if acceptances are received for more than a specified percentage of shares);
   • a condition that allows the bidder to acquire shares from some, but not all, of the shareholders who accept the bid;
   • a condition that target company shareholders approve or consent to a retirement payment being made by the target to any officer of the target company; and
   • a condition which is dependent upon the opinion, belief or other state of mind of, or an event that is within the sole control of, the bidder or any of its associates. For example, a condition that the bidder is "satisfied" with the results of its due diligence on the target company could not be included.
4. Bidder's disclosure obligations

   The Corporations Act requires that a Bidder's Statement must be sent by the bidder to all target company shareholders with its offer. The document must include a range of specific information, as well as general disclosure of all information (including confidential information) known to the bidder that would be material to a decision regarding the acceptance of the offer.

   The key specific disclosure requirements are:

   • the identity of the bidder, including its controllers and associates;
   • the bidder's intentions regarding the continuation of the business of the target company, the future employment of the present employees of the target company, and details of the changes that may be made to the business of the target (such as any proposed restructuring or sale of non- core divisions); and
   • if the bid price includes cash, details of the bidder's source of cash funding.
5. Target's disclosure obligations

   The directors of the target company must issue a Target's Statement in response to the Bidder's Statement, which similarly has both specific and general disclosure obligations. The specific disclosure obligations include a recommendation from each target company director as to whether or not the bid should be accepted, together with reasons for that recommendation. The general disclosure obligation requires disclosure of all information known to directors of the target company which target shareholders and their professional advisers would reasonably require to make an informed decision in relation to the takeover bid. As with the Bidder's Statement, this includes material information which is otherwise confidential.

   The directors' recommendations are important disclosures because it is common for some target shareholders to pay particular regard to the views of the board. The prospect of securing a favorable recommendation from target company directors (that is, a "friendly" bid) will often be attractive to a bidder. Accordingly, it is essential that the disclosure surrounding the directors' recommendations is fully explained and reasoned.

   A Target's Statement must include an independent expert's report opining on whether the takeover bid is "fair and reasonable" in circumstances where the bidder's voting power in the target company is 30% or more, if the bidder is a director of the target company or if the bidder has a director in common with the target company. Even where an independent expert's report is not required by law, it is common for target companies to include such a report in the Target's Statement.

6. Updating disclosure documents

   There is a general obligation on the bidder and target to update their respective Bidder's Statement or Target's Statement if, during the bid period, they become aware of a new matter that is material to target shareholders.

   The update is made by preparing a supplementary statement, which is lodged with ASIC and sent to the ASX for public release.

4.3 Schemes of arrangement

An alternative acquisition structure to a takeover bid is a "scheme of arrangement" (sometimes called a "merger"). A scheme is a court-approved form of corporate reconstruction. The scheme structure involves a shareholder vote rather than offers being made to, and accepted by, each shareholder individually (as is the case in a takeover bid) and, depending on the outcome of the vote, it delivers an "all or nothing" result. If it is approved by shareholders and by the court, the scheme of arrangement binds all of the target company's shareholders, including those who voted against it (or did not vote at all). Conversely, if a scheme is not approved, then it does not become effective, even for those shareholders who voted in favor of the scheme.

The mechanics of a scheme usually involve a transfer of all existing target shares to the bidder in exchange for the offer price which, like a takeover, can involve cash, securities, or any combination of the two. Schemes can also provide for the cancellation of all target shares other than those held by the bidder. In either case, the target company becomes a wholly owned subsidiary of the bidder. The target company does not "merge into" the bidder and cease to exist, unlike the merger procedure in certain other jurisdictions.

As it is the target company which has to prepare the scheme documents, apply to the court and convene the shareholders' meeting, a scheme cannot be used for a hostile takeover.

1. Overview of the scheme procedure

   A scheme of arrangement is a seven-step process:

   Step

   1. Agree a transaction with a bidder:

   Following due diligence and any other pre-bid steps, the first stage in the process is for the bidder and the target to negotiate and execute a Scheme Implementation Agreement and announce the transaction. Once the deal has been agreed and the Scheme Implementation Agreement is signed, the target effectively leads each further step in the scheme process. The Scheme Implementation Agreement sets the commercial parameters of the transaction and, importantly, provides a bidder with some level of contractual control over the scheme process to ensure that the scheme is conducted appropriately and in accordance with the agreed terms of the deal. The target, however, has the greatest degree of control over implementation of the transaction.

   2. Prepare a draft Scheme Booklet for shareholders: The Scheme Booklet is the combined notice of meeting, disclosure document and independent expert's report to be sent to target company shareholders for the purposes of convening a general meeting to vote on the scheme.

   3. ASIC review and approval of Scheme Booklet: ASIC is entitled to review the Scheme Booklet for at least 14 days (or longer in the case of more complex schemes) prior to the first court hearing and to have an opportunity to make submissions to the court in relation to the scheme and explanatory statement. ASIC's role is to assist the court to review the content of the scheme documents and the terms of the scheme, and to represent the interests of shareholders. This is because ASIC may be the only party appearing at the court hearing other than the target company and the bidder. ASIC also aims to ensure that all matters that are relevant to the court's decision are properly brought to the court's attention. For this reason, any complex, novel or uncertain issues in the scheme or scheme documents should be brought to ASIC's attention early, so as to ensure that ASIC can consider them before the hearing and advise the court that it has no objections to the scheme.

   4. First court hearing: The target company must apply to the court for approval to convene the shareholders' meeting to consider and vote on the scheme, and to approve the draft Scheme Booklet. This first court hearing is generally held at the end of ASIC's 14-day review period. In assessing whether or not to approve the Scheme Booklet and order a shareholders' meeting to be convened, the court will consider the structure of the proposed scheme, the adequacy of information and disclosures in the Scheme Booklet, and any objections or submissions from ASIC or other parties.

   5. Shareholder meeting and vote:  The shareholder approval thresholds for a scheme are: approval from more than 50% of the number of shareholders who vote at the meeting, regardless of how many shares they hold; and a special resolution of shareholders, which requires at least 75% of the number of votes cast on the resolution to be in favor of the scheme. Scheme votes are taken on a poll, which means that this test requires approval by at least 75% of the shares that are voted on the resolution. In each case, the voting threshold is based on only those shareholders or shares which are actually voted (either in person or by proxy). Shares which are not voted do not count as "no" votes. The scheme meeting vote binds all shareholders, whether or not they vote on it.

   6. Second court hearing: Once shareholders have voted to approve the scheme, a second court hearing will be held soon afterwards, at which the court will be asked to approve the scheme in order for it to become effective. The court's focus at the second hearing is primarily on ensuring that the procedural and voting requirements for the shareholders' meeting were complied with. The court will also seek confirmation from the target and bidder that all conditions precedent in the Scheme Implementation Agreement have been satisfied.

   7. ASIC lodgment and scheme implemented: Once the scheme is approved at the second court hearing, the court order is lodged with ASIC and the scheme becomes effective. After the effective date, there will be a record date for determining entitlements of shareholders to participate in the scheme. Shortly after the record date, the scheme will be completed by payment of the acquisition price and transfer to the bidder of all target company shares.

2. Scheme documents 

   There are several key documents required to implement a scheme of arrangement:

   • Scheme Implementation Agreement (SIA) – The SIA is the primary commercial document in an acquisition by way of scheme of arrangement. Apart from setting out the terms of the transaction, including the price and conditions precedent, the role of the SIA (from the bidder's perspective) is to exercise some degree of control over the transaction, which is otherwise controlled by the target company.
   • Scheme of arrangement – This is a technical procedural document that gives effect to the scheme when approved by the court and reflects the SIA terms.
   • Deed poll – This is a document that binds the bidder to its obligations in the SIA. Without this document, the shareholders of the target company cannot enforce the scheme against the bidder, as a scheme is (legally speaking) an arrangement only between the target company and its shareholders.

   The key documents to be sent to shareholders for the shareholder meeting are contained in the Scheme Booklet and include the following:

   • Notice of scheme meeting – The notice of meeting convenes the shareholder meeting where the scheme is to be voted on. Ordinary notice provisions apply (minimum 28 days' notice).
   • Explanatory statement – This is the key disclosure document for shareholders, which should provide all relevant information for a decision whether or not to vote in favor of the scheme. It contains recommendations from directors, together with detailed reasons. It also contains disclosures from the bidder which are equivalent to the disclosures that would be made in a Bidder's Statement for a takeover offer.
   • Independent expert's report – An independent expert's report opines on whether the scheme is in the "best interest" of the target company's shareholders. This report is not always required by law, but appointing an independent expert to provide a report for the benefit of shareholders is an almost invariable characteristic of schemes in Australia. Target company boards do not generally proceed with a scheme without an expert's report confirming that the scheme is in the best interests of shareholders, and is fair and reasonable. The report will typically contain a detailed review and valuation of the target company.
   • All of the shareholder documents must be lodged with ASIC for a 14-day review period before they go to court, and are then reviewed and approved by the court for dispatch to shareholders.

4.4 Differences between a takeover bid and scheme of arrangement

Takeovers and schemes are quite different ways of reaching a similar outcome. Choosing the best structure for an acquisition depends on a number of factors, some of which are summarized below: