[Last updated: 1 January 2025, unless otherwise noted]

6.1 Transaction structure

The table in section 4.4 above, sets out the different factors that a bidder and target company may consider when choosing a transaction structure for a takeover.

The "all or nothing" outcome of a scheme generally makes it a favored acquisition structure in Australia for friendly or agreed transactions. In leveraged acquisitions, where it is essential to obtain 100% control on a certain date, it may actually be necessary to proceed by way of scheme for this reason. Likewise, a "top-hat" restructure, where all classes of shares and convertible securities are to be simultaneously exchanged for equivalent securities in a new holding company, would generally also have to be structured as a scheme for similar reasons.

A scheme of arrangement might also be attractive where special corporate actions need to be undertaken in connection with the acquisition, such as where part of the acquisition price is in the form of a share buyback or capital return that requires approval by a shareholder vote.

However, in a hostile situation, a takeover bid is the only feasible structure.

6.2 Deal protection mechanisms

In a takeover bid that is likely to be friendly or recommended, or a scheme of arrangement, it is not unusual for the target company to grant a limited exclusivity period to the bidder, during which the bidder has exclusive access to due diligence and negotiations with the target company. In return for the bidder's commitment under either type of structure, the target will usually grant the bidder:

• exclusivity, where the target gives the bidder certain exclusive negotiation and dealing rights before and after the bid is announced (discussed further below); and
• a break fee, where the target agrees to pay a specific amount to the bidder if the bid fails in certain circumstances. Where there is a break fee, there may also be a reverse break fee, where the bidder agrees to pay an amount to the target in certain circumstances. To ensure that the size of the break fee neither unacceptably pressures shareholders to approve the bid nor deters a rival bidder, the Takeovers Panel recommends that target company directors cap the maximum fee payable at 1% of the equity value of the target company at the bid price as a guideline.

The Takeovers Panel has issued a policy on break fees, exclusivity agreements and asset lock-ups (collectively termed lock-up devices) which aims to ensure that target companies do not hinder an efficient and competitive market for corporate control. The Takeovers Panel does not consider that lock-up devices are always unacceptable, but has laid down guidelines to ensure that target companies do not use lock-up devices to shut out potentially higher competing bids.

6.3 Exclusivity arrangements

An exclusivity arrangement will usually comprise a number of individual components, including the following:

• No-shop – The target company agrees not to actively solicit offers from other parties. The Takeovers Panel regards no-shop agreements as acceptable, as target directors do not have a legal duty to solicit other offers or to actively auction the company when a bid is received.
• No-talk – The target company agrees not to respond to, or even negotiate with, any third party, even if the third party makes an unsolicited approach. No-talk agreements will only be acceptable if they are subject to a carve-out, which permits target directors to consider and recommend an unsolicited superior proposal in circumstances where it may be a breach of the directors' fiduciary or legal duties if they were to refuse to engage with the new bidder.
• Notification – A notification obligation requires the target company to notify the bidder of details of any potential competing proposals.
• Matching right – A notification right may be coupled with a matching right which allows the bidder to put forward a revised offer for the target company's shares to at least match the competing offer.

In a scheme of arrangement, the court may scrutinize an exclusivity agreement to ensure that shareholders have not been prejudiced by it. In such cases, it may be necessary to show that exclusivity was granted by the target company only after its advisers canvassed other potential bidders, and no superior transaction was considered to be available at that time.

6.4 Defensive tactics

Once a takeover bid has been announced, the defensive tactics open to a target company become very limited. For instance, there are specific restrictions on a listed target company:

• issuing any new shares, options or convertible securities without prior shareholder approval; and
• providing its directors with termination benefits that are triggered by a change in control of the company.

The target company's directors also have to contend with the Takeovers Panel's policy on "frustrating action". This policy broadly restricts the actions that a target company can undertake if the effect of the action would be to frustrate the bid and cause it to fail. The policy will apply regardless of the motives or intentions of the target company's directors.

In light of these restraints, one of the best ways for a company to prevent a hostile bid is to make arrangements well in advance of any bid being announced. Appropriate arrangements could include share placements and strategic alliances with like-minded parties, share buybacks and other capital maintenance tools, regular communication with shareholders, and other measures designed to ensure the company's share price reflects the full value of its strengths and available opportunities.

Once a hostile bid is announced, the target company's directors will often respond by attacking the Bidder's Statement or bid structure in the Takeovers Panel, or (where the bidder offers its own scrip) by attacking the value of the bidder's offer. Target company directors may also try to improve the bid price by negotiating with the bidder in exchange for a recommendation to accept the offer, or by creating an auction to attract other bidders.

6.5 Insider trading

The Corporations Act prohibits any person subscribing for, purchasing or selling shares in a company or procuring another party to do so, where that person possesses information that is not generally available and, if it were, would be expected by a reasonable person to have a material effect on the price or value of shares in that company. The person must also know or ought to reasonably be expected to know that the information is not generally available and, if it were, it might have a material effect on the price or value of those shares.

A potential bidder who is already a major shareholder in a target company or has been granted access to due diligence by the target company may be in possession of information which is not generally available and would be likely to materially affect the price of shares in the target company. Provided the information is disclosed to the market (such as in the Bidder's Statement or Target's Statement) before any shares are acquired, contravention of the insider trading provisions is not likely to occur.

6.6 Statements of intention

A mechanism through which a bidder may build support for a takeover bid or scheme is by target shareholders making a public statement or consenting to a public statement being made which is attributed to them, to the effect that they intend to vote in favor of the scheme or accept the takeover bid (as the case may be). This attracts the "truth in takeovers" policy, under which ASIC states that it will hold target shareholders to the course of action contained in their public statements of intention, akin to a promise.