Private Equity 2024 Comparisons

2024 has been another active year for private equity. As is to be expected, private equity funds have remained intrepid in the face of dynamic and challenging macro-economic conditions (discussed further in 1.2 Market Activity and Impact of Macro-Economic Factors).

Private equity has been active in public markets, with the announcement of a number of high-profile take-private transactions (eg, KKR’s AUD2.175 billion acquisition of Perpetual’s corporate trust and wealth management businesses). Competition among private equity firms has increased as well, as funds look to deploy their dry powder, with certain assets attracting attention from multiple private equity suitors (eg, AirTrunk). Pre-bid stakes continue to feature in a number of deals, as private equity bidders seek to cement any first mover advantage.

General partners are also employing innovative deal structures and strategies to maximise flexibility and transaction certainty where the bid-ask spread is too wide or the deal is otherwise proving too hard to close. We have seen an uptick in private equity funds pursuing corporate carve-outs, minority-stake acquisitions and sales to continuation funds to secure value-creating transactions. As the cash rate starts to slowly normalise in Australia, there is a resurgence of corporates evaluating their core businesses, highest-value assets and overall strategic direction. We expect this to drive an increase in demerger and corporate carve-out transactions, as corporates divest non-core assets and streamline their businesses. Private equity funds looking for buy-side opportunities are likely to become increasingly involved in these transactions (eg, Perpetual’s sale of its corporate trust and wealth management business units to KKR).

In relation to exits, the first half of 2024 has shown there may be early signs that the IPO window is opening. The offer of Guzman y Gomez shares raised AUD335 million and realised a market capitalisation of approximately AUD2.23 billion. Generally, however, the first half of 2024 continued to be slow for IPOs. From the frothy highs of 2021 (where IPOs raised AUD12 billion), approximately AUD600 million was raised from only seven IPOs in the first half of 2024. This has meant IPOs are still not considered to be a reliable exit strategy, leading some general partners to look at alternative liquidity solutions.

Macro-economic factors have had a significant impact on M&A activity in 2024. The year has, similar to 2023, been characterised by high interest rates and therefore more expensive debt. Continuing geopolitical tensions such as the ongoing Russia-Ukraine and Israel-Palestine conflicts have challenged supply chains and markets for certain important inputs such as wheat and oil, contributing to inflation and amplifying the impact higher rates have had on the economy and broader consumer confidence.

On the deal-making front, the proliferation of AI and software has continued to garner the attention of private equity funds. In 2024, private equity has been particularly focused on the professional services and financial sectors, with notable activity in the IT and software sectors. Similarly, Australia’s ageing population is greatly increasing the demand for healthcare services, and the country’s abundant natural resources present opportunities to capitalise on the global decarbonisation trend.

On the financing side, given the higher cost of debt financing, general partners have turned towards alternative providers of credit in search of greater flexibility and more competitive terms (aligning with a global surge in the private credit market). Australian superannuation funds are also stepping in to assist, as well as the credit arms of global private equity firms (eg, KKR and Bain). This coincides with two of Australia’s largest superannuation funds, AustralianSuper and Rest, planning to increase their allocations in private equity to 5% (from 3%) and 9% (from 5%) respectively within the next few years.

For private equity funds and their portfolio companies, the most significant recent legal developments have been in relation to:

• the Australian Competition and Consumer Commission’s (ACCC) proposed merger reform;
• certain aspects of the Foreign Investment Review Board’s (FIRB) approach to evaluating approvals; and
• increased FIRB application fees.

ACCC Proposed Merger Reform

Traditionally, Australia has had a voluntary notification system for merger clearance in relation to M&A transactions. In April 2024, the Federal Government announced substantial changes to the merger control regime following the ACCC’s year-long lobbying for reform. The reforms convert Australia’s merger process from a voluntary regime to a mandatory regime for certain transactions. This means merger parties will be prevented from completing a transaction that exceeds certain thresholds unless they have notified the ACCC and the deal has been cleared.

The merger notification thresholds are still being developed but will involve both monetary values (eg, revenue and turnover) as well as market share measures. The thresholds will be set so that the ACCC will continue to be notified of and assess approximately 300 mergers each year.

One factor affecting whether a transaction is notifiable is if it is part of a series of roll-up acquisitions, whereby a series of (potentially small) acquisitions over a period of time aggregate to have a substantial impact on competition in a given market. Specifically, all mergers within the previous three years by the acquirer or the target will be aggregated for the purpose of assessing whether the proposed transaction meets the notification thresholds. There has been recent enforcement action from the ACCC in respect of roll-up acquisitions, such as in Woolworths’ acquisition of PETstock and Viva Energy’s acquisition of OTR Group. In the Woolworths/PETstock acquisition, the ACCC’s approval was conditional on PETstock agreeing to divest 41 retail stores, 25 co-located veterinary hospitals, four brands and two online retail stores.

The proposed merger reform is currently undergoing consultation. It is expected to come into effect on 1 January 2026.

Updates to the FIRB Regime

New method of evaluation

FIRB announced on 1 May 2024 that it will now progress low-risk applications more quickly by concentrating its resources and attention on applications that are deemed higher risk. Applications may be considered to be high risk due to the nature of the acquirer (first-time investors and foreign government investors are likely to attract higher scrutiny) or the nature of the asset being acquired (investments in assets such as critical infrastructure, critical minerals and critical tech are more likely to be considered high risk).

Additional approval conditions

There have been discernible trends in FIRB’s approach to approval conditions in recent years. Among other things, FIRB has heightened its focus on tax evasion risks – as part of this, private equity applicants must accept ‘standard tax conditions’ (which are generally non-negotiable other than in exceptional circumstances). FIRB has also been observed to impose additional requirements on private equity applicants more frequently, including notification requirements (eg, regarding disposals above a certain threshold, often 10%, in the relevant asset or company). Additionally, for private equity funds, we have seen an increase in interest from FIRB around structuring – this is particularly the case where bidders, upstream special purpose vehicles or funds are domiciled across one or more low- or no-tax jurisdictions. FIRB and its consultation partners (including the Australian Taxation Office) expect these structures to be explained, and additional conditions to notify FIRB of disposals of assets ahead of time may be imposed.

Increased foreign investment fees

In July 2022, FIRB application fees doubled. The fees are also indexed annually. From 1 July 2024, the maximum cap on FIRB’s fees is AUD1,171,600. The significance of these fees (and the fact they are generally non-refundable) is impacting the deal strategy for some private equity buyers. For example, in competitive sale processes, private equity buyers have historically considered applying for FIRB approval early in the process so that their offer was, ideally, less conditional at the time it was made – this is no longer as prevalent, with a number of private equity buyers only applying to FIRB when they have a signed sale agreement (or have at least been granted exclusivity).

In the private M&A context, parties generally enjoy considerable freedom to negotiate and agree the sale terms and the method by which the transaction is implemented. That said, in certain circumstances, engagement with regulators may be required (as discussed below).

In the public M&A context, private equity buyers and sellers are subject to the rules and requirements of the Australian corporate legislation – the main obligations being those set out in the Corporations Act 2001 (Cth) (“Corporations Act”), and most particularly in Chapter 6. The Corporations Act regulates the ways in which interests in listed Australian companies and unlisted Australian companies with more than 50 shareholders can be acquired, as well as the circumstances in which a person must disclose their acquisition or disposal of an interest in a listed Australian company. To the extent that the company is listed on the Australian Securities Exchange (ASX) (whether or not it is an Australian company), the company must also comply with the ASX Listing Rules.

ASIC

The Australian Securities and Investments Commission (ASIC) is Australia’s corporate regulator. It has primary responsibility for matters relating to financial services, markets and consumer credit matters, and oversees enforcement of the Corporations Act.

All Australian companies (including those owned by private equity funds) must notify ASIC of changes to their capital structure, officeholders and the passing of certain resolutions (among other things). However, ASIC does not ordinarily become involved in private M&A in Australia.

ASIC does have a broader role to play in relation to public M&A in Australia. For schemes of arrangement, ASIC is directly and actively involved, and it reviews (and in most cases comments on) the disclosure document that is provided to target shareholders in relation to the scheme. ASIC is not directly involved in takeover offers in Australia. However, by virtue of its role overseeing compliance with the Corporations Act (including Chapter 6), ASIC often becomes involved in relation to potential breaches of the relevant provisions that arise in the course of the takeover. ASIC’s involvement in public M&A transactions is particularly relevant to private equity buyers given their regular involvement in such transactions.

ASIC has had a particular focus on ‘greenwashing’ in recent years. In 2024, ASIC has shown a willingness to take action where it considers this has occurred. For example, in June, ASIC lodged civil penalty proceedings in the Federal Court against LGSS Pty Ltd as trustee of the superannuation fund Active Super, alleging misleading conduct in relation to superannuation products and claims that it would not invest in companies that derive any revenue from, among other things, gambling, tobacco and oil tar sands. Following from the Vanguard case in 2023, this again demonstrates active enforcement by ASIC in relation to greenwashing.

FIRB

As discussed above, foreign persons and investors controlled by foreign persons may need FIRB’s approval to acquire an Australian company. The approval comes in the form of a ‘notice of no objection’ from the Australian Treasurer, which sets out certain conditions that the applicant (ie, the foreign person, such as the private equity fund) must comply with in connection with the proposed acquisition (plus certain ongoing reporting and other obligations following completion of the acquisition).

It is possible to apply for an exemption certificate in respect of, among other things, proposed acquisitions of Australian companies. If an exemption certificate is granted, the buyer can acquire the relevant companies (FIRB often requires the companies, or at least the category and type of company, to be specified) without needing approval in respect of each acquisition. These can be valuable to portfolio companies seeking to undertake a number of acquisitions.

Due to the breadth of what constitutes a foreign person under the relevant legislation, almost all foreign and most medium-to-large Australian private equity funds are characterised as ‘foreign’ and therefore need FIRB approval to acquire Australian companies.

ACCC

As discussed in section 2.1 Impact of Legal Developments on Funds and Transactions, the ACCC regulates competition matters in Australia. The proposed merger reforms, when passed into law, are expected to come into effect from 1 January 2026 and substantially alter the way merger activity is monitored and notified in Australia.

Australian Takeovers Panel

Unless the transaction is proceeding by way of scheme of arrangement, the Takeovers Panel is the principal forum for resolving takeover disputes in Australia. The only exceptions to this are criminal prosecutions and certain other proceedings commenced by ASIC or referred to ASIC by the Takeovers Panel itself or by other public authorities.

The Takeover Panel’s primary responsibility is to determine whether the circumstances in respect of a takeover are ‘unacceptable’. The Takeovers Panel makes this assessment not only by considering the black letter law of Chapter 6 of the Corporations Act, but by applying a pragmatic and commercial lens to the relevant circumstances. The Takeovers Panel has the ability to make broad orders if it considers that unacceptable circumstances have arisen.

Private equity buyers, along with their advisers, usually undertake extensive due diligence investigations before irrevocably committing to acquire a target. This due diligence often covers commercial, financial, accounting, legal and tax matters (and in some cases technical matters). The focus areas generally reflect the buyer’s existing knowledge of the business and broader sector, the risk profile of the company/sector, any specific requirements from debt and/or equity providers, and the time available (which can be driven by whether it is a bilateral or competitive sale process).

From a legal perspective, due diligence generally covers the following:

• corporate – capital structure, constituent documents, shareholders’ agreement (or similar), incentive arrangements, and board papers and minutes (usually from the last three years);
• material contracts – key customer/supplier contracts and joint venture arrangements;
• real property – freehold and leasehold interests;
• related party arrangements – material arrangements with shareholders and/or directors;
• banking and finance – existing debt facilities and financing and security arrangements and any other arrangements necessary to understand the target’s debt position, obligations to financiers, historical compliance with debt covenants, and any guarantees or similar security provided by or on behalf of the target;
• employment – key employment agreements, template employee and contractor agreements, and material policies;
• IP – material intellectual property owned or used;
• IT, privacy and data protection – material IT agreements and policies relating to privacy and data protection;
• litigation, disputes and investigations – litigation searches, and review of any threatened, anticipated, pending or current litigation and investigations into the target;
• regulatory and compliance – any applicable regulatory frameworks that apply to the business, and material licences and authorisations required to operate it; and
• anti-bribery and corruption – systems and policies related to applicable laws combating bribery and corruption, money laundering, terrorist financing, economic sanctions and fraud.

When a private equity seller runs a competitive sale (or auction) process, it is customary for potential bidders to be provided with certain vendor due diligence reports. In most cases, these reports cover accounting and legal issues, and in some cases tax issues. The reports are initially provided to potential bidders on a non-reliance basis, with the successful bidder being given reliance.

From a legal perspective, the legal vendor due diligence report generally looks relatively similar to a buy-side due diligence report. Just like a buy-side report, it generally covers the usual areas for legal diligence (see 4.1 General Information). A key difference is how the information is presented – in a buy-side report it is usual to make recommendations as to how to deal with any issues that are identified (eg, completion should be conditional on any material third-party consents that are required), whilst in a vendor report that information is more usually objectively presented, with the potential bidders then left to form a view as to how they wish to deal with the relevant issues.

The benefits of undertaking legal vendor due diligence is that the private equity seller can:

• identify and address potential issues that may impact the proposed transaction or reduce the purchase price before the bidders discover them;
• have greater control of the narrative in relation to any likely issues;
• help drive the optimal legal and tax structure for the sale;
• more easily answer a bidder’s questions regarding the business; and
• make the sale process more efficient.

The majority (at least by number) of acquisitions by private equity buyers are undertaken by way of private treaty acquisition. However, the acquisition of Australian companies with more than 50 shareholders must, for the most part, be undertaken by way of takeover bid or scheme of arrangement.

Companies With Fewer Than 50 Shareholders – Private M&A

In most cases, private M&A is undertaken by way of a negotiated share sale agreement (ie, a private treaty transaction). Private equity buyers ordinarily acquire a 100% interest, or otherwise a controlling interest, in the relevant company by acquiring the relevant shares. Control of the company or its business can also be obtained by the private equity entity subscribing for shares in the company (by way of a subscription agreement) or acquiring the business from the company (by way of a business sale agreement). The advantage of acquiring the business is that, unless otherwise specifically agreed, the buyer does not acquire the company’s residual liabilities (eg, under material contracts with third parties) and can cherry-pick the assets that it wants. However, this can result in additional complexity and, largely for this reason, share acquisitions are more common.

In theory, the acquisition terms should be materially the same regardless of whether the buyer(s) and seller(s) are negotiating on a bilateral basis or the sale is part of a competitive process. However, in practice, the buyer may need to accept less favourable terms if there is competition for the asset.

Companies With More Than 50 Shareholders – Public M&A

In most cases, public M&A is undertaken by way of takeover (off-market or on-market) or scheme of arrangement. Schemes are more common than takeovers (with off-market takeovers the far more common of the two takeover structures), especially in the case of transactions above AUD1 billion (at least 80% of such transactions per year were undertaken by scheme since 2018). Private equity buyers, often driven by a desire to obtain 100% of the target (with schemes having a 75% threshold for this versus 90% under a takeover) and a need to do due diligence (customarily to facilitate debt funding and/or equity co-investment), have an even stronger bias towards schemes.

Pure auction processes are not really a feature of public M&A. However, it is not uncommon for a rival bidder to emerge, which does create a competitive process. Where there is a rival bidder, the original bidder often has to improve its terms (eg, by increasing the purchase price or waiving conditions) to secure the asset.

Private equity buyers customarily incorporate an Australian special purpose vehicle to acquire the target company. This ‘BidCo’ is typically a wholly-owned subsidiary of an Australian incorporated holding company (ie, a HoldCo). It is not unusual for a number of other Australian companies to also be incorporated as part of the group – this often includes a MidCo or a MezzCo. The companies do not have any trading history, assets (other than shares in the other entities) or liabilities (other than under the transaction agreements in relation to the acquisition).

Private equity buyers rarely agree to, and strongly resist, the fund itself entering into the sale agreement. Sellers can sometimes request this (among other things, to guarantee the BidCo’s obligations under the sale agreement); however, they can often be satisfied with the provision of equity and debt commitment letters to demonstrate the BidCo’s ability to fund the acquisition.

Private equity deals are normally financed with a combination of equity and debt. It is customary for sellers to be given copies of equity commitment letters to provide the certainty of the equity funding. Certainty also needs to be provided regarding the debt funding – in most cases, this is done with a debt commitment letter that attaches the associated term sheet (with the key commercial terms, other than the aggregate amount of debt to be provided, redacted). Sale agreements customarily impose restrictions on what can be done in relation to the commitment letters (eg, the buyer cannot reduce the amount of equity covered by the equity commitment letter), and the buyer provides certain representations and warranties regarding the commitments – a material breach of these can entitle the sellers to terminate the sale agreement.

In the context of public M&A, the Australian takeover rules require bidders to have a reasonable expectation of funding before a bid is announced.

True consortium arrangements between private equity funds are rare in Australian private treaty transactions. A key factor in this is the relatively limited pool of appropriate targets and the number of private equity funds looking to deploy capital. Consortium arrangements are slightly more common in large public M&A – for example, the Brookfield-led consortium involving Morrison & Co (among others) that acquired Uniti Group for AUD3.4 billion in 2022 – due to the amount of capital required to complete mega-deals.

In the context of private treaty transactions, what is more common is for there to be passive investment alongside the primary private equity buyer. Offshore institutional investors and superannuation trustees (including those attracted by competitive performance and favourable fee arrangements) sometimes invest alongside the general partner of the main fund in a specific portfolio company. In most cases, this is done through a separately structured co-investment vehicle governed by a standalone set of agreements.

Private equity buyers tend to determine the most appropriate consideration mechanism for acquisitions on a case-by-case basis. Some businesses (and indeed some entire sectors) lend themselves to a ‘locked box’ (no adjustment to the agreed purchase price absent unauthorised leakage by the seller), whilst others are better suited to completion accounts (purchase price is adjusted, in favour of either the buyer or the seller, following completion if the agreed metrics (eg, working capital or net debt) are not at the levels agreed). Earn-outs and deferred consideration structures (eg, holding a part of the purchase price in an escrow account for a period of time) are also relatively common, in particular where there is some uncertainty about the future performance of the business or an actual or perceived risk to it (eg, a potential third-party claim). When the seller is also a private equity fund, there is generally a reluctance for the consideration to be deferred in this way.

It is common for private equity buyers to incorporate a special purpose vehicle as the BidCo (see 5.2 Structure of the Buyer). Assuming that is the case, it is customary for the sellers (in particular, sophisticated corporates or private equity funds) to insist on the buyer providing equity and debt commitment letters to demonstrate its ability to fund the acquisition. It is usual for the buyer to give the sellers representations and warranties in relation to these arrangements (see 5.3 Funding Structure of Private Equity Transactions).

Given the recent rise in interest rates, some sellers are seeking to be paid interest on the purchase price between the locked-box date and completion. The rationale is that, as the deal was priced at a historic point in time, the seller should be treated as having sold at that point and should benefit from interest on the purchase price from then until completion (ie, when the money would actually be paid).

In the same way, some private equity buyers are seeking interest on any leakage that occurs during the locked-box period. The approach to interest is often reciprocal.

Where the parties agree to use completion accounts, it is customary for a specific dispute resolution procedure to apply to the determination of any adjustments under the completion accounts regime. In most cases, one party will prepare the completion accounts and the other party will have the opportunity to challenge them to the extent it does not agree with them. If the parties cannot agree the completion accounts within a specified time period, an independent expert (usually, an appropriately qualified accountant) is engaged to make a determination.

Where the parties agree to use a locked box, any disputes tend to be dealt with under the dispute resolution framework (eg, arbitration, court proceedings, etc) that applies to the sale agreement more generally.

Private equity buyers tend to insist on, and in most cases get, a relatively high level of conditionality in private treaty acquisitions. In addition to conditions regarding any necessary approvals from regulators (eg, FIRB, ACCC and the Australian Prudential Regulatory Authority, etc), it is common to have conditions regarding third-party consents (although the list of required consents is almost always heavily negotiated), key executives entering into new employment contracts and the satisfactory resolution of any business specific issues (eg, any proposed pre-completion restructure). Material adverse change provisions are also becoming more common, although these are generally resisted by sellers and heavily negotiated (in particular, the relevant triggers and exceptions). It is less common to have finance or shareholder approval conditions in private treaty transactions.

In Australia, it is very rare for private equity buyers to agree to “hell or high water” undertakings. Sellers do, on occasion, ask for them where they consider there to be a real prospect of the ACCC (or an equivalent foreign regulator) taking a particular interest in the transaction. Even where a seller does ask for such an undertaking, and the private equity buyer is prepared to make some concessions, the negotiated outcome usually falls well short of “hell or high water”.

Break fees are rare in the context of private treaty acquisitions in Australia. Reverse break fees are even rarer still.

However, break fees are effectively standard in recommended public M&A transactions in Australia. Typically, a break fee is an agreed amount that becomes payable if certain specified events occur that prevent the takeover or scheme of arrangement from proceeding (such as a change of recommendation by one or more of the target directors or a rival bid emerging). Generally, a break fee not exceeding 1% of the target’s equity value is considered acceptable by the Takeovers Panel.

Reverse break fees are also becoming increasingly common in recommended public M&A transactions. This year, consistent with the last few, approximately 50% of bidders agreed to pay a reverse break fee to the target in certain circumstances. This is usually agreed in exchange for the target agreeing not to sue the bidder for damages under the implementation agreement. This is usually advantageous to the target as it may find it difficult to quantify its loss. However, it can also be detrimental because the reverse break fee usually acts as a cap on the bidder’s liability, potentially limiting the target’s recoverable loss to less than its actual loss.

The cap on break fees of 1% of the target’s equity value does not apply to reverse break fees (although the prohibition on penalties under Australian law still applies). However, it is usually the case that the break fee and reverse break fee are the same amount.

Private equity buyers usually require a right to terminate private treaty sale agreements if one of the following occurs:

• a condition precedent for their benefit is not satisfied or waived (if applicable) by the agreed date;
• a material breach of a seller representation or warranty;
• a material breach of the sale agreement (eg, of the conduct of business restrictions); or
• an insolvency event in relation to a seller or a member of the target group.

A seller can usually terminate sale agreements in similar circumstances. However, in practice sellers’ termination rights are narrower – this is because it is customary for fewer of the conditions precedent to be for the benefit of a seller, the scope of the buyer’s representations and warranties are narrower and the buyer has fewer obligations under the agreement to breach.

A long stop date of six months from the sale agreement is typical.

Historically, private equity buyers and sellers have adopted different starting positions to risk allocation from corporates. This could be seen most acutely in the context of post-completion claims in respect of breaches of representations and warranties and under indemnities – private equity generally sought such protections as the buyer, but heavily resisted such exposure as the seller (which led to interesting negotiations when private equity was on both sides of the transaction). For the most part, corporates’ position was more variable.

Private equity sellers’ reluctance to have any post-completion exposure has, in part, contributed to the increase in usage of warranty and indemnity insurance in Australian private treaty transactions (it can also be used in public M&A; however, this is much less common). Warranty and indemnity insurance protects either a seller (in the case of a sell-side policy) or a buyer (in the case of a buy-side policy) from financial loss that may arise in the event that there is a breach of warranties and/or indemnities given by the seller in the sale agreement.

Private equity funds (whether on the buy side or the sell side) tend to insist on warranty and indemnity insurance being used in private treaty transactions. As such, whilst risk allocation still remains a function of the specific circumstances of the transaction (eg, the parties’ relative bargaining power (including whether the acquisition is part of a competitive sale process), the parties’ comfort with the headline purchase price and consideration structure, the identified and inherent risks that apply to the business, etc), warranty and indemnity insurance has in effect narrowed the gap between what private equity and corporates are willing to accept.

As set out in 6.8 Allocation of Risk, private equity funds (whether on the buy side or the sell side) tend to insist on warranty and indemnity insurance being used in Australian private treaty transactions. On the basis that the majority of the warranties and indemnities are covered by the insurance policy (see below for some of the customary exclusions and limitations), it is customary for a seller to provide standard representations and warranties covering:

• its title to the sale shares;
• its authority and capacity to enter into the sale agreement and perform its obligations under it;
• certain aspects of the business (eg, accounts, assets, material contracts, compliance with laws, employees, intellectual property, information technology, property and tax, etc); and
• the sufficiency and accuracy of the information provided to the buyer during due diligence.

The warranties are supported by an indemnity in favour of the buyer. It is also customary for the buyer to be given an indemnity for any tax issues the target has. Additional indemnities for known or likely issues are negotiated on a case-by-case basis.

In most cases, the buyer will have two to three years from completion to bring a claim for breach of a representation or warranty (except regarding tax), and seven years for breaches of the tax warranties or under the tax indemnity. Assuming there is warranty and indemnity insurance in place, the seller will generally not have any personal liability for breach of warranties or under the tax indemnity (except for in the case of fraud). If there is no insurance in place, the seller’s liability will be capped at the purchase price.

De minimis thresholds also apply. That is, the buyer cannot bring a claim (either against the insurer, if there is insurance, or against a seller, if there is no insurance) unless the amount recoverable meets a specified threshold. Generally, each individual claim must exceed 0.1% of the purchase price and the aggregate amount recoverable must exceed 1% of the purchase price.

Even if there is insurance in place, the buyer will generally not be able to recover under the policy for losses that arise from:

• known or disclosed risks, including matters that are the subject of a specific indemnity in the sale agreement;
• forward-looking warranties;
• warranties in areas where the insurer considers that there has been insufficient due diligence;
• certain environmental or contamination issues;
• bribery and corruption;
• fines and penalties not insurable under law;
• underfunding of pension plans;
• misclassification of employees/independent contractors; or
• transfer pricing, post-completion tax or stamp duty liabilities.

Where the parties do not put warranty and indemnity insurance in place, there will nonetheless be limits on the buyer’s ability to claim from the seller for breach of warranty or under the indemnities. In most cases, the warranties and indemnities are qualified by (and the buyer cannot claim in relation to):

• materials uploaded to the data room, including any Q&A;
• information accessible on an agreed list of public registers (eg, such as company and land registries); and
• information contained in a disclosure letter, which contains specific disclosures against the warranties in the sale agreement.

Members of the management team will not usually provide warranties in their personal capacity (as distinct from the warranties they may provide in their capacity as shareholders in the target). On that basis, this regime only applies to management in their capacity as shareholders.

As outlined in 6.8 Allocation of Risk, private equity funds (whether on the buy side or the sell side) tend to insist on warranty and indemnity insurance being used in private treaty transactions. Subject to the limitations set out in 6.9 Warranty and Indemnity Protection, the policy ordinarily covers the fundamental warranties, business warranties and most tax matters.

The use of warranty and indemnity insurance means it is not necessary for a private equity seller’s obligations to be backed by escrow or retention arrangements.

It is not uncommon to have disputes in relation to private treaty sale agreements in Australia. In most cases, these relate to purchase price adjustments (whether in connection with completion accounts or alleged leakage in the context of a locked box), earn-outs and non-competes. However, in most cases the parties resolve the relevant dispute commercially before formal litigation commences.

Private equity-backed bidders are common in Australian public-to-private transactions. There has been notable public M&A activity in the first six months of 2024 (more than AUD16 billion of deals announced). About 48% of the 2024 activity was private equity driven.

Bidders can acquire control of publicly held companies in Australia in various ways. The most common ways are by takeover bid or scheme of arrangement. In general terms, a takeover bid involves an acquisition undertaken by making offers to the shareholders of the target company. Once sufficient shares have been acquired (normally above 50%), control of the target will pass to the bidder, which will then be able to appoint new directors and control the company’s operations. A takeover can be done on-market or off-market (the latter is more common). It is possible to have a friendly (recommended by the target board) or hostile (not recommended by the target board) takeover. On the other hand, a scheme of arrangement becomes binding on all shareholders once it is approved by a majority of shareholders (including 75% of votes cast) and also by the court. Schemes are driven by the target and so, unlike a takeover, can only be done on a friendly basis.

The bidder and target enter into an implementation agreement (which sets out things such as the offer price, conditions, steps the parties must undertake to effect the transactions, and break fees and deal protection mechanics) in respect of a friendly takeover and a scheme of arrangement. The target board plays a significant role in public-to-privates – including recommending that shareholders accept the offer or support the transaction (in accordance with the terms of the implementation agreement) in the context of a friendly takeover or scheme (as applicable), and recommending that shareholders not accept the offer in respect of a hostile takeover.

Under Australian law, a person that has, either alone or together with their associates, control over 5% or more of voting shares in an ASX-listed company has a “substantial holding” in that company and must fulfil certain notification requirements. A person must, within two business days, give a notice that sets out certain details of their holding (including their name, their address and the basis on which they have the interest in the shares) to the company and to ASX once they:

• begin to have, or cease to have, a substantial holding; or
• increase or decrease a substantial holding by 1% or more.

A person making a takeover bid for a listed company is also deemed to have a substantial holding in the target during the takeover period. Therefore, whenever there is a movement of at least 1% in the bidder’s holding, the bidder must notify the company and ASX by 9.30am on the next trading day.

The Australian takeover rules are underpinned by a number of prohibitions. The key prohibition applies where:

• there is an acquisition of control over issued voting shares in an ASX-listed company, or in an unlisted company that has more than 50 shareholders; and
• that acquisition results in the number of shares controlled by one person or their associates (being entities in the same corporate group, entities with which the bidder has entered into an agreement for the purpose of controlling or influencing the composition of the board of the target company or the conduct of its affairs, or entities with which the bidder is proposing to act in concert in relation to the target company’s affairs) increasing:
1. from 20% or less, to more than 20%; or
2. from a starting point that is above 20% and below 90%,

unless an exception applies. The main exceptions allow acquisitions under a formal takeover bid or under a formal scheme of arrangement, acquisitions approved by target shareholders, or creeping acquisitions of no more than 3% in a six-month period.

This means a private equity bidder (or indeed any other person) cannot purchase a stake greater than 20%, unless it does so under an exception (such as under a formal takeover bid or scheme of arrangement). In other words, unlike in the UK, there is no ‘mandatory offer threshold’ that permits a bidder to buy a stake over 20% (for example) provided it then makes a bid to other shareholders.

The nature of consideration that a bidder is allowed to offer under a takeover differs depending on whether it is an off-market or on-market bid. Only cash may be offered for an on-market bid, whereas cash, scrip, or a combination of cash and scrip may be offered for an off-market takeover. The most common form of consideration offered by bidders is straight cash, with approximately 70% of bidders in takeover transactions that were announced and became unconditional in the first half of 2023 (up to 31 July 2023) offering cash only.

In the context of a takeover, the consideration offered for target shares must equal or exceed the maximum consideration that the bidder or an associate provided, or agreed to provide, for a target share during the four months before the bid. There are particular rules for determining the value of pre-bid non-cash consideration, and for applying this rule where the consideration under the bid is or includes scrip.

On-market takeover bids must be unconditional. This is one of the primary reasons that they are relatively uncommon (compared to off-market takeover bids).

Off-market takeover bids may be subject to conditions, and common conditions include:

• minimum acceptance conditions (50% or 90%);
• conditions relating to material adverse changes in the financial or trading position or condition of the target;
• conditions requiring government approvals (such as FIRB approval or ACCC clearance); and
• conditions relating to adverse movements in market indices or in key commodity prices.

The bid can be subject to finance (provided it is framed in a way that means its satisfaction does not turn on the bidder’s opinion or events within the bidder’s control – see below). In practice, few takeovers contain such a condition due to the uncertainty it provides.

Certain conditions are also prohibited. These include:

• maximum acceptance conditions;
• conditions allowing the bidder to acquire securities from some but not all of the accepting shareholders;
• conditions requiring approval of payments to officers of the target ceasing to hold office; and
• conditions that turn on the bidder’s opinion or events within the bidder’s control.

The position is largely similar for a scheme of arrangement, except that minimum acceptance conditions are not applicable in the context of schemes (which are all-or-nothing transactions).

In the case of a friendly off-market takeover bid or a scheme of arrangement, it is customary for the parties to agree exclusivity arrangements in the implementation agreements. These generally include:

• ‘no shop’ or ‘no talk’ agreements, under which the target agrees not to solicit rival proposals from third parties and, subject to a fiduciary exception, not to negotiate with potential rival bidders; and
• notification and matching rights, under which the target agrees to notify the bidder if it receives an unsolicited proposal from a rival bidder, and not to recommend that proposal unless and until it has given the initial bidder a short period (usually three business days) to match or better that proposal.

A scheme of arrangement is an ‘all-or-nothing transaction’. If the requisite conditions (including target shareholder approval) are satisfied or waived (to the extent that they are capable of waiver), the bidder will acquire all of the shares of the target that it does not already hold. If the conditions are not satisfied or waived, the bidder will not acquire any shares.

Under a takeover, a bidder is able to compulsorily acquire all of the shares it does not hold if it holds at least 90% of the shares in the relevant class and acquired at least 75% of the shares that it offered to acquire under the bid. If the bidder ends up with more than 50% but less than 100% of the shares in the target, a private equity buyer will be entitled to reconstitute the board and will be largely able to control the strategic direction of the company (eg, M&A, dividend policy, etc). Bidders must set out their intentions regarding the target if their shareholding ends up at this level in the disclosure document in relation to the takeover bid, and ASIC will require the bidder to act in accordance with its disclosed intentions. Further, whilst the target remains listed on ASX, it will remain subject to the ASX Listing Rules as well as the Corporations Act even if it ceases to be listed, which will, among other things, require the bidder to obtain shareholder approval for certain transactions (including related party transactions).

In Australian public M&A transactions, it is not uncommon for private equity bidders to secure pre-bid commitments from existing shareholders to increase the likelihood of them obtaining control over the target (including by acting as a disincentive to any potential rival bidders).

These commitments can take the form of, among other things, call options (under which the bidder can acquire the relevant shares in certain circumstances), pre-bid acceptance agreements (under which a shareholder agrees to accept the takeover offer) or voting agreements (under which a shareholder agrees to vote in favour of the scheme of arrangement). Such arrangements are generally entered into prior to the initial approach to the target and are subject to certain conditions (eg, no superior proposal emerging for the target).

It is customary for private equity buyers to seek to align management’s interests with theirs by putting in place a management equity plan (in some cases, to sit alongside a cash incentive plan) following their investment in, or acquisition of, the company. Management’s equity participation will generally be limited to 5%–10%.

Management participation can be structured as either sweet equity or an institutional strip. Where employees roll their existing securities (whether they vested as a result of the private equity shareholders’ acquisition of, or investment in, the company or otherwise), they generally participate in the institutional strip. In respect of a management equity plan, or the rolling of unvested incentives, employees generally receive sweet equity.

In most cases, this takes the form of options or loan-funded shares issued in accordance with the terms of the management equity plan. Management is not usually issued preferred securities. The preferred treatment given to these types of securities (eg, redeemable preference shares) is usually reserved for the private equity shareholder.

As set out in 8.2 Management Participation, management equity plans generally contain time-based and/or performance-based vesting conditions. For the time-based conditions, these are often linked to the private equity shareholder’s proposed timeline to exit its investment in the company (eg, three to five years). For the performance-based conditions, these are often linked to the financial of the company or the relevant business divisions (ie, those in which the employee is involved).

The leaver provisions are often among the most heavily negotiated aspects of management equity plans (given employees will likely lose some or all of their benefits if they are a bad leaver). A relatively customary construct is for someone to be a bad leaver if their employment is terminated for cause or they resign, and for them to be a good leaver if their employment ceases for any other reason.

It is customary for manager shareholders’ employment contracts, as well as often the management equity plan for the company, to include provisions preventing management shareholders from competing (including by way of solicitation) with or disparaging the company. The private equity shareholder and the company are also often given rights under the shareholders’ agreement in respect of breaches.

Such provisions – in particular, non-competes – must operate in a certain way to be enforceable under Australian law. Although the exact requirements vary depending on the relevant Australian State or Territory, throughout Australia only reasonable non-compete clauses are legally enforceable. That is, they should be no more restrictive than is necessary to protect the employer’s legitimate business. The provisions must be carefully drafted to ensure that they are enforceable.

Manager shareholders’ minority protections depend on the nature (ie, the class of securities that they hold) and size of their shareholding. It is not unusual for manager shareholders to have veto rights over a limited a set of actions (eg, amendments to the company’s constitution or shareholders’ agreement), where that action would prejudice them in a manner that is materially and adversely disproportionate as compared to the rest of the company’s shareholders. Manager shareholders will also have the benefit of certain Corporations Act protections (eg, in relation to directors’ duties and oppression against minority shareholders) and common law protections. Where manager shareholders have a larger holding in the target – whether because they rolled as part of the acquisition of the company or as a result of the company’s incentive plan – they may have broader protections, although seldom do managers have any specific anti-dilution protection or the ability to control or influence the private equity shareholder’s exit from the company.

It is typical for private equity shareholders to have very high degrees of control over their portfolio companies.

Where there is a material minority shareholder in the portfolio company, that minority shareholder will usually have the benefit of certain limited minority protections. These protections will be set out in the shareholders’ agreement, and require the minority shareholder’s consent to be obtained for actions such as material acquisitions or disposals, related party transactions, departures from the agreed dividend policy and payment of directors’ fees (with the list to be negotiated at the time the shareholders’ agreement is entered into).

Where the portfolio company is wholly owned (including where members of management hold securities pursuant to an incentive plan), the private equity shareholder’s control will be subject only to the company’s constituent documents and general Australian law (eg, as set out in 8.5 Minority Protection for Manager Shareholders, the shareholder oppression provisions).

In Australia, shareholders are generally not liable for the actions of the company in which they own shares. Their liability is limited to the capital they have contributed to the company – for example, a private equity firm cannot be liable for the actions of its portfolio company. This is referred to as the ‘corporate veil’.

There are, however, circumstances in which the corporate veil can be pierced and a shareholder may be liable for more than its contributed capital. These include where a shareholder uses the company to commit fraud or its nominee is deemed to be a shadow director and therefore subject to directors’ duties.

In addition to trade sales (to other private equity investors or corporates) and IPOs, there has been an increase in the use of continuation funds (being vehicles established by the sponsor to acquire an asset from an existing vehicle operated by the same sponsor, effectively a general-partner-led secondary) in the last 12–24 months.

Trade sales remain the most common private equity exit route. The use of ‘dual track’ processes (ie, the concurrent pursuit of a trade sale and IPO) is still rare, largely as a result of the challenges in relation to public markets exits (see 1.1 Private Equity Transactions and M&A Deals in General).

It is not common for private equity sellers to reinvest upon exit.

In Australia, drag rights and tag rights are, effectively, standard in shareholders’ agreements for companies with private equity shareholders. However, in practice, these provisions are used relatively rarely.

Drag Rights

These provisions allow majority shareholders, when they are selling at least the agreed percentage of their shares in the company, to force the minority shareholders to also sell their shares (usually on materially the same terms). The drag threshold is generally somewhere between 60% and 80% of all shares on issue. However, whilst management shareholders will almost always have to sell their shares if the drag rights are validly effected, it is not uncommon for the consent of institutional co-investors to have to be obtained before they can be dragged.

Tag Rights

These provisions allow minority shareholders, when the majority shareholders are selling at least the agreed percentage of their shares in the company, to force the majority shareholders to also procure the sale of their shares (usually on materially the same terms). The tag threshold is generally somewhere between 10% and 20% of all shares on issue.

As set out in 1.1 Private Equity Transactions and M&A Deals in General, IPO activity in the first half of 2024 broadly mirrors that in 2023 but there are signs that the IPO window might be opening again following the listing of Guzman y Gomez, and subsequently with Bain Capital indicating that it is looking to refresh its plans to relist Virgin Australia on ASX after taking it private in 2020.

The approach to lock-up (or escrow) arrangements has, however, remained unaffected. These arrangements comprise either mandatory (ie, ASX-imposed lockup) or voluntary (ie, determined by the issuer, usually in conjunction with the lead manager(s) of the IPO) escrow arrangements that, in most cases, run for a period of 12–24 months from the IPO. In some cases, certain shares may be released from escrow once the issuer’s financial results are announced to ASX.

It is common practice for private equity sellers to enter into relationship agreements with issuers to govern their ongoing relationship following the IPO. These agreements generally deal with the private equity seller’s rights to appoint a nominee to the board and its information rights, and can also sometimes set out the basis on which the issuer will assist with a sell-down of the seller’s shareholding.