The year 2023 was a challenging one in M&A with overall volumes down significantly. Although some large transactions did complete, others failed due to shareholder activism or regulatory obstacles. The Australian M&A market is, however, showing encouraging signs of a rebound. The first quarter of 2024 commenced strongly with a string of friendly take-private deals announced. The early impetus for improved M&A activity in 2024 emanates from a combination of:

• more clarity around interest rates (although rate cuts are far from certain internationally and domestically, the tightening cycle appears to be over);
• the availability of quality assets combined with a perception that Australia remains a jurisdiction with a relatively safe and stable governmental and regulatory environment; and
• better alignment in pricing expectations between buyers and sellers.

It is already apparent that many companies are actively considering M&A opportunities to increase their scale, geographic presence and/or to diversify their revenue streams.

The key trends in Australian M&A include the following:

• Technology sector growth: digital transformation has taken place across various industries, including retail, banking, and healthcare, and has increased the demand for companies with advanced technological capabilities and digital innovation.
• Healthcare and biotech: the COVID-19 pandemic shone a spotlight on the healthcare and biotech sectors, leading to increased M&A activity in these sectors.
• Private equity activity: private equity firms have amassed significant capital and are actively seeking investment opportunities to deploy that capital. Private equity firms are also due to exit long-held Australian investments. 
• Shareholder activism: this continues to be prevalent in Australian M&A transactions (see 11. Activism).
• Cross-border M&A: despite heightened geopolitical tensions and increased regulatory scrutiny, Australian companies are still engaged in cross-border transactions, whether as targets or acquirers.
• Consolidation in certain sectors: in sectors such as energy, mining, and financial services, companies are merging to achieve economies of scale, diversify their operations, and enhance competitiveness.

The Australian M&A market in the past 12 months was dominated by transactions in the following three industries:

• technology;
• mining and minerals; and
• health and biotech. 

The distortions of the COVID-19 era (positive and negative) are beginning to fade into the distance. Nevertheless, sectors exposed to retail consumer discretionary spending are being impacted by elevated cost-of-living pressures arising from persistent inflation and successive interest rate rises. Companies within these sectors could be susceptible to opportunistic offers.

In Australia, the legal avenues for acquiring a company fall into one of the four primary categories outlined below. The first two are used for privately negotiated acquisitions of closely held companies and are regulated by the general law of contract, with limited statutory overlay. The last two are used to acquire widely held public companies, principally ones that are listed on the Australian Securities Exchange (ASX), and are highly regulated by statute and guidance published by regulators.

Share Purchase

This is when an individual or a company buys all or a majority of the shares in another company. On completion, the target company continues to own all of its operating assets, all of its intellectual property, all of its regulatory licences and permits, it continues to hold the benefit and the burden of its contractual arrangements, to employ all of its employees and to be exposed to its actual and contingent liabilities. There is simply a change in the upstream ownership of the shares and a reconstitution of the board of the target so that it comprises nominees of the buyer. Typically, this change in control triggers a requirement to obtain consent from counterparties to the target’s material contracts and from regulatory authorities that have issued relevant licences and permits to the target company.

Asset Purchase

In an asset purchase, the buyer acquires specific assets of a company rather than buying its shares. The buyer typically also takes an assignment or novation of key customer, supplier or other material contracts, and makes offers to re-employ the existing workforce. The buyer also typically assumes only specific liabilities of the company, such as accrued employee entitlements. Employees do not automatically transfer in an asset purchase. If, as is usually the case, the buyer wants to retain the existing workforce, the employees’ employment with the seller company terminates and new offers of employment are made by the buyer. An asset purchase is often intended to deliver the same economic outcome for a buyer as a share purchase (namely, ownership and control of the target’s underlying business) but without exposure to the target company’s actual or contingent liabilities (eg, tax, litigation and regulatory compliance), beyond the specific liabilities that the buyer is willing to assume.

Takeovers

This is the conventional structure for acquiring an ASX-listed public company or an unlisted public company with more than 50 shareholders. Under a takeover, the prospective acquirer (bidder) makes separate identical offers directly to all target shareholders to purchase their shares, in exchange for cash, shares in the acquirer (“scrip”) or a combination of cash and scrip. A takeover bid can be either an off-market bid or an on-market bid. On-market bids are rare, as these must be for cash only and unconditional. Usually, an off-market takeover bid is subject to conditions (see 6.4 Common Conditions for a Takeover Offer). Takeover bids are characterised as “friendly” or “hostile” depending on whether the bidder has secured the support of the target’s board in publicly recommending acceptance of the bid.

Scheme of Arrangement

An acquisition of a widely held Australian public company can also be achieved using a members’ scheme of arrangement. Indeed, most friendly takeovers of widely held Australian public companies are now undertaken by scheme. A scheme is a process initiated and controlled by the target whereby the target proposes a “scheme” (plan) for approval by its shareholders. The scheme typically entails all of the target’s shares being transferred to the prospective acquirer, in return for payment from the prospective acquirer in the form of cash and/or scrip. If the scheme is approved and implemented, the target continues to exist as a corporate entity – it is not automatically dissolved by the scheme process. The target simply becomes a wholly-owned subsidiary of the acquirer. If the target is listed on ASX, it will be de-listed shortly after implementation of the scheme.

A scheme requires the approval of the target shareholders and the court. Specifically, a scheme needs the approval of at least (i) a simple majority of the target’s shareholders by number present and voting at a meeting convened by order of the court, and (ii) representing at least 75% of the votes cast (excluding any votes cast by the prospective acquirer or any of its associates, if they hold any target shares). Importantly, shareholders who do not vote (due to apathy, being untraceable or otherwise) are not counted for this purpose and therefore do not affect the scheme voting process. 

Between these four primary acquisition methods, the method that is chosen depends on various factors, including the size and ownership structure of the target company, the objectives of the acquirer, and tax considerations. Legal, taxation and financial advice are typically taken at the preliminary stages of a potential transaction to determine the most appropriate method. 

In Australia, M&A activity is primarily regulated by the following authorities.

Australian Securities and Investments Commission (ASIC)

ASIC regulates Australian companies, financial markets, and financial services organisations. Its remit is to ensure markets are fair and transparent.

Australian Securities Exchange (ASX)

The timetable and general process for a takeover or scheme of arrangement must comply with ASX’s listing rules.

The Courts

If the proposed transaction is structured as a scheme of arrangement, the Federal Court of Australia or a State Supreme Court is required to review and approve the scheme. There are two court hearings in the scheme process. At the first hearing, the court determines whether it is appropriate to exercise its discretion to convene the scheme meeting. If the scheme is approved by shareholders at that meeting, the target (scheme) company returns to court for a second hearing seeking orders to approve the scheme. Court approval of a scheme is primarily concerned with ensuring that procedural and disclosure requirements have been satisfied; the court’s role is not to assess the commercial merits of the scheme.

Australian Competition and Consumer Commission (ACCC)

The ACCC, as Australia’s antitrust agency, regulates M&A transactions to ensure they do not substantially lessen competition. It has the ability to take enforcement action in court (including to seek to injunct a transaction), or may require undertakings (eg, a divestment) before clearing a transaction.

Foreign Investment Review Board (FIRB)

FIRB examines certain proposals by foreign persons to invest in Australia, including through M&A transactions. FIRB makes a recommendation to the Treasurer of the Commonwealth Government whether to object to the proposed investment. This recommendation is based on FIRB’s assessment of whether the proposed foreign investment is contrary to Australia’s national interest. 

Takeovers Panel

The Takeovers Panel is the primary forum for resolving disputes about a change-in-control transaction involving an ASX-listed public company or an unlisted public company with more than 50 shareholders. It was established to resolve takeovers disputes swiftly and cost effectively while removing tactical litigation from the courts. The Takeovers Panel can make declarations of unacceptable circumstances and has the power to make a broad range of remedial orders.

Foreign investment in Australia is primarily regulated by the Foreign Acquisitions and Takeovers Act 1975, which is administered and enforced by FIRB. FIRB reviews foreign investment proposals and advises the Treasurer of the Commonwealth Government on whether those proposals are contrary to Australia’s national interest.

For M&A transactions, some key points to note regarding foreign investment restrictions in Australia include the following.

• Notification requirement: “Foreign persons” are required to notify FIRB before making a significant investment in an Australian entity or business. A subset of “foreign persons” known as “foreign government investors” (FGIs) are required to notify FIRB of a broader range of proposed transactions.
• Percentage and monetary thresholds: Depending on the type of investment, certain percentage and monetary thresholds apply which, if exceeded, will require FIRB approval. The thresholds vary based on the type of investment, the country of origin of the investor and whether the investor is characterised as an FGI. 
• Sensitive businesses: Businesses in certain sensitive sectors such as media, telecommunications, transport, defence, and military-related industries may attract more scrutiny and may require approval regardless of the value of the investment.
• National interest: All foreign investment proposals are examined on a case-by-case basis to assess whether they are contrary to Australia’s national interest. Factors considered can include the impact on national security (see 2.6 National Security Review), competition, the economy, the community, and the character of the investor.
• Consultation: To inform its assessment of whether a foreign investment proposal is contrary to Australia’s national interest, FIRB consults with a range of government departments and agencies.
• Conditions: The Treasurer may impose conditions on an investment to ensure that Australia’s national interest is appropriately protected. These include conditions to ensure Australian taxation laws are complied with, conditions relating to the storage of and access to customer data, cybersecurity conditions, and governance conditions. 
• “Standstill”: It is an offence to complete (close) or otherwise proceed with a proposed transaction before FIRB clearance is received. The penalties are imprisonment and/or substantial fines. Transaction documents may be signed prior to obtaining FIRB clearance, provided there is a condition precedent relating to FIRB clearance, and the agreement does not become unconditional prior to receiving that clearance.
• Timeframe: The timeframe for approval varies significantly depending on a range of factors such as the complexity of the proposed transaction; the sensitivity of the sector; the character and country of origin of the applicant; whether the acquisition raises potential antitrust (competition), national interest or national security concerns; whether the application straddles a shut-down period for FIRB over late December to mid-January and whether the application straddles a federal election period, during which FIRB typically enters a caretaker mode. Having regard to these broad variables, the timeframe for approval can be as little as six weeks for straightforward applications, to several months for more complex or sensitive applications.
• No avenue of appeal: The Treasurer’s decision on whether to grant FIRB clearance is final, that is, there is no avenue of appeal.

In Australia the Competition and Consumer Act 2010 (CCA), which is administered and enforced by the ACCC, regulates the acquisition of shares or assets which have the effect, or are likely to have the effect, of substantially lessening competition (SLC) in any Australian market. The CCA applies to domestic and offshore transactions. 

Generally speaking, seeking ACCC approval for a proposed transaction is (currently) not mandatory in Australia, but significant reforms are imminent (see 3.2 Significant Changes to Takeover Law). At present, there are therefore no formal sanctions for failing to notify the ACCC of a proposed transaction. However, not notifying is risky, as the ACCC has the ability to investigate any transaction and to take enforcement action (pre- or post-close), including injuncting a transaction or seeking orders (including penalties) from the federal court where the transaction gives rise to an SLC. Therefore, parties routinely seek ACCC approval for transactions to reassure themselves the ACCC has no concerns, either via the informal clearance or merger authorisation process.

In Australia, labour or industrial relations laws are primarily governed by the Fair Work Act 2009 (Cth). This legislation establishes a range of standards for employment conditions and regulates the relationship between employers and employees.

Some important considerations for acquirers in relation to labour laws during M&A transactions are set out below.

• Transfer of business: If a business is sold by way of an assets transfer and the employees accept employment with the new owner, the new owner must recognise their prior service with the old employer to determine entitlements such as annual leave and personal/carer’s leave.
• Enterprise agreements: These are agreements made at an enterprise level between employers and employees about terms and conditions of employment. If a business is acquired and an enterprise agreement applies, the agreement will typically move over to the new owner and apply to the employees who transferred with the business.
• Redundancy: If an employee is made redundant due to a business acquisition, they may be entitled to redundancy or severance pay. The amount is usually based on the employee’s length of continuous service with the employer. However, the employee may not be entitled to redundancy pay if the employee was offered employment with the new owner and refused.
• Consultation requirements: Consultation involves providing employees with information about major changes, discussing the changes with them, inviting them to give their views, and considering their feedback. This is particularly relevant if the transaction may result in significant changes to the workforce or working conditions.
• Unfair dismissal: Certain classes of employees who believe they have been unfairly dismissed can apply to the Fair Work Commission for a remedy. It is important that any dismissals relating to a business acquisition are carried out lawfully.
• Long-service leave: Long-service leave entitlements are based on the laws of each state and territory and can sometimes be complex in a business transfer situation. Generally, the new employer takes on the liability for employees’ accrued long-service leave.
• Superannuation (pension): Employers must contribute a minimum percentage of each eligible employee’s earnings (currently 10%) to a complying superannuation fund. This obligation continues even if the business is sold or transferred.
• Work health and safety (WHS): The new owner of a business must ensure the health and safety of their workers and other people, like customers and visitors, in the workplace, as far as is reasonably practicable.

FIRB reviews certain foreign investment proposals, including mergers and acquisitions, to determine whether they are contrary to Australia’s national interest. This entails considering the impact of the proposed investment on national security. In January 2021, a new national security regime for Australian foreign investment commenced. Under these reforms, the following apply:

Mandatory Notification

Foreign persons must obtain prior FIRB approval for starting or investing in a “national security business”, regardless of the country of origin of the foreign person and the value of the investment. This includes businesses in sectors such as defence, telecommunications, and critical infrastructure (such as energy, water and ports).

Last-Resort Power

This allows the Treasurer to reassess previously approved foreign investments where subsequent national security risks emerge. This power can be used to make divestment orders and to unilaterally impose a new condition, or vary existing conditions, even after FIRB approval has been granted.

Call-In Power

This allows the Treasurer to review investments that have not been notified to FIRB but may raise national security risks. The Treasurer can “call in” these investments for review for up to ten years after they are completed, and decide whether to impose conditions or order divestment.

In the public M&A space, the most significant legal development in Australia in recent years is the heightened use of a dual-track (concurrent) scheme and takeover bid structure. This is an innovation that has emerged to address the potential for activist shareholders to disrupt the successful execution of a board-recommended take-private transaction. This dual-track structure typically entails a prospective acquirer launching a scheme and a takeover offer concurrently: the takeover offer is priced slightly below the scheme, with the takeover offer being conditional on the scheme vote failing. In this sense, the takeover offer is a “Plan B” offer structure but it is formally initiated at the same time as the slightly higher-priced “Plan A” scheme. 

This dual-track offer structure is typically used where an existing shareholder of the target – who might emerge as an opposing shareholder and/or a competing bidder – holds a stake large enough to potentially vote down the Plan A scheme (noting that a scheme requires the approval of at least 75% of the votes cast), but where that opposing stake is not large enough to defeat a Plan B takeover with a 50.1% minimum acceptance condition. The dual-track scheme/takeover structure means that a prospective acquirer does not lose any valuable time or momentum if its Plan A scheme fails to achieve the requisite level of shareholder voting support – if that happens, the Plan B takeover bid at the slightly lower price is immediately enlivened. 

The dual-track structure was first deployed in 2019 and was upheld as valid by the Takeovers Panel in 2023. It is now commonly used by acquirers in friendly takeovers to respond effectively to increased shareholder activism and otherwise improve execution certainty and timing. However, this is only a viable option for those acquirers who are prepared to accept the possibility of ending up with less than 100% ownership of the target under the Plan B takeover. 

There are major reforms to Australia’s merger control regime on the horizon, with the Commonwealth Treasury recently consulting on potential reforms to the existing ACCC approval process outlined in 2.4 Antitrust Regulations. 

This consultation is in response to advocacy efforts by the ACCC over recent years to overhaul the current regime, which reflect its concerns the regime is biased towards clearance and otherwise deficient. This has led to the ACCC proposing a range of reforms. The most significant is a proposal that the test for merger clearance be altered by placing a positive burden on merger parties to satisfy the ACCC that their transaction will not substantially lessen competition. If this proposal is adopted, it would significantly raise the evidentiary bar to obtaining merger clearance.

On 10 April 2024, the treasurer announced the government’s proposed merger control reform package which promises to deliver a “faster, stronger and simpler” merger system. The reforms represent a significant shift from the current approval process and will impact the effort, time and costs required to proceed with deals in Australia. The ACCC has not been given everything on its wish list, most notably, the government has not accepted its proposal that the onus in merger reviews be reversed and placed on merger parties. These changes are subject to further consultation in 2024 (including draft legislation), with a proposal to put the package before parliament later in 2024, ahead of a scheduled 1 January 2026 commencement.

Hostile Takeover Bid

For public M&A transactions, acquiring a pre-bid stake may be a helpful strategy for a bidder. Particularly in a hostile takeover bid, a bidder will typically confidentially approach one or more major target shareholders to purchase their shares up to the 19.9% limit. A pre-bid stake can be helpful for a hostile takeover bid as it not only gives the bidder immediate momentum; it creates a strong platform from which to achieve the control threshold of 50.1% and may discourage a third party from making a rival offer.

Friendly Takeover Bid

In a friendly takeover bid, or where the transaction proceeds by way of a recommended scheme of arrangement, the need for a pre-bid stake is less pressing. This is because the bidder will have the benefit of the target board’s public recommendation that target shareholders accept the bidder’s offer. Nevertheless, a pre-bid stake may be helpful in discouraging a third party from making a rival offer. That said, the presence of a pre-bid stake (even up to the maximum of 19.9%) has consistently been shown not to act as a deterrent to rival bidders.

Scheme of Arrangement

Also, in a scheme of arrangement, a large pre-bid stake may be counter-productive for the acquirer: any target shares held by the acquirer are excluded from voting on the scheme or must be voted in a separate class. This makes achieving the voting approval thresholds for a scheme harder, not easier.

Call Option

As an alternative to an outright purchase of shares, an effective stake can be acquired by the use of a call option granted by a target shareholder to the acquirer. The call option is typically only exercised by the bidder if a competing proposal for the target emerges. Therefore, the call option can be advantageous to the acquirer in warding off the threat of a competing bidder and also has the advantage of not requiring any immediate financial outlay by the acquirer (beyond the typically nominal fee for the grant of the call option).

For an ASX-listed company, the key shareholding disclosure threshold is 5%. A person must file a “substantial holder notice” with ASX and the target if the person has a relevant interest in 5% or more of the voting shares in the entity. They must then disclose subsequent movements of 1% or more up or down in their voting power in the company.

Australia’s Corporations legislation imposes certain restrictions on stakebuilding for ASX-listed entities or unlisted companies with more than 50 non-employee members.

For these entities, the key hurdle to stakebuilding is that it is limited to a maximum of 20%. This arises because of the 20% takeovers prohibition under which a person, including their associates or other related parties, cannot acquire shares if, as a result of that acquisition, that person would have “voting power” in more than 20% of the entity. The 20% prohibition is subject to numerous exceptions. The most relevant ones for Australian M&A transactions are that shares can be acquired above the 20% threshold through the permitted gateways of a takeover bid or a scheme of arrangement.

Dealings in derivatives are allowed in Australia.

The Takeovers Panel expects disclosure whenever the long position of a person and their associates is 5% or more, and if so, where that position changes by at least 1% or falls below 5% (in line with the equivalent position with physical holdings as described in 4.2 Material Shareholding Disclosure Threshold).

Whether or not the holder of a long position is contemplating a control transaction, the Takeovers Panel expects disclosure of all long positions over 5%. This promotes an efficient, competitive and informed market. Where a derivative position exceeds 20%, the Takeovers Panel considers that this may constitute unacceptable circumstances unless the holder of the position is not attempting to influence control of the company and would otherwise be able to rely on the 3% creep exception under the Corporations Act.

An ASX-listed target is only required to disclose a deal when a definitive agreement is signed. This disclosure should attach a copy of the definitive agreement, so that all market participants (including potential competing bidders) can assess the full terms, conditions and deal protection arrangements agreed to by the target.

ASX’s guidance confirms that a target company is not required to disclose the receipt of a non-binding indicative proposal, provided it remains confidential. By their nature, these proposals are subject to due diligence and further negotiation. Therefore, ASX considers that they are insufficiently definite to warrant disclosure.

Despite this, the Takeovers Panel expects disclosure of the material terms of any deal protection arrangements at the non-binding indicative proposal stage where those arrangements include an obligation on the target to:

• notify the prospective acquirer of the identity of a competing bidder or the terms of its competing proposal; or
• recommend a transaction if the prospective acquirer makes a binding proposal on terms consistent with its indicative proposal (or if a material cost reimbursement fee would be payable by the target if the target board failed to recommend a binding proposal on the same or better terms than the indicative proposal).

Market practice on the timing of disclosure sometimes varies from the legal requirements. For example, many target boards elect to voluntarily disclose the receipt of a non-binding indicative proposal. The usual rationale is that:

• this signals to the market that the company is potentially in play, generating the potential for competing proposals to emerge; and
• by publicly announcing the receipt of an indicative proposal and its price, this may neutralise the pressure tactics that the prospective acquirer may otherwise use (eg, leaks to key shareholders and/or the media) and it puts the onus on the prospective acquirer to firm up its approach.

The scope of due diligence generally extends to financial, operational, legal, and regulatory matters. An acquirer will focus its due diligence on areas of the target’s business which are of specific concern or importance to it. These include the target’s capital structure, its key contracts, its real property ownership and/or occupancy arrangements, its intellectual property, its labour law (employment) arrangements, its debt financing and associated security arrangements, its litigation exposure and regulatory compliance issues.

For a Target Listed on ASX

If the target is listed on ASX, there is typically a large volume of public filings and other publicly available information that a prospective acquirer can review beforehand. If the target agrees to allow the prospective acquirer to undertake due diligence, this will entail access to the target’s non-public information. Access to that information is intended to allow the prospective acquirer to confirm matters already identified in its prior due diligence review of the target’s publicly available information and/or to close any specific information gaps.

Focus During and Post-COVID

During the height of the pandemic, one area of focus for due diligence was reviewing the target’s key contracts to assess the extent to which the target (as the provider or recipient of the relevant product or service) could be affected by “material adverse change” or force majeure-type provisions. A similar focus was applied to the target’s debt-funding arrangements. The distortions of the COVID-19 era (positive and negative) are beginning to fade into the distance, so these areas of focus during due diligence are becoming less acute.

Standstill Restriction

An ASX-listed target that agrees to provide a prospective acquirer with due diligence access to its non-public information will typically insist that the prospective acquirer agrees to a standstill restriction. This precludes the prospective acquirer from acquiring any (further) target shares other than through a transaction structure that is publicly recommended by the target’s board or with the target board’s consent. Sometimes, other exceptions are negotiated. The Takeovers Panel’s expectation is that standstill restrictions should not exceed 12 months, otherwise they unduly inhibit a potential change of control of the target.

Exclusivity

In a “friendly” takeover of an ASX-listed target, the prospective acquirer will, as part of its non-binding indicative proposal, usually request a period of exclusive due diligence access to firm up its proposal. Whether exclusivity is granted is a matter for the target board to assess. This entails evaluating whether it is likely that other interested parties could emerge as well as the overall attractiveness of the indicative offer.

If a target board is minded to grant exclusivity at the non-binding indicative proposal stage, it should ideally negotiate a so-called “fiduciary carve out”. This allows the target to disregard its exclusivity obligations if it receives an unsolicited proposal from another party that is or could be superior. Increasingly, prospective acquirers are seeking and receiving, at the non-binding indicative proposal stage, so-called “hard” exclusivity; that is, a fixed period of exclusivity with no fiduciary carve-out for the target to be relieved of its exclusivity obligations during that period. The Takeovers Panel’s guidance is that any grant of so-called “hard” exclusivity at the non-binding indicative proposal stage should be the exception, not the rule, and should not exceed four weeks.

If a non-binding indicative proposal evolves into a binding proposal, the definitive agreement will usually include a suite of exclusivity provisions for the prospective acquirer’s benefit. These supersede any exclusivity arrangements that were negotiated at the non-binding indicative proposal stage, and apply between signing and expected completion. These exclusivity provisions comprise undertakings from the target around “no shop”, “no talk”, “no third-party due diligence access”, “notification of competing proposals” and a “right to match” an unsolicited superior offer. At the binding proposal stage, the “no talk” and “no third-party due diligence access” must be subject to the fiduciary carve-out.

Friendly Takeover Bid

In a friendly takeover bid, immediately before the takeover bid is publicly announced, the bidder and the target will typically enter into a “takeover bid implementation agreement” which:

• specifies the price, conditions and other terms of the offers to be made by the bidder to all target shareholders;
• obliges the target board to support the takeover bid, including by accepting the offer for all of their own shares and publicly recommending that target shareholders accept the offer, in each case in the absence of a superior proposal;
• sets out the respective procedural obligations of the bidder and target throughout the takeover bid process including for satisfying conditions, and the despatch of the offer documents to target shareholders (comprising the “bidder’s statement”, the target’s statement and any supplementary statements);
• imposes exclusivity obligations on the target board (see 5.4 Standstills or Exclusivity); and
• imposes an obligation on the target board to pay the bidder a break fee (generally not exceeding 1% of the equity value of the target) in various circumstances, including if the target board withdraws or changes its public recommendation (eg, in response to the receipt of a superior offer that the bidder elects not to match).

If the friendly takeover is being structured as a scheme, the definitive agreement is known as a “scheme implementation agreement”. Its provisions are similar to those for a takeover bid implementation agreement, with appropriate adjustments to reflect the scheme process.

Hostile Takeover Bid

A hostile takeover bid necessarily proceeds without the target company’s co-operation or public support. Therefore, there is no definitive agreement between the bidder and the target. Instead, the price, conditions and other terms of the bidder’s offers are contained in a document that is mailed to target shareholders. This is called a “bidder’s statement” and its content is highly regulated.

The target formally responds to the bidder’s statement with its “target’s statement” which must include a statement by each director recommending that shareholders either accept or reject the offer. The recommendation is typically (although not always) unanimous, and supported by a set of collective reasons.

Private-Treaty M&A Transaction

In a private-treaty M&A transaction, the period between submission of the non-binding indicative offer and signing of a definitive agreement varies considerably. The length of time depends on the level of due diligence required by the prospective acquirer, the extent of issues arising from due diligence, any pauses in negotiations due to commercial impasses and the complexity of the transaction documents (which are typically negotiated concurrently with due diligence). In turn, the length of time between signing a definitive sale agreement and completion can take anywhere between a matter of days, weeks or months. The timeframe depends on numerous factors, including the timing for receipt of regulatory approvals, the receipt of third-party consents to change in control of the target or assignment of key contracts, the timeframe for when the acquirer’s funding becomes available, and the overall complexity of the transaction.

Public M&A Transaction

In a public M&A transaction, the period between submission of the non-binding indicative offer and signing of a definitive agreement also varies considerably. The length of time depends on the same factors described above for a private treaty process. Once a definitive agreement is signed, there are statutory timeframes that govern the period to closing. These differ depending on whether the transaction is proceeding as a takeover (tender) offer or a scheme.

Tender offer

For a tender offer, the minimum offer period is one month but most bidders commence with a slightly longer offer period. In any event, the initial offer period is invariably extended at least once to provide extra time for receipt of regulatory approvals and to deal with typical developments in the offer process, including satisfaction or waiver of conditions, price increases, emergence of competing proposals, etc. Certain extensions in the offer period occur automatically by law (eg, by 14 days if the bidder increases the offer consideration or if the bidder’s voting power in the target increases to more than 50% within the last seven days of the offer period). The maximum offer period is 12 months.

Scheme of arrangement

For a scheme of arrangement, due to the various embedded timeframes that apply to the sequential steps in the process, the shortest possible length of time between signing the definitive agreement and closing is approximately two months. Typically, due to external factors such as delays with receiving regulatory approvals, the emergence of a competing offer or shareholder activism, the timeframe can be extended to anywhere from three months to a year.

Australia does not have a mandatory takeover-offer threshold; that is, a threshold above which a follow-on takeover bid must be made to all other shareholders. Rather, the primary rule is the 20% prohibition described in 4.3 Hurdles to Stakebuilding. However, provided an acquirer stays under 20%, they can lawfully remain at that level indefinitely without being required to make any follow-on offer. If and when a shareholder wishes to move beyond 20%, they can do so by relying on an exception to the 20% prohibition. If the shareholder is seeking control of the target, the most common exceptions are making a takeover offer or proposing a scheme of arrangement. If the shareholder is not necessarily seeking control, other commonly relied-on exceptions include the “3% in six months” creep rule as well as non-associated shareholder approval.

Consideration in the form of cash or shares (ie, scrip) or a combination of cash and scrip is relatively common. In a public M&A transaction, an all-cash consideration is generally preferred by target boards (due to the certainty of value it offers) and is more common than an all-scrip (or combined scrip-and-cash) consideration.

Stub-Equity Offer Structures

In public market M&A transactions where the target’s key shareholders comprise founders and/or executives, so-called “stub-equity offer structures” are common. These comprise an offer of shares in an unlisted public company controlled by the acquirer. Stub-equity offers allow founders and key management of the target to roll over all or some of their shareholding in the target by accepting shares in the unlisted public company, which on closing will be the holding company of the target. This allows founders and key management to retain their investment exposure to the target’s future upside, rather than exiting in full for cash.

Earn-Out Mechanisms or Deferred Consideration

Earn-out mechanisms or deferred consideration are commonly employed in private treaty M&A transactions. They are generally not used in public M&A transactions. However, where there is a material divergence of view on value between a prospective acquirer and the target board, public M&A offers can be structured to comprise a base cash figure, accompanied by a contingent right for target shareholders to receive a further top-up cash payment if a specific future event occurs after closing that is value accretive to the target. These contingent top-up payments have in the past been referrable to the favourable outcome of a future mineral resource test result for the target, or the outcome of litigation for a tax refund claim that the target had been pursuing. Contingent uplift payments can be a creative way to resolve valuation impasses and help structure a deal that may otherwise not proceed.

For private M&A transactions, it is more common for the consideration to be in the form of cash, with any valuation gaps being bridged by earn-out mechanisms, deferred consideration or a post-completion adjustment mechanism.

For an off-market takeover offer, common conditions include the following:

• receipt of regulatory approvals;
• a minimum level of acceptances (see 6.5 Minimum Acceptance Conditions);
• no material adverse change in the target;
• no material acquisitions, disposals or new financial commitments by the target; and
• no prescribed occurrences such as any issued new shares.

A bidder may elect to waive all or any of its conditions during the offer period (other than regulatory approval conditions). Bidders typically do so during the second half of their offer period, to make the offer less conditional and therefore more attractive to target shareholders.

Various rules apply to conditions of takeovers, including:

• offers under an off-market bid cannot be subject to a maximum-acceptance condition;
• offers under an off-market bid cannot be subject to a defeating condition that depends on the bidder’s (or an associate’s) opinion, belief or other state of mind, or that is within the control of the bidder or its associates (eg, a due diligence condition); and
• on-market takeover bids must be unconditional, except for certain prescribed occurrences.

For a scheme of arrangement, the conditions are similar to those outlined above for a takeover, except that:

• there will be no minimum-acceptance condition – this is not required for a scheme given the “all or nothing outcome” it produces; and
• the scheme will instead be subject to approval by the requisite majorities of target shareholders (75% by value and more than 50% by number) as well as the approval of the court.

Although on-market takeover bids must be unconditional, off-market takeover bids may be subject to defeating conditions including minimum acceptance conditions.

The bidder may specify in the offer the number of shares (specified as a number or percentage of the total shares of that class) chosen as the minimum acceptance level.

Minimum acceptance conditions often reflect relevant control thresholds in Australia and are generally either 50.1% if the bidder merely wants to control the target, or 90% if the bidder wishes to proceed to compulsory acquisition and own 100%. 

For private M&A transactions, there is no legal impediment to the inclusion of a funding condition. It is a matter for negotiation. Targets are generally not receptive to funding conditions, especially in a competitive sale process where a target will evaluate offers not just on headline price but also overall execution certainty – which entails assessing the certainty and timeliness of the prospective acquirer’s funding arrangements.

For public M&A transactions (whether by tender offer or scheme), a prospective acquirer must have an objectively reasonable basis for believing it will be able to pay target shareholders. This applies at the time of initial announcement of the takeover or scheme and throughout the entire process.

For public M&A transactions, deal protections typically sought by prospective acquirers in the definitive agreement include:

• positive public recommendation – an obligation on the target’s board to (unanimously) publicly recommend the bidder’s proposal to target shareholders, in the absence of a superior proposal (and generally, also subject to the receipt of a “positive” opinion from an independent expert);
• target directors to accept/vote in favour of their own shares – an obligation on the target to make sure that each target director who owns or otherwise has a relevant interest in target shares acts consistently with their public recommendation by accepting the bidder’s offer (if it is structured as a takeover bid) or by voting in favour of the bidder’s proposal (if it is structured as a scheme), in the absence of a superior proposal (and generally also subject to the receipt of a “positive” opinion from an independent expert);
• exclusivity – a suite of exclusivity undertakings by the target in favour of the prospective acquirer, typically comprising:
1. a “no-shop” restriction;
2. a “no-talk” restriction (this must be subject to a fiduciary carve-out – see 5.4 Standstills or Exclusivity);
3. a “no due-diligence” by third parties restriction (this must also be subject to a fiduciary carve-out);
4. a right to be notified of any unsolicited competing proposal (this can, by negotiation, be displaced by a fiduciary carve-out); and
5. an opportunity to match any superior proposal; or
• a break fee – this is payable by the target to compensate the prospective acquirer if the contemplated transaction does not complete in specified circumstances.

The Takeovers Panel’s position is that deal protections for a prospective acquirer must be subject to appropriate structural limits to ensure that they strike the correct balance between, on the hand, providing an inducement to the prospective acquirer to make its offer and, on the other hand:

• not having an overly anti-competitive effect by discouraging other potential bidders from making a competing offer; and
• not “coercing” target shareholders into accepting the bidder’s offer.

These structural limitations include:

• at the non-binding indicative proposal stage, if a target board determines that it is appropriate to grant so-called “hard” exclusivity (ie, exclusivity without a “fiduciary out”), ensuring the exclusivity period is capped at four weeks;
• at the definitive agreement stage, ensuring that there is a fiduciary carve-out to confirm the exclusivity arrangements (see above); and
• at the definitive agreement stage, ensuring that any break fee payable by the target to the prospective acquirer does not exceed 1% of the equity value of the target, as implied by the offer value (this 1% cap is intended to not discourage competing bidders from emerging, as they will, if successful, effectively inherit any break fee paid by the target to the first bidder; in limited cases, it may be appropriate for the 1% guideline to apply to a company’s enterprise value, eg, because the target is highly geared).

Private M&A Transaction

In a private M&A transaction, any additional governance rights are captured in a shareholders’ agreement that regulates the rights of the bidder and all other shareholders (eg, drag-along rights, tag-along rights, right to set dividend policy, and material decisions over which the majority shareholder has veto rights).

Public M&A Transaction

In a public M&A transaction, if a bidder ends up with less than 100%, there is limited scope to secure additional governance rights outside of its shareholding (noting, however, that a majority shareholding carries the right to control the composition of the board, being the primary decision-making organ). This is especially the case if the target remains listed on ASX. All ASX-listed companies must have a constitution that complies with the ASX Listing Rules. In a stub-equity transaction, the bidder will co-exist as a shareholder alongside founders, key management and potentially other target shareholders who have elected to roll over into a holding company controlled by the bidder. In that scenario, the shareholders’ agreement for the holding company will govern the rights and obligations of the relevant shareholders. That agreement will often enshrine additional governance rights in favour of the bidder as the majority shareholder.

In Australia, shareholders can generally vote by appointing a proxy to attend a shareholders’ meeting to vote on their behalf. A proxy may be directed or undirected. The chair of the meeting will usually be named as the proxy, but there are generally no restrictions on appointing someone else. A proxy does not need to be a fellow shareholder.

Direct voting is also possible if provisions facilitating this exist in the company’s constitution. Direct voting allows shareholders to cast their vote on resolutions of a meeting, either online or by completing their personalised voting form, without having to attend the meeting in person and without needing to appoint a proxy to vote on their behalf.

Australian law allows for the compulsory acquisition of remaining shares following a takeover bid when the bidder has an interest in at least 90% of the bid class securities (by number) during or at the end of the bid, and has already acquired 75% of the securities (by number) that the bidder made offers for under the bid.

Commitments from key target shareholders in support of a public M&A transaction are commonly seen in Australia. They usually take the form of a wide variety of acceptance agreements and/or a positive pubic statement that the shareholder intends to accept the takeover or vote in favour of the scheme (as the case may be). A public intention statement can be as effective as a more formal agreement. This is because of ASIC’s “truth in takeovers” policy which requires the party making the public statement of support to act consistently with it, as the market will be relying on this to inform trading in the target’s shares.

These agreements and public intention statements are often qualified by reference to no superior proposal emerging within a certain timeframe. If a superior proposal emerges, this will allow the shareholder to revoke their commitment and to pursue the superior proposal. 

Generally, a target is not required to disclose the receipt of a non-binding indicative takeover proposal to ASX. Nevertheless, a target may elect to do so for tactical reasons.

If and when a definitive, legally binding agreement is entered into, disclosure will then be mandatory. For market transparency, the disclosure should attach the full form of the agreement (see 5.2 Market Practice on Timing).

Generally, if shares are being issued as consideration for a takeover bid or a scheme, prospectus-level disclosure is required in either the bidder’s statement (for a takeover bid) or the scheme booklet (for a scheme). This typically entails disclosure of:

• a profile of the business operations of the merged group;
• the capital structure of the merged group including pro forma historical financial information for the merged group;
• the composition of the board and senior management of the merged group (or, if that is still to be confirmed, the principles for determining the composition);
• the rights attaching to securities in the merged group; and
• the risks associated with an investment in the merged group.

If shares are being issued as consideration for a takeover bid or a scheme, it is common for bidders’ statements and scheme booklets to include pro forma historical financial information. This gives target shareholders a reconstructed hypothetical picture of what the financial profile of the merged entity will look like if the merger has recently been completed (ie, in the last six months). It is also common for an investigating accountant’s report to be included, providing assurance as to the methodology adopted for the pro forma historical financial information.

In terms of forward-looking financial information, profit forecasts or cash-flow projections are not typically included because they are inherently speculative. As a result, these forecast are not always helpful and may potentially be misleading unless they are appropriately qualified and/or accompanied by a sensitivity analysis to show impacts if certain key variables or assumptions change materially or cease to be correct. 

In a public M&A transaction, the Takeovers Panel stated in 2013 (and this has since become established market practice) that the definitive transaction document (ie, either a bid implementation agreement or a scheme implementation agreement) is to be disclosed in full. This is typically done by attaching it to the ASX announcement released by the target following signing of the agreement.

In a private-treaty M&A transaction involving an ASX-listed entity as the buyer or seller of a discrete business, ASX notes that it is up to the listed entity to lodge a copy of the definitive agreement as part of its announcement of the transaction. However, ASX recognises that a listed entity may be reluctant to do this (eg, if, as is often the case, it contains commercially sensitive information). In those circumstances, the listed entity’s announcement of the transaction should:

• contain a fair and balanced summary of the material terms of the agreement; and
• include any other material information that could affect an investor’s assessment of its impact on the price or value of the listed entity’s shares. 

Directors of Australian companies have statutory duties under the corporations legislation and fiduciary duties under the common law. These duties require directors to:

• exercise due care and diligence;
• act in good faith, in the best interest of the company and for a proper purpose;
• not make improper use of their position or information acquired through that position, to gain an advantage for themselves or for any other person, or to cause detriment to the company; and
• avoid any actual or potential conflict between the obligations they owe to the company and their personal interests, or other duties to which they may be subject.

These duties are principally owed to company shareholders as a whole (not external stakeholders, such as employees, customers, suppliers or even creditors), except where a company is insolvent or nearing insolvency, in which case, the directors’ duty to act in the company’s best interests also includes a duty to consider the interests of the creditors.

In an M&A setting, these duties require directors to make an informed assessment of whether or not the transaction is in the best interests of the company’s shareholders, having regard to all of the circumstances. In practical terms, this requires the directors of acquirer and target companies, respectively, to consider:

• the material terms and conditions of the transaction (including whether the consideration offered is fair and reasonable having regard to the underlying value of the target company);
• the degree of certainty that the transaction will complete (having regard to regulatory approvals, funding and other execution risks);
• the appropriateness of deal protections sought by each party, including in the case of deal protections for the acquirer ensuring that their parameters comply with Takeovers Panel guidance (see 6.7 Types of Deal Security Measures);
• whether the transaction is otherwise the most favourable course of action for the company having regard to the opportunities and risks of not undertaking the transaction; and
• ensuring that actual or potential director conflicts of interest are identified and appropriately managed (see 8.2 Special or Ad Hoc Committees).

A company board may delegate authority in relation to a business combination to a sub-committee which has authority to convene and respond to material developments in relation to a transaction. 

According to guidance issued by the Takeovers Panel, a target company should establish an independent board committee (IBC) as soon as the board becomes aware of an actual or potential business combination which involves or is likely to involve "participating insiders".  For example, a director of the target will likely be a "participating insider" if they are offered a significant new employment or other agreement with the bidder (on more favourable terms than existing arrangements with the target) or if they are offered an opportunity to acquire a material equity stake in the target, the bidder or the bid vehicle that is not available to other shareholders. 

The role of an IBC in this context is to apply independent judgment to promote a fair and balanced transaction process. This includes:

• regulating the provision of due diligence and other information to the prospective acquirer and otherwise managing the conflict of interest;
• evaluating the fairness and overall merits of the proposed transaction, including by engaging external advisers;
• negotiating the price, terms and conditions of the proposed transaction on behalf of the target;
• making recommendations to the target board and shareholders on the proposed transaction; and
• taking responsibility for disclosure documents and other communications provided to target shareholders about the proposed transaction.

The business judgement rule in Australia provides that a director of a company will be taken to have met the duty of care and diligence in making a business judgement (defined as any decision to take or not take action on a matter relevant to the business operations of the company) if the director:

• has made the judgement in good faith for a proper purpose;
• did not have a material personal interest in the subject matter of the judgement;
• informed themselves about the subject matter of the judgement to the extent they reasonably believed to be appropriate; and
• rationally believed that the judgement was in the best interests of the company.

Depending on the nature, scale and complexity of a proposed business combination, directors of a bidder and target will commonly obtain independent external advice from investment bankers, lawyers, financial and tax advisers, public relations firms and proxy solicitation firms. Technical or other specialist advisers are also commonly obtained for the purposes of undertaking due diligence.

There is a statutory requirement for a target to commission an independent expert’s report where the bidder’s existing voting power in the target is 30% or more, or a director of the bidder is also a director of the target. Even outside these two mandatory circumstances, a target will often voluntarily commission an independent expert’s report (eg, in a hostile takeover where target directors consider the offer materially undervalues the target).

Where a business combination is structured as a scheme of arrangement, market practice requires the explanatory memorandum to include an independent expert’s report expressing an opinion on whether the scheme is in the best interest of target shareholders, even if such a report is not required by law.

Directors of Australian companies have statutory and fiduciary duties to avoid conflicts of interest.

Under Australia’s corporations legislation, a director must give notice to the other directors of a material personal interest that relates to the affairs of the company. Notice can be given at a directors’ meeting or by standing notice.

For proprietary companies, if permitted by the constitution, directors may vote on a matter in which they have a material personal interest, provided notice of the interest has been given.

For public companies, a director with a material personal interest that is being considered at a directors’ meeting must not be present or vote on the matter at the meeting, subject to limited exceptions.

The rules governing conflicts of interest in Australian M&A transactions are generally well understood and managed. This includes establishing an IBC and governance protocols where appropriate (see 8.2 Special or Ad Hoc Committees). Despite this, failures to appropriately manage conflicts of interest in an M&A context are occasionally ventilated in the Takeovers Panel.

For example, in a 2021 matter, the Takeovers Panel found that conflicts of interest between the directors of the bidder and the target (which shared common directors) were not adequately managed because governance protocols to address those conflicts were not implemented prior to negotiating the agreed terms of the proposed transaction and were not adequately disclosed to the target’s shareholders.

Hostile takeover bids are permitted in Australia. They typically arise in response to a failure by the target board to engage with an initial friendly proposal or the rejection by the target board of an initial friendly proposal. In those circumstances, the prospective acquirer may decide to bypass the target board and put an offer directly to target shareholders. In some cases, a prospective acquirer will launch a hostile bid without any prior attempt at friendly engagement with the target’s board.

Hostile takeovers remain far less common than “friendly” transactions, as they involve considerably higher execution risks and other uncertainties. This is because:

• a hostile bidder has no opportunity to undertake due diligence on the target beyond the target’s market disclosures and other publicly available information;
• a hostile bidder will usually encounter vigorous defence from the target board, including actively soliciting statements from key shareholders of their intention to –
1. reject the offer;
2. actively solicit competing bids; and
3. (if the target board is confident in its assessment of under-value) engage an independent expert to opine negatively on the fairness and reasonableness of the offer;
• a hostile bidder will not have the benefit of any of the deal protections that a friendly bidder typically secures (eg, exclusivity and break fee coverage), which leaves a hostile bidder commercially exposed if a competing offer emerges; and
• a hostile bidder may need to be willing to accept less than 100% ownership, noting that hostile takeovers rarely result in an acquisition of 100% ownership without the recommendation of the target board (which typically requires a price increase during the offer process).

For these reasons, the majority of business combinations in Australia are made with the public support and recommendation of the target board, usually via a court-approved scheme of arrangement which delivers a binary “all or nothing” outcome.

Once a takeover bid has been announced, target company directors are heavily constrained in the types of defensive measures they may adopt. 

For example, under the ASX Listing Rules an entity must not:

• issue or agree to issue new equity securities without shareholder approval, for three months after it is informed a person is or proposes to launch a takeover bid (subject to certain exceptions, eg, issues of shares following the exercise or conversion of existing securities, pro rata issues available to all securityholders, etc); or
• provide any termination benefits to a director or officer of the entity triggered by any change in the shareholding or control of the entity.

The Takeovers Panel’s policy on frustrating action seeks to ensure that target company directors do not take any action which may cause a takeover bid to be withdrawn or lapse or cause a potential bid to not proceed, without first obtaining shareholder approval.   

The Takeovers Panel has set out a non-exhaustive list of factors that could constitute unacceptable frustrating action, including:

• share issues or repurchase arrangements;
• acquisitions and disposals of major assets;
• undertaking significant liabilities or changing the terms of its debt;
• declaring a special or abnormally large dividend;
• significant change to company share plans; and
• entering into joint ventures. 

The Takeovers Panel has wide powers to make orders in relation to unacceptable frustrating actions, including to prevent an action or transaction from proceeding, requiring shareholder approval or unwinding an action or transaction.

When confronted with an unsolicited takeover bid that the target directors consider is not in the best interests of their shareholders, it is common for a target to adopt the following defensive measures:

• deny the bidder access to non-public due diligence materials (in Australia, there is no obligation to provide a bidder with access to due diligence; target directors have the right to choose to whom, and on what terms, to provide information, in the best interests of the company and its shareholders);
• publicly seek to discredit the merits of the takeover bid and recommend that shareholders reject the bid (eg, due to the bid undervaluing the target’s shares, being opportunistically timed, being highly conditional and uncertain to proceed, or for other specific reasons);
• engage with key target shareholders with a view to eliciting from them a public statement that they intend to reject the takeover bid;
• seek to solicit alternative superior proposals;
• apply to the Takeovers Panel challenging the acceptability of the terms or conditions of, or the bidder’s disclosure in relation to, the takeover bid with a view to undermining the credibility of the bid and/or to buy time for a competing bid to emerge; and
• commission an independent expert to prepare a report that independently validates the target board’s view that the offer materially undervalues the target’s shares – this step should only be taken if the target board is confident that an independent expert will arrive at a valuation range materially above the offer price.

More aggressive defensive measures that may be acceptable during a takeover bid in other jurisdictions, such as raising capital; acquiring, disposing or granting rights over material assets; or entering into significant strategic or financing arrangements with third parties, are uncommon in Australia. This type of conduct would generally either breach a takeover bid condition and/or breach the Takeovers Panel’s policy on frustrating actions, unless the target has obtained the fully informed consent of its shareholders.

In responding to a takeover proposal, the target directors’ principal duty is to act in the best interests of the target as a whole – this duty is owed to all shareholders, not just the minority or any controlling shareholder (see 8.1 Principal Directors’ Duties). 

Accordingly, target directors must ensure that any defensive measures protect or advance the interests of all target shareholders and are not motivated by improper purposes, eg, entrenching the position of incumbent directors, entrenching the position of a controlling shareholder or safeguarding employees’ jobs.

In addition to their general statutory and fiduciary duties, target directors must comply with specific statutory obligations concerning a target’s response to a takeover bid. For example, the target’s statement that is required to be issued by the target in response to a takeover bid must contain a statement from each director recommending that the bid be accepted or rejected, accompanied by the reasons for making that recommendation (or giving reasons why a recommendation has not been made, eg, where a director has a conflict of interests). 

As noted in 9.3 Common Defensive Measures, it is common for a target board to recommend that shareholders reject a hostile takeover bid because it undervalues the target – these statements are commonly known as “undervalue statements”. The Takeovers Panel has issued a guidance note on undervalue statements. These statements are susceptible to challenge if they are “loosely” or “nakedly” expressed. Instead, undervalue statements need to be supported by any disclosed financial methodology, or sufficient financial information to give target shareholders an adequate foundation to meaningfully assess the bid.

Although target directors may take steps to prevent a business combination, for example, by simply not engaging with a prospective acquirer or withholding access to due diligence information, the target cannot prevent a bidder from:

• engaging directly with the target’s key shareholders and informing them that the target is being obstructive by not facilitating a potential control transaction – the institutional shareholder may in turn apply pressure on the target board to engage with the prospective acquirer so that shareholders are not deprived of an opportunity to at least consider a proposal that embodies a premium for their shares and that may attract competing offers; and
• launching a hostile takeover bid, despite the significant execution risks associated with this (see 9.1 Hostile Tender Offers). 

While the bidder may seek to bypass the target board, history shows that the views and recommendations of target directors will materially influence the outcome of a hostile takeover bid. In particular, history shows that hostile takeover bids that do not embody a subsequent price increase that prompts a change in recommendation from the target board (from “reject” to “accept”) rarely result in the bidder acquiring 100% of the target.

In private M&A transactions, the definitive agreement typically contains an agreed approach to resolve disputes. This may include private negotiation, mediation and/or binding or non-binding arbitration. As a result, litigation is relatively uncommon in Australian private treaty M&A deals. 

In public M&A transactions, disputes in relation to takeover bids and other control transactions are determined by the Takeovers Panel (not the courts).  Applications to the Takeovers Panel may only be made by bidders, targets, shareholders, ASIC and other persons whose interests are affected by the relevant circumstances (eg, a competing bidder). Since the Takeovers Panel was given exclusive jurisdiction over takeovers disputes in 2000, it has heard approximately 28 cases per year. 

The types of issues raised in applications vary from year to year but often include:

• breach of the 20% prohibition (see 6.2 Mandatory Offer Threshold);
• breach of the substantial holding provisions (see 4.2 Material Shareholding Disclosure Threshold);
• bidder or target statement disclosure;
• the parameters of deal protection mechanisms (see 6.7 Types of Deal Security Measures);
• shareholder intention statements/truth in takeovers (see 6.11 Irrevocable Commitments);
• frustrating action (see 9.2 Directors’ Use of Defensive Measures);
• undervalue statements by targets in hostile takeovers (see 9.4 Directors’ Duties); and
• rights issues, share buy-backs and other share capital reductions that have a control impact.

Disputes in private M&A generally arise after completion. 

Conversely, disputes in public M&A generally arise prior to completion (ie, prior to or during the course of a takeover bid or scheme). Additionally, it is not uncommon for disputes to be taken to the Takeovers Panel even before a binding agreement has been struck between a prospective acquirer and the target.  For example, a number of high-profile cases have recently been brought before the Takeovers Panel concerning the permissible boundaries of deal protection arrangements granted by a target to a bidder during the non-binding, indicative proposal stage.

The overwhelming majority of take-private deals that are publicly announced and recommended by the boards of ASX-listed targets close successfully.  However, the Australian market has recently seen a proliferation of failed and disputed “friendly” take-private deals.

Lessons for Prospective Acquirers and Targets

Prospective acquirers and targets can draw many lessons from these, two of which are discussed below.

Lesson No 1: be wary of material adverse change (MAC) conditions

It has become standard in most public market deals for a prospective acquirer to have the benefit of a “no MAC” condition to allow it to walk away from an agreed transaction without paying a break fee or other penalty, if the target suffers a MAC event between the public announcement and closing. 

There have been multiple examples of prospective acquirers successfully invoking MAC conditions to withdraw from a publicly announced deal or to renegotiate a lower price, especially following the onset of the COVID-19 pandemic. Even where the acquirer did not succeed, the purported reliance on the MAC condition created material delays and market instability for the target.

A target should seek to ensure that:

• the triggers for what constitutes a MAC are drafted by reference to clear, objectively ascertainable financial metrics and seek to avoid more general, qualitative criteria that are potentially capable of subjective interpretation and reliance by the acquirer; and
• appropriate exclusions are incorporated into the MAC condition (that way, even if any of the triggers – financial and/or qualitative – are met, the exclusions will disqualify the prospective acquirer from relying on the condition). 

Lesson No 2: a prospective acquirer cannot walk away from an agreed transaction to pursue a superior proposal without express permission

In 2022, ASX-listed Perpetual entered into a definitive agreement with ASX-listed Pendal Group, under which Perpetual agreed to acquire Pendal by a scheme of arrangement to be initiated by Pendal as the target. If the scheme was approved and implemented, Pendal shareholders would receive cash and Pendal shares.

Subsequently, a consortium emerged with successive non-binding indicative proposals for Perpetual, conditional on Perpetual abandoning its planned acquisition of Pendal. While these proposals were rejected by Perpetual, it and Pendal approached the court for guidance on how their definitive agreement would respond if Perpetual sought to pursue an alternative transaction with the consortium.

Perpetual argued that its fiduciary duties to its own shareholders (ie, maximising optionality and potential future value for them) meant that it should have a right to walk away if it received a superior proposal. The court disagreed, ruling that if Perpetual sought to pursue an alternative transaction, Pendal could, at its election, (i) terminate its agreement with Perpetual and seek damages and/or receipt of the agreed “reverse” break fee; or (ii) keep the agreement alive and seek an order for specific performance. 

For prospective acquirers, the lessons are to seek to:

• expressly allow flexibility in the definitive agreement to terminate that agreement if the acquirer wishes to pursue a better deal for itself; and
• limit any “reverse” break fee to 1% of the deal value, being the target’s sole and exclusive remedy for an actual or anticipatory breach expressly excluding specific performance.

For a prospective target, the lessons are to seek to:

• resist any right for a prospective acquirer to terminate a definitive agreement to pursue a better deal that the acquirer might receive on an unsolicited basis;
• negotiate a “reverse” break fee (if possible) above the 1% limit the Takeovers Panel says applies to any break fee payable by a target to a bidder (importantly, this 1% limit does not apply to reverse break fees); and
• ensure that a reverse break fee is not the target’s sole and exclusive remedy for an actual or anticipatory breach by the acquirer – expressly preserve capacity to apply for an order for specific performance.

Shareholder activism is a well-embedded feature of the Australian corporate landscape, with activists regularly exerting their influence to impact transactions and corporate behaviour more generally. For example, shareholder activists are:

• leveraging their investment power to effect significant change in corporate governance, environmental, social and governance (ESG) issues, including the composition of boards and senior management teams (eg, addressing gender and cultural representation) and challenging excessive executive remuneration; 
• exerting influence on companies to re-set their strategic direction, including by undertaking material transactions or not proceeding with an announced transaction or otherwise altering course (see 11.2 Aims of Activists); and
• influencing the outcome of announced transactions by leveraging their voting rights, publicly expressing their views on proposed transactions, and mobilising other shareholders to either block or support deals based on an assessment of value creation and alignment with broader ESG objectives (see 11.3 Interference With Completion).

Shareholder activists regularly campaign for companies to initiate some form of M&A activity, for example, to de-merge or to spin off or divest non-core assets, to merge or acquire assets, or more fundamentally, to sell themselves or make themselves a more attractive target for potential bidders. 

Shareholder activists are increasingly interfering with the completion of announced transactions in Australia. This activism typically arises from:

• a long-standing institutional shareholder of the target who has a fundamentally different view on value to a bidder or the target board;
• a dedicated activist fund that takes a position in the target shortly after the public announcement of a proposed deal with a view to improving the price and making money on its investment (known as “deal arbitrage”); 
• an industry competitor who acquires (further) shares in the target on-market shortly after the public announcement of a proposed deal with a view to building a sufficient stake to either block an announced deal to protect its market position or to provide a “seat at the table” in extracting a side deal with the acquirer;
• environmental and socially conscious activists who attempt to exert pressure on either the bidder or the target company to provide assurances with respect to environmental issues; and
• environmental and socially conscious activists who acquire shares on the market after a corporate control transaction is publicly announced, with a view to building a sufficient stake to block an announced deal that they consider to be environmentally and/or socially detrimental.