Takeovers to become more challenging under Australia's proposed new merger laws 8 min read
One aspect of the proposed new mandatory and suspensory ACCC merger approval regime introduced into Parliament earlier this month which hasn't yet been the subject of much attention is how they will impact tactics, timelines and bidder strategies in public company takeovers in Australia.
In this Insight we delve into some of the practical implications of these new rules for takeovers of listed companies in Australia, particularly those bids which do not raise any competition concerns, and which currently don't require any ACCC approval. We also explore the proposed confidential review process for 'surprise hostile takeovers', highlighting areas where the drafting needs some work, and suggesting potential improvements.
Implications of the proposed changes
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Given the very low financial thresholds for notification under the new merger rules, in practice every takeover bid in Australia is going to require ACCC notification and clearance, even if it doesn't raise any competition concerns. This means every takeover bid will now have to be subject to an ACCC approval condition, unless the bid can be pre-approved under the proposed confidential review process for 'surprise hostile takeovers' (see below).
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This has implications for bidders who would not otherwise have an ACCC clearance condition in their bid, as they will not be able to get any momentum in their bid until the ACCC condition is satisfied (because shareholders typically won't accept while the bid is still conditional on a regulatory approval), and bidders may be precluded from acquiring shares on-market above the 20% takeovers threshold until the condition is satisfied.
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Under the new rules, it will take the ACCC a minimum of 15 business days (the ACCC can't decide an application in less than this) and more like 30 business days (and perhaps materially longer if the ACCC stops the clock by requiring further information) to approve the bid, even if it doesn't raise any competition concerns. It is not possible for the bidder to seek ACCC approval prior to publicly proposing the bid unless it falls within the 'surprise hostile takeover' provisions, and even if it was possible, the issue for bidders would be that the ACCC has to include the notification on its public register within one business day of receipt of the notification (so that the world will know the bid is coming), and the ACCC then cannot approve the acquisition for at least 15 business days.
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During the public consultation process on the earlier draft of the legislation, we argued for the inclusion in the legislation of a confidential review process for surprise hostile takeovers (i.e. takeovers which have not been announced and which are not recommended by the target board), so that, if the bid doesn't raise competition concerns, it can be approved before it is made. This means that the bid doesn't have to include an ACCC clearance condition, and the review process doesn't delay the bidder getting momentum under the bid, or acquiring shares on-market above 20% under relevant exceptions.
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To the Government Task Force's credit, it did listen to those concerns, and it did include a confidential review process for 'surprise hostile takeovers' in the draft legislation introduced to Parliament last week. However, that confidential review process for 'surprise hostile takeovers' is still clunky, and the requirements that a bidder needs to satisfy to come within it, and the way in which the process operates, mean its utility for bidders is materially compromised.
Key issues with the confidential review process for 'surprise hostile takeovers'
Some of the issues in relation to the proposed pre-bid approval process for surprise hostile takeovers are:
The provisions only allow for confidential review of takeover bids which are for all of the shares in the target and which are either unconditional, or subject only to a prescribed occurrence condition. This is obviously only a small subset of hostile takeover bids. Presumably the intention behind this drafting is that, if the takeover bid is subject to conditions, the bidder can wait until after the bid is made public, and then make its notification – the thinking being that the bidder in those circumstances will not be disadvantaged by the fact that the ACCC may take 30 business days or longer to make a decision.
However, there will be conditional takeover bids (i.e. bids subject to some condition other than ACCC approval) that raise no competition issues, but which now have to be notified under the new regime, where the bidder will be disadvantaged by the fact that they will not be able to get competition clearance ahead of making the bid (or within 15 business days of making the bid). For example, where the proposed takeover bid is subject to a minimum acceptance condition, the bidder will not want the bid to be subject to an ACCC condition while the Commission is completing its processes, as target shareholders will not in practice accept the bid while that ACCC condition remains outstanding, meaning the bidder will not be able to get the minimum acceptance condition satisfied until later than may otherwise have been the case. There doesn't seem to be a sound policy basis for excluding hostile surprise conditional takeovers (which are the majority of surprise takeovers) from the confidential clearance regime.
Under the proposed legislation, a request by a proposed bidder for confidential review of its notification by the ACCC must state that, if the ACCC does decide to approve the bid, then the bidder will give a bidder's statement to the target within one business day after that approval. In our view, the word 'will' in this provision needs to be changed to 'intends to'. This is so for a number of reasons:
- While a proposed bidder may have an intention at the time of making the notification that it will make the bid within one business day of getting the ACCC's approval, whether it does or not will depend on market conditions at the time, which will not be known for at least 15 business days (as the ACCC cannot make a determination until after the 15 business day period has elapsed). If, for example, in the intervening period, the target's share price has traded well above the price at the time of the notification, and potentially above the proposed bid price, then the bidder should not be bound to go ahead and make the bid.
- A bidder should not be bound to go ahead and make the bid if the ACCC's decision to approve the bid is subject to conditions that are unacceptable to the bidder.
- For all other transactions (i.e. transactions other than takeover bids), a proposed acquirer can give a notification to the ACCC even though the proposed contract, arrangement or understanding has not been entered into, if the parties intend to enter into it, without the parties being compelled by the Act to enter into the transaction if the ACCC approves it. The position should not be different for hostile takeover bids.
Even if it is only a statement of intention to make a bid within one business day of getting the ACCC's approval, the one business day period is too short. If the bidder does get ACCC approval on business day 16, it will then have to make a very quick decision whether the market conditions and the target's share price are such that it can launch the bid the next day, or whether it should withdraw its notification so it is not forced to go ahead with the bid. At a minimum, we think that the one business day period for making the bid should be five business days.
Under the proposed legislation, the Commission must not include the notification on the public acquisitions register before the 17th business day after the effective date of the notification. The 17 business day period for a confidential review is too short, given that the phase 1 determination period for a notification is 30 business days after the effective notification date. The 17 business day period ties back to the fact that the Commission cannot approve the notification for 15 business days (and then allows one day for the determination and one day for the bid to be made, before the notification is made public), but doesn't cater for the fact that the Commission may need more of the 30 business day phase 1 notification period to decide the application.
Under the proposed legislation, during the 15 business day period after the notification and request for confidential review is made, the ACCC can unilaterally determine that the confidential review process no longer applies to the notification, if it is satisfied that the bidder intends to obtain the target board's support for the bid, or that it is unlikely that the bidder will give the bidder's statement within one business day after approval by the ACCC. If that happens, the section is taken never to have applied in relation to the notification.
Clearly, if the ACCC did make a determination that the confidential review process no longer applies, that could have quite serious adverse consequences for the proposed bidder, who has made the notification on the assumption that it is the subject of a confidential review, as the world will then become aware that it is proposing to make a hostile takeover bid for the target. This will be the case even though the bidder may be still deliberating whether to make the bid because of market conditions and movements in the target's share price since the time of the notification.
As well as having serious adverse consequences for the party making the notification, it is also likely to lead to a false market in the target's securities for a period until the notifying party's intentions become clear.
Our recommendation would be that this ability for the ACCC to determine that the confidential review process no longer applies be deleted in its entirety, or that, at a minimum, the ACCC be precluded from doing that until such time as it has given notice to the party that it intends to do so, and the party has time to withdraw the notification so that it will not go up on the public register.
In the scenario where the Commission does give approval for a hostile takeover bid, the bid is made, but a third party then makes an application to the Tribunal for review of the determination, there is an inconsistency between the provisions of the Corporations Act which prohibit the bidder from withdrawing the bid, and new provisions of the CCA which state that the bidder contravenes the section if they put an acquisition into effect at a time when the acquisition is stayed. Under the Corporations Act, the bidder will be required to leave the offers open for acceptance, while under the CCA the bidder commits an offence and any acquisitions as a result of acceptances are void. Under the Corporations Act, it is not possible for the bidder to retrospectively include a condition that the Tribunal approve the acquisition of the target.
These issues may not be on the immediate radar for bidders, as the provisions do not commence until 1 January 2026 (with transitional arrangements from 1 July next year). However, we hope that they will be sorted out before the new merger reforms become law.
Please contact us below should you wish to discuss these potential implications further.