This is Allens

As the Australian superannuation industry matures and becomes more concentrated, superannuation funds are playing an increasingly active role in public market M&A transactions. This presents significant opportunities on both sides of the ledger, but it also comes with challenges.

It wasn’t so long ago that even Australia's largest superannuation funds were happy to leave the management of their listed markets exposures, and their participation in associated M&A activity, in the hands of their external investment managers. As a result, we traditionally haven't seen the funds engaging directly in public market M&A, either as an active bidder or even as an engaged shareholder with a public voice on merger proposals.

However, in recent years, we've seen a marked shift. Our biggest funds now have the appetite and internal capability to play a much more active role in Australian public market M&A, a trend which is shaping the way both bidders and targets look at potential transactions.

Their relatively recent arrival on the scene, however, means the regulatory and structural quirks governing superannuation funds' involvement in public market M&A are generally not well understood. It's important that bidders, targets and superannuation trustees themselves understand how best to negotiate these quirks.

Our biggest funds now have the appetite and internal capability to play a much more active role in Australian public market M&A, a trend which is shaping the way both bidders and targets look at potential transactions.

In particular, any public M&A transaction involving a superannuation trustee as an active participant requires careful consideration of a number of superannuation-specific issues. This includes SIS Act investment restriction compliance; internal member fairness considerations; the application of the insider trading regime in a superannuation-specific context; and application of the member best financial interest test to the various steps trustees take during the course of a transaction. There is also the spectre of increased public scrutiny of their every move given the increasingly high profile of our most prominent superannuation funds, not to mention their significant market holding positions.

As just one example of those issues, there is a prohibition on trustees of superannuation trustees intentionally acquiring assets from fund members (and their related parties). For funds that in many cases have more than a million members, this poses a tricky practical issue to grapple with on direct takeover offers launched by superannuation trustees given the very high likelihood that at least some of the fund's members or their related parties hold shares in the ASX-listed target.

Similarly, superannuation trustees need to proactively think through their philosophical and practical approach to dealing with insider trading risk, which poses unique issues for trustees given the variety of ways in which they invest across asset classes and engage with businesses across corporate Australia. This should ideally be done well before engaging in the cut-and-thrust of a real-life takeover opportunity, where decisions often need to be made quickly.

Ultimately, as demonstrated by a number of transactions we've been involved in in recent years, none of these quirks are insurmountable barriers for superannuation trustees' active involvement in public market M&A. However, the quirks presented do need careful foresight, consideration and planning to ensure all stakeholders - from targets and bidding partners, to the trustees themselves - can make the most of the growing financial and intellectual clout of a superannuation industry that is already one of the world's largest.