Acquiring a Company or Business in Australia

Foreign investors may wish to purchase all or part of Australian business. This can be done by either purchasing the shares in or the assets of, the relevant company which conducts the business.

Acquisitions of shares and businesses in Australia are regulated.

Depending on the method of acquisition, several issues may need to be considered when acquiring shares or businesses in Australia.

Overview

Acquisitions of shares and businesses in Australia are regulated by:

• the Corporations Act;

• the Foreign Acquisitions and Takeovers Act (FATA);

• the Competition and Consumer Act;

• the Listing Rules of the ASX; and

• legislation affecting the relevant industry of the corporation or business being acquired.

Depending on the method of acquisition, several issues may need to be considered when acquiring shares or businesses in Australia.

Acquisition methods

Private treaty

For Australian companies with less than 50 shareholders, it is possible to effect an acquisition by way of private agreement or treaty, usually in a share sale agreement) between the selling shareholders and the purchaser. The document will typically set out the shares in the target being sold, the price to be paid, the conditions of sale, warranties, and indemnities in favour of the purchaser and restraints of trade.

Relevant legislation when acquiring a new company

The primary piece of legislation governing foreign investment in Australia is the Foreign Acquisitions and Takeovers Act 1975 (Cth) and its accompanying regulations (together, the FATA). See the section on Foreign investment regulation.

In addition to the FATA, foreign investors should also be aware of the following:

• Certain industries, such as banking, civil aviation, shipping, media, airports, and telecommunications, have additional industry-specific rules that regulate ownership.

• Section 50 of the Competition and Consumer Act 2010 (Cth) prohibits the acquisition of assets or shares which would affect, or likely effect, of substantially lessening competition in a market for goods or services in Australia. If such an acquisition were to occur, the Australian Competition and Consumer Commission (the ACCC), the Australian competition law regulator, would have the power to bring proceedings in the Federal Court seeking divestiture orders and financial penalties.

Although seeking clearance from the ACCC for a proposed acquisition is not mandatory, a foreign investor may choose to voluntarily notify the ACCC of their intent so as to avoid later regulatory intervention.

Notification is recommended by the ACCC where the new entity would have a post-merger market share greater than 20 per cent in the relevant market that it is trading in, and the products of the two original parties are substitutes or complements.

Further information relating to the ACCC and the Competition and Consumer Act can be found in the section on Navigating the Australian Competition and Consumer Act.

Takeover legislation

Acquisitions of substantial interests in Australian companies are regulated by the takeover provisions of the Corporations Act(Chapter 6). Subject to a few exceptions (including unlisted companies with 50 or fewer members), if a person wishes to acquire a ‘relevant interest’ in more than 20% of the issued share capital of a company, that person must make a takeover bid (unless otherwise via a scheme of arrangement or with the approval of target shareholders). The concept of ‘relevant interest’ covers a broad range of direct and indirect interests in securities and a person can reach the 20% threshold without becoming a registered holder of securities.

If a person acquires interests in more than 90% of the voting shares of a company under a takeover offer, the compulsory acquisition provisions may be used to acquire the balance, if certain criteria have been met. Compulsory acquisition provisions can be used in other circumstances where thresholds are met.

Further details on the Takeovers Panel can be found at www.takeovers.gov.au.

Schemes of arrangement

Schemes of arrangement are court-approved agreements by a vote between a company and its members (or creditors) that become binding by statute. In general terms, schemes of arrangement can be entered into to reconstruct the share capital, assets or liabilities of the company and can, therefore, be used to effect a change of control in a target by either transferring all issued shares to a bidder or canceling all shares issued to parties other than the bidder.

Schemes of arrangement are binding on all the target’s shareholders (or creditors) if approved by them in a general meeting and subsequently approved by the court. As a result, schemes of the arrangement provide an alternative to takeovers as a means to purchase Australian Target Entities.

A scheme of arrangement is a statutory contract between the target company and its shareholders (and in some cases, option holders and creditors) to reconstruct the company’s share capital, assets or liabilities.

A scheme can be used to acquire a target company either by transferring all shares in the target to the bidder or canceling all shares in the target except those held by the bidder.

A scheme cannot be effected without the target’s cooperation and for this reason, schemes are only used for friendly transactions. The target is required to produce the scheme booklet and convene the necessary meetings.

There is a recent trend in Australia for friendly transactions to be structured as a scheme of arrangement owing to the certainty it can provide. If target shareholders and the court approve a scheme, 100% control will pass to the acquirer by a fixed date. On the other hand, if the scheme fails, the target’s current ownership structure continues.

Schemes also require a lower shareholder approval threshold (i.e. a majority of shareholders holding at least 75% if the votes voting in favour) to achieve full control, compared to the 90% compulsory acquisition threshold required for a takeover bid.

Reduction of capital

Sometimes a change of control may be achieved through a reduction of capital. Reductions of capital are regulated under the Corporations Act. A reduction of capital requires shareholder approval and must be fair and reasonable for creditors.

Other matters for consideration

There are other restrictions that may apply to a particular transaction.

Under the Corporations Act, substantial shareholding notices must be lodged with both the company and with the ASX when a 5% threshold is reached and updated notices must be lodged whenever the holding increases or decreases by 1% or more. The threshold relates to the number of votes attached to shares in which a person and their associates have a relevant interest. It may be reached before shares are actually acquired or transferred.

Under the Listing Rules of the ASX, there are provisions regulating various activities, including the sale of a company’s main undertaking or the issue of shares over a prescribed level which require shareholder approval and compliance with certain ASX requirements.
The Corporations Act also regulates the circumstances in which a company may financially assist a person to acquire shares in itself.

A company can only do this if:

• the financial assistance does not materially prejudice the company, the shareholders or the company’s ability to pay its creditors;

• alternatively, if the shareholders give their advance approval to the financial assistance.

Trading in securities while in possession of information that is not generally available to the public and that, if it were available, would have a material effect on the price of the securities is prohibited by the Corporations Act under insider trading provisions.

Business asset acquisitions

As an alternative to buying the shares in a company, a foreign investor may acquire only the business assets of a company. Such an acquisition will usually be documented in a business sale agreement which will record what assets are being sold, the price to be paid and the conditions of sale. Similar to a share sale agreement, the business sale agreement will also typically describe the basis of setting the purchase price, warranties, and indemnities in favour of the purchaser, pre-completion conditions and restrictive covenants.

Asset vs share purchases

Asset purchases are typically documented by a sale agreement between the seller and the purchaser, which will record the assets being sold and the price being paid. The assets that are commonly transferred include business premises, equipment, employees, contracts and intellectual property. In an asset purchase, the purchaser does not acquire the actual business vehicle and, as such, generally only assumes the liabilities that it contractually assumes. This means that the purchaser may need to obtain third-party consent to the transfer of relevant contracts to the purchaser. Also, it is unlikely that any government licences held by the seller will be able to be transferred to the purchaser, and the purchaser may have to apply for fresh licences.

On the other hand, acquiring business through the purchase of the shares in a company results in the purchaser acquiring all the liabilities of the company. To mitigate this risk, the purchaser may obtain warranties and indemnities from the seller. In contrast to purchase of assets, purchasing the shares in a company results in the purchaser acquiring the business vehicle, meaning that all contracts will be automatically acquired and there may not be a need to obtain third-party consent.

There are advantages and disadvantages associated with both asset and share purchases – including the tax treatment of each type of transaction – see the section on Navigating the Australian tax regime – so it is important to discuss with your legal and commercial advisers what method is most suitable for your objectives.