No-one could accuse ASIC of making policy on the run: the recent rewrite of its downstream takeovers policy is the first revision of the policy since 1996.
Some might even say that the rewrite was long overdue. After all, the relevant legislation was heavily amended in 2000, with the result that the 1996 policy was of only limited relevance to modern takeover law.
The reality is that downstream takeovers are not often a major takeovers issue. They generally occur where a takeover target owns 20% or more of a listed company (usually called the downstream company), with the result that a takeover of the (upstream) target automatically gives the successful bidder a 20+% stake in the downstream company.
Since 2000, the Corporations Act has exempted such bidders from the need to make a formal bid for the downstream company - but only if the upstream target is listed in Australia or on a foreign exchange that has takeover rules reflecting the policy of Australian takeovers law.
As a result of the 2000 changes, downstream takeovers tended to fade from the headlines. That changed in 2010, when a Spanish takeover of a German construction company ended up in the Australian Takeovers Panel.
The German company, Hochtief, controlled 54% of Leighton, an ASX-listed company. It was alleged in the Panel that a main purpose of the Spanish bid for Hochtief was to get control of Leighton. As a result, it was argued, the Spanish bidder should be required to make a separate bid for Leighton, rather than being allowed to acquire it automatically under the downstream acquisition law.
The Panel rejected these arguments, but the dispute spurred ASIC into revisiting its policy on downstream acquisitions.
The result, published on 16 May, is effectively a brand new policy. It covers everything from ASIC potentially taking a downstream acquisition to the Panel (on the grounds that it's unacceptable) to ASIC being prepared to allow downstream acquisitions that don't fall within the strict terms of the downstream acquisition exemption.
The policy gives two examples of situations in which a downstream acquisition may be "unacceptable" even if it complies with the letter of the law.
The first is where control of the downstream company is a "significant purpose" of the upstream acquisition. The second is where the downstream acquisition "subverts or otherwise does not meet the policy basis for reliance on the exemption" (eg, where the upstream company is listed in name only and is closely held).
The legislative policy underlying the Act will also play a part when ASIC is asked to grant relief for a downstream bid which doesn't meet the statutory criteria for exemption.
Even where such relief is granted, it will rarely be unconditional.
The upstream bidder may be required to make a bid for the downstream company if control of the downstream company appears to be a significant purpose of the upstream bid, the downstream shares are a significant part of the upstream target's assets or the bidder will obtain effective control of the downstream company.
Where none of those factors is present, ASIC may still impose standstill and voting restrictions on the upstream bidder.
By attempting to cover all the bases, the new policy aims to take much of the guesswork out of this highly-specialised area of takeover law. It will, therefore, be very useful for Australian lawyers who are advising foreign corporate clients.
This article was written by Head of Mergers & Acquisitions John Elliott and was first published in The New Lawyer on 21 May 2012
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
