Australia: Selling Before You Buy in Public Market Deals

Last Updated: 22 November 2005
Article by Aaron Kenavan and Weyinmi Popo

A bidder in a takeover will often want to divest a particular asset or business of the target company in the event that its bid is successful. In fact, in certain cases, the divestment of the asset will be central to the bidder’s decision to launch a takeover offer. Recent transactions have shown that a bidder might seek to sell target assets before making its takeover offer for various reasons, including:

  • concerns about the competition law implications of acquiring the business subject to the pre-bid sale agreement
  • the business proposed to be divested may not fit within the bidder’s future plans for the target company
  • assisting with the finance of the bid.

This article outlines the legal issues to consider where, before launching its takeover offer, a bidder wishes to enter into an agreement with a third party purchaser to sell some of the target company’s assets in the event that its bid is successful. It also addresses the issues that arise if the takeover is effected by way of scheme of arrangement.

Sale structure

There are various ways in which a bidder can structure a sale or divestment of the target company’s assets. These include:

  • Entering into a pre-bid sale agreement under which the bidder will procure to sell the unwanted assets to a third party if the bidder acquires control of the target company. An example of this is Sunov Petroleum Pty Ltd’s (Sunov) bid for Novus Petroleum Ltd (Novus), where Sunov entered into a pre-bid sale agreement with Santos Ltd (Santos) to procure, conditional on Sunov acquiring control of Novus, that Novus entered into an agreement to sell specified assets to Santos.
  • The bidder offering, as part of the bid consideration, securities which are convertible into shares in a company which owns or will own the unwanted assets, or which will be redeemed in cash out of the proceeds of sale of the unwanted business. Examples of the former include Smorgon Steel Group Ltd’s (Smorgon) bid for Email Ltd (Email) and Metcash Ltd’s (Metcash) original bid for Foodland Ltd (Foodland). In each case, the bidder offered as part of the bid consideration, securities which would be redeemed for, or convert into shares in a company which owned the unwanted business of the target (which, in Smorgon’s case was Email’s Major Appliances Business and in Metcash’s case was Foodland’s New Zealand business).
  • The bidder agreeing to procure that the target effects a dividend in specie of shares in a company that owns the unwanted assets. An example of this is Toll Holding’s Ltd (Toll) bid for Patrick Corporation Ltd (Patrick), where Toll has promised to procure that Patrick declares a fully franked in specie dividend of 0.3 Virgin Blue shares for each Patrick share if Toll acquires control of Patrick.


If the bidder is reliant on the divestment of the assets to finance its bid, it could do so (subject to tax implications) by:

  • obtaining a loan from the purchaser, repayable by the transfer of the assets the subject of the pre-bid sale agreement after the bid is successful
  • obtaining a bridging loan from a finance provider, secured by the pre-bid sale agreement
  • reducing the amount of cash consideration payable by it under its bid and adopting the second or third ‘Sale structures’ outlined above.


A pre-bid sale will create an association between the bidder and the buyer. Important consequences flow from this, including:

  • the bidder and the third party’s holding in the target are aggregated to calculate their voting power (which could mean that a substantial holder notice, attaching a copy of the sale agreement, must be given and/or the 20 per cent threshold is breached)
  • any purchases of target shares made by the buyer would set the floor for the bid price.

Therefore, discussions and the time of agreeing the pre-bid sale agreement will need to be carefully managed to avoid the need for premature disclosure of an imminent bid and other pitfalls.


The bidder will need to disclose its intention to sell the unwanted assets and the terms (including the price) of the pre-bid sale agreement in its bidder’s statement or scheme document.

Collateral benefits and Eggleston principles

If the purchaser is a shareholder of the target company, care is needed to ensure that the opportunity to purchase the arget’s assets does not constitute the giving of a collateral benefit not available to other target shareholders in intravention of section 623 of the Corporations Act. If the transaction is on arms length terms it is arguable, applying the net benefit test favoured by Takeovers Panel (eg in PowerTel Ltd (No 3)) that the pre-bid sale agreement does not confer a prohibited collateral benefit on the purchaser. In any event, it would be prudent to enter into the pre-bid sale agreement before the offer period commences and ensure that it completes after the offer closes so as not to fall quarely under section 623. If the sale forms part or all of the consideration given by bidder for the shareholder’s shares in the target, additional issues arise in relation to the floor price rule in section 621(3) (which requires the bid price to be no lower than the highest price paid for target securities by the bidder and its associates in the four months before the bid).

Although the collateral benefits prohibition and floor price rule do not apply to schemes of arrangement, a scheme of arrangement can not be used for the purpose of avoiding section 623. If the purchaser is a target shareholder, depending on how the sale is structured, the buyer may be a separate class of shareholder for scheme purposes. This may be because its rights are so dissimilar to other target shareholders that it is impossible for them to consult together with a view to their common interests. If the buyer is a separate class, it will vote on the scheme separately from other target shareholders. Even if the buyer is not a separate class, if the scheme is approved only because the buyer voted for it, the court may exercise its fairness discretion to reject the scheme.

Significance of achieving 100 per cent

Obtaining 100 per cent ownership of a target is usually important to allow the bidder to extract maximum synergies and obtain access to target’s cash flows. However, if a pre-bid sale agreement has been entered into, obtaining full ownership is even more important, because without it minority shareholder approval of the sale of target assets under the pre-bid sale agreement will usually be required. In addition, the bidder will not be able to ‘push down’ its bid price to the target’s assets and thus reduce or eliminate capital gains tax if it does not achieve full ownership. However, its ability to do this where the pre-bid sale agreement is entered into before the bidder owns 100 per cent of target may not be beyond doubt.

Target minority shareholder approval is often required if the target is not fully owned by bidder for a number of reasons, including the related party rules in ASX Listing Rule 10.1 and Chapter 2E of the Corporations Act, directors’ duties and the financial assistance prohibition in section 260A of the Corporations Act. Of course the minority target shareholders will be those shareholders that did not accept the bidder’s offer and therefore they might generally be expected to vote against the proposed sale. In some circumstances, it may be possible to undertake a sale without minority shareholder approval, but this would not be without risk.

This additional significance of obtaining full ownership can itself lower the bidder’s ability to obtain full ownership because:

  • the bidder’s ability to waive its conditions (thus allowing or encouraging institutional shareholders and arbitrageurs to accept the offer) is curtailed both by:
    • contractual limitations in its prebid sale agreement and financing documents (which usually require the bidder to obtain the buyer’s/financier’s approval to waive conditions), and
    • the increased risk and cost of having to refinance the acquisition if full ownership is not achieved and a sale is not approved by minority target shareholders
  • interlopers may be encouraged to take a blocking stake, knowing that the 90 per cent minimum acceptance condition is less likely to be waived
  • the requirement to disclose the sale price can indicate to target shareholders the target is being undervalued by the market and that the bidder is not paying a full price.

A scheme will deliver a binary outcome, so the bidder will either obtain full ownership or nothing. The issues referred to above regarding waivers of conditions will therefore be less problematic. However, the terms of the financing and sale agreements need to be drafted having regard to the requirement that at the second court hearing when the court is asked to approve the scheme, all conditions must have been satisfied or waived.

Freehills advised Sunov in its bid for Novus, Metcash in its bid for Foodland and Smorgon in its bid for Email.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.