Merger or acquisition?
People commonly mistake the difference between mergers and acquisitions for two main reasons. Firstly, companies use the word merger when performing acquisitions to avoid the negativity of the word ‘acquisition’. Secondly, mergers are uncommon because companies often do not want to sacrifice their power. Both of these have blurred the practical differences between the two terms. To understand shareholder rights, and whether shareholder approval is needed for ‘takeovers’ it’s important to understand the meaning of the two.
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Merger
Companies coming together to form a new company is known as a merger. The new company is a completely different entity from the two separate companies. As a result, stocks are surrendered, with new stocks given to the previous owners.
Advantages of a merger
- Reduces operational costs
- Expands market reach
- Boosts revenue and profit
Want to read up on mergers? Click here to read about an $11 billion merger between Australia’s largest gambling giants.
Acquisition
A company taking ownership of another company is an acquisition. Usually people refer to acquisitions as takeovers because the larger company takes over ownership of the smaller one. The need to buy out shares makes acquisitions require a large amount of cash.
Advantages of an acquisition
- Allows the purchasing of the smaller company’s supplier
- Improves market share
- Expanding into new product lines
- Reduces cost
Interested in acquisitions? Click here to read up on a $1.78 billion proposed acquisition between Woolworths and BP.
Click here to learn more about the differences between mergers and acquisitions.
Shareholder approval
Chapter 6 of the Corporations Act sets out the rules for Australian acquisitions and mergers. Their purpose is to:
- Ensure that takeovers are done in an efficient, competitive, and informed market;
- Give time to target shareholders to consider a proposal
- Safeguard the equal treatment of shareholders
To uphold these purposes the Corporations Act limits the amount of shares a person can acquire to 20%.
The exceptions to the 20% rule require shareholder approval. Shareholder approval is required officially with the scheme of arrangement whereas the other two main exceptions can be argued to require shareholder approval, because the shareholder selling their shares approves of the takeover.
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The 20% rule
The 20% rule stops a person from buying enough shares to have more than 20% voting power. Voting power is the percentage of all votes that a person and all of their associates have if they have a relevant interest. A person having direct or indirect control over shares means that they have a relevant interest. For example, if they own the shares that would fall under direct control because they can choose to sell them.
Associates are included in the definition of voting power to better uphold the purpose of Chapter 6 of the Corporations Act. People acting together in relation to the control of a company are associates. The scope of the 20% rule expands greatly because of the associates provision as it captures a group of people that share the same mind and will. Associates sharing the same direction and will is similar to one person simply exercising their own.
Exceptions to the 20% rule
There are three main exceptions to the 20% rule that allow one to acquire control of a company. These are:
- An on-market takeover bid;
- An off-market takeover bid; and
- A scheme of arrangement.
Off-market takeover bid
This is essentially making offers directly to every share holder to buy their shares. For this exception, the offers must all be identical and a ‘bidder’s statement’ must be sent. This statement has all information known to the bidder that is important to the owner of the shares in considering whether to sell or not.
Because the choice of selling shares is left up to the shareholder, shareholder approval is required for this exception in some regard. However, there is no formal vote or minimum percentage of votes needed.
On-market takeover bid
This is where the person trying to buy the shares hires a stockbroker to buy the shares off the ASX for them. The same rules apply as in the off-market counterpart, such as ‘bidder’s statements’. The requirement for the offer price to be all in cash and the inability to make the offer subject to any conditions, makes this exception far less common however. Although not used much, this method is much quicker in buying shares than the off-market one.
Similar to the off-market exception this would still require shareholder approval as the choice to sell on the market is up to the shareholder. There is no actual share holder approval needed however in the form of a vote.
Scheme of arrangement
This exception requires shareholder approval. It is where a company asks its shareholders and the court for their approval to transfer all shares to the bidder. The bidder must prepare a ‘scheme booklet‘ that contains in it information that is important in deciding how to vote for the shareholder. The document is similar to a bidder’s statement and has in it an independent expert’s report valuing the shares. To assemble a meeting for the voting procedure, a bidder must send the booklet to ASIC for approval and then seek the Court’s approval to send the booklet to the shareholders. Then the court may set up a voting procedure.
The approval of this exception requires both:
- 75% of the votes; and
- More than half of the shareholders that voted
To clarify, this means that out of the total shares in the vote more than 75% of them have to be for the scheme. To make sure the votes of people that do not possess a large amount of shares have weight, the actual number of votes in favour of the scheme has to be greater than 50%.
Conclusion
Acquisitions need shareholder approval due to the 20% rule, as all three of the main exceptions either directly or indirectly require it. Although not officially requiring shareholder approval for the off-market and on-market exceptions, the fact that the shareholders choose to sell their shares it can be reasoned that they have approved of the takeover. For a scheme of arrangement there must be shareholder approval of at least 75% of the votes and more than half of the shareholders.
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