What listed funds need to know before a M&A deal - three key issues

Where the purchase price in an M&A transaction is payable in whole or in part in scrip (ie as securities of the purchaser rather than cash), several regulatory hurdles may be triggered:

• If the transaction results in the purchaser acquiring a relevant interest in more than 20% of the listed fund, securityholder approval under Chapter 6 of the Corporations Act may be required to avoid breaching takeover provisions. This can be a cumbersome process (involving an independent expert’s report on whether the transaction is fair and reasonable) from both a time and cost perspective and needs to be factored into the transaction timetable.
• If the scrip consideration exceeds the purchaser’s 15% placement capacity (and the transaction is not undertaken as a takeover bid or scheme of arrangement), Chapter 7 of the ASX Listing Rules may require securityholder approval before the scrip consideration can be issued to the vendor.
• Disclosure obligations under Chapter 6 may also arise if the transaction results in a substantial holding by the vendor (ie a holding of 5% or more in the listed fund), in which case it must be notified to the market via a substantial holder notice. Where the scrip consideration is subject to escrow restrictions, those restrictions may also result in the listed fund having a relevant interest in itself (due to the negative control it has on the securities), which can result in the requirement to disclose the sale agreement itself if that relevant interest exceeds the 5% substantial holder threshold.
• The unit pricing for scrip consideration issued in a listed fund must be determined in accordance with the fund’s constitution and relevant ASIC guidance. See our article on unit pricing in listed fund capital raisings for further detail.

Under Listing Rule 3.1, a listed entity must disclose any information that a reasonable person would expect to have a material effect on the price or value of its securities, subject to certain exceptions. Most relevantly to M&A activity, an exception applies to information that:

• concerns an incomplete proposal or negotiation;
• is confidential; and
• a reasonable person would not expect to be disclosed.

While this exception will generally apply to information that a transaction may proceed throughout the negotiation stage prior to it becoming binding or public (including by leaks to the market), compliance with the conditions needs to be continuously monitored.

Once the exception no longer applies, issuers need to be announcing the following to the extent that the information is price sensitive:

• the transaction itself, which must be made immediately once the agreement becomes binding, even if it is subject to conditions precedent;
• updates to the transaction terms or progress, such as completion, amendments to key sale agreement terms, satisfaction of key conditions or termination;
• in some cases, the sale agreement itself may need to be disclosed where it results in a relevant interest (as described above where the purchaser acquires a relevant interest in itself).

Continuous disclosure is not an issue exclusive to listed funds, with unlisted schemes that have issued enhanced disclosure (ED) securities also being captured. For both unlisted funds that are captured, the continuous disclosure obligations in Listing Rule 3.1 are mirrored in the Corporations Act.

Securityholder approval requirements can add delay, cost, and uncertainty to completion of an acquisition and should be factored into the timetable and transaction terms from the outset.

Securityholder approvals may be required under various provisions of the ASX Listing Rules:

• Under Chapter 7, approval will be required where any scrip consideration exceeds the 15% (or in some cases 25%) placement capacity limits.
• Under Chapter 10, transactions with related parties that are considered to be ‘persons in a position of influence’ require approval.
• Under Chapter 11, if the transaction involves a significant change to the nature or scale of the fund’s activities it will require notification to the ASX, and potential securityholder approval if determined by the ASX.

Additionally, approval may be required undersection 260B of the Corporations Act if financial assistance is involved, or under Chapter 2E of the Corporations Act if it involves the provision of a financial benefit to a related party.

These approvals often dictate transaction timing and structure and should be carefully considered during deal planning.