The compulsory acquisition of shares is a right under the Corporations Act 2001 (Cth) (the Act). It gives a shareholder who holds at least 90% of the shares in a company the ability to compulsorily acquire the remaining shares. Consequently, the shareholder ends up with 100% of the shares. The compulsory acquisition of shares allows a shareholder to access the benefits and flexibility of fully owning a company. It also encourages company acquisitions and provides shareholders with the prospect of obtaining full ownership. This article outlines the different ways in which the compulsory acquisition of shares may occur and how each works.
Types of Compulsory Acquisition of Shares
There are currently two types of compulsory acquisition of shares. These are a:
- compulsory acquisition following a take-over bid; or
- general compulsory acquisition, in the absence of a takeover bid.
The Act governs both types of compulsory acquisition. The Act sets out when the right arises and the terms of the compulsory acquisition.
A person can also obtain full ownership of a company by way of an internal reconstruction via a:
- scheme of arrangement (generally for public or listed companies rather than private companies); or
- share capital reduction. For example, a share buyback where there is a cancellation of the shares of the minority shareholders.
As these alternatives can be complex and expensive, a compulsory acquisition of shares may be preferable.
To compulsorily acquire shares you must meet specific requirements. Requirements include completing and lodging the following prescribed notices with the Australian Securities and Investments Commission (ASIC):
- Form 6021 for a compulsory acquisition following a take-over bid; or
- Form 6024 for a general compulsory acquisition.
Compulsory Acquisition of Shares Following a Takeover Bid
A takeover bid is where a bidder makes an offer to acquire the shares of all of the shareholders on the same terms. The Act outlines the process of a takeover bid, facilitating a fair sale for all shareholders. The takeover laws under the Act usually only apply to listed companies or companies with more than 50 members.
Suppose a person makes a takeover bid for a company but still has less than 100% interest in the company. That bidder may decide to compulsorily acquire the remaining shares. This is permissible because ASIC believes that when the terms of a takeover bid receive overwhelming acceptance, the bidder should be able to acquire any remaining shares on the same terms unless the acquisition is unfair.
The bidder can then acquire the remaining shares on the same takeover bid terms if they meet two thresholds:
- at the end of the takeover bid, the bidder has an interest in at least 90% shares; and
- the bidder has already acquired 75% of the shares that the bidder made offers for under the bid.
The bidder can only compulsorily acquire shares in the same bid class to which the takeover bid applied. Therefore, if the takeover bid was for ordinary shares, the bidder can only acquire ordinary shares. The bidder must also be able to show that they hold 90% of shares in that particular bid class.
Where a bidder does not meet the thresholds, they may undertake a compulsory acquisition of shares, but only with the approval of the court. A court will permit this if shareholders in the company are unidentifiable or uncontactable, or if the bidder has an interest just below the 90% threshold.
General Compulsory Acquisition
Sometimes, the takeover provisions under the Act may not cover or apply to someone with 90% of shares in a certain class. This may occur because the company may be too small or is not listed. In such circumstances, a general compulsory acquisition allows that person to compulsorily acquire the remaining shares in that class.
A person is a 90% holder of shares in a particular class where the person holds at least 90% of:
- shares in that particular class; or
- voting power and 90% of shares of the company. The 90% may include issues that are either shares or convertible into shares.
After becoming a 90% holder of shares, the person has six months to undertake a general compulsory acquisition of shares.
The Act outlines additional requirements for general compulsory acquisitions to ensure that minority shareholders receive protection. The requirements include that the person undertaking the compulsory acquisition must:
- offer a cash sum for the acquisition of shares unless:
- there are differences in accrued dividends of the shares; or
- there are differences in the amounts paid on the shares (the same amount must be paid for each security); and
- provide to the shareholders whose shares they will acquire an independent expert report that addresses:
- whether the cash to be paid is fair value; and
- any information relevant to whether they should object to the acquisition.
Additionally, if shareholders of 10% or more of the shares object to the acquisition, the person must obtain approval from the court before compulsorily acquiring the shares. There is also the expectation that they will pay for the court proceedings.
If you are a shareholder holding a majority interest in a company, you can achieve full ownership of the company through a compulsory acquisition of shares. Depending on the company, the type of compulsory acquisition may differ. When compulsorily acquiring shares, it is important to be aware of and adhere to the Act and threshold requirements.
If you have any questions or need advice on how to undertake a compulsory acquisition of shares, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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