As with all other jurisdictions, the Australian economy has not been immune to the COVID-19 pandemic, with the effects of sporadic lockdowns and resurgences in cases continuing at the time of writing. Border closures continue to present challenges with international bidders and due diligence, as well as greater difficulty for domestic funds with raising funds from offshore.

Despite these challenges, Australian private equity funds have largely adapted to the "new normal" and deal activity has been strong during Q1 and Q2 of 2021. Following an initial slowdown at the onset of the pandemic (which resulted in a 20% decline in total transactions during 2020), the Australian economy has been resilient, partially attributable to government stimulus. A number of auction processes and bilateral deals that were put on hold amongst the initial uncertainty caused by the onset of the pandemic have since resumed in response to increased confidence from private equity funds.

Private equity funds have been actively seeking to deploy the dry powder that developed during prior years, and this is expected to continue throughout the year. In addition, interest rates are at record lows, which has created a favourable debt market. In response to highly competitive auction processes for assets, the market has seen innovative deal structures and increased focus on the diversification of portfolios and asset classes. As expected, there has been an increase in investments in healthcare and technology (particularly that which lends to remote working) and a reduction in investments in industries that are susceptible to disruption during the COVID-19 pandemic, such as leisure, retail, tourism and hospitality. Private equity funds are expected to hold on to their investments in these sectors for longer than usual, rather than divesting with unfavourable returns. The rise in distressed opportunities predicted at the initial onset of the pandemic has not transpired in the Australian market to the extent expected (although the administration of Virgin Australia and its acquisition by Bain Capital is one notable exception), although these may eventuate in the coming years as the longer-term impacts of the COVID-19 pandemic play out and government stimulus is discontinued.

Despite the challenges of the COVID-19 pandemic, fundraisings have been strong in Australia throughout 2020 and 2021, and private equity firms have been looking to deploy the approximately AUD11 billion of dry powder that has developed to date. AUD4.3 billion in aggregate capital was raised in 2020, which is almost three times the amount raised in 2019. As explained in 1.1 M&A Transactions and Deals, 2021 has seen an increase in investments in healthcare and technology and a decrease in investments in the leisure, retail, tourism and hospitality industries, and, consistent with previous years, private equity houses have been looking to invest in businesses that have been carved out from financial institutions (particularly since the Financial Services Royal Commission of 2018-19).

IPOs have been active during the first six months of 2021, and financial sponsors have showed a renewed appetite for IPOs as an exit option, including the notable listings of non-bank lenders Latitude and Pepper Money (both backed by KKR). 2020-2021 has also seen a rise in the number of special purpose acquisition companies (SPACs) in the USA and growing interest by US-based SPACs in Australian companies. The USD1.2 billion merger between Decarbonization Plus Acquisition Corporation II (DCRN) (a SPAC) and Tritium Holdings Pty Ltd (an Australian company specialising in electric vehicle fast chargers) was the first SPAC merger deal with an Australian target. While Australian regulators are yet to make any formal comments on whether SPACs will be permitted in Australia (the current laws prevent their establishment), no immediate law reform to permit SPACs on the ASX is anticipated, partly because SPACs are unlikely to be as advantageous in the Australian market in comparison to the USA. SPACs are particularly attractive in the USA because they offer a cheaper and quicker option to an IPO. However, in Australia, it is relatively inexpensive and less time-consuming to list on the ASX compared to the listing process in the USA.

A notable market trend observed in the past 12 months is that warranty and indemnity (W&I) insurance (described in further detail in 6.8 Allocation of Risk) has continued to grow in popularity, reaching a point where this is arguably the "norm" for a private-equity sponsored transaction. In response to the surging demand, W&I insurers are becoming increasingly selective, often declining to progress with more than one preferred bidder in a single transaction.

Another trend observed is a growing number of infrastructure funds broadening their mandates to also consider "infra-like" assets (with some funds extending this to include education and aged care). Likewise, a growing number of private equity funds are finding new angles in their investment mandates to invest in new and alternative assets. The market is also seeing crowded and competitive auction processes, with attempts to pre-empt processes (such as by way of exclusivity offers) becoming more common, and private equity firms positioning to win assets by being ready to accept and offer earn-outs, writing larger cheques for minority positions, and approaching bid documentation more creatively and competitively.

The most significant legislative developments in 2021 from a private equity perspective have been the changes to Australia's foreign investment regime that came into effect on 1 January 2021. The changes, which are summarised below, increase the number of transactions that are subject to a foreign investment review board (FIRB) filing, including introducing a new filing requirement for investment in a broad range of "national security"-related businesses and assets. However, the introduction of a new limb of the foreign government investor classification may exempt some private equity funds from certain filings that were previously required.

National Security Test

One significant aspect of the amendments to Australia's foreign investment regime is the introduction of a "national security" test that applies to certain transactions that would previously not have required FIRB approval. A proposed investment by a foreign person in a "national security business" or "national security land" (defined terms in the Foreign Acquisitions and Takeovers Act 1975 (Cth)) must be notified to and approved by FIRB before the proposed investment can occur. Mandatory notification to FIRB is required in these circumstances, regardless of the value of the investment.

In addition, under the new regime, the Treasurer may "call in" for review on national security grounds an investment that would not normally require notification to FIRB. The Treasurer also now has a "last resort" power to impose conditions, vary existing conditions or, in exceptional cases, require the divestment of any investment that was previously approved by FIRB, if national security risks subsequently emerge. Broadly speaking, "national security businesses" include those that provide services to or operate critical infrastructure assets (such as certain electricity, port, gas and water assets), telecommunications providers and carriers, and businesses that provide goods, services or technology for defence, military or intelligence purposes. At the time of writing, draft legislation is being considered by Australian Parliament that would, if approved in its current form, expand the definition of "national security businesses" to include 11 new sectors: communications, data storage and processing, defence, financial services and markets, food and groceries, higher education and research, healthcare and medical, transport, energy, space technology and water and sewerage. If approved, this legislation would expand the scope of sectors that are subject to mandatory FIRB review.

Foreign Government Investors

Under the changes to Australia's foreign investment framework, certain investment funds will no longer be considered "foreign government investors" and will not have to obtain FIRB approval to undertake certain investments (subject to other applicable screening thresholds). Specifically, corporations, trustees and general partners of unincorporated limited partnerships with over 40% foreign government ownership (in aggregate and without influence or control) and under 20% ownership from any one foreign government will no longer be considered "foreign government investors" for the purpose of the Foreign Acquisitions and Takeovers Regulations 2015 (Cth) if, among other requirements, the corporation, trustee or general partner operates a scheme whereby individual members cannot influence investment decisions or management of individual investments. While such entities will still be screened on the basis that they are "foreign persons", the change is likely to reduce red tape for some foreign private equity investors.

In addition, if a corporation, trustee or general partner does not operate a scheme of the type described above but its investors are only passive, the corporation, trustee or general partner may apply for an exemption certificate from the Australian Treasurer, which would approve a programme of its proposed investments. In these circumstances, the corporation, trustee or general partner would generally be required to demonstrate that its investors are only passive investors. Alternatively, the corporation, trustee or general partner may apply for an exemption certificate on the basis that its proposed investment is consistent with and not contrary to Australia's national interest.

Generally speaking, and with the exception of control transactions relating to public companies, the manner by which shares in Australian companies may be acquired or disposed of is not regulated in Australia. This means that private equity investors are generally free to choose which entities they invest in, how much capital should be deployed, and what (if any) structural changes should be made to an entity following an acquisition. However, consultation with regulators may be required in certain circumstances (see below). In relation to takeovers, Chapter 6 of the Australian Corporations Act 2001 (Cth) (Corporations Act) regulates the acquisition of interests (both direct and indirect) in listed Australian companies, unlisted Australian companies with more than 50 members and listed management investment schemes. In addition, for listed entities, the Listing Rules of the ASX will apply.

FIRB

As noted in 2.1 Impact on Funds and Transactions, foreign investors and investors controlled by foreign persons may need to obtain clearance from FIRB in order to proceed with a proposed acquisition of an Australian company. Proposed foreign investment in agricultural land, commercial land, non-sensitive internal reorganisations and residential real estate will also require FIRB approval. If the proposed transaction cannot go ahead without FIRB clearance, it will generally be expressed as a condition to completion in the transaction documentation. In the height of the pandemic in 2020, FIRB approval was taking up to six months to obtain. While this is no longer the case, investors are still experiencing unpredictable wait times for FIRB approval, with an average of two to three months for straightforward applications.

ASIC

The Australian Securities & Investments Commission (ASIC) is Australia's primary corporate, markets, financial services and consumer credit regulator. Most of ASIC's work is carried out under the Corporations Act. ASIC has a limited practical role in private M&A in the sense that transacting parties and investors do not need to consult with ASIC in relation to a proposed transaction. However, all such transactions operate within the framework of the Corporations Act and must comply with its provisions.

In private M&A, ASIC and the Corporations Act are of the most relevance when considering how to give effect to the proposed transaction, because the Corporations Act prescribes the manner by which shares may be issued, transferred and disposed of. All Australian companies must notify ASIC of any changes to their details, such as shareholdings and officeholdings. ASIC has supervision over the takeover rules, which, as explained above, govern the acquisition of interests in listed Australian companies and unlisted Australian companies with more than 50 members. ASIC has the power to exempt a person (including a corporation) from a provision of the takeover rules and/or modify their application in a particular case. These powers are subject to review by the Australian Takeovers Panel, which is the main Australian forum for resolving disputes concerning takeover bids (see below for further detail).

ACCC

The Australian Competition and Consumer Commission (ACCC) is Australia's primary regulator of competition (or antitrust) matters, and its main role is to enforce the Competition and Consumer Act 2010 (Cth) and a range of additional legislation. Similar to other jurisdictions, such as the United Kingdom, Australia has a voluntary notification regime, which means that merging parties are not legally required to notify or seek approval from the ACCC before a merger can take place. However, the ACCC encourages merging parties to contact the ACCC as soon as there is a real possibility that the transaction will proceed if (i) the products of the merger parties are substitutes or complements, and (ii) the merged entity will have a post-merger market share of over 20% in the relevant Australian market.

Prior to the transaction taking place, merging parties can apply to the ACCC for informal review (ie, for a view from the ACCC as to whether it would consider the proposed transaction to be, or to be likely to be, anti-competitive) or for formal authorisation (ie, for legal protection from court action). Where ACCC approval is required, this will generally be expressed as a condition to completion in the transaction documentation. Notably, FIRB may consult with the ACCC about the anti-competitive implications of a proposed transaction. Once notified, the ACCC will typically take between two and 28 weeks to review and approve a transaction, depending on the complexity thereof. Its findings will usually be made public, but a party may request a confidential review.

APRA

The Australian Prudential Regulation Authority (APRA) is Australia's primary regulator of the banking, insurance and superannuation sector. There may be certain circumstances in which APRA approval is required to proceed with a transaction, such as where the target is a bank, insurer or superannuation entity. In situations where APRA approval is required, this will be included as a condition to completion in the transaction documentation.

Other Parties in Control Transactions

Australian Takeovers Panel

As mentioned above, the Australian Takeovers Panel resolves disputes concerning takeover bids. Its main power is to "declare unacceptable circumstances" in respect of a takeover or the control of an Australian company or managed investment scheme. The Panel can make orders it thinks are appropriate to ensure that a takeover bid proceeds in a way that it would have proceeded if the unacceptable circumstances were not present.

Australian courts

Australian courts have a limited role to play in public and private acquisitions (outside the resolution of disputes) but have an active role (alongside ASIC) in reviewing and effecting "schemes of arrangement", which allow companies to restructure their capital with shareholder and court approval.

Australian private equity transactions will typically involve a detailed due diligence process prior to executing binding transaction documents. However, the scope of a buyer's due diligence will vary on a case-by-case basis, depending on the nature of the transaction and whether the buyer is already familiar with the business. Due diligence will typically be undertaken in respect of financial, tax, commercial and legal aspects. In some cases (but not all), private equity investors will undertake diligence in respect of insurance, environmental, ESG, anti-bribery and corruption/anti-money laundering and IT aspects. Whether or not these aspects are covered in due diligence generally depends on the nature of the business, the proposed shareholding the buyer intends to acquire, the buyer's sense of risk and its budget for advisory fees.

Legal due diligence will typically focus on the following key aspects:

• corporate structure – a review of the target's corporate structure (to understand its membership, its constituent documents, and its obligations with respect to its officeholders and members);
• material contracts – a review of material contracts to which the target is a party, such as customer/supplier contracts and joint venture arrangements (to understand any obligations or issues that may arise under these contracts as a result of the proposed transaction);
• real property – a review of freehold and leasehold interests in the target's name (to understand the target's assets and any issues that may arise under any leasehold agreements as a result of the proposed transaction);
• financing and security – a review of financing and security arrangements that the target has in place (to understand its debt position and obligations to financiers);
• employment – a review of the target's employment contracts and other records (to assess legal compliance and understand the target's position with respect to employment, such as the amount of outstanding leave owed to employees, which would need to be accounted for in the purchase price);
• intellectual property – a review of intellectual property interests owned or licensed by the target (to identify the target's intellectual property rights and any interests to be transferred to the buyer (if applicable));
• privacy/data protection – a review of the target's privacy and data protection policies (to assess the target's level of compliance with relevant laws and regulations);
• litigation – a review of any current, threatened or anticipated litigation, as well as any existing settlement documentation (to understand the target's exposure to future liabilities and its ongoing obligations under any settlement agreements); and
• regulatory and compliance – a review of the regulatory framework applicable to the target's business (to determine whether regulatory approvals or licences are required to operate the business).

Where a buyer will be chosen by way of a "bid" or competitive auction, it is common in Australia for a private equity vendor to provide vendor due diligence reports to a shortlisted group of bidders. This process benefits the vendor in that it allows:

• the identification of key issues that may hinder the proposed transaction or reduce the attractiveness or value of the target, thereby providing an opportunity to rectify such problems before a buyer's due diligence is conducted; and
• the vendor to run a more streamlined and competitive process by keeping a bidder's transaction costs down.

Vendor due diligence reports also allow the vendor to "show off" its business and attract investment. However, notwithstanding the presence of a vendor due diligence report, it is common for buyers to engage external advisers to conduct a "gap analysis" of the target, by highlighting any inconsistencies or errors in the vendor's due diligence and any issues not covered in the vendor due diligence reports. As part of this process, a buyer's advisers may be instructed to review a sample of documents that were reviewed as part of the vendor's due diligence, for verification purposes.

The successful bidder will typically be provided reliance on the various vendor due diligence reports through reliance letters provided by each of the relevant advisers.

The typical structure of a private equity acquisition will depend on whether the target is a private or public company.

Private Companies

Acquisitions of privately held companies are typically effected through negotiated sale and purchase agreements. Through this mechanism, private equity investors will normally acquire some or all of the shares in a target entity. In cases where a private equity investor does not want to assume ownership of the entity or its liabilities, investors will instead purchase the assets of a business by way of an asset and/or business sale agreement. These types of transactions are less common than share purchase arrangements, given the increased complexity. In principle, the terms of acquisition documentation do not generally differ between those negotiated privately and those negotiated via an auction process. However, depending on the competitiveness of an auction process, the acquisition documentation may, given the competitive tension, ultimately be more "seller-friendly" when compared to analogous documentation negotiated privately.

Public Companies

Acquisitions of public companies are typically effected through court-approved schemes of arrangement. It is also possible, but less common, for a private equity buyer to acquire control of a public company through a takeover, which may be on-market or off-market. The key differences for a private equity buyer between the scheme of arrangement and takeover approaches are:

• a scheme of arrangement has a lower shareholder consent threshold to obtain 100% ownership of the target than a takeover (loosely 75% for a scheme versus 90% for a takeover); and
• a scheme can only be effected in collaboration with the target, whereas it is possible, although unusual, to complete a hostile takeover.

It is the lower consent threshold of a scheme (and the fact that many private equity funds are restricted from attempting hostile takeovers through their investment agreements) that drives most private equity buyers to use it as the mechanism to acquire public companies.

The buyer in an Australian private equity transaction is typically an Australian incorporated special purpose vehicle (bidco) set up by the private equity fund specifically for the purpose of the acquisition. Bidco will normally have an Australian incorporated holding company (holdco) and may also have an interposed Australian incorporated special purpose vehicle for the purposes of acquisition financing (finco). Unlike other jurisdictions, the limited partnership structure is not often used as the preferred private equity fund structure, because limited partnerships in Australia are taxed in the same manner as companies, unlike in other jurisdictions where limited partnerships are afforded flow-through tax treatment.

It is very uncommon for a private equity fund itself to enter into transaction documentation; that is the purpose of bidco (and finco, if financed). The only exception to this is that the private equity fund may enter into an equity commitment letter.

In Australia, private equity transactions are generally financed by a mixture of equity funding and senior debt. Certainty of equity funding is usually demonstrated by an equity commitment letter provided by the private equity fund. Where the private equity fund also intends to use debt, it will typically provide a debt commitment letter, which will attach either a term sheet or a facility agreement. Additional requirements as to certainty of funding apply with respect to bids for public companies.

Co-investment by other investors alongside the private equity fund is also relatively common (eg, in industries where stricter foreign investment rules apply, a foreign private equity fund may co-invest with an Australian partner). Regardless of whether the private equity fund invests on its own or with a partner, the acquisition will typically be for all (or at least a majority) of the shares in the target, to enable the buyer to control the target post-completion.

In certain circumstances, private equity funds have formed consortia with other private equity funds, superannuation funds or corporates. However, due to the highly competitive and relatively small nature of Australia's private equity landscape, it is more typical for private equity sponsors to seek sole ownership of portfolio companies. Passive co-investment by other investors alongside the private equity fund is common, and is typically done by limited partners co-investing alongside the general partner of the fund in which the limited partners are already an investor.

Private equity buyers continue to use a mix of the locked-box consideration mechanism and the completion accounts mechanism, depending on the nature of the target's business and its internal accounting processes. Earn-outs and deferred consideration are also common where there is a bid/ask valuation delta to be bridged.

Sellers will not typically provide protection to a buyer in relation to the consideration mechanism adopted, other than in circumstances where there is an identifiable risk to the buyer, in which case a portion of the purchase price may be placed into escrow (or held back) to cover any expected post-completion purchase price adjustment. A private equity buyer will often be asked to provide an equity commitment letter to provide a level of funding certainty to the seller, in the same way that a corporate buyer may be asked for a parent company guarantee in certain circumstances.

Where a locked-box consideration structure is used, it is becoming more common for the seller to ask the buyer to pay an additional amount representing interest on the purchase price, or the cost of capital for the business.

Where the completion accounts mechanism is used, it is common for a dispute resolution mechanism to be included in the acquisition documentation, by which an independent expert (usually an accountant) will review the target's balance sheet in the event of a dispute between the parties. Typically, a locked-box consideration mechanism will be subject only to the broader dispute position taken in the relevant agreement.

Private equity transactions in Australia have a fairly high level of conditionality. Not only are mandatory and suspensory regulatory conditions typical, but it is not unusual to have other conditions, such as third-party consents and shareholder approval (for public company targets). Material adverse change (MAC) conditions (or no material breach of warranty conditions) are becoming more common and are being relied on and heavily negotiated during the COVID-19 pandemic.

In Australia, it is unusual for parties to insist on "hell or high water" undertakings. Unlike other jurisdictions, these are rarely negotiated, let alone featured in acquisition documentation. This could partly be due to the relatively low incidence of antitrust or other regulatory conditions, where potential divestment issues arise.

Break fees, or costs reimbursement, may arise in a variety of different circumstances in Australian transactions:

• exclusivity breach – exclusivity agreements often include a break fee concept where a seller must reimburse the buyer's costs (which are sometimes pre-determined) if it breaches its exclusivity obligations;
• auction incentive – while not the norm, sellers will sometimes incentivise a bidder to participate in (and thereby maintain) a competitive process by agreeing to reimburse that bidder for costs incurred during the due diligence and preliminary negotiation process if the bidder is unsuccessful; and
• public acquisition completion failure – in the context of an acquisition of a public company, it is common for the target to agree to pay a break fee (normally limited to no more than 1% of the target's equity value under Australia's Takeovers Panel's guidance) if the target breaches certain key obligations (director recommendations, no shop, etc) and the transaction does not complete. Reverse break fees (those agreed to be paid by the buyer to the seller if completion does not occur) are becoming more common, but are still not the norm.

Parties should note that break fees are at risk of being viewed as a contractual penalty by Australian courts and subsequently being unenforceable unless they are a genuine pre-estimate of the potential loss that would be suffered by the party receiving the break fee in the circumstances it is payable.

In general, termination rights in acquisition documentation are limited to:

• failure to satisfy conditions precedent or completion deliverables;
• breach of a MAC;
• material breach of gap controls (ie, seller conduct between signing and completion);
• insolvency of a party or the target; and
• pre-completion breach of a warranty.

Transactional risk allocation will vary depending on the nature of the transaction and the strength of negotiating power between the parties. Typically, a private equity seller in Australia will look to take on minimal or no post-completion liability for breaches of warranties and indemnities. This has led to the now widespread use of warranty and indemnity (W&I) insurance on these types of transactions. On the other hand, corporate sellers may be inclined (and able) to bear more risk than their private equity counterparts, and will often do so if it benefits the transaction.

A private equity seller's post-completion liability (or the relevant insurance underwriter's liability, in instances where a W&I insurance policy is taken out) will generally be limited in a number of ways. For example, sellers will generally not be held liable for claims arising out of matters disclosed in the due diligence material, as buyers are deemed to have knowledge of such matters. The extent of a seller's liability (in terms of both quantum and how it may be time limited) will also vary depending on the nature of the claim being made (for example, certain warranties may be considered "fundamental" and attract a higher liability cap and a longer period during which claims may be made). It should also be noted that a seller's aggregate liability will generally always be capped so that it cannot exceed the full amount of the purchase price.

Private equity sellers will typically provide the following fundamental warranties, which are typically effective for three to seven years:

• title – the seller has title (legal ownership) in relation to the shares (or assets in the case of an asset sale) of the target;
• capacity – the seller has the full power and legal capacity to enter into the transaction and the acquisition documentation; and
• tax – the target is an Australian resident for tax purposes and, to the best of the seller's knowledge, has complied with its tax obligations and is not liable for any taxes other than those already disclosed in the target's accounts.

Private equity sellers will typically also provide general business warranties, which may be effective from anywhere between six months to three years. Examples of general business warranties include:

• accounts – the target's accounts represent a true and fair view of its assets, liabilities, profits and losses, and have been prepared and audited in accordance with applicable laws and regulatory standards;
• sufficiency of assets warranty (asset sales only) – the assets being transferred are sufficient in quantum and type for the buyer to continue operating the business;
• no external finance – the target does not have any external finance arrangements in place, other than those disclosed during due diligence;
• material customer contract warranty – the target is not in breach of any material customer contracts and, as far as the seller is aware, none of its counterparties are in breach; and
• disclosure warranty – all information disclosed through the due diligence process is true, accurate and not misleading.

Unlike other jurisdictions, members of the management team will not generally provide any warranties to the buyer in their personal capacity (as opposed to their capacity as a seller, if relevant). Sellers will not generally be liable for warranty claims unless the amount recoverable from the seller meets a specified threshold. The amount recoverable from the seller in respect of an individual claim must generally exceed 0.1% of the purchase price, and the aggregate amount recoverable must generally exceed 1% of the purchase price. As stated in 6.8 Allocation of Risk, known issues (or those deemed to be known through disclosure of the due diligence materials) will typically be excluded from the warranty coverage.

It is now common for private equity buyers to obtain W&I insurance, which offers an additional layer of protection to the acquisition documentation. Sellers are less likely to obtain W&I insurance than buyers, but may do so in the context of an auction to increase the appeal and competitiveness of the transaction. Other forms of protection can include specific indemnities in favour of the seller, as well as set-offs and earn-outs. Given the prevalence of W&I insurance, it is not common to have an escrow or retention in place to back the obligations of a private equity seller.

Generally speaking, Australia is not as litigious as other jurisdictions, such as the USA. However, disputes do often arise in the context of private equity (and corporate) transactions. The most commonly litigated provisions are the seller's representations and warranties (including claims made under a W&I insurance policy), MAC clauses, those concerning drag and tag rights, and consideration adjustment mechanics.

While not as common as private deals, public-to-private transactions are a feature of the private equity deal landscape in Australia. Public-to-private deals had been increasing in popularity in previous years, but dropped from 51% of total deals in 2019 to 9% of deals in 2020.

As mentioned in 3.1 Primary Regulators and Regulatory Issues and outlined in further detail in 7.2 Material Shareholding Thresholds, the takeover rules set out in Chapter 6 of the Corporations Act apply to the acquisition of public companies. Notably, there is a general prohibition against acquiring a "relevant interest" in the issued voting shares in a public company that would result in a person's voting power exceeding 20%. There are various exceptions to this prohibition, such as where the acquisition results from the acceptance of an offer under a takeover bid or scheme of arrangement. Other exceptions include situations where shareholder approval is obtained and creep acquisitions (being no more than 3% in any six-month period).

The primary material shareholding disclosure threshold and filing obligation under the Australian takeover rules is the "substantial shareholder" notification: persons who obtain 5% or more of the voting power in an ASX listed company must disclose this fact (as well as other details about their interests and their name and address) by filing a "substantial holding notice" by 9.30 am the day after the voting power is obtained. In circumstances where a person's voting power exceeds 5%, a substantial holding notice must also be filed each time the voting power increases or decreases by 1%.

Australian law prohibits the acquisition of a "relevant interest" in the issued voting shares in a public company which would result in a person's voting power exceeding 20%. Acquisitions above this level must be effected through one of the legislative exceptions, most notably either a takeover or a scheme of arrangement in the context of a control transaction.

In an off-market takeover bid, bidders may offer any form of consideration, including a cash sum, securities or a combination of cash and securities. All security holders must be offered the same form of consideration. In an on-market takeover bid, cash is the only form of consideration that may be offered.

Stub equity is an alternate form of consideration offered in the context of takeovers and schemes of arrangement. Where stub equity is used, a bidder will offer shares in the bid vehicle or its holding company and typically require that the shares be held through a custodian or nominee structure. By using custodian and nominee arrangements, the bidder is able to structure ownership in the stub equity vehicle so that its registered shareholders remain under 50 and the takeover provisions and certain disclosure requirements under the Corporations Act do not apply.

Following several high-profile deals that made use of the stub equity consideration mechanism, stub equity arrangements became the subject of heavy scrutiny by the Australian corporate regulator. In September 2020, ASIC announced that stub equity arrangements are permissible where the shares are offered in a public company (including an unlisted public company) but not private companies. This is because an offer of stub equity in private companies would allow bidders to circumvent important protections (such as disclosure requirements) afforded to retail investors in public companies under the Corporations Act and therefore defeat the purpose of the legislation. However, ASIC has clarified that use of the custodial arrangements is permissible, provided that the custodial arrangement includes "conversion and termination provisions" that can only be amended by a special resolution of beneficial owners.

Offers that are made under an on-market takeover bid (for quoted securities) must be unconditional. Offers that are made under an off-market takeover bid may be conditional, although certain conditions (or classes of conditions) may not be included, such as conditions that are within the sole control or subjective opinion of the bidder, or those seeking to impose a maximum acceptance threshold.

The following conditions are common in off-market takeover bids:

• minimum interest threshold – the bidder must offer to acquire a certain percentage of the shares in the target (eg, 90%, so that the bidder can compulsorily acquire the target);
• regulatory approvals – mandatory approvals from regulators such as FIRB and the ACCC must be obtained; and
• no MAC – there has been no material adverse change in respect of the target.

A bidder is able to compulsorily acquire a target if it has obtained "relevant interests" (ie, direct or indirect control) in at least 90% of the securities in the bid class and acquired at least 75% of the securities that the bidder offered to acquire under the bid. If more than 50% but less than 100% of the target is acquired, a private equity buyer will largely have control over the target through its ability to control the board. However, for so long as the target remains listed it will continue to be subject to the ASX Listing Rules, which will, amongst other things, require shareholder approval for certain transactions (including related party transactions).

Pre-bid undertakings from existing shareholders, whether taking the form of call options, bid acceptance agreements or public statements of intent, are a common feature of Australian takeovers. These are normally obtained prior to the initial approach to the target and will often contain an ability for the shareholder to take advantage of any superior offer that may emerge.

These types of arrangements are subject to the general 20% rule discussed in 7.1 Public-to-Private and 7.3 Mandatory Offer Thresholds, to the extent that they create a relevant interest in the shareholder's underlying holding in the target for the benefit of the bidder.

Hostile takeovers are permitted in Australia, but are not very common with private equity bidders. The reason for this is twofold:

• most private equity take-private transactions are effected through a scheme of arrangement due to the lower thresholds for obtaining 100% control and the fact that schemes of arrangement require the co-operation of the target to complete; and
• typically, private equity investment mandates prohibit most hostile takeover situations.

Equity incentivisation of the management team is a common feature of private equity transactions in Australia. However, management will typically only hold a small level of equity ownership in the target – generally 5–10%.

Management participation will be structured as either sweet equity or an institutional strip. Where members of management are rolling their existing vested investments, it is more common to structure this by way of participation in the institutional strip. For new incentivisation schemes, or the rolling of unvested incentives, management will typically obtain sweet equity in the target. In Australia, this generally takes the form of options or loan-funded shares. Preferred instruments are not typically used in the management equity structures (these are generally reserved for investors) and so management will generally be issued ordinary equity (or a separate class of equity with largely the same rights as ordinary equity).

Australian leaver provisions generally contemplate "good" and "bad" leavers. More frequently, however, the concept of "intermediate" leavers (being anyone who is neither a good nor a bad leaver) is also being adopted.

In Australia, vesting provisions are typically time-based (as opposed to value-based). It is most common for 25% of shares to vest every four years or for 33% of shares to vest every three years, although there can be wide variation between different schemes.

A management incentive plan will normally include provisions preventing management shareholders from taking active steps to compete with the target's business. These provisions can be found in the relevant plan rules, the associated shareholder agreements (if relevant) and the relevant manager's employment contract. Such non-compete clauses are generally limited geographically and temporally, typically for about one to three years (depending on the nature of the transaction). It is also common for these clauses to extend to a prohibition on soliciting key employees, suppliers and customers of the target. Legal advice should be obtained when preparing and negotiating these clauses, as restraint of trade provisions may be subject to heavy scrutiny by Australian courts.

Depending on the aggregate level of holding, and whether managers have an interest in the institutional strip or sweet equity, manager shareholders may obtain minority protections by way of veto rights, such as the ability to prevent amendments to the target's constituent documents (such as its constitution and shareholders' agreement) where doing so would materially prejudice their interests. Notably, these rights are subject to the provisions of the Corporations Act, which prohibit shareholder oppression and are generally quite limited in scope. In situations where the management team rolls over its existing vested interests in the target, and depending on the particular circumstances, management may be able to obtain higher levels of protection.

It would be very unusual for management shareholders to have meaningful influence over a private equity owner's exit strategy/rights, unless those management shareholders have a very large minority stake.

For wholly owned portfolio companies (including those where there is a management shareholder group under an incentive plan), the private equity owner will have complete control, subject to general Australian law.

In situations where there is a material minority shareholder in addition to the private equity owner, the private equity fund will generally have majority board appointment rights and its control will be tempered only by certain minority veto rights set out in a negotiated shareholder's agreement. It would be typical in these situations for the private equity owner to have full visibility over every aspect of the portfolio company's business.

In Australia, as with many other jurisdictions, shareholders of a company will generally not be held liable for the company's acts or omissions. However, the "corporate veil" may be pierced in exceptional circumstances, such as:

• to prevent a person from using the company to avoid an existing legal or contractual duty, obligation or liability;
• where the company is being used as a sham or facade to hide the real purpose of the corporate controller; and
• where the shareholder has acted as a shadow director of the portfolio company and is therefore subject to the same liabilities as a director (including in relation to insolvent trading).

It is becoming more common for private equity shareholders to impose their compliance policies on their portfolio companies.

In Australian private equity transactions, the typical holding period for an investment is transaction- and fund-specific, but will generally range from three to six years. Private sales have been the most common form of private equity exits seen thus far in 2021. There has been a decrease in exits conducted as "dual track" processes in recent years, mainly due to the decreased attractiveness of public market exits. While it is not common for private equity sellers to reinvest upon exit, there have been a few recent examples (eg, Five V reinvesting in Education Perfect as part of the sale of Education Perfect to KKR).

Almost all majority private equity investments include drag rights applied on the minority, which allow majority shareholders to force minority shareholders to sell their shares to a buyer. If there are large institutional co-investors in an asset, then the consent of such co-investors may be required prior to the exercise of the drag.

As with drag rights, almost all equity arrangements will also include the associated tag rights, which afford minority shareholders a right to tag-along or "piggy-back" on a sale of shares by majority shareholders.

As stated in 1.2 Market Activity, there have been a number of IPOs in 2021, including the notable listings of non-bank lenders Latitude and Pepper Money. Private equity buyers have also demonstrated increased appetite for IPOs as an exit strategy. Exits undertaken by way of an IPO will almost always feature either voluntary escrow arrangements or, in certain circumstances, mandatory escrow arrangements enforced by the ASX. These escrow or "lock -up" arrangements are generally effective for 12–24 months from the listing date and may allow partial release of shares from the escrow once the company's results are announced.

Relationship agreements will also typically be entered into between the private equity seller and the target company, ensuring board seats and information rights, amongst other things.