A look at strategies to secure support from—and transact with—major target shareholders in takeover scenarios

By Mark Malinas, Emin Altiparmak, Hannah Biggins, Joshua Hoare
Mergers & Acquisitions

Dealing with major target shareholders in takeovers 8 min read

In our recent Insight: Is two better than one? A look at dual scheme of arrangement and takeover bid structures, we looked at how creative dual scheme and 50.1% bid structures can be used to overcome blocking stakes held by rival bidders and enhance contestability in public M&A auctions.

In this Insight, we turn to major shareholders (think those with a 20% plus interest) in listed targets who are not necessarily rivals. We explore some strategies that would-be-bidders can employ to shore up pre-bid support from these shareholders, before considering structures that can be used to offer differential consideration to them when implementing the control transaction itself.

Securing pre-bid support

Major target shareholders with blocking stakes don't have to be competing bidders to influence public M&A transactions. Among others, they can include founder/management shareholders or legacy sponsors yet to sell down their stakes post an IPO. Given that, alone or with others, such shareholders can typically defeat a scheme vote or frustrate a minimum acceptance condition, securing their support is usually paramount.

Pre-bid support from these shareholders can of course take many forms, however we focus here on two key avenues: (1) obtaining a voting commitment and (2) acquiring a physical stake (via a call option), in each case without attracting regulatory scrutiny.

Voting intention statements

A rather simple way to generate momentum for a transaction is to obtain a public statement from a major shareholder that they intend to vote in favour of a scheme or accept a takeover offer absent a superior proposal—known as a ‘voting intention statement'—that binds the shareholder to act in accordance with the statement under ASIC's 'truth in takeovers' policy.

While these statements are effective, bidders need to tread carefully. In particular, bidders need to avoid any association with major target shareholders that risks a breach of the '20% rule', while also leaving those shareholders unable to vote (more on that below). The 20% rule precludes a person from acquiring a 'relevant interest' in target securities that would result in its (and its associates) relevant interests in target securities collectively exceeding 20% (subject to certain exceptions, including pursuant to a scheme or takeover bid).

ASIC has become increasingly focussed on how these statements are procured. ASIC's concern is that a bidder that has an agreement, arrangement or understanding with a major shareholder as to how it will vote its shares will be its associate or, worse, a deemed acquirer of the major shareholder's interests (as would be the case, for example, under a formal pre-bid 'voting agreement' or 'acceptance agreement'). In ASIC's view, a bidder should not be free to avoid the 20% rule simply by procuring the shareholder to make a voting intention statement instead.

While not all discussions between a bidder and target shareholder will result in a bidder and shareholder becoming associates (or more), bidders sometimes seek to manage this risk by requiring the target board to procure a voting intention statement from major shareholders as a pre-condition to the transaction. However, it is often not necessary for bidders to seek such statements (directly or via the target board) where major shareholders are involved. Target boards will (or at least should) consult their major shareholders regardless when considering any takeover proposal—their support is essential, so it would be a brave target board to announce a deal without their support. If the shareholders' support is forthcoming, the target board itself can then procure the voting intention statement for its deal announcement (with said shareholders' consent), mitigating the 20% rule risk for the bidder.

Many well-known examples of these statements—and intermittent ASIC intervention—are available. One is the statement of support procured by AusNet from its then c. 33% shareholder Singapore Power, which said it intended to vote in favour of the 2021 scheme proposal by a Brookfield-led consortium, subject to usual carveouts (the SID not being terminated, no superior proposal and the independent expert concluding it was in the best interests of shareholders). Another to watch is Slater & Gordon, which last month announced a recommended takeover offer from Allegro Funds with a 50.1% minimum acceptance condition—there's been no public announcement to date as to which way controlling shareholder Anchorage Capital intends to vote its 53% stake.

Call option agreements

A step up from voting intention statements, another way for a bidder to obtain the support of a major shareholder (and at the same time discourage rival bids) is to enter into a call option agreement over some or all of their shares (up to a maximum of 20% of target securities, notwithstanding that the major shareholder may hold more, to avoid breaching the 20% rule).

Whilst terms vary, broadly speaking a call option is typically exercisable on the announcement of a competing proposal and may be terminated if a scheme or bid is not announced by the bidder or approved by a certain date. To the extent the bidder is considered a foreign government investor (most private equity funds are) and the call option is over 10% or more of target securities, the call option is typically structured into two underlying options, with the second option (for the target securities exceeding 9.99%) conditional on FIRB approval (absent a relevant exemption certificate). The exercise price is often set at the bidder's offer price and sometimes an uplift is included in the event the bidder later completes the takeover at a higher price or accepts a higher-priced rival offer.

A key advantage of a call option is that it serves to deter interlopers (as it provides a pathway for a bidder to obtain a blocking stake should a competing bid emerge), but doesn't require an upfront capital commitment from the bidder or leave them holding an illiquid minority interest if the transaction doesn't proceed. The granting target shareholder can also typically still vote the underlying shares in the scheme (the bidder wouldn't be able to do so if it exercised the option and held the shares itself) or accept into the bid (and therefore participate in any increase in the offer price).

Perhaps the most notable recent example was used by Wesfarmers as part of its successful take private of pharmacy operator Australian Pharmaceutical Industries (API) in late 2021/early 2022, where it exercised a call option to acquire c. 19.3% of API from major shareholder Washington H. Soul Pattinson, in response to a competing proposal made by Sigma Healthcare (and later, Woolworths Group).

Structures for offering differential consideration

It's not uncommon for a bidder (particularly a private equity sponsor) to wish to roll-over certain major shareholders (eg founder/management shareholders) as part of the acquisition of the target while 'cashing out' the balance. Two primary offer structures are typically used to achieve this—a 'stub equity' offer in a scheme (more common) or a joint bid with ASIC relief (less common).

Stub equity schemes and dual class offers

A stub equity scheme typically involves the bidder offering two consideration alternatives to target shareholders: cash or a combination of cash and unlisted scrip in a bidder-controlled vehicle (the so-called stub equity).

In a 'typical' stub equity deal, all target shareholders receive the same offer (including consideration alternatives) and vote in the same class at the scheme meeting, all other things being equal. The risk for the bidder here is that some minority shareholders may choose to take up the scrip alternative and roll alongside the major shareholders the bidder is targeting. In practice, however, minority shareholders usually accept the cash offer, including due to the target board's recommendation usually being confined to the cash consideration (rather than illiquid scrip), the c. 30% discount the independent expert will apply when assessing the value of the stub equity (as compared to cash or listed scrip alternatives) and many institutional investors being precluded by their mandates from taking unlisted scrip.

Minority rollover risk can also be managed to a degree by including a minimum and maximum scrip acceptance threshold (with a pro-rata scale back in the event of oversubscriptions), as well as by disclosing the terms of the shareholders' agreement (which must be done in the scheme booklet and often includes terms that are unfavourable to minority shareholders given their relative holdings). However, the bidder can't completely control the amount of equity that particular shareholders will receive (unless the bidder is happy to create separate classes and make separate consideration offers).

If a targeted rollover is a priority, a far less common 'dual class offer' structure can be used:

  1. an all-scrip or cash-and-scrip offer to the proposed rollover shareholders; and
  2. an all-cash offer to the remaining shareholders.

In this scenario, shareholders are split into two separate classes requiring two separate but inter-conditional votes for the scheme to pass (ie each class must satisfy the 75% votes cast and 50% headcount tests to approve the scheme). The main danger here is this can increase greenmail risk from the proposed rollover shareholders, but also from minority shareholders as their voting power increases (often significantly) relative to a single class vote.

An example of this was seen in Zenith Energy in 2020, where Pacific Equity Partners made a scrip rollover alternative available to certain founder/management shareholders only. This reduced the cash-only-offer class, with the resultant blocking stake needed to defeat the scheme brought below c. 15%. Interlopers OpTrust and ICG then used a 17.5% stake to agree terms to join up with PEP, which reduced the cash-only-offer class further—Euroz Securities in turn used a c. 13% stake to prompt a price bump.

Another alternative, of course, is to proceed with a cash-only deal and negotiate a reinvestment with the relevant target shareholders after the deal closes. There are downsides here for both bidders and target shareholders, however—among others—bidders have no comfort the shareholders will agree terms once they are cashed out, while reinvesting shareholders will lose out on the opportunity to enjoy CGT rollover relief.

Joint bid structures

A comparably rare alternative to a stub equity scheme is for a bidder to pursue a joint or consortium bid alongside one or more aligned major shareholders. This typically involves the bidder entering into a joint bidding or consortium agreement with those shareholders and making a joint cash bid—whether by way of scheme or takeover bid—for the listed target. The choice of scheme or takeover bid turns on the dynamics of the deal itself—schemes are, for the most part, more flexible (particularly for offering different forms of consideration), but they require the support of the target board, whereas takeover bids do not (so can be used in hostile scenarios).

Importantly, where the combined relevant interests in target securities held by the consortium members and their respective associates exceed 20%, 'joint bid relief' will be required from ASIC before the joint bid is launched. ASIC typically grants this relief, provided the bid complies with certain conditions, including (among others):

  • A non-waivable minimum acceptance condition of 50.1% of shares held by target shareholders who are not associated with the joint bidders (in the case of a takeover bid) or a condition that the joint bidders and their associates do not vote in the same class as the other shareholders (in the case of a scheme). This is designed to ensure the bid proceeds only at a price that the remaining shareholders consider acceptable and prevent the joint bidders using the joint bid to take control of the target at a discount.
  • A so-called 'match or accept condition' that requires the joint bidders to accept (in the case of a takeover bid) or not vote against (in the case of a scheme) a rival offer that is 5% higher than their own. In launching a joint bid, bidders must therefore be prepared for a scenario in which they are outbid and forced to sell their shares. The condition is designed to ensure joint bidders do not deter an auction for control of the target, as they can't use their stake to block a rival offer. Equally, for this reason, ASIC may choose not to impose the condition where there is no increase in voting power when the joint bidders combine (or the increase is less than 3%—a level unlikely to materially deter a rival bid and consistent with the 'creep' exception), or where one joint bidder already holds voting power of more than 50% (such that the prospect of a rival bid is already low).

The key advantage of a joint bid structure is that it allows the consortium full flexibility to agree on the form of the consortium structure, economics and governance, including form of shareholders' deed and precise rollover and selldown economics. It also reduces the risk of any change of heart by major shareholders, as they are fully committed upfront.

An effective variation on the joint bid theme was seen in BGH Capital's 2020 take private of Village Roadshow Limited (VRL). There, ASIC granted relief for BGH to come together with members of the founding Kirby family and then CEO Graham Burke, who held a c. 40% interest in VRL, including via Village Roadshow Corporation, for the purpose of acquiring VRL pursuant to an innovative dual scheme structure.


Acquiring control of a public target without the support of its major shareholders is challenging. However, where those shareholders are willing sellers, or willing partners, well-advised bidders can navigate association, voting class and other concerns through a range of strategies to effectively garner their support, ward off interlopers and structure go-forward ownership pathways for those who wish to stay involved.