ACQUISITION AND LAW 10
Laws Governing Acquisition
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Analysis
Overview
Acquisition in Perspective and Law
An acquisition is referred to as “A corporate legal action by which a company ‘acquires’ the rights to ownership of most, if not all, of the company’s assets and liabilities in a bid to increase the base of the acquiring company. The strategy is a competitiveness one commonly made as part of an organizational growth method that makes it more beneficial to take over a company. Acquisitions and Mergers (M&A) are paid in cash, the acquiring companies or combination of both Serge Moresi S, S SalopJ Woodbury, ‘Market Definition In Merger Analysis’ (Papers.ssrn.com, 2018) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2906111> accessed 20 July 2018
The business activity for any Merger and Acquisition to take place in the US, it is closely monitored by both state and federal laws. State laws formulate the rules and procedures with a judicial oversight to approve a merger and also to defend the shareholders interest by ensuring fair value are considered or not, by the merging companies. State laws also require the management of companies to be merged or acquired to have clarity over various governing laws to defend.
Speculative Investment
A speculative investment also known as an application of resources on uncertain grounds is one that involves a very high level of risk and the buyer is mainly focused on price fluctuations to benefit from the profitability of the changes.
Apex Defense System PLC (APS) is a locally owned multinational company based in Adelaide, Australia. APS Offers a range of military services and training sessions, among them security training and weapons training for both the law enforcement agencies and civilians. The core goal of the APS is providing soldiers and other allied forces with the requisite military services and articles that give an extremely edge over rivals and enemies. And to meet this objective, APS possesses expertise and experience majorly in areas of weapons, ammunition, and weaponry platform lifecycle management from mission requirement via demilitarization and mitigation of war impacts on civilians. That said, APS just as any other defense company or military organization at one time or another may need improvement and broadening the areas of designation and base so that it can compete appropriately in a fast technologically changing world A Farina, A Sarti, and E Barbi, ‘The Role Of Chief Technology Officer (CTO) In A Modern Defense Company – IEEE Journals & Magazine’ (Ieeexplore.ieee.org, 2018) <https://ieeexplore.ieee.org/abstract/document/7901730/authors> accessed 21 July 2018.)
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APS is a company adequately staffed by knowledgeable and experienced, well-trained security personnel and instructors, possessing diverse know-how for purposes of creating an impactful sense of belonging to the population and those that choose to associate themselves with the development program of APS.
Delta Finance
Established in 1989, Delta Finance is a privately owned independent Finance Broker with operations mainly in South of Australia and neighboring regions. The company majors in the defense sector and related fields. Additionally, the Delta Finance is the only one brokerage firm a broad national footprint and extensive designation and also with representation in more than half of all states of Australia.
With a relatively appealing image and record in aiding companies in acquisitions and merging of more than twenty-five years, Delta is a becoming one of the biggest firms that clients are looking to enhance their operations and increase the base of operations.
A relationship between APS PL and Delta Finance in Acquiring Beta Aerospace Avionics
Delta Finance has helped more than fifty companies in Australia regarding merging and acquiring rights of other small companies, and therefore there was no surprise when APS approached the firm to support it in its bid to buy rights of ownership for Beta Aerospace Avionics Ltd. Leaning heavily on an advisory role and limiting itself to financial angle of negotiations between Carbine Holdings (mother company to Beta Aerospace Ltd) and Apex Defence System Company PLC, Delta Company was least expected to transparently reveal to both parties the terms of negotiations and commission, if any of any deal reached between them and any of the parties, in regard to the acquisition bid. That, unfortunately, did not happen and Delta hid the information from APS till it reached the APC days after the acquisition. A question of law and compliance with the acquisition and merger governing rules arose and the need to get the detailed information of the secret deal for legal purposes and compensation for that matter.
What Delta Finance Had to and Failed?
Many of the businesses and companies in Australia have an entered into agreements between among themselves for purposes of acquisitions and mergers. Many of the corporate acquisitions do not lead to significant improvements in post‐acquisition operating performance Hsu-Huei Huang and others, ‘Operating Performance Following Acquisitions: Evidence From Taiwan’s IT Industry’ (2014) 43 Asia-Pacific Journal of Financial Studies <https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-5957.00428>.)
As stated above in the overview section, the acquisition does not necessarily involve the bidding but also the financial aspect of it. Indeed, the feasibility of the process must include the economic impacts that the deal (acquisition) will have on the company. That being said, ADS PLC was not under any jurisdiction to enter into an agreement with Delta Finance for the purposes of acquiring Beta Aerospace Avionics Ltd. It was the decision of the management of APS to opt to seek the advisory opinion on the same but was not necessarily a requirement on the part of ADS. The hidden legal loophole Delta Finance used in getting a commission equivalent of 3.8% of the total bidding price, is the fact that there is no legal requirement that the mediator or advisor, in this case, Delta Finance, that they should reveal any secretive deal they have entered with either if the parties involved, to the other Breno Schmidt, ‘Costs And Benefits Of Friendly Boards During Mergers And Acquisitions’ (2015) 117 Journal of Financial Economics.
An acquisition (take over) arose when one company (ADSP PLC) took over the full ownership of all liabilities and assets of Beta Aerospace, which consequently ceases to exist.
The legal drive of the transfers of the Beta Aerospace Ltd is that it will either get dissolved or continue existing but will remain dormant. The legal identity of the company that gets acquired is, according to the M&A (Merger and Acquisition), will either get discarded immediately after the takeover or at least gets maintained now as a subset or division of the mother company (ADS PLC). The high profile positions and executive administrative positions will often get reviewed and merged while be trimmed to be smaller than the combined views of the two companies before the acquisition.
Importance of Communication in Acquisition
More often, acquisitions aim at increasing the strength of a company in the industry Rabi Narayan Kar, Amit Soni and Chandan Kumar Singh, ‘Assessing The Impact Of Mergers And Acquisitions On Firm Performance: Evidence From India’ (2014) 1 FOCUS: Journal of International Business http://management.nrjp.co.in/index.php/JMSOS/article/view/216
. Additionally, acquisition aims at increasing the base of the company and creating a sort of monopolistic environment around the market to enable the company to have control over price and profitability Duncan N. Angwin and others, ‘How Communication Approaches Impact Mergers and Acquisitions Outcomes’ (2014) 27 The International Journal of Human Resource Management <https://www.tandfonline.com/doi/abs/10.1080/09585192.2014.985330> accessed 21 July 2018.
Legislative Framework around Acquisition
The Legislative amendments in 1993 January for the competition test ensured that mergers become prohibited and illegal, as, according to the amendment, “lessen” the competition between companies in the industry.
The Australian Competition and Consumer Commission (ACCC) is tasked with the acquisition benefits that accrue from M&A agreements.
In administrating the act, the ACCC requires judgments on proposed M&A as likely substantially leading to lessening the competitiveness of the companies coming together.
In addition to ACCC, there were a Draft Merger Guidelines that came into force in 1992, setting out the approaches for administering new competitiveness test and include some several stage evaluation mechanism for mergers that are legally not feasible and that would lead to lessening of the competitiveness of the company.
Corporations Act
The Act governs the acquisition of full control of listed or held Australian companies. The Act does not expressly point to the need for an advisor in the process of M&A. Additionally, The Corporations Act tends to impose substantial restrictions on the acquisition of rights in the company that is listed in Australia and with more than 50 shareholders. Important to note is the fact that the restrictions that the Act imposes can constitute criminal offenses and penalty. Contravention of these restrictions is serious. Neither of The Foreign Acquisitions and Takeovers Act 1975 nor The Competition and Consumer Act 2010 takes about the adversarial requirement of the processes of M&A. Also, the above regulations do not constitute a need for an intermediary and the percentage of commission to be paid out to the agent. And therefore a case of noncompliance with the regulations by Delta Finance company ltd can be revealed.
Laws Governing Corporate Acquisitions
Role of an Advisory Firm in Company Acquisition
In Merger and Acquisition (M&A), the sole function is to deliver transaction-focused mechanisms based advice, to private equity entities. In defense sector or industry, the firms majoring in the mergers must be well conversant with the industry, the know-how of the working of the various complex sections of the companies. A company of the profile like that of Delta Finance must be highly respected and with a non-comparable record. Transparency and integrity is the driving values for such companies due to the complexity of the dealings in the defense industry Chikashi Tsuji, ‘An Overview Of The Cross-Border Mergers And Acquisitions’ (2015) 3 Archives of Business Research )
Most of the M&A activity in Australia (especially the public M&A) are generally motivated by the need for foreign investment. Apex Defense System Ltd, which is offering defense services on international levels, aiming at enhancing and broadening their base, is one such company. By agreeing to acquire Beta Aerospace Avionics, the company is looking to increase its customer base and better the services Mark Zerdin, ‘The Mergers & Acquisitions Review – Edition 11 – The Law Reviews’ (Thelawreviews.co.uk, 2017) <https://thelawreviews.co.uk/edition/1001071/the-mergers-acquisitions-review-edition-11> accessed 22 July 2018.
Often in Australia, private M&A dealings are principally regulated by contract law, which primarily derives its operational powers from the common law and the Competition and Consumer Act 2010 (CCA). Moreover, there are other pieces of regulations among them:
(FATA) The Foreign Acquisitions and Takeovers Act 1975.
(FSSA) Financial Sector (Shareholdings) Act 1998.
(IATA) Insurance Acquisitions and Takeovers Act 1991
(BSA) Broadcasting Services Act 1991
The above pieces of legislation all majors on regulating the processes of Mergers and Acquisitions (M&A) in Australia. The terms of the acquisition and commissions (though as stated earlier, the law is silent on whether there is the need for intermediary intervention for advice and financial interpretation of the process and therefore any deal of the sort is left to individual companies to decide) are noted and well described. Importantly, the regulations state expressly that any agreement must be open and transparent, devoid of any secretive deal with any of the parties involved Breno Schmidt, ‘Costs And Benefits Of Friendly Boards During Mergers And Acquisitions’ (2015) 117 Journal of Financial Economics
. Delta Finance Ltd did not comply with the requirement, because the company agreed with Carbine Holdings to ‘aid’ in selling Beta Aerospace Avionics Company to ADS, and got paid the commission, without the knowledge of the acquiring company.
Competition Law
There exist no compulsory pre-merger communication and notification process in Australia but the ACCC’s essential investigative and compliance powers state that it is common for dealings to be notified and communicated to the ACCC on voluntary basis and clearance be obtained henceforth after completion of the acquisition process Mark
The Mergers & Acquisitions Review – Edition 11 – The Law Reviews’ (Thelawreviews.co.uk, 2017) <https://thelawreviews.co.uk/edition/1001071/the-mergers-acquisitions-review-edition-11> accessed 22 July 2018.
. In the case of ADS and Beta Aerospace Avionics, that did not happen and the blame squarely falls under the doors of the company activating the acquisition process, in this case, Delta Finance.
Regulation
An extensive range of rules involved in affirming and approving acquisitions in transactions and implantation is based on the laws discussed above and the regulatory bodies to do that are discussed below.
Australian Securities and Investment Commission (ASIC)
ASIC is the principal implementer and regulatory body regarding M&A in Australia. Its sole task is to administer and oversight the implementation of the Corporations Act together with the market supervision. Also, the organization has powers to amend the provisions of Chapter 6 that talks about the ‘Takeovers.’
Australian Competition and Consumer Commission (ACCC)
As discussed earlier, the ACCC focus on the anti-competitiveness implications of the acquisitions and takeovers. The law on merger and acquisition as stated in the Competition and Consumer Act 2010 (the Competition and Consumer Act) are enforced by ACCC.
Section 50 of the CCA states that a corporation must not necessarily acquire shares in the body corporate if it makes all feasible research shows that the transaction will most likely lessen the competitiveness of the company Lauren Patterson, ‘The Pricing Impact Of Decreasing Competitiveness Of The Health Insurance Market’ (Trace: Tennessee Research and Creative Exchange, 2018) <http://trace.tennessee.edu/utk_chanhonoproj/2202/> accessed 22 July 2018)
(FIRB) Foreign Investment Review Board
The other most important regulatory body regarding M&A is the FIRB. The body evaluates proposals made to and by international interests for purposes of undertaking direct investment in Australia. The FIRB after that recommends to the Government, depending on the effectiveness and suitability of the proposal. The government will outline the policies that will be used to effect the deals and ensure the interests of the company are done within the regulations.
Restraints on Agreement and Acquisitions
The acquisition process comes under deliberations and agreements between parties and of course if there is a third party like in this case the Delta Finance, then all three parties must have full disclosure of the agreements. Restraints are allowed if for example, the acquisition process involves technical companies being acquired and when there is no need for an intermediary. Soliciting money or making a commercial deal from either of the parties during the contract is illegal like it happened in the case of ADS.
Reference
Angwin D and others, ‘How Communication Approaches Impact Mergers and Acquisitions Outcomes’ (2014) 27 The International Journal of Human Resource Management <https://www.tandfonline.com/doi/abs/10.1080/09585192.2014.985330> accessed 21 July 2018
Farina A, A SartiE Barbi, ‘The Role Of Chief Technology Office (CTO) In A Modern Defense Company – IEEE Journals & Magazine’ (Ieeexplore.ieee.org, 2018) <https://ieeexplore.ieee.org/abstract/document/7901730/authors> accessed 21 July 2018
Huang H and others, ‘Operating Performance Following Acquisitions: Evidence From Taiwan’s IT Industry’ (2014) 43 Asia-Pacific Journal of Financial Studies https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-5957.00428
Kar R, A SoniC Singh, ‘Assessing the Impact of Mergers and Acquisitions on Firm Performance: Evidence From India’ (2014) 1 FOCUS: Journal of International Business http://management.nrjp.co.in/index.php/JMSOS/article/view/216
Zerdin M, ‘The Mergers & Acquisitions Review – Edition 11 – The Law Reviews’ (Thelawreviews.co.uk, 2017) <https://thelawreviews.co.uk/edition/1001071/the-mergers-acquisitions-review-edition-11> accessed 22 July 2018
Moresi S, S SalopJ Woodbury, ‘Market Definition In Merger Analysis’ (Papers.ssrn.com, 2018) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2906111> accessed 20 July 2018
Patterson L, ‘The Pricing Impact of Decreasing Competitiveness of the Health Insurance Market’ (Trace: Tennessee Research and Creative Exchange, 2018) <http://trace.tennessee.edu/utk_chanhonoproj/2202/> accessed 22 July 2018
Schmidt B, ‘Costs And Benefits Of Friendly Boards During Mergers And Acquisitions’ (2015) 117 Journal of Financial Economics
Tsuji C, ‘An Overview Of The Cross-Border Mergers And Acquisitions’ (2015) 3 Archives of Business Research