Super funds could be targeted in sweeping M&A reform

Routine investment transactions are at risk of being caught up in proposed merger and acquisition (M&A) reforms, industry bodies have warned.

Industry bodies have raised concerns that super funds and fund managers could inadvertently be swept up in proposed M&A legislation, according to several submissions lodged with Treasury.

Namely, the Treasury Laws Amendment (Mergers and Acquisitions Reform) Bill 2024, which was read for a second time in the House of Representatives on Tuesday, seeks to establish a mandatory notification process for certain acquisitions.

The Financial Services Council (FSC), while supportive of the bill's broader goals of boosting competition and productivity in Australia, highlighted uncertainties about how the new regime would impact fund managers and superannuation funds, such as those following passive investment strategies.

“Traditionally, Australia’s mergers and acquisitions laws have focused on transactions involving changes in control of (or significant stakes in) large target companies. In contrast, the overwhelming majority of transactions involving fund managers and superannuation funds involve relatively small stakes in a diverse range of corporations,” the FSC highlighted.

While it does not appear that the bill intends to capture these day-to-day investments, according to the council, it argued that its reliance on ministerial determinations may inadvertently result in many of these transactions being unintentionally captured.

Namely, the bill relies on the minister to set both thresholds for transaction notifications and classes of transactions.

According to the FSC, any adverse impact on fund managers or super funds risks being exacerbated by provisions that would allow for the cumulative effect of serial acquisitions to be assessed over a three year period.

In his second reading speech, Treasurer Jim Chalmers clarified these thresholds.

According to him, the ACCC will scrutinise mergers if combined Australian turnover exceeds $200 million and if the acquired business or assets meet certain thresholds: $50 million in Australian turnover or $250 million in global transaction value. 
Additionally, the ACCC will review any merger by large companies with turnovers above $500 million acquiring smaller businesses with turnovers over $10 million, and serial acquisitions totaling $50 million over three years in similar sectors.

“As things stand, it appears that many ordinary course investment transactions involving fund
managers and superannuation funds are still liable to be captured by the bill,” the FSC underscored.

“On its face, if ordinary course investment transactions (or a subset of them) were to be captured by the new notification regime, this would create a significant operational burden, increased compliance risk and higher transaction costs, as well as potentially delays associated with ACCC approval processes – all of which would be damaging to end investors and deter overseas investors from investing their capital in Australia.”

Concerns for private markets

FSC also pointed to concerns that the reforms may have a “particularly adverse” impact on private equity, venture capital, unlisted managed funds and micro/small-cap funds.

“For example, the bill might make venture capital funds’ fees uncompetitive relative to large-cap funds due to a higher administrative burden, with potentially adverse implications for start-ups and job growth,” it underscored.

Similarly, a submission from the Australian Investment Council (AIC) pointed to the likelihood of the proposed thresholds capturing the majority of mergers in the unlisted capital market.

“The council maintains its position that these [thresholds] are proposed to be set at a very low level and do not strike an appropriate balance between safeguarding against acquisitions that substantially lessen competition and placing additional administrative burden,” the AIC wanted.

In relation to the “very large acquirer threshold”, the AIC said the intention is to capture transactions by very large businesses, however the Council said its view is that the low transaction value for this test of only $10 million for target turnover would again capture a much larger volume of transactions.

The vast majority of these are not likely to raise any competition issues, the AIC said.

“Our members advise that most private equity portfolio company turnover exceeds $200 million
individually - or is likely to when aggregated with the target (i.e. $150 million of acquirer turnover
plus $50 million of target turnover to provide a combined turnover of $200 million),” it added.

“For many businesses, every acquisition they undertake will be caught, irrespective of whether they could give rise to competition issues.”

To avoid over-capture, the council recommended the government increase the combined Australian turnover limb to $400 million, raise the individual Australian turnover limb to $100 million, and change the definition of a “very large acquirer” to $750 million in Australian turnover.

“The council notes the announcement that the thresholds will be reviewed 12 months after the
reforms become effective. We would strongly recommend that this review includes public
consultation on the impact on investment efficiency and confidence,” it concluded.