ISSUE 1 JULY 2001

FOCUSMERGERS &

ACQUISITIONS

Inside:What is a DLC

structure?

Benefits of a DLCstructure

Risks of a DLC structure

Key features of aDLC structure

Our experience

Why Australia needsinnovative structures

for cross-bordermergers

Innovative Structures –Dual Listed CompaniesTwo of Australia’s largest corporate transactions were announced duringthe first quarter of 2001, BHP/Billiton and Brambles/GKN. Bothtransactions were structured as dual listed companies (DLC) mergers.Although first seen in Australia in 1995 with RTZ/CRA, thesetransactions have caused renewed interest in this innovative structurefor cross-border mergers.

What is a DLC structure?The DLC structure is a series of contractual arrangements between two listed entitiesunder which they operate as if they were a single economic enterprise while retainingtheir separate legal identities, tax residencies and stock exchange listings. The result isthat the shareholders of each entity are in substantially the same position in terms ofvotes, dividends and capital returns as if they held shares in a single economicenterprise controlling the assets of both entities.

Benefits of a DLC structureAlthough the DLC structure is often described as novel, there are real benefits for cross-border arrangements. These include the following.

• It provides the benefits of scale, merger synergies and continuity of franking withoutthe need for a disposal or transfer of shares. There are no capital gains tax or stampduty issues and pre-emptive rights in favour of third parties are less likely to betriggered. In addition, no shareholder is forced to sell or exchange their shares.

ISSUE 1 JULY 2001

• The DLC structure permits a nil (or low) premiumcombination as no party is paying for control ofthe other.

• Importantly, there is no loss of national identity orcorporate status for either DLC entity.

• Merger accounting may be available (subject toASIC policy). This means that the post-implementation balance sheet may not need toaccount for goodwill.

• It avoids the problem of flowback often found inother cross-border merger forms, whereshareholders sell the foreign scrip for reasonssuch as portfolio investment restrictions, thedesire for franking or simple discomfort with aforeign stock. This can result in pressure onprice and change in national ownership profile.

• Particularly important for Australian entitiesseeking growth, the DLC structure providesimproved access to capital markets and a choiceof currencies for future global acquisitionopportunities.

Risks of a DLC structureThe DLC structure will not necessarily be appropri-ate for all proposed mergers and there are risks.These include the following.

• When compared with short-term business planson a stand-alone basis, analyses have shownthat the DLC structure can result in earnings pershare dilution in the short term.

• The DLC structure is more complex than astand-alone or holding company arrangement.This complexity results from both the governanceand administration requirements as well ascompliance with two different legal andaccounting regimes (at least for cross-borderarrangements).

• It is usual for the DLC structure to require eachentity to pay matching dividends on a per sharebasis. If either entity is unable to declare or pay amatching dividend, the boards may agree areduced dividend. Alternatively the entities mayenter into transactions with each other so as toenable matching dividends, but doing so mayhave adverse taxation consequences.

• The cross-guarantees will mean that each entitywill be exposed to the credit risks of the other.

• The voting interests of the shareholders of each entityon actions which affect them in similar ways will bediluted by the votes of the other group of shareholders.In addition, where each group of shareholders havedivergent interests, one entity will not be able toproceed with any proposed action (which mightotherwise benefit that entity’s shareholders) withoutseparate approval from the other entity’s shareholders.

• The DLC structure will often introduce one entity’sbusiness to new risks, laws and regulations to which ithad no previous exposure; and its shareholders to newassets and territories.

Key features of a DLCstructureSome of the key features of this structure are:

• Equalisation Ratio. The ratio of economic and votinginterests attaching to an ordinary share in one entityrelative to the economic and voting interests attachingto an ordinary share in the other entity afterimplementation of a DLC structure is called theEqualisation Ratio. It is the Equalisation Ratio thatgoverns the proportions in which dividends and capitaldistributions will be paid on the shares in each companyrelative to the other. Upon commencement of a DLCstructure, the Equalisation Ratio will normally be 1:1.

• DLC Equalisation Principles. In a DLC structure it isusual for each entity to ensure, as far as practicable,that all ordinary shares enjoy economic returns andvoting rights in the combined group in proportion to theEqualisation Ratio. Where a proposed action by eitherentity would not have this effect, then:

(i) an action must be undertaken to ensure that theeconomic and voting rights of shares in each entityare maintained in proportion to the EqualisationRatio; or

(ii) an adjustment must be made to the EqualisationRatio; or

(iii) the proposed action must be approved by aseparate vote of each group of shareholders.

• No transfer of assets. The implementation of a DLCstructure does not involve any transfer of assetsbetween the groups of each entity. This is because thecontractual arrangements allow equality of treatment ofshareholders following implementation. Going forward,assets will be acquired and owned by the member ofthe combined group for which it is most efficient andappropriate to hold those assets at the time.

• Identical boards. Each entity will operate and bemanaged as if it were part of a single unified economicenterprise with the two boards of directors comprisingthe same persons and a unified executive managementteam. Importantly, in addition to its duties to its owncompany, each board will be authorised to have regardto the interests of both groups of shareholders inmanaging the combined group.

• Cross-guarantees. Under the DLC structure, eachentity gives a guarantee (subject to certain exceptions)of future contractual obligations of the other with effectfrom implementation. These guarantees ensure thatcreditors will, to the extent possible, be placed in thesame position as if the debts owed to them by the oneentity were instead owed to them by the combinedgroup. This should ensure a single credit rating for thecombined group.

• Voting arrangements. Special voting arrangementsoperate so that the shareholders of each entityeffectively vote as a single decision-making body onmatters which affect both groups of shareholders insimilar ways. Actions relating to matters where eachgroup of shareholders have divergent interests requirethe separate approval of each group. These votingarrangements are effected through special votingshares, a voting agreement and the constitutions ofeach entity.

• Takeover restrictions. The constitution of each entityalso provides that a person (or a group of persons)cannot gain control of one entity or of the combinedgroup other than by making an offer to the shareholdersof both entities on equivalent terms or with the relevantboard’s consent.

• Liquidation. Equalisation arrangements on liquidationexist to ensure the equal distribution of any surplusassets on a per share basis to ordinary shareholders ofboth entities.

Colin Smith, Senior Associate

Vijay Cugati, Solicitor

Our eOur eOur eOur eOur experiencexperiencexperiencexperiencexperienceAllens Arthur Robinson have been theprimary Australian legal advisers in all ofAustralia’s three DLC structures –BHP/Billiton, Brambles/GKN andRTZ/CRA. Peter Cameron, lead partnerfor the BHP/Billiton and Brambles/GKNtransactions, has been namedAustralian Business Lawyer of the year2001-2002 by London-based legalresearchers Chambers and Partners.

BHP Billiton merger – At A$58 billion,this represents the largest merger inAustralian corporate history. A time-critical, highly complex and documentintensive transaction, BHP Billitonadopted an innovative dual listedcompanies structure used successfullyonly once before in Australia.

Brambles/GKN merger – We areacting for Brambles on its merger withthe industrial services business of theUnited Kingdom’s GKN to create aA$20 billion international servicesgroup. The demerger and novelrefinancing aspects added a furtherlayer of complexity to this dual listedcompanies structure.

Australia’s first dual listedcompanies structure – We helpedRio Tinto Ltd (formerly CRA Ltd) andRTZ plc (now Rio Tinto plc) structureand establish the world’s largest miningenterprise and Australia’s first duallisted companies structure. We devisedunique and innovative features to obtainthe major benefits of a merger, whilepreserving the advantages of eachlisted company continuing its separateexistence.

ISSUE 1 JULY 2001

For further information contact:

Peter CameronPartner, SydneyM&A Practice LeaderPhone: +61 2 9230 4962Peter.Cameron@aar.com.au

Steven ColePartner, PerthPhone: +61 8 9488 3743Steven.Cole@aar.com.au

Andrew KnoxPartner, BrisbanePhone: +61 7 3334 3356Andrew.Knox@aar.com.au

Larry MagidPartner, Taxation, SydneyPhone: +61 2 9230 4918Larry.Magid@aar.com.au

Cameron RiderPartner, Taxation, MelbournePhone: +61 3 9613 8900Cameron.Rider@aar.com.au

Jon WebsterMelbournePhone: +61 3 9613 8832Jon.Webster@aar.com.au

WWWWWhhhhhy y y y y AAAAAustrustrustrustrustralia needs innoalia needs innoalia needs innoalia needs innoalia needs innovvvvvaaaaatititititivvvvveeeeestrstrstrstrstructuructuructuructuructures fes fes fes fes for cror cror cror cror cross-boross-boross-boross-boross-border merder merder merder merder mergggggererererersssss‘Every year, usually in late January, an M&A sage will be quoted in the financial press predicting anotherrecord year for takeovers and mergers. On the basis of the first quarter of 2001, the sage will be provencorrect. Activity levels have increased and the dollars involved have become much larger.’

‘Globalisation has been a significant element in this increase of M&A activity and with it comes the desireof Australian companies to be a driver and not a victim of the process. Merger restrictions under the TradePractices Act taken together with mature domestic markets of limited size have meant that Australiancompanies have had to look offshore for growth through acquisition. Inefficiencies in the tax system havemeant that many Australian companies with significant foreign earnings are thinking about restructuringand relocating offshore. The benefit of access to foreign capital markets and the importance of inclusionin foreign market indices mean that, in cross-border mergers, Australian companies are frequently targetsrather than acquirers. The forces are vicious ones for Australia. Concerns that many long-establishedAustralian companies risk disappearing from the All Ordinaries index and the apparent relegation ofAustralia to ‘branch office’ economy status have been accompanied by calls for regulatory overhaul.’

‘Australian companies therefore need to find a way to perform on the world stage while ensuring themaintenance of an Australian identity and culture and the facility for Australian shareholders to invest.’

‘That means renewed focus upon innovative structures for cross-border mergers of which the Dual ListedCompanies (DLC) structure is the best current example.’

Peter Cameron, Practice Leader, Mergers & Acquisitions, Allens Arthur Robinson(From Focus On Mergers & Acquisitions May 2001)

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