Merger and Acquisition

Written by Michael McAlary

Service Area: Transaction Structuring

Industry Sector: Mining and Oil

Situation/Responsibility

In 2009, Yangzhou, a Chinese State owned mining company made a 100% takeover offer for Felix Resources Ltd (Australian Securities Exchange listed) on a cash for scrip basis. A shareholder of Felix engaged Chairmont to advise them on the implications, e.g. taxation of this transaction, given that the client’s investment vehicle was a pre-Capital Gains Tax (CGT) company, although its assets (shares in Felix) were acquired post CGT.  This is a C6 event under the CGT legislation.  On completion of Felix/Yanzhou transaction the client’s entity would be a cash box company with significant franking credits and a tax liability. 

In the post Global Financial Crisis (GFC) environment, where cash is king, this provided a significant opportunity for businesses seeking to increase their capital basis and obtain a stable shareholder. Chairmont undertook a major review of possible companies who would benefit from taking over of the client’s company.  A number of companies were short listed and approached and eventually the agreement was reached with a major financial institution. 

The transaction proposed was scrip for scrip takeover, whereby the financial institution purchased 100% of company in exchange for shares (ordinary and preference shares) in this financial institution.  It also meant that shareholders of this company would obtain CGT relief while the financial institution acquired would have a cash box and they could utilise tax consolidation rules. This transaction was to occur simultaneously, (i.e. on the same day) and off the back of the Felix/Yangzhou transaction. The end result being that the financial institution would own a cash box company and the owners of Leopold would end up with a shareholding in the financial institution and having obtained CGT relief.

Risks/Challengers

The challenges were many incluidng identifying appropriate target companies and organising the transaction to occur off the back and on the same day as the Felix acquistion date.

Achievement

Chairmont initiated, managed and structured the transaction.