Carolyn Pugsley of Herbert Smith Freehills—Australia’s 2021 “Law Firm of the Year” in Mergers and Acquisitions—discusses changes in the M&A market in Australia. In an interview with Phillip Greer, CEO of Best Lawyers, Pugsley speaks on the rise of shareholder activism, policy changes, and the impact of COVID-19 on their practice.


Congratulations on your recognition for “Law Firm of the Year” in Mergers and Acquisitions.  Tell us a little about what it means to have your firm recognized by your peers and by Best Lawyers?

Carolyn Pugsley: Herbert Smith Freehills is delighted to have received this recognition, being selected by our peers as the standout firm for Mergers and Acquisitions is truly very humbling. Our clients are at the heart of our firm, and we see this recognition as a reflection of the value we add to our clients and a demonstration of our teams’ contributions to their success.

Can you explain how public takeovers and mergers are regulated in Australia and who oversees them?

Public M&A in Australia is predominantly regulated under the Corporations Act 2001 and the Listing Rules of the Australian Securities Exchange.  The Corporations Act regime includes a general requirement that once a potential bidder acquires over 20 percent of a target, a takeover offer must be made, subject to a number of exceptions. The Act also regulates the types of takeovers, including on-market and off-market offers and (in friendly transactions) schemes of arrangement. The corporate regulator, the Australian Securities and Investments Commission (ASIC), has extensive discretionary powers in regulating public takeovers. Certain disputes regarding takeovers are resolved by the Takeovers Panel, a peer review body comprised of members of the Australian M&A community, including two Herbert Smith Freehills partners.

Additional regulation applies to foreign bidders, generally requiring approval from the Foreign Investment Review Board (FIRB)for significant acquisitions by a foreign person of 20 percent or more (or by a group of foreign persons of 40 percent or more) of the shares in an Australian corporation. Where a merger could have competition implications, the Australian Competition and Consumer Commission can also be involved.

According to a recent article in Forbes, there has been a rise in shareholder activism globally, with Australia cited as a major player. Have you seen evidence of that in your own casework?

Shareholder activism remains on the rise in Australia as it is elsewhere around the globe, underlining the need for companies and boards to focus on enhancing—and communicating—commercially, socially, and environmentally sustainable business models. This includes taking proactive steps to ensure compliance with all legal and regulatory requirements but also highlighting an appropriate commitment to corporate social responsibility.

Australia’s shareholder class action landscape continues to show growth in this more extreme form of activism by shareholders; however, temporary changes to market disclosure rules in response to the COVID-19 pandemic may slow this trend.

You were involved in shaping policy through connections with regulators and peak bodies. Was there any specific policy that you found especially challenging?

As noted, Herbert Smith Freehills is often heavily involved in consultation with the governments, ASIC and FIRB on Australian legislation and regulation that impacts upon M&A activity. An emerging challenge is how the law can keep up with technological developments, noting the pace of change driven by innovative technology. It will be interesting to see whether any of the temporary COVID-19 changes facilitating more virtual interactions (e.g. electronic meetings and signing of documents) lead to permanent reforms that provide more virtual legal solutions.

Are there any other local policy changes that have had a significant impact on your practice in recent years?

As with all aspects of society and the economy across the world, the changes wrought by the pandemic have had a significant impact on the M&A landscape in Australia. Temporary changes to Australia’s foreign direct investment (FDI) regime, in particular the lowering of the monetary threshold for all acquisitions from levels in the hundreds of millions of dollars to $0, have resulted in significantly more transactions requiring FIRB approval. At the same time, FIRB has sought to extend the 30-day decision timeframe to six months, to cope with the increase in decisions requiring approval. These changes have the potential to cause significant disruption for investors, if not managed carefully. However, thankfully our M&A market has been relatively buoyant despite the challenges created by COVID-19 and the tightening of our FDI regime.

You are responsible for leading the strategic direction of your firm. Is there anything specific you’ve done to help pivot the practice?

We keep an eye on the horizon, monitoring trends and other indicators that suggest we need to make changes to ensure our offering remains aligned to the needs of our clients. To date, there haven’t been any dramatic pivots, more areas that we’ve identified a need to amplify, like bringing together cross-practice and multi-disciplinary teams with the right combination of skills and personality fit to best support a particular client. These aren’t groundbreaking or novel issues to tackle, but there is a definite competitive advantage to be gained in delivering them well and doing so consistently.

You are considered a thought leader on governance issues. What advice would you have for an international client undertaking an acquisition while following Australia’s foreign investment framework (which includes the Foreign Acquisitions and Takeovers Act 1975)?

Australia remains welcoming for foreign investors, but increased scrutiny on national security issues and the temporary changes in response to COVID-19 present new challenges that need to be managed. These can be overcome by considering foreign direct investment (FDI) approval issues early on in the transaction process and engaging with FIRB at the earliest appropriate time. Bidders may wish to seek early FIRB approval (e.g. prior to signing deals), and vendors may need to structure transactions to retain competitive tension where some potential buyers are affected by the temporary FIRB approval delays. As a result, the key is being proactive in your consideration of, and engagement with, FIRB issues on M&A transactions noting the FIRB approvals are usually forthcoming on FDI (with FIRB rejections still a rare occurrence).

The broader Australian M&A market saw a decrease by approximately one-third in deal value compared to the financial year 2018 (FY18), mainly due to the impact of the U.S.-China trade war and related diplomatic tensions in the region. How has that impacted the work your firm does?

Deal flow in the Australian M&A market remains strong; although there was a dip in investment from China in FY19, this was met with increased interest from investors in other nations. The continued evolution of the investor mix is to be expected, with China and the US both to remain major participants in Australian M&A. We also envision that continued strong investment from private equity funds and pension funds will help underpin robust M&A activity over the next 12 months. Looking ahead, we remain very optimistic about the M&A market and the opportunities it will generate for our clients.

What else has changed in the M&A market in Australia in the past few years?

The M&A market in Australia continues to evolve year on year driven by local and international factors as well as legislative reform. One trend in Australian M&A is the increasing use of warranty and indemnity (W&I) insurance, particularly for private equity exits, to facilitate a robust risk allocation process. There has also been a reduction in the number of competitive sale processes with more exclusive negotiations taking place between a vendor and the most natural buyer. Schemes of arrangement also continue to be popular for public takeovers, especially in higher-value acquisitions, where the process is friendly as between the bidder and the target.

Finally, are there any projects or upcoming work you are particularly excited about?

There are a number of M&A projects in the energy and infrastructure space coming to market in the near future which present an opportunity for us to combine our M&A and sector expertise to provide additional value for clients which I’m especially pleased about. As also previously mentioned, I expect we will see increased M&A activity involving financial sponsors. As there are many domestic and international players in this area of the market I’m excited to see the opportunity this presents for us given the international reach of our network.

The COVID-19 environment has also impacted our clients in different ways, for some causing major disruption, while creating opportunities for others. A particular passion for me is combining strengths across the firm to support clients in new ways and deepen our relationships. I am, therefore, very enthused by our focus on helping our clients navigate this new world together.