Geopolitical risk is no longer the black swan - it is a permanent fixture. For private capital sponsors, infrastructure funds, sovereign investors and their co-investors, the question is not whether geopolitical risk applies to a deal but how it is managed, including regulatory approvals.
The Federal Government's reforms to the foreign investment framework (Further streamlining and strengthening the foreign investment framework) recognise that geopolitics is shifting and that control and influence can come through non-traditional channels. For funds, that puts the spotlight on fund structures, LP composition, co-investment rights and governance arrangements, not just on the identity of the bidding entity.
Sophisticated sponsors no longer treat the national interest as a regulatory hurdle to clear after the commercial terms are settled. Rather, they build it into the investment thesis from day one.
Regulatory approvals drive timing, certainty and risk allocation and increasingly impact on the shape of the deal structure, the documents and the execution plan.
For private bidders, this means:
- completing regulatory approval analysis early
- a deliberate plan for engaging with regulators and
- active management of stakeholders, including government, target boards and consortium partners.
Targets and their advisers now actively assess execution risk against a bidder's ownership at the time of approach. A bidder that cannot clearly explain who sits behind it, and whether that will change, will be seen as a less certain counterparty and will be priced accordingly.
How regulatory risk hits returns
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Deal uncertainty |
This is the biggest threat for any dealmaker. A deal may be blocked, delayed, cleared only with remedies, or face enforcement after closing. Once parties have committed, often publicly, they want condition precedent risk within their own control. Regulatory conditions do not allow that. The decision sits with a government agency that has its own interests and stakeholders, quite separate from the parties' commercial goals. |
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Deal delays |
Long assessment periods, extensive information requests and ‘stop the clock’ mechanisms all push out timetables. For funds, delay means capital tied up, deployment slipping and pressure on fund-life and IRR. It also encourages buyers to look for exits, such as material adverse change conditions or termination rights, which in turn reduces deal certainty. |
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Value erosion |
Remedies such as divestitures, behavioural undertakings or limits on integration can directly cut the value of a deal. In Australia, these arise most often through ACCC competition clearance, which matters for platform and bolt-on strategies. Delay erodes value too, for example through ticking fees on acquisition finance before closing. |
The contractual toolkit
Some of the contractual mechanisms at a party's disposal are long established in Australian M&A and increasingly we see overlap between public and private M&A. Others follow the approach from the US, UK and continental Europe.
‘Hell or high water’
Sellers turn to ‘hell or high water’ (HOHW) provisions when a reasonable efforts commitment is not enough. Until recently HOHW provisions were uncommon in Australia but are increasingly put forward as a starting position by sellers to be negotiated ‘back from’.
Choosing between HOHW and reasonable efforts is one of the most important decisions in allocating regulatory risk. It shapes legal obligations, negotiating leverage, price and deal certainty.
Buyers will usually resist HOHW unless they are highly confident of clearance or face strong competitive pressure, such as a contested auction. Accepting HOHW means pricing in the cost of remedies, including a worst case where the deal economics are significantly eroded. For a fund, that is a question for the investment committee, not just the legal team.
We expect more conditions that come close to HOHW, requiring the buyer to accept regulatory conditions with only limited carve-outs, such as a material adverse effect on value.
Long stop dates and the economics of delay
Long stop dates are increasingly set with options to extend for a set period if a regulatory condition has not been met. This gives parties room to deal with unexpected delay or complications in the regulatory process.
We expect:
- Separate long stop dates for regulatory and non-regulatory conditions.
- Wider acceptance of one or more extension periods for the regulatory long stop date, especially where a rejection or unacceptable conditions could be appealed or challenged. Access to those extensions may depend on the appeal or challenge being formally commenced.
- Ticking fees for delay, particularly where one party has failed to do something it was required to do. These will depend heavily on the facts, for example where a buyer's FIRB approval is held up because the seller has not yet agreed a tax withholding position with the ATO before completion.
- More frequent reverse break fees to partly compensate a seller if a deal fails because a regulatory clearance allocated to the buyer was not obtained before termination. The key issues will be the amount, the triggers, whether the fee is the sole remedy and whether it applies where the buyer could have obtained approval by accepting remedies or conditions. For sponsors, reverse break fees also raise questions about equity commitment letters and who ultimately pays.
- Reimbursement of a seller's costs where it must negotiate and complete a divestiture as part of the transaction.
Reasonable efforts, plus good faith
The conduct of the parties in seeking approvals is under greater scrutiny, especially after last year's Mayne issues (Mayne Pharma: Act 3).
We are increasingly seeing regulatory conditions that require a bidder to accept conditions for acting reasonably and in good faith. The added good faith standard means the bidder cannot act in a way that deliberately damages or delays the clearance process. We expect regulatory conditions to increasingly require bidders to act honestly, cooperatively and fairly in pursuing approvals.
On larger or more complex deals, parties also want clarity on what those efforts do and do not include, especially where a refusal could be appealed or challenged. This is already happening around FIRB applications and filings. We also expect parties to set out what obligation, if any, a buyer has to seek review by the Australian Competition Tribunal, or judicial review by the Federal Court, if the ACCC refuses merger clearance.
The hard part is drafting clear triggers for any positive obligation to challenge or appeal, and any preconditions. These clauses usually include a ‘tolling’ or ‘stop the clock’ concept. This pauses one or more contractual deadlines, most often the long stop date, for a specified reason. The clock starts again once the tolling event is resolved.
Cooperation and process control
Cooperation obligations are closely related to reasonable efforts obligations. They set out what each party must do to support a filing, most commonly providing information and agreeing who can deal with the regulator, with or without reporting-back obligations.
Process control can make a real difference to how quickly clearance is obtained. It covers clearance strategy, the scope and quality of submissions (including other parties' rights to review and comment), which remedies, concessions or undertakings may or must be offered, and whether a party must agree to extension requests from the regulator.
For ACCC merger clearance, we expect parties to restrict the pursuit of ‘conflicting’ transactions during a clearance process without consent, while managing the information sensitivities involved. This is directly relevant to sponsors running buy-and-build strategies across a portfolio. On remedies, parties may also limit how far a buyer must go, including divestitures, price controls or ongoing monitoring and reporting, provided this does not materially and adversely affect deal value or the buyer group. For funds, the definition of ‘buyer group’ and whether it extends to other portfolio companies will be a key point of negotiation.
Anti-scuttling obligations
Few parties set out to scuttle an agreed deal. But a longer regulatory timetable increases the chance that something adverse happens in the target business, or comes to the buyer's attention, between signing and completion, prompting the buyer to want to walk away.
That creates an incentive for a buyer to, for example, change its stated intentions for the business after completion, which could lead a regulator to withdraw or refuse approval.
We expect:
- More focus before signing on what will be disclosed in regulatory applications and
- Obligations preventing parties from changing that disclosure without the other party's prior approval.
Syndication risk: the issue for private capital
Given uncertainty in global dynamics, increasingly bidders' must not do anything which could jeopardise approval and we expect more widespread use of ‘no syndication’ provisions.
Where LP and investor jurisdiction matters and syndication is more complex, we are increasingly seeing obligations that limit the time available to bring in new investors and require the seller's consent before new investors are introduced.
For sponsors that rely on post-signing sell-downs or co-investment to fund equity cheques, this directly affects deal capacity and needs to be addressed at the outset, with consortium members, co-investors and LPs.
The bottom line
For private capital in Australia, regulatory strategy is commercial strategy. Success depends on more than finding attractive assets. It requires anticipating political priorities, understanding how national interest considerations are changing, and allocating execution risk properly across the bidder, its investors and the seller.
The winning deals will be designed from the start to navigate foreign investment scrutiny, competition regulation and shifting political priorities. As geopolitics becomes part of everyday dealmaking, regulatory preparedness will be the key competitive advantage for private capital in Australian M&A.
