Legal Practice Briefing No. 8

Number 8

15 December 1993


Government privatisation of assets has increased substantially.
In recent years, the Commonwealth has moved to privatise
a number of GBE assets including Qantas, the Commonwealth
Serum Laboratories, the Moomba-Sydney Gas Pipeline, the
Snowy Mountains Engineering Corporation, and approximately
20% of the Commonwealth Bank of Australia.

Privatisation presents a number of different and unique
challenges compared with other commercial agreements. Managing
the change of ownership from the public to the private
sector raises numerous Government issues that are not faced
in traditional mergers and acquisitions, for example, industrial
arrangements for transfer of staff from the public to the
private sector.

This paper gives a brief overview of some of the issues
to be confronted, including:

  • key methods and procedures for privatisation of GBEs;
  • important Government factors when preparing a GBE
    for privatisation; and
  • common issues establishing an ongoing 'regulatory
    framework' for the GBE after privatisation.

Privatisation Methods

Privatisation methods which are considered in this paper

  • public offerings of shares (full or partial);
  • private sales of shares (full or partial, otherwise
    more generally known as 'a trade sale');
  • individual sale of assets;
  • fragmentation;
  • introduction of new private investment into a GBE;
  • management/employee buy outs.

Public Offering of Shares

Under this approach, the Government sells to the general
public and institutions either all or large blocks of the
stock it holds in a wholly or partly owned GBE, which is
assumed to be a going concern set up as a public limited
liability company. This amounts to a secondary distribution
of shares (as only existing shares are sold), as opposed
to more traditional capital raising exercises involving
an issue of new shares for public subscription.

While technically the public offering is a secondary distribution
of existing Government held shares, it is generally handled
as if it were a primary issue. As with the recent Commonwealth
Bank of Australia offer, a prospectus is usually prepared
for the offering. The Government has to determine:

  • whether the offer will be underwritten;
  • how the shares will be priced (for example, fixed
    price, tender, open price offer);
  • who the shares should be marketed to (retail sector,
    domestic/ international institutions);
  • the type of marketing campaign;
  • what advisers need to be appointed; and
  • whether the shares will be listed overseas.

The offering may involve, apart from sales to the general
public, incentives for employee participation. There also
may be restrictions on the size of individual shareholdings.

To be eligible for a public offering, the GBE must comply
with certain legal, financial and disclosure requirements
as required by the Australian Securities Commission and
the Australian Stock Exchange. This raises the following
issues for consideration:

  • The condition of the GBE. If the GBE is not
    a strongly performing public limited liability company
    with a reasonable trading record, a public offering is
    probably possible only to the extent that primary restructuring
    and a turn- around in operations are a realistic option.
  • Targeting Ownership. If the objective is to
    achieve widespread share ownership or to target certain
    segments of the investing public, specific mechanisms
    (incentives, restrictions, etc) need to be introduced
    to ensure those objectives are obtained and maintained.
  • Valuation and Price. These issues need careful
    handling to ensure that the Government receives full

Private Sale of Shares - Trade Sale

This is one of the most common privatisation methods.
It involves the Government selling all or part of its shareholding
in a wholly or partly owned GBE to a pre-identified single
purchaser or group of purchasers. It assumes that the business
enterprise is a going concern set up in the form of a Corporation
represented by shares. The transaction can take various
forms, for example, a direct acquisition by another corporate
entity or a private placement targeting a specific group
(such as institutional investors). A private sale may be
carried out before, or simultaneously with a public offering.

The principal advantage of a trade sale is that prospective
owners are known in advance and can be evaluated. They
may be selected based on their ability to bring to the
GBE benefits such as management, technology and market
access. In many instances, the future success of the GBE
may be as important to the Government as the proceeds from
the sale. In some cases, a partial private sale may be
a necessary first step to full privatisation, because it
brings in a leveraged party who is able to turn the company
around so that it becomes attractive to investors.

The sale of Government shares in a GBE in this manner
can be handled in a variety of ways. One common way is
through a full competitive process, with pre-qualification
of bidders. This maximises both the proceeds and chances
of success of the privatised enterprise. Another is sale
by direct negotiation, with ad hoc procedures for identified
potential buyers (often involving a wide investor search).

When deciding whether to transfer ownership of the shares,
the Government will look at the purchasing party's general
business reputation, financial strength, record of performance,

Sale of Government or Enterprise Assets

A number of implementation issues arise with this approach.
The GBE concerned may be in need of financial restructuring,
such as alleviation of liabilities. Mechanisms for handling
employment issues, particularly job loss and Government
benefits, may need to be designed as most will carry some
cost. To ensure Government objectives are met and the public
interest is served, mandatory procedures may need to be
introduced to govern valuation, purchaser selection, etc.
In partial privatisation there may also be a need for the
Government to allay investor fears of continued interference.

Under the two previously discussed methods of privatisation,
the private sector would be purchasing shares in a GBE
that is a going concern. Here the transaction consists
basically of the sale of assets, rather than shares in
a going concern. The Government may sell the assets directly
or the GBE may do so itself. The decision depends largely
on the structure of the actual GBE.

Generally, while the purpose may be to hive off separate
assets representing distinct activities, the sale of separate
assets may be only a means of selling the enterprise as
a whole. Thus, the assets may be sold individually or be
sold together as a new corporate identity.

By definition, a sale of assets involves a known party
and in that sense it has the same advantages as a trade
sale. In addition, it offers additional flexibility in
that it may be more feasible to sell individual assets
than the whole business enterprise, or it may permit the
sale of a business enterprise that might be extremely difficult
to sell as a going concern. However, this approach may
often result in residual liabilities for Government, for
example, not all of the assets of the business enterprise
may be able to be sold.

The main implementation issue is how to handle existing
liabilities. Unlike the sale of a going concern, assets
are often sold without their corresponding liabilities.


This method of sale permits piecemeal privatisation, in
particular the privatisation of component parts where there
is no potential buyer for the whole company. For example,
in seeking to privatise a company, it is not unusual to
find that some activities are more attractive to buyers
than others.

There are several possible ways to proceed that will depend
on the legal structure of the enterprise. The options include:

  • breaking up the GBE into several legal entities;
  • transforming the GBE into a holding company that acquires
    the shares of the subsidiary companies which have taken
    over the assets and liabilities of the original GBE;
  • hiving off of some activities, with the Government
    retaining others.

New Private Investment in GBE

A Government may wish to add more capital to a GBE and
achieve this by a capital increase opening up equity ownership
to the private sector. The main characteristic of such
a privatisation method is that the Government is not disposing
of any of its existing equity in the GBE. Rather, it increases
the overall equity of the GBE and causes the dilution of
the Government's equity position. The resulting situation
will be joint private/Government ownership of the enterprise.

Normally a new equity raising does not result in sales
proceeds for the Government. Rather the capital is returned
to the company through recapitalisation.

This directly addresses the funding problems of an undercapitalised
GBE or permits rehabilitation or an expansion of the capacity
of a GBE. This type of privatisation is accomplished through
a capital increase of the GBE. The new share issue of the
GBE may be handled through a public offering or private
sale. In some instances, various classes of shares may
be issued depending on the objectives of the parties involved.

Management/Employee Buy Out

The term management/employee buy out refers generally
to a transaction where employees, or management and employees,
acquire a controlling interest in the GBE for which they
work. The leveraged management/ employee buy out involves
the use of credit to finance the acquisition. The assets
of the acquired company are generally used as security.

A management/ employee buy out is a relevant means of
transferring ownership to management and employees with
little wealth or knowledge of share ownership. It may be
a solution for GBEs not otherwise saleable. It also may
constitute a substantial incentive to productivity.

Preparing GBES For Privatisation

Few business enterprises are in a condition to permit
sale or other transfers to the private sector to take place
without preparatory measures. Based on a detailed legal
and financial analysis which will proceed just about any
divestiture (for example, 'a scoping study') it frequently
will be determined that the business enterprise is not
saleable on an 'as is' basis and that a number of preparatory
restructure methods may be necessary. Common steps in this
process are:

  • corporate financial and legal analysis (that is, due
  • alteration, amendment or conversion of the legal structure
    of the business enterprise;
  • modification of the overall legal framework within
    which the business enterprise operates;
  • financial restructuring including measures with respect
    to excess liabilities;
  • rehabilitation of assets;
  • changes with respect to staffing; and
  • ensuring management co-operation.

Relationship with Government

The nature of the ongoing relationship between the Government
and a GBE after privatisation is a difficult issue. Normally,
as part of the initial 'scoping study' there is a detailed
examination of the regulatory environment in which the
GBE operates.

Such a study can then give rise to a number of issues.
For example, if the GBE is operating as a virtual monopoly,
the question of whether the monopoly should be removed
after privatisation will arise. If the GBE performs a number
of community service obligations the Government would have
to decide if it requires the privatised GBE to continue
to perform the services after sale. If so, it must be determined
how the GBE is to be compensated if the performance of
those community service obligations is non-profitable.

Getting the regulatory environment right is often the
key to ensuring that a successful privatisation occurs.
Purchasers are anxious to know and understand the nature
of the relationship that will exist between the privatised
GBE and the Government after sale. This is particularly
so where the GBE has operated in a very protected environment.

Perhaps one of the most difficult areas to deal with is
where the Government itself will continue to retain an
interest in the privatised GBE. The relationship between
the Government as shareholder and its role as a regulator
of the industry in which the company concerned operates
may create obvious tensions.

Care needs to be taken to delineate the Government's role
in this regard. It may be necessary for the Government
to consider entering into a form of 'shareholder agreement'
with its private sector partner, setting out the manner
in which the jointly owned GBE in question will be run
in the way in which the Government as shareholder (as opposed
to regulator) will act.

Other Techniques

Techniques sometimes referred to as privatisation, or
which are linked to it but not specifically covered in
this paper are:

  • introduction of competitive features into a GBE's
    operation (eg performance related incentives);
  • economic policy reforms such as demonopolising certain
    activities or reducing regulatory constraints on business,
    possibly in specific sectors;
  • use of private sector funding for new activities;
  • revenue participation, certification or revenue bonds
    issued by the Government itself or by Government-owned
  • switching the source of financing for the supply of
    goods or services to user charges;
  • contracting out and franchising.

Major Privatisation Projects Undertaken
by The Legal Practice

The Privatisation Group within the Legal Practice has
been involved in some of the largest sales of Australian
assets. The following list indicates the range of this

  • Qantas sale of Australian Airlines to Qantas, sale
    of 25% of Qantas to British Airways, and preparation
    for float of residual Commonwealth holding. This included
    due diligence of both Australian and Qantas, sales legislation,
    public interest protection, post sale memorandum and
    articles and complex trade sale negotiations and documentation.
  • Commonwealth Bank float of approximately 20%, negotiations
    with Bank board, ASC and ASX, difficult Corporations
    Law issues, novel pricing structure.
  • Second Telecommunications Licence sale of licence
    and Aussat to Optus, together with establishing an appropriate
    regulatory structure for competition in the provision
    of telecommunications services.
  • Chifley Square, Sydney long-term lease which achieved
    Australian record value for CBD.
  • Tokyo Embassy sale and redevelopment with complex
    contractual structure providing for land swap, major
    construction, and environmental and heritage protection.
    Also involved issues relating to domestic land law and
    sovereign immunity.
  • Williamstown Dockyard, Melbourne sale of business
    with major industrial issues, documentation of existing
    arrangements for ship construction, foreign ownership
    and other public interest issues including the use of
    a 'special share'.
  • Air Terminals long-term lease of domestic air terminals
    with provision for third carrier access, lessor development,
    and continuing performance of Commonwealth regulatory
  • Commonwealth Serum Laboratories currently preparing
    for float, including due diligence, sales legislation,
    and establishing appropriate contractual arrangements
    for the delivery of services to Government after privatisation.
  • Defence Service Homes Loan Scheme sale of mortgage
    portfolio to Westpac together with arrangements for the
    delivery of Defence Service Homes benefits through the
    Westpac branch network.
  • Moomba-Sydney Gas Pipeline currently engaged in trade
    sale negotiations for the sale of this pipeline and the
    establishment of appropriate third party access and other
    regulatory arrangements for the post sale operation of
    the pipeline network.
  • Commonwealth Accommodation Catering Services Ltd sale
    of catering and hostel company, involving company conversion,
    contracts for future government services, and complex
    industrial issues.
  • Snowy Mountains Engineering Corporation Ltd management
    buy out with sales legislation and issues relating to
    contingent liability.
  • Hollywood Repatriation Hospital, Perth contracts signed
    for sale of Hollywood Hospital and for the provision
    of ongoing hospital and medical services by the purchaser.

ISSN 1448-4803 (Print)
ISSN 2204-6283 (Online)

The material in this briefing is provided
for general information only and should not be relied
upon for the purpose of a particular matter. Please contact
the Legal Practice before any action or decision is taken
on the basis of any of the material in this briefing.

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