Consistent with global trends, shareholder activism, particularly by institutional investors, has been on the rise in Australia, grabbing headlines in the recent times. Notable examples include Wilson Asset Management’s role in the board changes of Australian Infrastructure Fund, Perpetual and Mark Carnegie seeking to break the shareholding deadlock with Brickworks and Washington H. Soul Pattinson & Company and more recently a small shareholder of Karoon Gas seeking board changes in that company.
An issue often faced by activist shareholders is uncertainty as to whether, in pursuing a common goal or agenda with other likeminded shareholders, they become associates, which would raise substantial holding disclosure and takeovers issues under the Corporations Act. ASIC has recently released a consultation paper with new draft guidance on this issue (among other things) which, if implemented, could provide some more certainty for investors so that they can pursue, and listed entities can respond to, activist campaigns on a more certain footing.
Association: the legal position
The Corporations Act aggregates the voting power of ‘associates’ for a number of purposes, including the substantial holding disclosure requirements and also the 20% takeover threshold. Whether shareholders who are pursuing the same outcome with respect to the governance of a company, or as ASIC puts it, are taking ‘collective action’, are associates, can be a finely balanced question. Under the Corporations Act, investors become associates if they:
- have entered into a “relevant agreement” for the purposes of controlling or influencing the composition of the board of an entity or the conduct of its affairs; or
- are acting, or proposing to act, in concert in relation to the listed entity’s affairs.
If shareholders become associates, and their combined voting power exceeds 5%, then substantial holding disclosure will be required (including disclosing the terms of any “relevant agreement”) and if they reach or exceed the takeovers threshold of 20%, neither will be able to undertake any transaction (eg buying shares) which would increase their voting power any further.
New from ASIC: do’s and don’ts guidance
Among other things, ASIC’s new proposed regulatory guide will, if implemented as proposed, helpfully provide some practical guidance on ASIC's views of what types of conduct between investors may be more or less likely to give rise to an association. Among ASIC's suggestions are the following:
Click here to view table.
In addition, ASIC provides draft guidance on particular topics on which investors may engage which would attract ASIC’s scrutiny. These are:
- actual or proposed control transactions (eg a takeover, scheme of arrangement, etc);
- replacement of directors;
- proposals that benefit only particular securityholders rather than all securityholders; and
- conduct by institutional investors who have a history of collective action, where that history suggests that they act in concert to achieve a control purpose.
There are parallels between ASIC’s proposed guidance on association and decisions by the Takeovers Panel on this matter. For example, among others, the Panel has highlighted the following as potential indicia of an association:
- a shared intended outcome or purpose;
- prior collaboration between the parties; and
- dealings which are not on arms’ length basis or appear to be uncommercial.
Ultimately whether two investors are associates will be determined by the Takeovers Panel on the particular circumstances if an application is made. For example in our view, two shareholders canvassing views on a proposed board change, or even jointly signing a requisition for a meeting having independently formed their views on the matter without any formal or informal agreement, would be unlikely to give rise to a finding of association by the Panel. However two shareholders taking that same action, having done so on numerous occasions in the past, may support an association finding. The guidance from ASIC is a useful indicator of ASIC’s views on these matters and is a handy reminder for any shareholder (institutional or otherwise) considering engaging with fellow investors. The draft regulatory guide also provides high level guidance that acts as reminders to institutional investors and listed entities about other potential legal issues which may present themselves when engaging in collective action. For example:
- taking collective action can give rise to those particular investors having price sensitive information which is not otherwise generally available, giving rise to insider trading issues;
- ASIC also flags that institutional shareholders should consider whether their conduct (ie in seeking change at the entity) will render them a ‘shadow director’ of the entity by impliedly managing its affairs. This concern seems overstated to us. There is a clear distinction between exercising rights as a shareholder and effectively managing the entity via influence over the board; and
- public statements made collectively by investors, including via the media, are still subject to the misleading and deceptive conduct provisions in the Corporations Act. We agree with ASIC's reminder that the safest course is to take care in making any public statement on these matters, regardless of the forum.
The new proposed guidance is, on the whole, a helpful insight into ASIC’s views on what is often a difficult area of the Corporations Act. Once finalised, ASIC’s views on this matter will be reflected not only by its regulatory guide, but also any investigations or action it ultimately takes in relation to potential association matters. In any event, greater certainty for institutional shareholders on these issues should be encouraged.
ASIC has said that it will take comments on the consultation draft until 20 April 2015 and expects to finalise and issue the new regulatory guide in June or July 2015.