In light of the current debate in Australia and overseas regarding the implications of shareholder activism, it was timely that in February this year the Australian Securities & Investments Commission (ASIC) sought to review its regulatory guidance on collective action by investors.
In Australia, collective action by investors can give rise to difficult issues under Australian takeovers law, including the potential for aggregation rules to result in investors breaching the 20% takeover threshold and/or becoming subject to a requirement to make public disclosure regarding the extent of their interest in the relevant company.
In brief, under Australian takeovers law:
- a person is prohibited from obtaining an interest in more than 20% of a public company’s voting shares, unless via prescribed “gateways” such as a regulated takeover bid; and
- a person must publicly file a substantial holder notice which discloses their interest in a company if the voting shares in which that person has an interest is 5% or more of the company’s issued voting shares (and subsequent notices must be filed to the extent there is any movement of at least 1% in their holding).
In determining a person’s interest in shares for this purpose, Australian takeovers law contains certain aggregation rules – centred on the concepts of “associates” and “relevant interest” – which can result in shares being attributed to a person even though the person does not own those shares. This may occur, for example, where a person has an arrangement or understanding with another person regarding the voting or disposal of the shares, or where they are acting in concert with the other person.
Depending on the circumstances, these rules can have the following implications for investors who are seeking to engage in some form of collective action in relation to a public company:
- if their aggregated shareholdings are more than 20%, they may be in breach of the 20% takeovers threshold;
- if their aggregated shareholdings are less than 20%, their ability to acquire further shares will be restricted if it would increase their aggregate interests above 20%; and
- if their aggregated shareholdings are 5% or more, they may need to lodge a substantial holder notice disclosing their aggregated interests, including details of their relationship.
The operation of these rules is very broad and can be activated by collective action between investors even where such behaviour does not have a corporate control-seeking purpose.
ASIC has recognised that these broad rules have the potential to discourage collective action by investors and that this may adversely impact desirable forms of shareholder engagement with a public company.
Accordingly, in its new regulatory guidance issued in June, ASIC adopts a more facilitative approach, indicating that acceptable behaviour can include investors exchanging views or information, one investor recommending that another investor vote in a particular way, or investors making joint representations to a company’s board about the company’s policies or practices. In particular, ASIC indicates it is less likely to be concerned where such conduct relates to matters directed at improvements in a company’s corporate governance, such as a company’s disclosure practices, board evaluation processes, risk management, executive remuneration structures and corporate social responsibility reporting.
However, ASIC cautions that where conduct evolves into the formulation of “joint proposals” by investors a level of mutuality can arise between the investors which triggers the aggregation rules. ASIC also indicates that it will consider carefully collective action which occurs in the context of a control transaction or which seeks a change in the composition of a company’s board, concerns a proposal which has benefits for particular investors rather than shareholders as a whole, or forms part of an ongoing pattern of collective action by the relevant investors. ASIC considers that these circumstances are more susceptible to giving rise to an inappropriate arrangement between investors regarding control of a company.
ASIC’s guidance is welcome. Its clarification that “good corporate governance” activism is unlikely to be unacceptable provides clarity that could only be achieved previously under a very limited (and rarely used) legislative relief instrument. However, ASIC’s guidance is not a general endorsement of more aggressive forms of collective shareholder activism, including where investors collectively seek a change in composition of a company’s board. In those cases, it will remain necessary to carefully consider the implications of Australian takeovers law.