John Elliott takes a look at how ASIC’s update provides shareholders with a timely reminder of what activities are acceptable under Australia’s takeover and disclosure laws.
Last month, Australian Securities and Investments Commission (ASIC), Australia’s principal securities regulator, released a consultation paper seeking feedback on its proposal to update its Regulatory Guide 128: Collective action by institutional investors (RG 128).
What is RG128?
RG 128 was originally issued in 1998 in a much different market environment to that which exists today. It set out ASIC’s legal view about when institutional investors could collectively discuss their intentions about voting at a meeting of a company in which they hold shares. ASIC also provided limited class order relief to facilitate two or more institutional investors entering into a voting agreement for a particular meeting of the company.
What has prompted the review?
As ASIC notes in its consultation paper:
“Both internationally and within Australia, in recent years there has been both a general appreciation that investor engagement can be positive for the financial market and concern about control-seeking behaviour of ‘shareholder activists.”
ASIC is proposing to review its guidance in RG 128 with the aim of striking the appropriate balance between facilitating investor engagement and maintaining the spirit of Australia’s takeover laws, given changes in engagement practices and international developments
So what REALLY has changed?
In terms of ASIC’s view of the operation of the relevant law and its application to collective action – not much.
ASIC has done a thorough job of analysing the applicable law and setting out examples of collective action by investors that might trigger a disclosure obligation under, or potentially constitute a breach of, Australia’s takeovers laws. In doing that, ASIC has listed examples of conduct that is unlikely to constitute a problem and other examples of conduct that is likely to cross the line. However, putting aside the proposal to drop the rarely-used class order relief enabling institutional investors to enter into voting agreements, and a modernisation of the terms of its guidance having regard to current activity, there is no change of significance in the way ASIC views the applicable law.
Having regard to the “concern about control-seeking behaviour of shareholder activists” mentioned earlier, it was possible that ASIC might have laid down an interpretation of the applicable law which could have set new ground rules for the activity of shareholder activists. That has not happened.
Instead, ASIC’s discussion of examples of conduct which may or may not be problematic is consistent with the advice which any experienced M&A lawyer, well versed in the nuances of the activities of shareholder activists, would be advising their client, whether that client be a company, an activist or other institutional shareholder.
The shareholder activist’s playbook
Whilst every situation needs to be judged on its own particular facts, the examples of particular types of conduct in ASIC’s proposed rewrite of RG 128 essentially give comfort to shareholder activists that the key actions in which they commonly engage when seeking change from companies and enlisting support for that change from other shareholders, properly conducted, are unlikely to breach Australia’s takeover laws or prompt a disclosure requirement.
Conduct listed by ASIC as unlikely to raise relevant concerns are institutional investors:
- holding discussions or meetings about voting at a specific meeting of a company;
- discussing issues about the company including problems and potential solutions;
- discussing possible matters to be raised with the company’s board;
- discussing and exchanging views on a resolution to be voted on at a meeting;
- disclosing individual voting intentions on a resolution;
- recommending that other institutional investors vote in a particular way;
- making representations to the company’s board about the company’s policies, practices or particular actions that the company might consider taking.
On the other side of the line, conduct more likely to constitute a problem under the takeovers laws and disclosure requirements include institutional investors:
- jointly signing with other investors a notice requisitioning a general meeting of a company for the purpose of putting a resolution to change the board;
- formulating joint proposals relating to board appointments or a strategic issue;
- accepting an inducement to vote in a particular way or to not vote or otherwise agree on a plan concerning voting.
Well advised activist investors are aware of each of these limitations. The skill of an experienced M&A lawyer is in advising their client how far the acceptable conduct can go before it crosses the line.
ASIC’s consultation paper is a timely reminder of some age-old principles underlying Australia’s takeover and disclosure laws. The examples of relevant types of conduct listed by ASIC as likely being either side of the acceptable line are uncontroversial. In the context of the increasing focus on shareholder activism and concern about control-seeking behaviour of such investors, the examples of conduct listed by ASIC will confirm to shareholder activitists that a range of activities engaged in by them, properly conducted, will be acceptable having regard to Australia’s takeover and disclosure laws.