- ASIC has released Consultation Paper 228 seeking comments on its proposed updates to Regulatory Guide 128 Collective action by institutional investors.
- With lots of practical examples, the guidance is aimed at letting companies and their investors know where the line is between healthy engagement and a breach of the takeovers rules.
- A key to staying on the right side of the line is maintaining individual discretion. Systematic joint recommendations or proposals risk falling into association and relevant interest issues.
ASIC is proposing to update its guidance on collective action by institutional investors (Regulatory Guide 128).
ASIC notes that both internationally and in Australia there has, in recent years, been a general appreciation that investor engagement can be positive for the financial market – enhancing long-term performance and corporate value of entities. So ASIC does not wish to discourage engagement but says it must be balanced against concerns regarding control seeking behaviour of 'shareholder activists'. The ways in which investors engage has also become more sophisticated since ASIC issued its existing policy back in 1998.
ASIC’s practical examples provide greater clarity as to how investors can engage without breaching the substantial holder and takeover provisions in the Corporations Act – and avoid unacceptable circumstances.
ASIC’s focus remains on avoiding control of an entity being acquired inappropriately.
Why does it matter - substantial holdings, takeover provisions and unacceptable circumstances?
Collective action by investors may be relevant to whether they are associates of one another and whether, as a consequence, they together have a substantial holding or a relevant interest in a company.
Where the collective action of two or more investors results in them being deemed 'associates' of each other, then their relevant interests in the company are aggregated for disclosure purposes. Their 'cooperation' must be detailed in the substantial holder notices if their combined relevant interest is more than 5%.
Their holdings are also then aggregated for the purposes of the 20% takeovers law limit. To the extent that it is ambiguious whether a collective action is caught by the takeover and substantial holding provisions, ASIC's focus is on whether the conduct has a control purpose and effect when determining whether unacceptable circumstances exist and enforcement is warranted.
What constitutes acceptable and unacceptable collective action conduct?
ASIC has usefully provided a general framework of conduct which we have summarised below.
Based on the practical examples, the key factors to keep in mind in determining which side of the spectrum collective action conduct falls, are whether the conduct has the nature of an agreement or understanding and whether the discretion of each investor has been preserved.
What ASIC says is unlikely to constitute investors acting as associates or entering into a relevant agreement giving rise to a relevant interest
- discussing and exchanging views about voting, disclosing individual voting intentions, recommending that investors vote in a particular way or the general exchanging of views or information between investors, in circumstances where each investor is not bound to act in a certain way and retains its own discretion, but
- concerns may arise where the conduct extends to formulation of joint proposals, or where there is an understanding that investors will act or vote in a particular way.
What ASIC says is more likely to constitute investors acting as associates or entering into a relevant agreement giving rise to a relevant interest
- jointly requisitioning a general meeting or proposing a resolution at a general meeting, joint proposals relating to board appointments or strategic issues, and
- accepting an inducement to vote or act in a specific way, agreeing a plan in relation to voting, or limiting any investors freedom to vote (e.g by granting a proxy).
What conduct may attract ASIC scrutiny?
- collective action which involves an actual or proposed control transaction (e.g. bid or a transaction under a takeovers prohibition exception),
- proposed replacement of directors of a company to obtain board control – particularly where the proposed directors have a connection with the investors engaged in the collective action,
- proposals that have benefits for particular investors rather than investors as a whole, and
- pattern of collective action – where particular investors have a history of collective action which suggest that they act in concert for control purposes.
What conduct is ASIC less likely to closely examine?
Collective actions which involve encouraging:
- better disclosure or expanded forms and types of reporting,
- more comprehensive board evaluation processes, and
- changes to executive remuneration structures.
Will ASIC grant relief?
ASIC is proposing to revoke its existing class order which was virtually never used.
ASIC says it may still grant relief in the future where the collective action proposed is clearly caught by the takeover provisions, yet the nature of the action is not concerned with acquiring a substantial interest or control over an entity. ASIC’s preparedness to grant relief will more likely facilitate short-term, specific arrangements that do not include the provision of consideration. These arrangements are akin to the exception to the relevant interest provisions for proxies.
Any relief which ASIC is prepared to grant will generally require disclosure to the market.
Comments on Consultation Paper 228 Collective action by investors: Update to RG 128 are due by 20 April 2015 with the updated Regulatory Guide 128 Collective action by investors expected to be released in June or July 2015.
This article was written by Courtney Dixon, Senior Associate, Sydney.