Broker handling fees are a well established tool that takeover bidders sometimes use to encourage acceptances and achieve all important acceptance momentum. However, recent 'future of financial advice' reforms have significantly curtailed the ability of bidders to continue to use broker handling fees. If you're involved in takeovers, whether as a director, adviser or broker, you need to understand the impact of these reforms and the substantially diminished scope for broker handling fees. There is still some scope for these fees to continue to be used by bidders and received by brokers. But understanding the permissible boundaries is critical.
In both friendly and hostile takeover bids, a bidder is keen to create as much acceptance momentum as early as possible in its offer period. To that end, a long established tactic employed by bidders is to offer to pay a broker a handling fee for any acceptances that the broker procures from its clients who hold shares in the target.
A 'broker handling fee' is a fee offered by a bidder to brokers who solicit acceptances of a bid from their clients. The broker either stamps the acceptance form or initiates the acceptance in CHESS. In return, the broker receives a fee from the bidder. The fee is paid based on the value of the shares subject to acceptances submitted by the broker, typically, though not always, up to a maximum fee for each individual acceptance.
Until now, broker handling fees have been an effective way for bidders to increase the awareness of their takeover offer and its merits, especially with retail shareholders, and in turn help achieve all important acceptance momentum.
However, the recent 'future of financial advice' reforms have significantly curtailed the ability of bidders to continue to use broker handling fees. This briefing note outlines these recent reforms and their implications for prospective bidders, their directors and advisers, as well as brokers who have been accustomed to participating in these arrangements with bidders.
- Broker handling fees are likely to constitute ‘conflicted remuneration’ under the Corporations Act 2001 (Cth) (the Act) and are therefore prohibited unless an exception applies. There is no express exemption for broker handling fees.
- A bidder who continues to offer, and a broker who accepts, broker handling fees now risk penalties of up to $200,000 for an individual or $1million for a body corporate as well as compensation orders for any damages (which are defined to include profits made by any person) resulting from the contravention.
- A broker in breach of financial services laws by receiving conflicted remuneration may also risk supervisory action by ASIC in relation to their financial services licence.
- To eliminate these risks entirely, bidders should now cease to offer broker handling fees altogether and, similarly, brokers should now cease to accept these fees altogether.
- A less conservative approach would be for a bidder to confine the offer of broker handling fees to target shareholders who clearly qualify as wholesale clients (including, for example, 'institutional' shareholders or high net worth investors). Both the bidder and the broker would need to be satisfied that the shareholder was a wholesale client.
- A further alternative for takeover bids that involve a cash offer would be for the fee arrangements to be restructured so that any fee payable is a fee that is paid by the shareholder. This approach could be adopted for all shareholders or just retail shareholders.
The Takeovers Panel's approach to broker handling fees – before the recent reforms !
Since 2003, the Takeovers Panel has had a guidance note in relation to broker handling fees. The salient aspects of that guidance, before its reissue as a result of the recent reforms, were as follows.
- The amount of a broker handling fee should be set so that it is unlikely to materially influence a broker in making recommendations to the client or pressuring their client to accept a bid. To that end, the Panel suggested that fee should not exceed 0.75% of the consideration payable to an accepting shareholder and that it should be capped at $750 for each acceptance. A minimum amount may be set to encourage brokers to contact clients with small shareholdings.1 The Panel considered that generally a minimum not exceeding $50 per acceptance is acceptable.2
- In terms of the period of availability of a broker handling fee, it should not be made available for a short time such that clients of brokers may be pressured into accepting a bid. Therefore, once an offer is made, a broker handling fee should generally be made available for the balance of the bid period (including all extensions), unless clearly expressed otherwise or at least for a relatively long period (and where ample notice is given of any intended withdrawal). 3
- If a handling fee is payable, to avoid any issue under the collateral benefits rule in s 623, it should not be payable to a broker in respect of the broker's own securities in the target and, generally, the broker should be required to undertake not to share the fee with the client.4
- A broker handling fee offer (including the availability period for the fee) should be disclosed in the bidder's statement.5
- The broker must comply with various matters under the Corporations Act in providing the advice 6 , including having a reasonable basis for any personal advice given to the client and disclosing the existence of the fee to his or her client: Pt 7.7, Div 3.7
What's now changed? R ecent financial advice reforms
On 24 November 2015, the Senate passed the Corporations Amendment (Streamlining of Future of Financial Advice) Bill 2014 (Bill). This completes the series of reforms that have come under the appellation 'Future of Financial Advice reforms' (FOFA).
FOFA was the result of the 2009 Parliamentary Joint Committee on Corporations and Financial Services' Inquiry into financial products and services in Australia (Inquiry). FOFA was developed to improve the quality of financial advice in Australia and enhance retail investor protection.
The Inquiry suggested in its final report, among other things, that remuneration structures which were incompatible with a financial adviser’s proposed fiduciary duty (Recommendation 1 of the Inquiry) should be removed.8 Prohibitions on conflicted remuneration were introduced in 2012 as Div 4 of Part 7.7A of the Corporations Act.
Ban on 'conflicted remuneration'
The prohibitions on conflicted remuneration apply to Australian financial services licensees and their representatives (including authorised representatives). They prohibit licensees and representatives from accepting 'conflicted remuneration' (s963E, 963G and 963H)9
Section 963A defines conflicted remuneration to mean:
"any benefit, whether monetary or non‑monetary, given to a financial services licensee, or a representative of a financial services licensee, who provides financial product advice to persons as retail clients that, because of the nature of the benefit or the circumstances in which it is given:
- could reasonably be expected to influence the choice of financial product recommended by the licensee or representative to retail clients; or
- could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative."
Financial product advice’ is defined in s766B(1) as a recommendation or a statement of opinion, or a report of either of those things, that:
- is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
- could reasonably be regarded as being intended to have such an influence.
Broadly, section 963L contains a presumption (unless the contrary is proven) that benefits the value of which are dependent on the number or value of financial products recommended by a licensee to retail clients or acquired by retail clients constitute conflicted remuneration. This presumption may apply to broker handling fees depending on the nature of the bid and whether it involves the acquisition of financial products by a retail client and, if not, whether the reference to "recommended" may be construed as a reference to financial products recommended to be sold or disposed of.
We are aware that ASIC considers that broker handling fees are likely to constitute conflicted remuneration.
The Takeovers Panel's res pons e to the FOFA reforms
On 9 March 2016, the Takeovers Panel amended its Guidance Note on broker handling fees to say that these now appear to fall under the definition of ‘conflicted remuneration’ in the Corporations Act 2001 (Cth) and are therefore prohibited unless an exception applies.
The Panel puts forward the following reasons to support its conclusion that broker handling fees may qualify as ‘conflicted remuneration’:
- ‘Financial product advice’ relates to advice which is intended to influence another to make a decision regarding a financial product (s766B). The Panel says there is no indication that this financial product has to be one which the person does not own. In the case of broker handling fees, the financial products are the shares held by the target shareholders who consider advice regarding the takeover and make decisions on whether to hold their shares or sell into the bid.
- Considering the factors in ASIC Regulatory Guide 246 Conflicted remuneration (RG 246), broker handling fees appear to the Panel to fall within the definition of conflicted remuneration as a benefit which is likely to influence the licensee’s advice to its client.
- Broker handling fees appear to the Panel to fit within the policy basis for prohibiting conflicted remuneration. While broker handling fees may have a beneficial impact on the market, the Panel acknowledges that they may also result in target shareholders being pressured to accept a bid or accept prematurely. The Explanatory Memorandum to the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2012 (2012 Bill) considered that commissions may encourage advisers to sell products rather than give unbiased advice. The Inquiry also considered that the most effective way to improve the quality of financial advice was to remove this conflict altogether.
- Broker handling fees are likely to be volume-based benefits which are presumed to be conflicted remuneration.
There are exemptions to the conflicted remuneration prohibitions. However, broker handling fees are not specified as an exemption.
Implications for takeover bids
The Panel says it will monitor market developments following the FOFA reforms and may withdraw its current guidance if it becomes market practice not to offer broker handlings fees. In the meantime however, the Panel's guidance note on broker handling fees (as summarised earlier in this briefing note) remains in place.
So then, does this signal the end of the road for broker handling fees in Australian takeovers? Almost. But there are still some angles for bidders and brokers.
In our view, as the FOFA reforms are aimed at retail clients there is still scope for broker handling fees to be paid to shareholders who are clearly wholesale clients under sections 761G and 761GA (for example, institutional investors, high net worth investors and experienced investors).
Alternatively, where the bid involves a cash offer, there may also be scope for the arrangements with respect to the fee to be restructured so that it becomes a fee payable by the client in relation to financial product advice given by the broker to the client relying on the exemption in section 963B(1)(d)(ii).
For this to occur, the client would need to authorise the person making the payment to the client to deduct a fee from the payment due to be made to the client (being the client's money rather than the bidder's money) and pay it to the broker. This relies on section 52, which provides that a reference to doing an act or thing includes a reference to causing or authorising the act or thing to be done.
Any authorisation by the client should take into account ASIC's view as expressed in Regulatory Guide 246: Conflicted Remuneration that any consent by the client should be 'clear consent' and therefore genuine, express and specific.
If the broker provides financial product advice that is personal advice to a retail client, the broker would also need to comply with the 'best interests duty' in Part 7.7A Division 2 along with any other regulatory requirements applicable to giving personal advice.