Does a new draft Bill go far enough to encourage the development of a retail corporate bond market in Australia?
On 11 January 2013, the Government released draft legislation containing a number of proposed amendments to the Corporations Act 2001 (Cth) aimed at encouraging the development of a retail corporate bond market in Australia. The release of the Corporate Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 follows the Government's December 2011 Discussion Paper which sought industry comment on future reform in the area of retail corporate bonds.
The main focus of the Bill is to increase offerings of corporate bonds to retail investors in Australia by:
- streamlining the disclosure regime for issuers;
- changing the civil liability regime in respect to retail corporate bonds; and
- clarifying the application of the requirement to take "reasonable steps" in respect of misleading and deceptive statements and omissions in disclosure documents relating to retail corporate bonds.
The Bill introduces a streamlined disclosure and liability regime for so-called "simple corporate bonds". A simple corporate bond is a debt security that satisfies certain conditions including that:
- it is a debenture for the purposes of section 9 of the Corporations Act;
- it is quoted on a prescribed financial market;
- it is denominated in Australian currency;
- its face value does not exceed $1,000;
- the minimum amount raised under the offer is $50 million;
- its fixed term does not exceed 10 years;
- it bears a fixed or floating rate of interest. The floating rate must comprise a reference rate over which the issuer has no direct control;
- to the extent that it bears a fixed interest rate, the fixed rate or fixed margin cannot decrease over the term of the debt security;
- interest cannot be deferred or capitalised by the issuing body;
- it may only be redeemed by the issuer prior to the maturity date in certain limited circumstances;
- if the issuer is a wholly-owned subsidiary, its parent must guarantee the debt securities;
- it cannot be converted into another class of security;
- the issuer or its parent (if the issuer is a wholly-owned subsidiary) must have continuously quoted securities which have not been suspended for more than a total of five days during the last 12 month period;
- the most recent auditor's report in respect of the issuer's financial statements (either the yearly or half yearly statements) must not be qualified; and
- the holder of the security must rank in priority to the unsecured creditors of the issuer if the issuer is wound up.
The rationale behind the inclusion of the final condition is not particularly clear. If holders of simple corporate bonds must rank in priority to unsecured creditors in the winding up of the issuer, this would mean that all simple corporate bonds must be secured instruments.
The Explanatory Memorandum to the Bill states that this requirement has been included to ensure that "subordinated debt securities are not able to be considered to be simple corporate bonds". If this is the mischief that is trying to be addressed, then the requirement as drafted seems to be broader than intended – it should be sufficient to require that simple corporate bonds rank "at least equally with all other unsecured unsubordinated debt obligations of the issuer".
Two-part prospectus for simple corporate bonds
The Bill introduces mandatory two-part prospectuses for issuances of simple corporate bonds, to simplify the disclosure obligations for issuers. The two-part prospectus will be structured as:
- Base Prospectus: A base prospectus which will be valid for three years and will contain general information about the issuer and the issue that is unlikely to change significantly during that period.
- Offer specific prospectus: For each particular issue of bonds the issuer will be required to release a second document (the offer specific prospectus) outlining the key details of the offer. The offer specific prospectus will be required to have an expiry date which is no later than 13 months after being lodged with ASIC.
Both the base prospectus and the offer specific prospectus are to be read together in relation to a particular issue of simple corporate bonds. The offer specific prospectus may supplement or modify information in the base prospectus provided the information, when taken "in totality", is presented in a clear, concise and effective manner.
Although the content requirements of the two-part prospectus were discussed in detail in the Government's Discussion Paper, the Bill does not mandate any specific content for either the base prospectus or offer specific prospectus. Rather, the specific content of the two-part prospectus has been left to future regulation.
However, the Bill provides that information can be incorporated by reference into both the base prospectus and the offer specific prospectus provided the relevant cross-referenced information is or has been lodged with ASIC. The reference must also inform investors of their right to obtain a copy of that information lodged with ASIC.
It should be noted that ASIC Class Order 10/321 already allows companies to issue "vanilla bonds" to retail investors under a simplified two-part prospectus. However, in the two-year period since the Class Order was introduced, only one issuer has issued retail bonds under a two-part prospectus. Some have suggested that this fact indicates that the prospectus content requirements under the Class Order are too onerous. It will therefore be interesting to see whether the Government will minimise the two-part prospectus specific content requirements under the new regime when the regulations are finally released.
The Bill provides that for the first two years after its commencement an issuer will have the flexibility to offer simple corporate bonds either under (1) a prospectus in accordance with sections 701 and 711 of the Corporations Act or (2) a two-part prospectus. Any issuance of simple corporate bonds after this two year period will need to be made under the new two-part prospectus regime.
Liability for prospectus content
One of the legal impediments to retail bond issuances by corporates is the lengthy due diligence process which arises because of, among other things, the deemed directors' liability provisions for prospectus content in the Corporations Act. In response to this, the Bill removes deemed civil liability of directors under section 729(1) of the Corporations Act for misleading and deceptive statements in, or omissions from, a two-part prospectus.
However, as directors are required to consent to the lodgement of the two-part prospectus, this means that they will still be subject, effectively, to the criminal liability provisions for these document under sections 1308 and 1309 of the Corporations Act. These provisions are only contravened where it is determined that "reasonable steps" have not been taken. The Bill clarifies the type of conduct which will be taken to constitute "reasonable steps" for the purposes of these criminal liability provisions.
The Bill provides that a director will be considered to have taken reasonable steps to ensure a statement in, or omission from, a disclosure document is not false or misleading where:
- that director has made all inquiries (if any) that were reasonable in the circumstances and, after doing so, the director believed on reasonable grounds that the statement was not misleading in a material particular or there was no such omission; or
- that director proves they relied on information provided to them by someone other than a director, employee or agent of the issuer and the reliance placed on the information by the director was reasonable in the circumstances.
Although the Bill clarifies the due diligence obligations under sections 1308 and 1309, the proposed amendments do not remove the need for the board of an issuer to be involved in the due diligence process. Therefore, these proposed amendments may not have gone far enough to satisfy some industry participants who have previously suggested that directors should be given the benefit of a "safe harbour" or "business judgement" rule.
Differences between the Class Order and the Bill
The disclosure regime for simple corporate bonds proposed by the Bill contains very similar parameters to the vanilla bond regime that applies pursuant to the Class Order.
The notable differences between the disclosure regime applicable under the Class Order and that which is proposed by the Bill include:
- the Class Order allows for the use of a one-part prospectus, rather than mandating the use of the two-part prospectus, as required by the Bill;
- the Bill requires simple corporate bonds to rank ahead of (rather than equal with) unsecured creditors in the event of a winding-up, which effectively requires simple corporate bonds to be secured. This was not required under the Class Order;
- the Bill provides that simple corporate bonds may be issued by a wholly-owned subsidiary of an entity that has continuously quoted securities (rather than only by the entity whose securities are continuously quoted), on the condition that the parent company must provide a guarantee. The Class Order did not provide this flexibility; and
- the Bill provides that the "base prospectus" has a life of three years, as compared to the two year term provided by the Class Order.
As noted above, the regulations containing the disclosure obligations relevant to simple corporate bonds have not yet been released. These regulations may present some further differences between the applicable disclosure regimes.
Summary and submissions
The draft Bill is the latest in a series of initiatives by the Government to encourage the development of a retail corporate bond market in Australia. However, apart from the removal of director's deemed civil liability for misleading and deceptive statements in, or omissions from, a retail corporate bond disclosure document, the Bill is in substance very similar the Class Order relief for "vanilla bonds" which was introduced in 2010. Those reforms failed to ignite the retail bond market and therefore it is arguable that the draft Bill has not gone far enough.
Further, although director's deemed civil liability has been removed, this is unlikely to remove the necessity of conducting a full due diligence of retail bond disclosure documents. A failure to do so may expose directors to the criminal liability provisions under sections 1308 and 1309.
Therefore, although the changes are encouraging in that they demonstrate the Government's continued interest to encourage a retail bond market, the impediments to such a market are much wider than the issues addressed in the legislation – the legislation addresses some of the "easier steps", the question is whether the Government can help in relation to the harder steps to a healthy and liquid retail bond market.
The Government is seeking industry feedback on the above by 15 February 2013.