Roll up listings, on-market buy-backs and fiduciary outs will be of particular interest to ASIC in the next six months.
Every six months, the corporate regulator releases its report on its regulation of corporate finance, which is an important resource for anyone looking not only for key statistics but ASIC's regulatory focus. The most recent report, released on 15 March 2019, covering July-December 2018 (the "Period") is no exception. Report 612 ASIC Regulation of Corporate Finance identifies ASIC's concerns in areas such as fundraising, mergers and acquisitions and corporate governance, and sets out its three main areas of focus for the next six months: roll up listings, on-market buy-backs, and fiduciary outs.
In the Period, 296 original disclosure documents were lodged with ASIC, seeking to raise approximately $7.6B with $5B actually raised, compared to 229 original disclosure documents seeking to raise $8.6B with $9.4B actually raised in the preceding 6 month period (1 Jan-30 Jun 2018).
ASIC intervention in fundraising
There were fewer interim stop orders made by ASIC in this Period (11 compared with 24 in the previous period).
When ASIC did raise concerns with prospectuses, 80% of issuers provided new or amended disclosure. The top five disclosure concerns raised by ASIC with respect to prospectuses remained the same as the previous period, which include the following:
- business model: not fully or adequately disclosed;
- misleading or deceptive disclosure: misleading or unclear statement;
- use of funds: unclear or insufficient detail;
- risk disclosure: inadequate, insufficiently prominent or not tailored; and
- clear concise and effective disclosure: insufficient summary, investment overview or key information.
Financial information in prospectuses
ASIC notes that many issuers include disclosure about key "accounting judgments and estimates" made in regards to financial statements. ASIC encourages issuers to include this type of disclosure to give potential investors greater insight into the areas of the financial statements that are subject to judgments.
ASIC focus – roll up listings: Sufficient financial disclosure in roll up listings is a focus of ASIC in the Report. In most cases, ASIC does not accept proposals from issuers seeking to rely on circumstances where reduced disclosure may be appropriate for roll up acquisitions as outlined in Regulatory Guide 228. In cases involving legacy or predecessor businesses, the predecessor company will most likely need audited accounts for the usual 2.5 or 3 year period, with the acquisitions subject to the normal 25% significance test outlined in Regulatory Guide 228.
ASIC focus – on-market buy-backs: On-market buy-backs are a focus of ASIC in the Report. ASIC warns that companies must ensure that on-market buy-backs are truly "on-market" and carried out "in the ordinary course of trading". Trades such as block trades, trades with price improvement and out of hours trades are not "on-market" and are not carried out "in the ordinary course of trading".
Initial Coin Offerings (ICO)
On 31 January 2019, Treasury released an issues paper on ICOs for interested parties to make submissions. ASIC reminds potential ICO issuers and their advisers that it is the legal substance of the offer – not what it is called – that will determine whether Australian laws apply. ASIC notes that many of the crypto-assets considered have involved a regulated financial product under the Corporations Act. ASIC plans to update Information Sheet 225 to provide further guidance on when an ICO may involve the issue of a financial product and on the applicable disclosure requirements.
Critiques of expert valuations
ASIC reminds bidders to take care when commenting on the value of target securities, which include challenging the expert's valuation of target securities.
ASIC reminds experts to ensure that a company's capital expenditure funding requirements are properly accounted for in the valuation, where it is not implicitly reflected in certain valuation methodologies (eg. the quoted price for listed securities). This is because the valuation may not reflect the dilutive effects of future equity fundraisings.
During the Period, ASIC raised concerns with reports by technical specialists and their compliance with relevant codes and requirements. When commissioning technical specialists, parties should consider the nature of the information being prepared and ensure that the qualifications and experience of the technical specialist suit these requirements. As an example, ASIC raised concerns about a prospectus for a mining exploration company that included a report by a tenement manager (who lacked legal expertise) giving opinions about the application of legislation to the company's tenements. In response to ASIC's concerns, the company had the tenement report reviewed and corrected by a legal practitioner who provided a statement in the prospectus that they had reviewed the report and gave consent to be named as a reviewer of the report.
3. Mergers and acquisitions
In the Period, 44 independent control transactions and 10 restructure transactions were commenced, compared with 29 and 2 respective transactions in the previous period.
While the number of control transactions commenced via scheme was similar to those commenced by takeover bid, the larger control transactions were generally undertaken via scheme eg. the five control transactions over $1B were schemes. During the Period, the largest control transactions were in most cases offers of cash rather than scrip.
Foreign bidders/acquirers were behind 78% of all deal value in the Period, which represented 41% of the number of transactions.
ASIC relief and intervention in control transactions
The most common relief sought from ASIC in relation to the takeovers provisions was voluntary escrow relief (53%) followed by relief relating to relevant interests, Item 7 transactions and variation of offer terms/bid class. The majority of ASIC's regulatory intervention related to schemes of arrangement and issues relating to offer terms, "truth in takeovers" statements, shareholder classes and bid structures.
Novel or complex considerations in schemes of arrangement
ASIC is likely to scrutinise novel/complex consideration in schemes that raise issues of class composition, fairness or public policy. Examples of circumstances where ASIC intervened include:
- offering shares in a proprietary company to a large number of security holders, including retail investors ("stub equity");
- consideration that is different (in form or substance) between certain security holders – ASIC is concerned about issues of fairness and companies who offer target holders different consideration can expect extra scrutiny from ASIC, particularly if the transaction lacks the traditional mechanisms for managing class issues (eg. voting in separate classes); and
- consideration structures that allow for share splitting and use of other devices that detract from equality of treatment and an efficient, competitive and informed market.
Market and procedural integrity
During the Period, ASIC intervened in schemes and takeover bids when it had concerns about voting intention and public statements. ASIC reminds bidders/acquirers to properly recognise the limits of agreements/understandings reached with target holders.
Disclosure of underwriting arrangements
ASIC emphasises that when a term in an underwriting agreement may prevent the issue of shares to the underwriter at the end of the offer, any reference to "full" underwriting must be clearly qualified and explain the following:
- the extent of underwriting, including details of an excess shortfall that may arise;
- potential impact on control arising from third parties taking up their entitlement where there is an excess shortfall; and
- details of the terms on which the sale of the excess shortfall may occur.
Corporate governance during takeover transactions
ASIC focus – fiduciary out: ASIC is currently focusing on "Fiduciary Outs" and warns against drafting these provisions in a way that unnecessarily interferes with the board's role. In particular, companies should:
- not include an objective "reasonableness" requirement on the target board in determining what its fiduciary and statutory duties are; and
- carefully consider any tailoring that may prevent the target board from relying on the exception when its duties may otherwise require eg. requiring unanimity in the board's decision.
ASIC is also focusing on full disclosure of all benefits received by the target's directors in connection with a transaction eg. benefits relating to acceleration and vesting of incentives, retirement and offers of employment from the bidder.
Criminal actions relating to takeovers
Contraventions of the Corporations Act in relation to a control transaction can result in criminal prosecution and potential imprisonment For instance, one current case involves prosecution of a person who knowingly made false or misleading statements to ASIC by stating that they had no interest in particular shares, when they in fact did.
4. Corporate governance
Climate risk disclosure
In September 2018, ASIC published Report 593 Climate Risk Disclosure by Australia's Listed Companies. Report 593 sets out a number of high-level recommendations and ASIC encourages listed companies and their directors to:
- consider climate risk (take a proactive approach to emerging risks);
- develop and maintain strong and effective corporate governance;
- comply with the law (s 299(1)(c) Corporations Act requires disclosure of material business risks affecting future prospects in an Operating and Financial Review (OFR), which may include climate change); and
- disclose useful information to investors (companies with material exposure to climate risk should consider voluntary reporting under the Task Force on Climate-Related Financial Disclosures framework).
Corporate Governance Taskforce
In August 2018, ASIC received specific funding to undertake in-depth reviews of corporate governance practices in large listed entities. ASIC is conducting two work streams of review, which include:
- director and officer oversight of non-financial risk; and
- board and officer decisions regarding the granting and vesting of variable remuneration to key management personnel.
ASIC aims to publish reports based on its observations in August 2019 and will highlight actual practices and deficiencies, as well as good practices and ASIC's recommendations on improvements.