On 16 May 2012, the Australian Securities and Investments Commission (ASIC) released updated guidance on Australia’s regulation of ‘downstream acquisitions’. This guidance is set out in Regulatory Guide 71 Downstream acquisitions (RG71).
What is a ‘downstream acquisition’?
A ‘downstream acquisition’ occurs when a person acquires a relevant interest in more than 20 per cent of the voting securities of an Australian company (downstream entity) as a result of an acquisition in another company, including a foreign body corporate (upstreamentity).
When is a downstream acquisition prohibited?
The Corporations Act 2001 (Cth) (Act) prohibits a downstream acquisition of voting securities in:
- companies with more than 50 members
- a listed company, or
- a listed managed investment scheme,
unless an exception applies.
Why are certain downstream acquisitions prohibited?
A downstream acquisition may result in an upstream acquirer obtaining control over a substantial interest in the downstream company without:
- downstream shareholders being given an opportunity to consider the proposal, or
- downstream holders being given an equal opportunity to share in any premium for control of the downstream shares, which is reflected in the price paid for the upstream acquisition.
Under the Act, the upstream acquirer is deemed to have the same relevant interests that the upstream entity has if they have voting power above 20 per cent in, or control, that upstream entity.
What are the exceptions?
Section 611 of the Act provides the exceptions to the general prohibition on downstream acquisitions. In particular, item 14 of section 611 (item 14) provides that downstream acquisitions are not caught by the prohibition if the upstream entity is included in the official list of a:
- prescribed financial market, or
- foreign body conducting a financial market that is a body approved in writing by ASIC. ASIC’s list of approved foreign exchanges is set out in Class Order [CO 02/259] Downstream acquisitions: foreign stock markets.
What are the changes to ASIC’s policy?
The recent updates to RG71 are the first in over 17 years and were necessary to reflect changes to Australia’s takeover law. Accordingly, RG71 is effectively a new policy on the area.
RG71 provides ASIC’s latest guidance on:
- downstream acquisitions and when a person may breach the prohibition as a result of an upstream acquisition. The policy gives the following two examples of when a ‘downstream acquisition’ may breach the thresholds in the Act:
- Company A acquires a relevant interest in 40 per cent of the securities in Entity B where Entity B has a relevant interest in 25 per cent of the shares in Company C. This will result in Company A acquiring a relevant interest in 25 per cent of the shares in Company C, and
- Company A acquires control of Scheme 1 where Scheme 1 has a relevant interest in 25 per cent of the interests in Scheme 2 (a listed managed investment scheme). This will result in Company A acquiring a relevant interest in 25 per cent of the interests in Scheme 2
- the exemption for downstream acquisitions in item 14. ASIC has outlined that its approach to item 14 is to uphold the policy behind the exemption while also taking into account the investor protections afforded to downstream shareholders. The policy behind the exemption is to:
- preserve the free flow of shares in widely-held entities listed on appropriate exchanges;
- prevent companies constructing a takeover defence through the acquisition of strategic parcels in downstream companies; and
- enhance international comity through the removal of obstacles to primarily foreign business transactions;
- the scope of the item 14 exemption and when ASIC may apply to the Takeovers Panel for a declaration of unacceptable circumstances even though the exemption in item 14 is satisfied;
- when ASIC may grant relief to allow downstream acquisitions which do not satisfy the exemption in item 14. Generally ASIC may grant relief subject to appropriate conditions if they are satisfied that the policy and investor protections identified in RG71 will be upheld;
- the conditions that may apply to ASIC relief, which may include:
- a downstream bid condition; or
- standstill and voting conditions; and/or
- other types of conditions (including sell-down condition) instead of, or in addition to, the above conditions on a case-by-case basis; and
- how to apply for ASIC relief in relation to a downstream acquisition where the exemptions are not satisfied, the information applicants should provide in their application to ASIC, and when ASIC may consult with the downstream company, shareholders of the company or other potentially adversely affected third parties.
What do the changes mean for you?
RG71 provides useful guidance to companies, listed managed investment schemes, investors and their advisors who are involved in, or affected by, downstream acquisitions. Entities considering completing a downstream acquisition should carefully consider the implications of ASIC’s revised policy and guidance in RG71.
ASIC recently proposed further changes to takeover laws, including the so called ‘creep provisions’.
The creep provisions provide an exemption from the general prohibition concerning acquisitions of relevant interests in voting shares over 20 per cent. The exemption permits a major shareholder to increase its voting power in the target by a net three per cent over a six month period.
The creep provisions are commonly used by major shareholders who wish to gradually increase their share holding without having to pay the premium normally attached to a takeover bid. ASIC chairman Greg Medcraft has labelled the creep provisions as “an anachronism” that allows “takeover by stealth” when there is a change of control.
One option ASIC is considering is to limit potential suitors to acquiring one per cent of a company every six months and capping a suitor’s ability to ‘creep’ at 30 per cent. The proposed 30 per cent cap would increase the time taken to move from 19.9 per cent to 30 per cent of a company from two years to five. Under the proposals, once the cap is breached it would become mandatory for the acquirer to make a full takeover bid.
A further change ASIC has proposed is the introduction of UK style ‘put up or shut up’ provisions, which forces a bidder to make a firm takeover offer within a limited period of time.
ASIC formally submitted these proposals to Treasury on 14 July 2012. Treasury is currently considering the proposals and will be responsible for determining whether they are appropriate to recommend to the government to change the law.We will monitor these proposals and provide further updates.