ASIC has recently re-written its long outdated Regulatory Guide 74: Acquisitions approved by members. It has released a revised draft regulatory guide as an attachment to a consultation paper giving the market an opportunity to comment on its proposed new guidance.
Regulatory Guide 74 gives guidance on ASIC's views in relation to the application of item 7 of section 611 of the Corporations Act.
Item 7 allows for a person to acquire shares beyond the 20% takeovers threshold in section 606 provided that the transaction is approved by non-interested shareholders. It facilitates companies making large placements. It is also a useful mechanism for a large shareholder to exit its position by selling to one party avoiding the negative effect on share price involved in a widely dispersed market sell down and without the expense to purchaser and target involved in a takeover bid.
The re-write seeks to update the guidance to bring it up to date with current legislation and "policy developments". The old guidance was written in 1994, prior to the amendments to the Corporations Act which applied item 7 to all acquisitions of relevant interests (not just those arising from allotments or purchases). It was also prior to the introduction of trust schemes with their reliance on a modified item 7. The re-write reflects how ASIC policy has changed in reaction to current market practice. ASIC has said it has released the re-write as a consultation paper because it has been so long since the original guidance was released, not because there are any major policy shifts.
The re-write leaves the policy settings in the old guidance largely unchanged. For example, there is an emphasis on disclosure and making sure shareholders are fully informed when it comes to voting on acquisitions. The revised guidance still allows for directors to choose between providing shareholders with analysis as to whether the transaction is fair and reasonable themselves, or by engaging an independent expert to provide that analysis.
However, there is one particular change which, while it may appear minor, could have a significant impact on the timetable on which transactions are completed. The change relates to formalising ASIC's policy that draft explanatory memoranda (EMs) be provided to it 14 days in advance of printing for detailed review and comment.
Item 7 requires non-interested shareholders to approve the acquisition in a general meeting. In connection with the shareholders meeting, shareholders are provided with a notice of meeting (ie an EM) that discloses all material information needed to make an informed decision in relation to the proposal for them to vote. The new policy contains a "strong encouragement" that the EM be provided to ASIC in draft form at least 14 days before it is proposed to be sent for printing and despatch. For large listed companies, the process of finalising an EM is a substantial process that involves detailed review by advisors and considerable coordination. In this respect, the proposed new policy seems to add unnecessarily to deal timelines.
ASIC says that it asks for the EM to be provided in draft form prior to dispatch to printers so that the entity can resolve any issues that ASIC may have with the disclosure and reduces the risk that ASIC will need to take action that may disrupt the acquisition. The 14 day ASIC review period is the same period which ASIC has for review of EMs for schemes of arrangement. However, unlike the case in schemes, the legislation does not mandate any ASIC review period and does not give ASIC any formal role in item 7 transactions. Instead the legislation on item 7 provides for, in effect, the same position for target statements in takeover bids which are provided to ASIC in final form at the same time as they are provided to shareholders. It isn't immediately clear why a different regime should be applied to transactions of this nature.
Unlike the case with schemes, ASIC has less scope in item 7 transactions, to enforce its views on the target company if the target refuses to change the notice of meeting to comply with ASIC's wishes. If ASIC were to take action, it would most likely be via the Takeovers Panel. Since 2005, ASIC has made 1 application to the Panel which did not relate to an item 7 acquisition.
From time to time ASIC asks for supplementary disclosure to shareholders if it considers the EM could better disclose certain matters. The entity may agree to this without things going further. This is typically provided by way of an ASX announcement providing the supplementary disclosure although it may also be necessary to send the supplementary disclosure to shareholders. Other than where a substantial re-write of the EM is needed, this would appear to be the most efficient method for resolving such issues.
The market will watch with interest to see how ASIC reacts to submissions and commentary on its consultation draft, and remains hopeful that the commercial consequences of this well-meaning amendment to the policy are properly understood.
The re-write also details ASIC's policy on the relief it gives for the takeover of managed investment schemes (MIS) that rely on item 7, often referred to as 'trust schemes'.
ASIC modifies item 7 to facilitate its use to effect a takeover of a MIS. The relief is usually technical, that is, the modification typically allows for all unit holders to vote on the resolution approving the transaction even though item 7 says that anyone whose securities are to be purchased under the proposed transaction cannot vote. In a takeover, given that all unit holders are sellers, this would, absent relief, prohibit all unit holders from voting. ASIC accepts that a trust scheme is a valid alternative to a takeover bid because the scheme of arrangement provisions do not apply to MIS and so modifies the law to facilitate these transactions.
ASIC has said in its draft guidance that when considering whether to give relief, it will consider factors such as whether the transaction is designed to undermine the policy of the takeovers provisions and whether the trust scheme appears to be properly conducted with appropriate voting arrangements and disclosure. ASIC considers similar factors when it conducts its reviews of company schemes of arrangement.
ASIC has for some time been granting the relief described in the new draft regulatory guide and there are no surprises for the market in terms of ASIC's practices here. Nevertheless, it is a good thing to see ASIC's views expressed formally. The new guidance is also drafted with reference to the Takeovers Panel's existing Guidance Note 15: Trust Scheme Mergers. If the re-write is adopted, it seems the market will now have two sources of guidance for trust schemes. While guidance for market participants is usually always welcomed, if one started with a blank page on regulation and regulatory guidance, it is doubtful that an ideal position would be to have separate guidance from 2 different regulators on the same topic!