This is a service specifically targeted at the needs of busy non-executive Directors. We aim to give you a “heads up” on the things that matter for NEDs in the week ahead – all in two minutes or less.

In this edition, we consider the independent review of ASX’s proposed CHESS replacement software, ASX’s July activity report and ASIC’s extension of transitional relief for foreign financial services providers. We also consider the $650m Federal Court action against Mercedes-Benz and the judgment in favour of Bell Potter Securities in Keybridge Capital Ltd v Bell Potter Securities Ltd [2022] NSWSC 1022.

In Over the Horizon, we consider the potential impact of the International Sustainability Standards Board’s first two draft sustainability-related disclosure standards.

GOVERNANCE & REGULATION

Independent review of proposed new CHESS software. ASX recently announced a further delay to the CHESS replacement project, with consulting firm Accenture to conduct an independent review of progress to date and action items for the future. The aim of the review is to provide the market and regulators with a new go-live date and assist ASX with its planning process. ASIC and the RBA have monitored the CHESS replacement project closely and in November 2021, imposed an additional requirement that an independent review be conducted to assess the fitness for purpose of the new system. ASX will be required to publish the independent review report, provide all independent assurances to the regulators and provide senior executive and Board attestations. ASIC and the RBA must be satisfied that the replacement software, at a minimum, meets the requirements of system availability, resilience, recoverability, performance and security. See media release.

ASIC extends transitional relief for foreign financial services providers. Transitional relief allowing foreign financial services providers (FFSPs) to provide financial services to Australian wholesale clients without holding an Australian Financial Services Licence (AFSL) was due to sunset in March 2023. ASIC has however announced that it will extend the transitional relief for a further 12-month period, until 31 March 2024. This means that FFSPs holding a foreign AFSL issued by ASIC will be able to continue to operate their business in Australia until the extended sunset date. ASIC has stated that it will continue to consider individual temporary licencing relief for entities unable to rely on the transitional relief during the period also. See media release.

ASX activity down on PCP. A combination of COVID-induced loose monetary policy and Government stimulus was believed to have largely accounted for the boom in ECM activity (particularly new IPOs) in the second half of 2021. The change in sentiment is revealed in ASX’s July activity report showing a 10% decline in total capital raised over the prior corresponding period. Notably, primary issuance declined a huge 95% (from just under $6 billion to less than $300 million), but secondary raisings nearly doubled (from $4.2 billion to $8.6 billion).

LEGAL

Australian car dealers take Mercedes-Benz to the Federal Court. Late last year, a group of 38 Mercedes-Benz dealerships commenced proceedings against Mercedes-Benz in the Federal Court for $650 million in compensation for conduct in relation to the change to a fixed-price direct-to-consumer sales model implemented in January 2022. Under the new sales model, Mercedes-Benz retains ownership of its cars while dealerships act as agents and are required to sell cars at a fixed price for a set commission. Before the new sales model, dealerships purchased cars directly and could choose the on-sale price. The dealerships allege that Mercedes changed its sales model to strip profits away from them following a sham consultation process in breach of the franchise code’s good faith provisions and in breach of the Australian Consumer Law. Deloitte conducted modelling of the impact of the change on car dealerships in 2019 and found that in the case of one dealer, profits declined by more than 50%. The trial commenced on 2 August 2022, with Mercedes-Benz stating that it will defend its position in Court and that the new transparent sales model has been embraced by customers in Australia, as it has been in other countries in Europe previously. The case looms as one of the most important franchising cases in Australian history.

NSW Supreme Court finds one-minute phone call insufficient to indicate intention to be bound to $10m purchase of shares. In Keybridge Capital Ltd v Bell Potter Securities Ltd [2022] NSWSC 1022, Keybridge Capital Limited (Keybridge) alleged that during a one minute and 18 second phone call in 2015, a representative of Bell Potter Securities Limited (Bell Potter) committed its client to purchasing $10m worth of shares in Molopo Energy. Justice Rees however, held that the phone call was insufficient to demonstrate a binding intention to be bound to the purchase given that several preconditions would have needed to be met before the trade could complete and Bell Potter was not in receipt of any funds to support the purchase. Her Honour stated, ‘it cannot have been imagined…that by this conversation, [the representative] was taking the risk that he would have to fund a $10m deal’. The Court was asked to consider the meaning of the word ‘firm’ in the context of a ‘firm bid’, which Keybridge claimed had a specific technical meaning within the investment industry and resulted in a binding commitment. Her Honour was not convinced that ‘firm’ had a specific technical meaning and that without more, did not amount to a binding intention. Her Honour considered the magnitude and subject matter of the transactions weighed against a conclusion that the conversation was to have immediate legal effect and the fact that the number of shares to be purchased was never agreed also led to the conclusion that there was no binding agreement. Further, Her Honour concluded that Keybridge had not suffered any loss as it pursued a different strategy of acquiring Molopo shares. See decision.

OVER THE HORIZON

Consultation closes on ISSB sustainability standards. The consultation period for the first two draft standards prepared by International Sustainability Standards Board (ISSB) has closed, with over 500 submissions received, the bulk of which are broadly supportive of the new standards. However, in its submission to the ISSB, the AICD has noted that compliance with the standards may expose Australian companies and Directors to heightened legal risks, as there is generally no “safe harbour” provisions for some of the forward-looking disclosures required under the standards, including in circumstances which may fall short of the “reasonable basis” implicitly required under s.769C of the Corporations Act 2001 (Cth). Directors should take stock of their internal capability to comply with the new standards including (under draft standard IFRS S2 “Climate-related Disclosures”) the obligation to disclose absolute greenhouse gas emissions across Scope 1, 2 and 3 (as defined in the Greenhouse Gas Protocol Corporate Standard). Directors should also note the potential for climate and sustainability-related disclosures to provide a catalyst for M&A activity in the future, as investors gain access to more objective means to assess bidders’ and targets’ relative exposure to sustainability-related risks and opportunities.