ASIC is proposing to update its Regulatory Guide 74 which concerns the takeovers exception for acquisitions approved by members.
The proposed update focuses on:
- Managed investment schemes – relief from voting restrictions will only be granted if ASIC is satisfied that the principles of Chapter 6 of the Corporations Act 2001 (Cth) (Corporations Act) are not undermined,
- Independent expert reports – directors should provide independent expert reports to satisfy their disclosure obligations,
- Material changes – supplementary material should be provided to members at least 10 days prior to the meeting to approve the acquisition,
- Documents – notices of meetings and accompanying material should be provided to ASIC 14 days prior to distribution, and
- Voting restrictions – beneficial shareholders may be relieved from voting restrictions in certain circumstances.
On 26 May 2011, ASIC released a proposed update to its guidance on the takeovers exception for acquisitions approved by members (item 7 of section 611 of the Corporations Act (Item 7)). This exception allows a person to acquire more than 20% of an entity with the approval of the other members. It is also commonly used to implement ‘trust scheme’ mergers.
ASIC’s proposed update to the current guidance (Regulatory Guide 74):
- reflects the changes to the law since the initial 1994 guidance (which is now well out of date)
- extends the scope of the guidance to trust schemes, and
- provides greater detail on disclosure/information requirements.
The updates are generally consistent with ASIC’s current practices and the views it has expressed in other recent policy documents.
Relief for trust schemes
Because of voting restrictions under Item 7, a person seeking to acquire control of a managed investment scheme by way of a trust scheme requires ASIC relief to enable the members to vote on the proposed acquisition. ASIC is now expressly setting out its position that it is only prepared to give this relief if it is satisfied that the principles and protections in Chapter 6 of the Corporations Act are not undermined.
ASIC recognises that implementing a trust scheme may also require relief from other technical provisions of the Corporations Act, such as the inadvertent provision of ‘financial services’, and the application of the withdrawal offer procedures.
Independent expert reports
Item 7 requires the directors of the target entity to provide to members information that is material to the decision on how to vote. ASIC’s current policy states that these disclosure obligations may be satisfied by the provision of an independent expert report or a detailed directors’ report on the proposed transaction.
The proposed guidance is stronger than the current policy, as it notes that directors should provide an independent expert report or a detailed directors’ report.
ASIC also emphasises that there are only limited circumstances where not using an independent expert report will be acceptable, but that:
- the use of independent expert reports has become ‘standard market practice’
- ASIC will closely scrutinise directors’ reports, and
- there is ‘significant risk’ of inadequate disclosure where directors’ reports are used.
Material changes to transaction
Where a material change has occurred after dispatch of the notice of meeting but prior to the meeting, the target entity is required to provide members with supplementary information. ASIC has stated that this information should be provided at least 10 days before the meeting (although it acknowledges that a shorter notice period may be acceptable in certain circumstances).
Where a material change has occurred after the meeting approving the acquisition, such that the transaction is materially different to what was approved (for example, an acquirer increasing its voting power beyond the level specified in the notice of meeting), ASIC indicates that fresh approval of members should be sought.
Provision of draft documents to ASIC
ASIC strongly encourages draft notices of meeting and accompanying explanatory material to be provided to it 14 days before the documents are printed for dispatch to members (or an even longer period where relief is sought). This is more forceful than the current policy, which does not include a timeframe.
However, it is unclear whether any supplementary information provided to members needs to also be provided to ASIC, and it would be useful for ASIC to clarify its expectations in this regard.
Voting restrictions on trustees and nominees
Item 7 prevents the acquirer (or their associates) from voting in favour of the transaction. This restriction can be problematic where a precluded person holds shares on trust or as a nominee for a third party that would be entitled to vote if they held the shares directly.
In the proposed guidance, ASIC confirms its practice of granting relief to remove this restriction where the beneficial holder:
- is not an associate of the trustee or nominee
- would be entitled to vote if they held the shares directly, and
- directs the trustee or nominee to vote in favour of the resolution.
Comments on the proposed guidance are due by 1 August 2011.