New Law to Encourage Informal Restructuring
On 28 March 2017, the Federal Government released its long awaited draft legislation that is designed to encourage restructuring of distressed businesses.
The proposed legislation is open for consultation with the finalised legislation expected to come into effect on 1 January 2018. There are two proposed changes:
- insolvent trading safe harbour – under the proposed changes, directors of companies that may be insolvent will be protected from personal liability for debts incurred where they take a course of action that is reasonably likely to lead to a better outcome for the company and its creditors than a formal administration
- stay to apply to ipso facto clauses – the proposed ipso facto provisions set out in the legislation will prevent parties contracting with a company which enters into a restructuring arrangement from terminating the contract with the company solely due to it entering into a scheme of compromise or arrangement, or voluntary administration.
Once introduced, a safe harbour carve-out should allow for increased opportunities for deal makers to effect restructuring deals prior to a formal insolvency process. There are a number of requirements the directors must meet to ensure they continue to fall within the safe harbour, including appointing 'appropriately qualified advisers' to assist with the restructuring.
The changes to the treatment of ipso facto clauses enhances the going concern value of distressed entities in formal insolvency. It mitigates the risk that the mere fact of a formal insolvency will lead to a loss of key contracts of the restructuring business. It should enhance the ability of deal makers to work with distressed companies to 'pre-pack' restructuring deals which could then be implemented through the voluntary administration process. It will also enhance the prospects of an informal restructuring because the option of formal appointment may be less value destructive to the business.
Trump's Virtual Wall
U.S. President Trump is contemplating the introduction of a border adjustment tax, essentially a tariff, that will impact countries that have large trade surpluses with the U.S. Exporters from Mexico and China appear to be most at risk although there will be impacts on Australian exporters to the U.S. This could be a risk factor for the value of Australian businesses that rely heavily on exports to the U.S. or licenses intellectual property to the U.S.
Trump's view on what is originally a House GOP initiative is still unclear, however our Policy & Regulatory team based in Washington DC think that some form of border tax is likely to be introduced – particularity to help pay for the GOP's plan to lower the federal corporate tax rate from 35% to 20%.
For Australian entities that export to the U.S., the introduction of a border tax would put them at a significant disadvantage when compared to U.S. producers of the same products. The impact will be most largely felt by Australian exporters who currently compete with American manufacturers/producers of like goods and services, as there will be a significant and direct cost benefit of purchasing from U.S. domestic suppliers.
An additional fear is that 'Trump's Virtual Wall' could spark a tit-for-tat response from China – a clear negative for some Australian exporters.
Statements of Intention in a Takeover Context
Statements of intention by market participants have been a feature of takeovers practice for many years. Under the 'Truth in Takeovers' policy, ASIC will hold market participants to their public statements.
Over the last 12 months ASIC has more actively sought to discourage the use of shareholder intention statements because ASIC considers them to be the functional equivalent of a pre-bid agreement. ASIC is concerned that bidders can use intention statements to circumvent the limits on pre-bid agreements by locking in a pre-bid stake beyond 20%.
The Takeovers Panel has made it clear in GN23 that intention statements "can give rise to concerns … particularly where the interests the subject of the statement, when aggregated with the bidders interests, exceed 20%". In its Corporate Finance update in February 2016 and again its report for the period January to June 2016 ASIC reiterated concerns it had with shareholder intention statements. ASIC is actively regulating intention statements in the context of takeovers and schemes in a manner consistent with that stated policy.
ASIC considers that it can be inferred from the mere existence of discussions leading to a statement or the behaviour of the participants prior to a statement, that there is an agreement or understanding between the participants giving rise to a breach of Chapter 6. This is the kind of activity that was considered unacceptable by the Panel in MYOB Limited, Bullabulling Gold and Ambassador Oil 01 (which lead to the greater ASIC proactivity in this area).
ASIC takes this a step further. Because it will hold market participants to their public statements under the Truth in Takeovers policy, ASIC takes the view that even if there is no actual mutual agreement, arrangement or understanding between a bidder and a shareholder, if the bidder knows that the shareholder will make a statement of intention and its bid (or a proposed price rise) is conditional on the statement being made, ASIC may regard that as a 'relevant agreement' and accordingly a breach of section 606 where the interests of the bidder and shareholder aggregate to more than 20%.
Due to ASIC's approach to enforcement, market participants in public control transactions should take particular care in the following circumstances:
- in discussions before a bid is announced, that may lead to a significant shareholder making a statement that it intends to accept the bid or vote in favour of a scheme of arrangement, great care needs to be taken not to reach an understanding between the bidder and the shareholder
- in discussions during a bid or before a scheme vote that may lead to a price rise in a takeover or scheme – similar care should be taken. In particular, it may be problematic if the price increase is to be conditioned on a public statement of support
- in making a statement regarding a shareholder's intention to accept a takeover offer, ensure that the intention is subject to there being no superior proposal. It may be unacceptable circumstances to have an unqualified statement of intent to accept where that statement could preclude a higher offer
- in accepting a takeover bid, ensure that, if a shareholder has made a statement that it intends to accept a takeover offer, subject to there being no superior proposal, that it does not accept the takeover offer early, so as to preclude a higher offer from arising.