Corporate Finance Update - Issue 19

Issue 19, October 2024

Reporting entities should prepare for sustainability reporting

ASIC urges Australian businesses to proactively engage with the mandatory climate reporting requirements contained in the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024, which received Royal Assent on 17 September 2024. 

From 1 January 2025, many large Australian businesses and financial institutions are required to prepare an annual sustainability report containing mandatory climate-related financial disclosures. The sustainability report will be required as part of an entity’s annual reporting obligations, in addition to financial, directors’ and auditor’s reports.

ASIC is responsible for administering the sustainability reporting requirements in the Corporations Act 2001. To assist reporting entities, ASIC has established a dedicated sustainability reporting page to provide information about the new regime and how ASIC will administer it. We encourage reporting entities to bookmark this page as it will be updated with further information and regulatory guidance.

ASIC will consult with stakeholders in the near future on issuing new and/or updated regulatory guidance to help them comply with their sustainability reporting obligations. This will include specific guidance about ASIC’s approach to relief from the sustainability reporting obligations as well as how the regime will interact with existing legal and regulatory requirements.

This is a significant reform that will have far-reaching implications for many stakeholders. ASIC recognises there will be a period of transition as organisations develop the capabilities required to comply. We will take a proportional and pragmatic approach to supervision and enforcement as industry adjusts to these new requirements.

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Product issuers must improve distribution practices to ensure DDO compliance 

We remind issuers that, under design and distribution obligations (DDO) in Part 7.8A of the Corporations Act 2001 (Corporations Act), they must take reasonable steps that will, or are reasonably likely to, result in financial product distribution consistent with their target market determination: section 994E(1).

We recently called on product issuers to review their distribution practices for DDO compliance, as poor product design and distribution puts consumers at risk of financial harm.

This call to action follows ASIC’s latest DDO surveillance which looked at product issuers’ obligation to take reasonable steps to support appropriate distribution of their products. We found several areas for improvement. See Media Release (24-200MR) ASIC calls on product issuers to review distribution practices for DDO compliance (10 September 2024) and Report 795 Design and Distribution obligations: Compliance with the reasonable steps obligation (REP 795).

We also issued a DDO interim stop order on Candy Club Holdings Limited. We were concerned that if Candy Club issued the product to a retail client consistent with Candy Club’s distribution channels and conditions, it would not be reasonable to conclude that the retail client would likely fall within the company’s target market. See Media Release (24-202MR) Two interim stop orders placed on Candy Club (16 September 2024). 

Issuers need effective arrangements to manage the risks identified in the distribution of their product. See Regulatory Guide 274 Product design and distribution obligations (RG 274) at RG 274.140–RG 274.146. Ordinarily, an issuer would need to have considered the appropriate distribution channels and methods for their product before they draft a prospectus and before it is lodged with ASIC.

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AFS licensee to cease providing independent expert reports on corporate transactions

ASIC has accepted a voluntary variation of the Australian financial services (AFS) licence of AP Lloyds Pty Ltd, excluding the firm and its corporate authorised representative, Advisory Partner Connect Pty Ltd, from providing advice as an independent expert.

The variation means AP Lloyds and Advisory Partner Connect cannot prepare or provide independent expert reports (IERs) and related opinions or valuations in connection with corporate transactions, including takeover bids, corporate schemes of arrangement, related party transactions and corporate restructures.

The variation follows ASIC’s concerns that various IERs prepared by Advisory Partner Connect did not comply with:

• policy guidance in Regulatory Guide 111 Content of expert reports (RG 111), including the suitable selection, application, and accurate disclosure of: 
  • valuation approach, methodology and inputs, and 
  • transaction opinion, or 
• policy guidance in Regulatory Guide 112 Independence of experts (RG 112) relating to the engagement of technical specialists and review of their reports.

Given the deficiencies identified within the reports, ASIC had concerns about AP Lloyds’ competence to provide independent expert advice and ability to adequately supervise its authorised representative, as part of its general obligations as an AFS licensee.

An independent expert plays a critical role as gatekeeper in a corporate transaction. IERs are prepared for the protection of shareholders and we expect independent experts to comply with ASIC policy regarding content and independence. ASIC will continue to monitor the conduct of AFS licensees and review IERs prepared for corporate transactions. We will consider regulatory action if there are material issues with the content of an IER or if we have concerns about the independence of an expert.

• Read the media release.

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How to avoid risks with shareholder communications during schemes

The Supreme Court of New South Wales has recently considered the implications of certain shareholder communications in the Vonex Limited and Ansarada Group Limited schemes of arrangement (see Vonex Limited [2024] NSWSC 1075 and Ansarada Group Limited [2024] NSWSC 1121). These decisions helpfully remind the market of the importance of informing the Court of communications, both proposed and made, with scheme shareholders.

In the Vonex scheme, the proponent proposed to have the company secretary answer calls from shareholders without an established call script. While the Court accepted Vonex’s proposal, which included ASIC’s request of keeping a register of all inbound calls received, it required the company to provide evidence of the content of those calls and emphasised the scheme proponent’s ex parte disclosure obligations for the approval hearing.

In the Ansarada scheme, the Court considered numerous communications with shareholders that had not been foreshadowed at the first court hearing. The Court indicated that the communications should have been drawn to its attention at that hearing to ensure they did not affect the integrity of subsequent steps taken in relation to the scheme.

In order to discharge its role, ASIC requires scheme proponents to disclose the nature of intended communications with shareholders to ASIC before the first Court hearing.

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Promises to issue shares prior to attracting the takeovers prohibition

In Ringers Western Limited [2024] ATP 8, the Takeovers Panel considered a novel question of whether a promise to issue shares by a non-Chapter 6 entity may be performed without relying on a section 611 exception when, at the time of the issuance, the entity has attracted the jurisdiction of Chapter 6 and the section 606 prohibition applies.

The Panel agreed with ASIC by answering that question in the negative, making it clear that Chapter 6 cannot by displaced because of a contract entered into at the time when the entity was not subject to Chapter 6.

The Panel’s decision confirms the overriding operation of Chapter 6, and suggests that in similar circumstances, parties may wish to seek fresh approval under an item 7 resolution to avoid a potential declaration of unacceptable circumstances.

ASIC reminds the market of our policy position that fresh approval under item 7 should be sought if:

• a change in circumstances happens after approval has been obtained but before the acquisition is completed, and
• the change means the transaction is materially different from the one approved by members.

The Panel’s decision was affirmed in Ringers Western Limited 02R [2024] ATP 17.

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What significant global entities need to know about financial statements

We remind significant global entities (SGEs) that the financial reporting obligations in Part 2M.3 of the Corporations Act 2001 require lodgement of an annual financial report either with ASIC under Form 388 Copy of financial statements and reports (Form 388) or, if listed, via the market operator. 

Although SGEs are required by law to lodge general purpose financial statements with the Australian Taxation Office (ATO) – which are then provided to ASIC by the ATO and made publicly available from the company register as document type ‘SGEF’ (our code for Significant Global Entity Financials) – provision to ASIC by the ATO does not fulfil the lodgement requirements under the Corporations Act.

An entity is an SGE if it is any of the following:

• a global parent entity (GPE) with an annual global income of A$1 billion or more
• a member of a group of entities consolidated for accounting purposes as a single group and one of the other group members is a GPE with an annual global income of A$1 billion or more, or
• a member of a notional listed company group and one of the other group members is a GPE with an annual global income of A$1 billion or more.

For more information see Companies and organisations on the ASIC website.

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Financial reporting relief for companies and other bodies under external administration

We remind external administrators and companies under external administration relying on relief under ASIC Corporations (Externally-Administered Bodies) Instrument 2015/251 to monitor compliance with the legislative instrument’s requirements.

Since 6 October 2021, ASIC Instrument 2015/251 has provided conditional relief to companies in external administration by:

• extending the time for a company to prepare and lodge financial reports by a minimum period of six months and a maximum period of up to 24 months (deferral relief), and
• extending the time for a public company to hold an AGM until two months after the deferral relief ends.

If a voluntary administration is followed by a deed of company arrangement, the relief in ASIC Instrument 2015/251 will continue up to 24 months after the voluntary administration commenced, as long as the deed administrator exercises all or most of the management functions and powers of the company.

Companies that are still under external administration after the end of the deferral relief must comply with any previously deferred financial reporting obligations and any forthcoming financial reporting obligations, unless they have obtained further individual deferral relief before the obligations fall due.

We may refuse to grant relief from any continuing obligations to prepare and lodge financial reports where an external administrator has failed to monitor compliance with the legislative instrument’s requirements.

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Removal of ‘Draft’ or ‘Confidential’ watermarks and placeholders

We remind companies and advisers that related party meeting materials submitted for lodgement with ASIC under Chapter 2E of the Corporations Act 2001 must be in final form. ‘Draft’ or ‘Confidential’ watermarks or headers should not be included in the notice of meeting or explanatory material. Expert reports, valuations and proxy forms must also be in final form and submitted for lodgement with the notice of meeting and explanatory statement. These documents become public documents after they are lodged through the ASIC Regulatory Portal.

Placeholder text should only be used for information that is not material information. We consider material information to include the date, place and time of the meeting. We also consider that material information will generally include any dollar amounts relevant to the value of the financial benefit and to other information shareholders require to decide if the financial benefit to the related party is in the best interests of the company. For example, placeholder text should not be used where trading prices or volume-weighted average price (VWAP) calculations are to be provided. Trading prices and VWAP calculations should be provided based on information available as at the date the meeting materials are submitted to ASIC for lodgement.

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