Corporate Finance Update – Issue 3
Issue 3, December 2020
We have extended the temporary relief for capital raisings due to the continuing uncertain impacts of COVID-19.
The capital raisings relief, originally announced on 31 March 2020, enables certain ‘low doc’ offers (including rights offers, placements and share purchase plans) to be made to investors without a prospectus, even if they do not meet all the normal requirements.
ASIC has registered the ASIC Corporations (Amendment) Instrument 2020/862, which means:
- the earlier amendment to the ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 will now be repealed on 1 January 2021 (instead of 2 October 2020)
- the ASIC Corporations (Trading Suspensions Relief) Instrument 2020/289 will now be repealed on 1 January 2021 (instead of 2 October 2020).
Since our last update, we raised concerns with issuers including:
The need for balanced disclosure when including financial forecasts – We required a company to remove a ratio from its key information section which valued the company on the basis of a multiple of gross transaction value. We are of the view that the inclusion of this type of single headline ratio may mislead potential investors. Disclosure should be balanced, and other ratio analysis based on audited or reviewed financial statements should be included in the offer document.
Use of non-IFRS financial information – We provided guidance to a prospective issuer that prominence should not be given to management’s view of ‘underlying profits’, which were derived from the pro-forma financial statements. We accept the use of pro-forma financials that adjust for one-off costs, transactions and capital structure adjustments related to the IPO. However, we do not consider it appropriate to emphasise management’s view of profits (which contained further adjustments to the financials beyond the pro-formas) throughout a disclosure document.
On 20 October 2020, we made a determination which requires Smiles Inclusive Limited (Smiles) to issue a full prospectus if it wishes to raise funds from retail investors.
Our decision was based on Smiles’ failure to lodge a financial report, directors’ report and auditor’s report for the half-year of the company (ended 31 December 2019), within 75 days, as required under the Corporations Act 2001.
We consider the ability to use a reduced-disclosure prospectus a privilege, dependent on compliance with other aspects of the law, including that companies meet their ongoing disclosure obligations.
Where a company fails to comply with its periodic disclosure obligations in a full, accurate and timely manner, we will intervene to ensure that retail investors are protected.
- Read the media release
Following recent inquiries, we remind companies that we will not accept prospectuses for lodgement where the company is still in the process of converting to a public company.
Proprietary companies are prohibited (under section 113(3) of the Corporations Act 2001 (the Act)) from engaging in any activity that would require disclosure to investors under Chapter 6D of the Act, except for an offer of shares to existing shareholders or to employees of the company or its subsidiary.
We take a broad view of what constitutes ‘any activity’ for the purposes of section 113(3) of the Act. We consider that once a prospectus is lodged and is generally available to retail investors, the company is making offers of its securities for the purposes of Chapter 6D. This is the case even where the prospectus states that the offer is only ‘open’ at some later date after the company has converted to a public company.
If we receive a prospectus from a proprietary company (other than as permitted by section 113(3)(a) or (b)), we will refuse to accept lodgement of the document, seek an injunction for a contravention, or proceed to issue a stop order on the document.
We remind issuers that, in 2018, we issued ASIC Corporations (ASIC Close Down Period) Instrument 2018/1034. This instrument continues to operate to automatically extend the exposure period to 14 days for disclosure documents lodged between 5 pm on the last business day before 18 December and 9 am on the first business day after 1 January. Issuers should consider this carefully when lodging fundraising documents during the months of December and January.
Since our last update, we intervened in merger and acquisition activities when we had concerns about the structural or conduct elements of the transactions, including:
Election of consideration on contingent events – In a recent scheme of arrangement, shareholders were able to elect to receive cash or scrip consideration subject to scale back arrangements. There was also consideration that was contingent on pre-conditions occurring before the scheme meeting.
We insisted that shareholders be given sufficient time to submit proxies following the announcement of both the indicative consideration election results and an announcement about whether any contingent consideration was payable. This required the scheme timetable to be revised.
It is important that scheme proponents structure timetables to ensure shareholders have enough time after receiving updates on consideration to make an informed decision on how they should vote, including where they choose to vote by proxy.
‘No increase’ statements – A bidder recently made a ‘no increase’ statement subject to a higher competing offer qualification. Shortly after this, a competing bidder increased their offer price to a value equal to the first bidder’s offer. The target issued an announcement which created uncertainty in the market as to whether the first bidder’s qualification had been enlivened and, if so, whether that bidder was able to depart from their ‘no increase’ statement.
In our view, the first bidder was not entitled to do so, and we intervened to ensure the first bidder clarified their position to the market immediately to remove any uncertainty. The competing bidder also made an application to the Takeovers Panel, which it withdrew after the first bidder clarified its position to the market. We remind parties to be mindful of the disclosures they make, and to what extent it may create uncertainty in the market.
Assessment of fairness – We urge experts to carefully consider how fairness is assessed, particularly regarding any nuances in how any value ranges themselves are derived. In a recent scrip merger transaction, we raised concerns with the expert’s fairness assessment. The fairness assessment did not appear to consider whether the entirety of the value ranges (e.g. for the target company and the merged entity scrip) were all equally possible points of value and comparison.
In this matter, it appeared inappropriate and internally inconsistent to assume that you could be at one point in the value range of the target and compare this to a point in the merged entity scrip value range that implied a different value for the target itself (noting the merged entity valuation was itself a summation of the value of the target and bidder). Our action resulted in the expert changing their fairness opinion from ‘fair’ to ‘not fair’.
Following our consultation last year, we acted to protect retail investors by modifying the Corporations Act 2001 (the Act). The modification (set out in ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734) prevents the offer of stub equity scrip in a proprietary company being made to large numbers of retail target holders in takeover bids or schemes of arrangement.
Proprietary companies are not subject to the same governance and disclosure requirements as public companies, and offers of securities in proprietary companies to the general public are not usually permitted. The modification of the Act:
- upholds the legislative intent of the restrictions on proprietary companies
- ensures that retail investors benefit from the higher levels of regulation available in public companies.
We did not proceed with a proposal to restrict offers of stub equity in public companies that use mandatory custodial structures. However, we have included anti-avoidance measures to ensure that these types of public companies do not convert to proprietary companies after the control transaction is completed.
Report 669 Response to submissions on CP 312 Stub equity in control transactions highlighted our better practice considerations regarding disclosure for stub equity offers and stated our intention to continue monitoring developments in disclosure practices and raising concerns with deficient disclosure.
We recently updated Regulatory Guide 6 Takeovers: Exceptions to the general prohibition and Regulatory Guide 111 Content of expert reports (RG 111) confirming our practice on when we will give takeover relief for share transfers under section 444GA of the Corporations Act 2001.
Section 444GA allows shares of a company in administration to be transferred by an administrator as part of a deed of company arrangement (DOCA). Since 2014, we have received more than 15 applications for relief in matters involving section 444GA share transfers via a DOCA.
Our updated guidance explains that before we will give Chapter 6 relief for share transfers under section 444GA, we will generally require:
- explanatory materials to be provided to shareholders, including an independent expert’s report (IER) prepared on a non-going concern basis in accordance with RG 111 demonstrating that shareholders have no residual equity in the company
- the IER to be prepared by an independent expert other than the administrators in accordance with Regulatory Guide 112 Independence of experts.
We were recently made aware of releases of research and analysis which disclosed prospective information. We remind research analysts (analysts) of their obligation to ensure they do not make misleading statements if they disclose prospective information.
Prospective information may include:
- mineral resource or reserve estimates, in circumstances where the subject company has not declared the resource or reserve estimate
- production targets based on such estimates and/or inferred resources
- other forward looking or prospective information (e.g. estimates of project NPVs).
As noted in Regulatory Guide 264 Sell-side research, analysts require reasonable grounds if they wish to disclose prospective information. Information Sheet 214 Mining and resources: Forward-looking statements also provides guidance that prospective information should not be disclosed unless underlying assumptions have a reasonable basis.
We consider it highly unlikely an analyst will have a reasonable basis to make a mineral resource or reserve estimate in circumstances where the subject company has not determined it appropriate to declare or update a resource or reserve estimate. This is because:
- an analyst is highly unlikely to have the same level of information as the company
- the research and analysis will not typically comply with the JORC Code, including being accompanied by the additional disclosures required under the JORC Code.
We will extend the deadlines for both listed and unlisted entities to lodge financial reports under Chapters 2M and 7 of the Corporations Act 2001 by one month for certain balance dates up to and including 7 January 2021.
The extension will assist entities whose reporting processes take additional time due to the impacts of COVID-19. If entities can lodge within the statutory deadlines, they should continue to do so.
We have also adopted a ‘no action’ position where public companies do not hold their annual general meetings within five months after the end of financial years that end from 31 December 2019 to 7 January 2021, but do so up to seven months after year end. This will allow additional time for distribution of financial reports to members prior to the AGM for companies that relied on our extension of time for lodgement of financial reports.
- Read the media release which provides a summary of the extended deadlines.
We have issued an instrument to extend the ability to electronically sign and lodge by email deeds of cross-guarantee, assumption deeds and certificates until 21 March 2020. The instrument aligns with the relief outlined in the Treasurer’s recent determination.
To take advantage of the relief, lodging parties must comply with the terms of the ASIC email lodgement service user agreement.
Deeds may temporarily be executed or signed using a cloud-based signature platform like DocuSign while the instrument determination is in force.
We have updated Information Sheet 24 Deeds of cross-guarantee to provide additional guidance regarding the security and protection of personal information available to the public on deeds that are signed and lodged electronically using DocuSign or a similar platform.
We have written to a number of large corporations in Australia about the transition from the London Inter-bank Offered Rate (LIBOR) to alternative reference rates (ARRs), highlighting the need to plan and encouraging them to start the transition early.
LIBOR is a widely used interest rate benchmark and is referenced in more than US$350 trillion worth of financial contracts globally. It’s expected that LIBOR will cease to be published after the end of 2021.
We recommend that corporations assess the extent to which their organisations are exposed to LIBOR and how the transition can affect their business. Conducting a LIBOR ‘stocktake’ and reaching out to banks and financial services providers are some of the recommended actions that will allow corporations to make informed decisions during the transition process.
Corporations are encouraged to find more information from industry-led groups such as the:
- Sterling Risk-Free Reference Rate Working Group
- Alternative Reference Rates Committee
- Euro Working Group.
Our financial benchmarks webpage contains updates about LIBOR transition in Australia.
Treasury has extended temporary regulatory relief with respect to:
- continuous disclosure provisions that apply to companies and their officers for a further six months until 23 March 2021. In response, companies may hold back from making forecasts of future earnings or other forward-looking estimates, limiting the amount of information available to investors during this period
- insolvency and bankruptcy protections until 31 December 2020. Regulations will be made to extend the temporary increase in the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive. The changes will also extend the temporary relief for directors from any personal liability for trading while insolvent.