Corporate Finance Update – Issue 5

Issue 5, June 2021


Financial disclosure in prospectuses – your questions answered

The compilation and presentation of financial information in prospectuses can be complicated. To assist you, we have prepared answers to some of your frequently asked questions.

Q: Can we disclose total transaction value (TTV) metrics and ratios?

This metric is often used by e-commerce marketplaces and represents the total value of transactions for which the company may earn a fee as revenue. While it is open for issuers to disclose this information, we believe it is appropriate to also disclose the revenue metric derived from the financial statements (which is usually a small fraction of TTV). So if, for example, you disclose an enterprise value (EV)/TTV ratio, you should also include an EV/revenue metric.

Q: Can we realign year-end dates (say from 31 December to 30 June) in the historical financial information to reflect the way we will report going forward?

Yes, so long as the underlying financial information complies with audit requirements and the reporting accountant has performed suitable review procedures.

Q: For roll-up initial public offerings, can we create a special purpose combined set of accounts for the ‘notional group’ rather than have individual accounts audited for each significant acquisition?

Generally, yes, and it has been done from time to time. Of course, the accounts will need to otherwise comply with general purpose reporting requirements for pre-admission disclosure on the ASX.

Q: Can we present the management discussion and analysis (MD&A) financial information section in a due diligence style report format?

Absolutely. Often the presentation of historical and forecast information on the same graphs (for example, revenue and operating margins) can quickly highlight the reasonableness of the underlying assumptions and support concise disclosure.

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Special purpose acquisition companies – are they coming to Australia?

Special purpose acquisition companies (SPACs), commonly known as ‘blank check companies’, have long operated in the United States and their popularity has increased in recent years. SPACs are companies with no commercial operations. They are formed strictly to raise capital through an initial public offering (IPO) to acquire an existing company within a fixed timeframe (usually two years). Shareholders vote on any proposed acquisition and may redeem their interest if they do not want to participate.

We are closely monitoring developments in the United States (and elsewhere). The UK Financial Conduct Authority recently released a consultation paper considering the introduction of a range of investor protection measures for SPACs. The Singapore Exchange also released a consultation paper on SPACs.

Before these types of listings could occur here, rule changes would be required. Together with the exchanges, we would need to be satisfied that any potential commercial benefits would outweigh any possible regulatory detriments. It may be the case that the USA-style model cannot be ‘lifted’ and introduced in Australia without considerable changes to allow for differences in the way our laws and markets operate.

The need for SPACs may not arise in the same way in Australia as other nations. For example, in Australia, forecasts are routinely included in prospectuses (where there is a reasonable basis), we have lower financial thresholds in listing requirements for standard IPOs, and IPOs can be brought to market in quicker timeframes than other overseas jurisdictions.

We have noted a recent cooling in the SPAC market on the back of increased regulatory scrutiny by the US Securities and Exchange Commission, academic research into outcomes for investors and incentives for sponsors, as well as market commentary suggesting that there may be too many SPACs searching for merger targets. We will continue to monitor these developments.

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On-market buy-backs must be carried out in the ordinary course of trading

As noted in Report 612 ASIC regulation of corporate finance: July to December 2018, we remind companies and market participants that on-market buy-backs must truly be ‘on-market’ and carried out ‘in the ordinary course of trading’. Otherwise, the buy-back may be a selective buy-back that requires special shareholder approval.

A recent Markets Disciplinary Panel (MDP) matter considered that the ‘ordinary course of trading’ means trading in strict order of price–time priority, with indifference as to the identity of counterparties and with no pre-agreements or selection of counterparties. This means market participants should conduct buy-backs using orders that do not have participant preferencing enabled (whether through ASX Centre Point orders or Chi-X orders) to avoid the risk of non-compliance with both the Corporations Act 2001 (the Act) and the market integrity rules.

Companies are ultimately responsible for ensuring their on-market buy-backs are conducted lawfully. Companies that fail to adhere to the buy-back procedures in the Act run the risk of contravening the prohibition against self-acquisition of shares.

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Individual voluntary escrow relief

Modification of substantial holding provisions are no longer required

We recently provided relief to facilitate voluntary escrow arrangements under an initial public offering (IPO) in ASIC Corporations (Amendment) Instrument 2020/721. Applicants seeking individual relief for voluntary escrow arrangements will generally no longer need to apply for a corresponding modification to the substantial holding provisions.

Previously, applicants seeking relief to disregard a relevant interest resulting from an escrow arrangement also needed to apply for a corresponding modification to the substantial holding provisions. This ensured that the parties’ obligations under the substantial holding provisions were not affected by the relief to disregard the relevant interest and substantial holder notices were still provided.

Following the new instrument, we can grant relief to disregard the relevant interest arising under voluntary escrow arrangements while still maintaining the parties’ obligations under the substantial holding provisions. Applicants will no longer need to pay an additional application fee for relief from the substantial holding provisions.

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Certain transfers of escrowed securities allowed

Applicants seeking individual relief for voluntary escrow arrangements may now include certain permitted transfers of escrowed securities under the escrow agreements. This follows our relief to facilitate voluntary escrow arrangements under an initial public offering (IPO) in ASIC Corporations (Amendment) Instrument 2020/721.

For individual relief applications, the escrow agreement may now allow a holder of escrowed securities to transfer those securities to another holder where there is no change in beneficial ownership or where there is an exercise of security interests over the escrowed securities.

Voluntary escrow relief will generally only be provided where the relevant escrow agreements meet certain requirements. These requirements are set out in full in Regulatory Guide 5 Relevant interests and substantial holding notices.

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Relief granted to facilitate a voluntary escrow agreement with a term exceeding two years

We recently granted relief in relation to voluntary escrow agreements that extended for two years and five months. We granted the relief where the voluntary escrow agreements proposed a staggered release of escrowed securities on release of the financial reports for the first two full financial years of the company after listing.

Although the escrow agreements extended beyond the maximum limits set out in our policy in Regulatory Guide 5 Relevant interests and substantial holding notices, we were satisfied that the extended length was appropriate because:

  • the ongoing involvement of the founders appeared to be crucial to the business
  • the benefits of allowing the market to fully value the company based on its financial performance over the relevant periods outweighed any increased risk of the escrow arrangements being used as a defensive takeover mechanism
  • the additional five months was due only to the circumstantial timing of the initial public offering and release of the financial reports.

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Mergers and acquisitions

Declaring dividends as consideration in schemes of arrangement

Schemes of arrangement may include a dividend as part of the scheme consideration offered to members. We expect scheme proponents to make a decision on whether to declare the dividend early in the scheme timetable, and at the latest before the second hearing. Where the decision will not be made until after members have voted on the scheme, we expect the scheme booklet to include clear disclosure of the circumstances where the dividend may not be declared.

We recently intervened in a scheme of arrangement where it was proposed that the decision on whether to declare a special dividend that formed part of the consideration would not be made until after the second court hearing. There were commercial reasons as to why the decision could not be made before the scheme meeting. We ensured that members were given disclosure of the circumstances where the dividend would not be declared before voting on the scheme and that a decision on whether to declare the dividend was made and announced before the second court hearing, rather than after it. This timing meant that we and any other interested parties could make submissions on this issue at the second hearing if necessary.

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Communications in electronic dispatch of takeover documents

We recently granted relief in a number of instances to allow parties to a takeover bid to dispatch takeover documents electronically to shareholders. We remind parties seeking this relief that communications to members in connection with the electronic dispatch of takeover documents should be limited to facilitating members’ electronic access to the documents, in lieu of receiving these documents in hard copy. These communications should not be used to repackage or summarise information relating to the takeover bid.

We have intervened where these proposed communications included repackaged information from takeover documents, such as the advantages or disadvantages of the offer or instructions on how to accept or reject the offer. We consider that the relevant takeover documents should be the source of full and complete information about the takeover bid to allow members to make an informed assessment of the offer. The communications made in connection with this relief should be limited to instructing members on how to access electronic copies of the relevant takeover documents.

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Experts and mining

Acquisitions approved by members – obligations to provide independent expert reports

Providing independent expert reports for the benefit of members

We remind parties that where members are asked to vote to approve the acquisition of a relevant interest, the directors should provide members with an independent expert report (IER) or a detailed directors’ report on the proposed transaction.

Providing an IER or directors’ report is consistent with the directors’ obligations to disclose all material information on how to vote on the resolution. These reports should comply with the standards set out in Regulatory Guide 111 Content of expert reports.

There is a risk that member approval of an acquisition may be invalid if it is obtained without either an IER or directors’ report. The parties may also risk an application to the Takeovers Panel seeking a declaration of unacceptable circumstances.

Please contact us before the notice of meeting is sent to members if you do not plan to provide either an IER or directors’ report.

Defective directors’ report replaced with independent expert report

We have intervened in several transactions recently to ensure that members were provided with suitable disclosure.

For example, we intervened where a company provided a defective directors’ report with a ‘fair and reasonable’ opinion. We were concerned that:

  • the directors did not have the expertise to express an opinion on certain financial and technical components of the transaction
  • the report was not independent, as it appeared to have been edited by a company director who was a related party of the allottee
  • the report relied on the industry experience of certain directors for technical views related to oil and gas assets, despite those directors not having appropriate qualifications as defined under the Valmin Code 2015.

Following our intervention, the company engaged an independent expert to assess the transaction. The independent expert report, which included an oil and gas specialist report, opined that the transaction was ‘not fair but reasonable’.

We remind companies to carefully consider the technical capacity and independence of any director, or director group, that may provide a report to members for the purpose of assessing transactions. Directors should only prepare a report if they have enough expertise, experience and resources to do so and if they are not associated with the proposed transaction.

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Forward-looking statements before a capital raising

We remind mining companies that forward-looking statements made shortly before a capital raising must be based on reasonable grounds or they will be deemed by law to be misleading.

We obtained a retraction of statements about future matters made by a mining company in an investor presentation leading up to a capital raising. The company released various statements that gave the impression that mining at a particular project would commence at a certain time and outlined details of the potential production scale of the project. Our inquiries identified that there were no reasonable grounds underpinning the statements, and that they were intended to be aspirational only. Given the specificity of the statements, we were concerned that they risked being interpreted as statements about future matters for which the company should have had reasonable grounds. This risk was heightened as the statements were not clearly identified as aspirational statements.

As the statements were not underpinned by any reasonable grounds, we took action to obtain a retraction to ensure that the market and investors would not be misled.

As part of our monitoring of capital market activities, we regularly review recent market announcements and investor information. Information Sheet 214 Mining and resources – Forward-looking statements explains our views on disclosures of aspirational statements.

Companies should be mindful of their legal obligations when making statements in market announcements that may be construed as being statements about future matters.

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Corporate governance

Board oversight of executive variable pay decisions

In March 2021, we updated Information Sheet 245 Board oversight of executive variable pay decisions (INFO 245), which explains factors that boards should consider when overseeing and making executive variable pay decisions.

This is the first update since its initial release in June 2020, when it was framed around decisions being made in the COVID-19 pandemic.

INFO 245 is informed by our 2019 review of remuneration governance practices across 21 ASX 100 companies and is intended for large listed companies and their boards.

Although the guidance in this information sheet is intended for large listed companies, many of the principles can be adopted by a broader range of listed companies in any market. The guidance can help boards implement effective governance for decisions on executive variable pay.

INFO 245 provides guidance on:

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Last updated: 08/06/2021 12:00