Corporate Finance Update – Issue 7
Corporate Finance Update – Issue 7 – December 2021
Financial disclosures in prospectuses can be complicated and require judgement. To assist you, we have prepared answers to some commonly asked questions.
What is statutory financial information?
This seems like an unusual question. However, in many situations, audited financial information included in a prospectus may not strictly be ‘statutory’ financial information based on financial statements lodged in accordance with Chapter 2M of the Corporations Act 2001 (the Act).
Often companies undertaking an initial public offering may not have had historical audit and lodgement requirements under Chapter 2M, or may compile special-purpose aggregated accounts (such as carve out accounts). We would generally not object to the use of the term ‘statutory’ if:
- it is defined or described on the basis of accounting note disclosure
- the measurement and recognition principles in the accounting standards are followed.
Can we include trading information that is more recent than our last full-year or half-year balance date?
While this is unusual, there may be circumstances where it is appropriate. The most frequent scenario is where an issuer is unable to provide a formal forecast but believes they need to disclose more recent information to draw investors’ attention to a material change in trading. This information must be clearly labelled and subject to appropriate due diligence. This is likely to be closely scrutinised on review.
We remind issuers that prospectuses will automatically have the exposure period extended if lodged over the Christmas close down period.
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 this period.
As previously described in the Corporate Finance Update, the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 modified the Act to permit the use of technology to convene and hold hybrid and virtual meetings. The temporary amendments are in effect until 31 March 2022. We recently published FAQs about the temporary amendments.
The Government has also consulted on draft legislation proposing to permanently modernise meeting and execution requirements under the Act. On 20 October 2021, the Government introduced the Corporations Amendment (Meetings and Documents) Bill 2021. Significantly, this would allow companies and registered schemes to hold physical and hybrid meetings on a permanent basis. Under the proposals, wholly virtual meetings may be used, but only if they are expressly required or permitted by the constitution.
If the proposed legislation becomes law, established companies who seek to change their constitutions will first need to put a special resolution to members. Companies who are newly formed for an IPO may already have constitutions that allow virtual-only meetings. This is an important fact that we believe should be clearly and prominently disclosed in the Investment Overview of an IPO prospectus.
We recently granted relief to a large listed entity to permit the threshold parcel in their buy-back tender offer to be set at $10,000 instead of $5,000.
In line with our policy in Regulatory Guide 110 Share buy-backs (RG 110), ASIC provides case-by-case relief to allow a company to buy back a small parcel of shares from each shareholder as if it was an equal access scheme (even though the small parcels represent a different percentage holding for each shareholder). Without relief, this type of buy-back would need approval by special resolution as a selective buy-back under section 257D of the Act.
RG 110.47 specifies that for large companies, the maximum value of a ‘threshold small parcel’ should be no more than $5,000. We provided relief to increase this to $10,000. Our decision considered:
- the entity’s size and strong capital position
- that 76% of the entity’s shareholders held between 1 and 1000 shares
- the $10,000 parcel size represented approximately 36% of the average holding, meaning the majority of participating shareholders would not be placed in an ‘all or nothing’ situation, and
- a $10,000 priority allocation would result in a smaller scale back percentage for small shareholders as compared with large and institutional shareholders.
We granted relief similar to ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547 (ASIC Instrument 2019/547), but with the exception that part (e) of the definition of ‘purchase plan’ was amended so that the price was not required to be at a discount to the previously traded market price.
The purpose of the share purchase plan (SPP) offer was to partially offset shareholder dilution under a proposed recapitalisation and ‘top hatting’ transaction by way of schemes of arrangement. Prior to the recapitalisation, the applicant proposed to carry out a 20 for 1 share consolidation. As the consolidation was to be effected after the SPP offer was made, but before the resultant shares were issued, the issue price would be calculated on a post-consolidation basis and would not be less than the previously traded market price.
Our decision considered the following:
- the applicant was only unable to rely on ASIC Instrument 2019/547 due to the impact of an unrelated corporate action
- the SPP offer was priced at the same implied price as creditors were to receive under the recapitalisation scheme, and
- both the recapitalisation and the SPP were subject to shareholder approval.
Section 11 of ASIC Corporations (Short Selling) Instrument 2018/745 provides relief for deferred settlement trading of Australian Securities Exchange (ASX) quoted products following certain corporate actions such as IPOs and rights issues.
This relief was due to cease on 30 September 2021 pending ASX’s review of trading processes as part of the CHESS Replacement project. However, CHESS replacement is not yet complete and is unlikely to remove the need for deferred settlement. We therefore removed the expiry date for deferred settlement relief and it will now continue until ASIC Instrument 2018/745 sunsets on 1 October 2028: see the Explanatory Statement to ASIC Corporations (Amendment) Instrument 2021/754 for more details.
Statements about ‘net zero’ commitments or plans may be considered forward-looking statements, for which there must be reasonable grounds. Where there are no reasonable grounds to underpin a ‘net zero’ statement that is predictive in nature, the disclosure may be misleading.
In a recent matter, our action resulted in an exploration stage energy company clarifying that in relation to its net zero mandate it:
- was only applicable to the production phase of its project
- had not commenced developing any detailed plan for how it will achieve its mandate, and
- has not planned to progress any specific works in the near term for this mandate, and as such had not allocated funds from the fundraising for this purpose.
In the context of statements about ‘net zero’, we consider it is important that investors are provided with sufficient context about a company’s goals. Among other matters, this should include explanations of the company’s progress towards achieving its goals.
Following recent lodgement issues encountered, we remind companies that we will not accept prospectuses for public fundraisings lodged by proprietary companies.
Proprietary companies are prohibited under subsection 113(3) of 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.
In many floats, a prospectus is lodged by both the issuer and a ‘saleco’ when there is a proposed vendor sell down. In our view, both the issuer and saleco need to be public companies to offer shares to the public. If we receive a prospectus from an issuer or a saleco that is a proprietary company we will refuse to accept lodgement of the document, seek an injunction for a contravention, or proceed to issue a stop order.
Most ordinary shares are not subject to the design and distribution obligations but offers of ordinary shares by investment companies may be subject to the regime if a disclosure document is required (see paragraph 994B(4)(b) of the Corporations Act 2001 (the Act)). Offers of preference shares, debentures, partly paid shares, and options over ordinary shares are also subject to the regime. Please consult with us if you have any doubts as to whether the regime applies to your product.
What are the aims of the design and distribution obligations?
The design and distribution obligations seek to improve consumer outcomes and place greater responsibility on issuers for their products. The regime is a fundamental shift away from disclosure and the ‘investor beware’ model. If these obligations apply, the issuer must prepare a target market determination (TMD) that, among other things, describes the class of consumers that comprise the target market and specifies distribution conditions.
The design and distributions regime only commenced on 5 October 2021 and compliance continues to evolve. We will take a reasonable approach in the early stages of these reforms – provided issuers and industry participants are using their best efforts to comply.
Our detailed guidance on the new regime is contained in Regulatory Guide 274 Product design and distribution obligations (RG 274).
It’s good practice for TMDs to:
- refer to the objective characteristics of investors for whom the product is likely to be appropriate – such as ability to bear loss, risk profile and investment timeframe – and have distribution conditions that allow for the assessment of these characteristics or otherwise ensure that only investors likely to have these characteristics will be targeted
- detail the product’s key attributes and explain how these features align with the objectives, financial situation and needs of investors in the target market.
We have seen some TMDs that revert to a disclosure model or put the onus back on the investor, which is contrary to the objectives of the design and distribution obligations. Some problematic practices include:
- TMDs that require investors to give a warranty that the investor understands the TMD and that the investor comes within the target market (see also RG 274.178 which explains that distributors should not ask consumers to self-certify that they are in the target market)
- TMDs where the target market is ‘investors who are willing to accept the risks of the product’ – this may tend to put the onus for the investment decision back on the investor and shift responsibility away from the issuer
- TMDs that focus solely on an investor’s preference for particular product features – with no regard for the target investor’s financial situation and needs. For example, while a common objective for investors is capital growth, this objective must be considered with other relevant circumstances of investors in the target market. Some investors who are seeking capital growth may also have a low risk tolerance, may be seeking to preserve capital or need access to funds in the short term.
Appropriate distribution conditions are a very important part of the design and distribution regime, and are one component of the controls an issuer needs to implement to comply with its obligation to take reasonable steps in the distribution of its product. The nature of distribution conditions depends on the circumstances. For a financial product with a narrow target market, the distribution conditions will likely be specific and detailed. For a financial product with a comparatively wide target market, fewer distribution conditions may be needed: see RG 274.95–RG 274.98.
However, we have seen TMDs with a narrow target market that do not specify any appropriate distribution conditions – for example, where the target market is defined as ‘investors who can afford to lose their investment’ but the public offer has no restrictions or conditions on distribution. This may not comply with the issuer’s obligations in paragraph 994B(5)(c) and 994B(8)(a) of the Act.
For detailed guidance on the scope of the design and distribution obligations, the products covered and the obligations of both issuers and distributors, see Regulatory Guide 274 Product design and distribution obligations.
We recently granted relief from section 606 of the Corporations Act 2001 (the Act) to facilitate a downstream acquisition, subject to a voting condition that allowed an upstream acquirer to vote up to 20% of the shares in a downstream company.
The transaction involved a foreign acquirer (the upstream acquirer) acquiring 100% of the securities in another unlisted foreign entity (the upstream company). As a result of the foreign transaction, the upstream acquirer would obtain a downstream relevant interest in approximately 30% of the securities in an ASX listed company (the downstream company) that were held by the upstream company. As the upstream company was unlisted, the upstream acquirer was unable to rely on the exemption in item 14 of section 611 of the Act, and accordingly required individual relief from ASIC to facilitate completion of this foreign transaction.
We were satisfied that the applicant met the policy requirements set out in Regulatory Guide 71 Downstream acquisitions (RG 71) to obtain relief from section 606 and considered that relief should be granted subject to a standstill and voting condition. Notably, RG 71 provides that where absolute or effective control of an upstream company is acquired, ASIC will apply a voting condition that prohibits the upstream acquirer from exercising any votes attached to the downstream company shares it will acquire a relevant interest in for a specified period of time.
We extended the policy position in RG 71 and granted relief subject to a standstill condition and a voting condition that allowed the upstream acquirer to vote up to 20% of the downstream relevant interest it will procure.
Our decision to provide relief is assessed on a case-by-case basis. In other situations, we may impose our usual strict voting condition if we consider it is necessary to protect the interests of downstream company shareholders and to reduce the control effect of the downstream acquisition.
Shareholders voting at a scheme meeting should have certainty as to the scheme consideration being offered
We consider that, where possible, scheme proponents should structure scheme timetables in a way that ensures shareholders are informed of the settled details of the consideration offered with sufficient time before they are asked to vote.
Parties should also ensure that where supplementary disclosure of these details is required, shareholders are given 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.
We recently observed a scheme where it was proposed that the calculation of the scrip consideration to be offered to shareholders would occur after the scheme meeting. Shareholders could elect to receive scrip consideration, or to participate in a share buy-back conducted by the scheme proponent (which was effectively an offer of cash consideration).
The calculation of the scrip consideration was based on a formula considering the post-tax net tangible assets of the scheme proponent and acquirer, as well as the level of participation in the share buy-back. Announcement of the final determination of scrip consideration to be offered would occur immediately prior to the approval court hearing. We sought clarification from the scheme proponent in relation to the proposed timing of calculation and announcement of the scrip consideration to ensure that these matters were brought to the court’s attention.
In this case, we did not object to the proposed timing given both the scheme proponent and acquirer were listed investment companies, the unique structure of the consideration offered under the scheme, and the potential commercial detriment that may occur if the timetable were changed.
We remind parties that we regularly monitor transactions and will intervene if we are concerned that disclosures made outside of the scheme booklet do not meet the standard expected in the scheme booklet.
We recently intervened where a scheme proponent proposed to contact its shareholders by phone, email and letter regarding a proposed scheme. We considered that the communications proposed by the scheme proponent did not meet the standard of disclosure expected in the scheme booklet. In particular, the call script included statements inconsistent with the scheme booklet and the terms of the offer, and highlighted a particular offer premium without providing balanced disclosure. As a result of our concerns, the scheme proponent amended its proposed communications to exclude these statements.
As part of our review and monitoring of scheme of arrangement transactions, we may request that scheme proponents provide a copy to us of any relevant communications they, or their agents, propose to have with shareholders, including call scripts.
We granted relief to facilitate the proposed delisting of an ASX listed group that included an off-market buy-back in conjunction with a rights issue. The group proposed to conduct an off-market buy-back to facilitate an exit opportunity for any securityholders who did not wish to hold unlisted securities and in parallel offer a non-renounceable rights issue to permit any securityholders who wished to subscribe for additional securities to do so.
We may be concerned where an entity proposes to conduct a buy-back and rights issue in parallel or within a short time. However, in this case, the transactions were undertaken in connection with voluntary delisting and designed to provide maximum optionality to existing securityholders. The delisting and off-market buy-back transactions were also subject to securityholder approval. Securityholders would receive a notice of meeting containing disclosure of the transactions, including an independent expert’s report.
Item 19 of section 611 of the Act provides an exception in relation to relevant interests acquired under a buy-back. However, this does not apply to managed investment schemes.
We granted (ASIC Instrument 21-0738 and ASIC Instrument 21-0736) to permit the responsible entity and its securityholders to acquire relevant interests under the buy-back without breaching the takeovers thresholds. Additional relief was also provided from aspects of the managed investment and unsolicited offers regimes.
Application to approve nominee appointment declined for a rights issue with significant control implications
We raised concerns where a company proposed to undertake a highly dilutive rights issue that may result in the company’s majority shareholder increasing its interest in the company to over 90%. The majority shareholder had recently made a takeover bid for the company at the same offer price per share proposed under the rights issue. The minimum subscription amount applying to the rights issue was equal to the majority shareholder’s entitlement under the offer and the majority shareholder had confirmed its intention to subscribe for its full entitlement. The company did not propose to extend the rights issue offer to shareholders in certain foreign jurisdictions and therefore required ASIC’s approval to appoint a nominee to sell entitlements on behalf of those holders.
The company did not wish to seek shareholder approval for the potential increase in the majority shareholder’s relevant interest. Given our concerns were not allayed, the company withdrew its application for approval of the nominee appointment.
If it appears that a rights issue may be designed to avoid the requirements of Chapter 6 or may otherwise give rise to unacceptable circumstances, we will generally not provide approval for appointment of a nominee per section 615 of the Act until any matters of concern have been addressed. This is because we will not facilitate a rights issue or underwriting arrangement that may be inconsistent with the purposes of Chapter 6. We may also raise concerns or take action even where a company undertaking a rights issue does not require ASIC’s approval for appointment of a nominee.
Company directors need to verify their identity as part of a new director identification number (director ID) requirement.
A director ID is a unique identifier that a director will apply for once and keep forever – which will help prevent the use of false or fraudulent director identities.
All directors of a company, registered Australian body, registered foreign company or Aboriginal and Torres Strait Islander corporation will need a director ID.
When you must apply depends on when you were appointed as a director:
- Existing directors have until 30 November 2022 to apply.
- New directors appointed between 1 November 2021 and 4 April 2022 must apply within 28 days of their appointment.
- From 5 April 2022, intending directors must apply before being appointed.
The new Australian Business Registry Services (ABRS) is responsible for administering the director ID initiative.
ASIC is responsible for enforcing director ID offences set out in the Act . It is a criminal offence if you do not apply on time.
We remind companies that section 253RA of the Act, as introduced by the Treasury Laws Amendments (2021 Measures No.1) Act 2021 (Cth), limits the circumstances in which companies can electronically despatch documents containing meeting materials to shareholders.
This provision prohibits companies from electronically despatching documents containing meeting materials to shareholders who have elected under section 253RB to receive them in hard copy. In ASIC’s view, the provision extends to prohibit companies providing these shareholders with a letter or postcard with details on how to access the documents electronically.
During our supervision of a scheme of arrangement, we noted that a company had proposed to send members electing to receive hard copy documents a letter containing directions on how to electronically access the scheme documentation before holding the scheme meeting. As a result of our intervention, the company agreed to provide these members with hard copies of the scheme documentation, consistent with the limitations around the electronic despatch of documents set out in subsection 253RA(3).
We recommend companies avoid holding members’ meetings between Monday 20 December 2021 and Friday 14 January 2022 (inclusive).
This view is based on the requirement in section 249R of the Act that ‘a meeting of a company’s members must be held at a reasonable time and place’. This means that a company should provide an opportunity for the maximum number of shareholders to attend and consider resolutions and any other matters that are to be put to the meeting.
From 14 September 2021, all listed entities that have received JobKeeper payments are required to give a notice to the relevant market operator outlining:
- the listed entity’s name and ABN
- the number of individuals for whom the entity or its subsidiaries received JobKeeper payments each fortnight that ended in the financial year
- the total amount of JobKeeper payments the entity and its subsidiaries received in a JobKeeper fortnight that ended in the financial year
- whether or not the entity or its subsidiaries made voluntary repayments of JobKeeper payments, and the total amount of those repayments if they did.
ASIC has issued a JobKeeper template notice and ‘FAQs’ to help listed entities comply with their obligations. The notice is also available on the ASX and National Stock Exchange of Australia websites.
Listed entities have 60 days from the date their annual financial report was lodged with ASIC to notify the market. All listed entities must ensure information that is disclosed about JobKeeper payments is up to date and accurate. We have published the information given to market operators up to 30 November 2021 in a consolidated report, which will be updated each month.