Corporate Finance Update – Issue 8
Relief from prospectus requirements for acquisition by a US-based special-purpose acquisition company (SPAC)
We granted relief to allow the distribution of a registration statement Form (F-4) together with a wrap prospectus (without an application form) to Australian investors in an Australian company that had agreed to a merger with a US-based special purpose acquisition company (SPAC).
- Australian residents will hold more than 10% of the total number of securities in the bid class before offers under the bid are made, and
- the transfer of shares was not pursuant to a regulated offer, compromise or arrangement (as contemplated in the relief instruments).
We gave relief because:
- the registration statement, together with the Australian wrap prospectus, provided sufficient information making a full separate Australian prospectus unnecessary
- only a small proportion of the Australian resident recipients of the SPAC scrip consideration were retail investors.
An application form accompanying the wrap prospectus was not required as the transaction was already effectively binding on all Australian shareholders because the required number of shareholders had already entered into a Share Transfer Agreement.
We issued stop orders during the second half of 2021 in relation to three offers for not meeting basic disclosure requirements. Key concerns included:
- Failure to include audited accounts of sufficient duration. We reviewed two prospectuses that did not include audited accounts of sufficient duration, and an Offer Information Statement that included only interim accounts, where there is a statutory requirement to include accounts for a full 12-month period.
- Inadequate verification to ensure lodged documents were clear, concise and effective. We reviewed a prospectus with numerous inconsistencies throughout the document, including:
- disclosure that there was no reasonable basis to include a forecast, yet a forecast was included later in the document
- a declaration that there was no litigation, yet litigation was described later in the document.
- Failure to include expert reports. A prospectus we reviewed failed to include an independent property valuation in the offer document for an acquisition that was highly material to the offer. Without this, investors had no third-party verification of the value of the property which was clearly required in an offer of this nature, and consistent with market practice.
We remind issuers and their advisers to consult Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors (RG 228) when compiling a prospectus. This regulatory guide sets out our views on commonly encountered disclosure issues and helps ensure investors are provided with appropriate disclosure.
During the period, we observed situations where mining assets are coming to market with new owners. In some cases, the former owners of those assets have conducted exploration and development activities such that there is information about resources estimates reported in accordance with the JORC Code, historical or foreign resource estimates, or previous technical studies.
This information is commonly relevant and valuable information for investors to enable them to understand the new owner’s mining assets. However, we underscore the importance of this information being disclosed in a manner that helps investors understand the continuing relevance of that information in the context of the new owner and, in some cases, the specific nature of the information itself. For example, we recently required:
- retractions of disclosure where forward-looking information from previous technical studies by former owners were disclosed by the new owner without consideration of whether the new owner had reasonable grounds for the disclosure of that information
- replacement disclosure to make clear the quality and currency of estimates that were previously reported, given the considerable time that had elapsed since that initial reporting
- supplementary disclosure to identify the nature of foreign estimates and the foreign code they were reported under so that investors could understand what those foreign estimates were, and their comparability with estimates that might have been reported in accordance with the JORC Code.
We will continue to act on prospectuses by mining companies to ensure disclosures are compliant with Chapter 5 of the ASX Listing Rules and the associated guidance and FAQs, the JORC Code 2012 and the VALMIN Code 2015.
There was a large increase in the number of original disclosure documents lodged with ASIC from July to December 2021 (382 lodged, $10.25 billion sought) compared to the previous period from January to June 2021 (298 lodged, $7.62 billion sought).
Initial public offering (IPO) activity in July to December 2021 increased significantly compared to the previous period (123 totalling $7.05 billion, compared to 83 totalling $5.22 billion in January to June 2021).
The top 10 fundraisings completed under disclosure documents raised $6.98 billion, a substantial increase over $5.57 billion raised in the previous period. The largest offers over the period included the Westpac Banking Corporation hybrid security issuance (raising $1.45 billion), the GQG Partners Inc. IPO (raising $1.25 billion), and the APM Human Services International Limited IPO (raising $0.98 billion). The remaining offers included two significant hybrid security issuances from banks and a number of large IPOs.
Below is a summary of the outcomes of applications for relief from the requirements of Chapter 6D of the Corporations Act 2001 (Corporations Act) to provide prospectuses and other disclosure documents for the period 1 July to 31 December 2021.
Table 1: Outcome of disclosure relief applications determined in the period 1 July – 31 December 2021
Note: The statistics reported are based on individual relief decisions, rather than a singular head of power under which several decisions may be made (as demonstrated in our previous reporting).
We remind target boards to use caution when considering corporate actions that may cause a takeover bid, or proposed takeover bid, to be withdrawn, lapse or not proceed.
Where a target board is proposing to undertake a corporate action that may frustrate a takeover bid, the board should consider whether it is appropriate to obtain the approval of its security holders to undertake that action. Appropriate disclosure should be given to security holders about the potential impact of proceeding with the proposed corporate action on the takeover bid. Doing so gives security holders the opportunity to decide whether the corporate action is in their best interests as a group.
Recently, a target announced its proposal to undertake a rights issue shortly after a conditional off-market bid was made. The rights issue, if it proceeded, would trigger a condition of the bid. The target did not propose to seek shareholder approval for the rights issue and had not disclosed the impact of conducting the rights issue on the takeover bid to its security holders. The bidder made an application to the Takeovers Panel and a declaration of unacceptable circumstances was made (see Nex Metals Explorations Ltd – Declaration of Unacceptable Circumstances and Orders).
Boards of targets subject to a takeover bid or proposed bid should be aware of the implications on the bid of any corporate actions they are considering and, where such actions may constitute frustrating actions, consider seeking security holder approval.
The substantial holding disclosure requirements promote the underlying principle of the takeover provisions in Chapter 6 of the Corporations Act that the acquisition of control should take place in an efficient, competitive and informed market.
Shareholders should ensure that, when making substantial holding disclosures in connection with a transaction, they provide full copies of all contemporaneous agreements relating to the substantive transaction. It is not sufficient to only attach a preliminary agreement – even if that agreement was the first to give rise to the person’s change in voting power.
We consider it generally inappropriate to redact documents attached to substantial holding notices. Full disclosure is important to ensure compliance with both the spirit and letter of the substantial holding requirements and to avoid misleading the market. We will generally insist all relevant agreements relating to a substantial holding be disclosed on an unredacted basis.
The acquisition of a 100% controlling interest in a target company in reliance on item 7 of section 611 of the Corporations Act is generally not possible without ASIC relief. This is because offers will need to be made to all members and item 7(a)(ii) of section 611 prohibits members whose shares will be acquired from voting in favour of the acquisition.
Regulatory Guide 74 Acquisitions approved by members indicates that we may consider granting relief in exceptional circumstances where there are clear legal and commercial reasons which would require the transaction to proceed via an item 7 resolution – as opposed to a takeover bid or scheme of arrangement – and we are satisfied the protections and principles of Chapter 6 or Part 5.1 of the Corporations Act would not be undermined.
In reviewing applications, the following considerations do not generally amount to exceptional circumstances:
- A small number of shareholders in a closely held target. The target is still a ‘Chapter 6 company’ and members are entitled to the protections under the Corporations Act.
- That compliance with the technical requirements of a Chapter 6 takeover bid or a scheme of arrangement is more onerous, costly and inefficient compared to conducting the transaction through an item 7 meeting of shareholders.
We do not consider the cost and the time it takes to follow the established takeover mechanisms under the Corporations Act – which ensure shareholders have been provided with the appropriate protections – is unreasonably burdensome.
Section 670F of the Corporations Act provides a bidder who announces a proposed takeover bid (takeover proposal) with a defence against contraventions arising from a failure to continue with the bid and make ‘offers’ to target shareholders. To rely on section 670F a bidder must, among other things, establish that it is unreasonable for the bidder to proceed to make a formal offer – for example, where the bidder is purportedly outbid by a rival.
In a recent example, BidCo A made an all-cash takeover proposal for TargetCo. Subsequently, BidCo B sent a revised cash and scrip offer to TargetCo shareholders with an implied value slightly higher than BidCo A’s takeover proposal. BidCo A sought ASIC consent to withdraw its takeover proposal on the basis it had been outbid. We advised BidCo A that ASIC could not provide consent under section 652B of the Corporations Act because:
- no formal offers had been made by BidCo A, and
- it was uncertain whether BidCo A could rely on section 670F because it was not definitively clear it had been outbid from a shareholder’s perspective.
In forming our views, we considered the small consideration differential between both bids, variability of the scrip component of BidCo B’s offer and liquidity benefits of BidCo A’s proposal (see Part V of Regulatory Guide 59 Announcing and withdrawing takeover bids). In this case, BidCo A resolved to make offers in accordance with its takeover proposal.
We remind bidders that they must be clearly outbid if they seek to rely on the defence in section 670F and that, in some circumstances, this may be difficult to definitively determine (unlike, for example, two competing unconditional cash proposals). In such scenarios, we consider it best to leave the choice between offers to the market and target shareholders.
ASIC provided consent under section 652B of the Corporations Act to allow a bidder to withdraw unaccepted offers made under its off-market takeover bid for all ordinary shares in the target. The takeover bid had been made in parallel with dual alternative scheme of arrangement acquisition structures. The bidder sought to withdraw unaccepted offers under its takeover bid once target shareholders had voted in favour of one of the proposed two alternative schemes of arrangement and that scheme was to be implemented.
In line with our policy at Regulatory Guide 59 Announcing and withdrawing takeover bids (s653 and s746), ASIC can consent to a bidder withdrawing unaccepted offers under a takeover bid. In doing so, we may impose conditions such as requiring the bidder to prepare a notice of withdrawal.
In this instance, one of the defeating conditions of the takeover bid was that the schemes would not go ahead. We accepted that our consent was warranted in the circumstances and, shortly after, the bidder (through the target) released its notice of withdrawal on ASX.
We granted relief to extend the offer dispatch date under paragraph 631(1)(b) of the Corporations Act and the period for the dispatch of the bidder’s statement under item 6 of section 633. This enabled the bidder, who had recently converted from a small proprietary company into an unlisted public company, to prepare replacement bidder statements that incorporated audited financial statements as required in making a scrip offer to target shareholders.
Without this unusual intervention, target shareholders could have been provided with bidder statements that did not contain prospectus level disclosure (see paragraph 636(1)(g) of the Corporations Act) because the bidder statements did not contain an audited statement of financial position, audited income, or cash flow statements (see RG 228.87 of RG 228). This intervention also avoided the bidder breaching the Corporations Act by not being able to dispatch the bidder statements (with the requisite financial information) by the dispatch date.
Prospective bidders who have not previously been required to prepare or lodge financial statements with ASIC because of their former corporate status, must engage early with auditors well in advance of lodging a bidder statement containing a scrip offer with ASIC. We do not consider bidders should be exempt from including audited financial statements in bidder statements merely because they have not previously been required to prepare those reports. Bidders offering scrip consideration should consider ASIC’s general expectations on the disclosure of historical financial information at RG 228.87–90 of RG 228.
Intended refusal of relief for a proposed top hatting reconstruction by way of individual shareholder agreement
We raised concerns where an unlisted public company sought relief from takeovers, disclosure and on-sale requirements to facilitate a proposed top hatting reconstruction by individual shareholder agreements. The shareholders would agree to ‘swap’ their shares in the company for the same proportionate shares in a new holding company.
The applicant submitted that ASIC should provide relief to facilitate this transaction on the basis that:
- this was not a control transaction, there would be no material change to the shareholders’ investment, and the two companies would be part of the same corporate group controlled by the same shareholders in the same proportions, and
- obtaining approval of all shareholders before the transaction could proceed would be preferable to the lower thresholds required by a scheme of arrangement.
We indicated that we were minded to refuse relief as we were not persuaded that there was any compelling reason why the company could not conduct the transaction via a scheme of arrangement under Part 5.1 of the Corporations Act, or another lawful and effective way that would not require relief (see ASIC’s policy in Regulatory Guide 51 Applications for relief).
We were concerned that equivalent protections to Chapter 6 did not exist under the proposed arrangement. Our in-principle decision to refuse relief emphasises that reconstructions, even when they are not a control transaction, should be completed through a scheme of arrangement or another lawful and effective way that would not require relief. The application was withdrawn.
We observed a scheme of arrangement where the directors of the scheme proponent and the expert did not provide an opinion on the scrip consideration alternative offered under the scheme. We remind scheme proponents and acquirers that it is best practice to have the company’s directors and an independent expert advise on alternative scrip consideration for control transactions.
We consider that where an essential part of the overall transaction is that members accept shares in a company as part of the scheme, disclosure in the explanatory statement should meet the requirements of a bidder’s statement for a scrip bid. It is the responsibility of the directors of the target company to ensure the scheme documentation contains this information before proposing the scheme to its members. This information includes pro forma financial information for the merged company having regard to a possible range of outcomes based on the number of members electing to receive the alternative scrip consideration. For example, (i) 100% cash/0% scrip (ii) 50% cash/50% scrip and (iii) 0% cash/100% scrip.
We observed a scheme of arrangement for an acquisition/merger of a target being conducted at the same time as a scheme of arrangement for the restructure of the bidder.
Where this occurs, it is best practice for the target to ensure its explanatory statement takes into account the possible outcomes of the scheme of arrangement being proposed by the bidder for its restructure, including pro forma financial information for the merged entities where the bidder’s restructure scheme of arrangement is approved and when it is not approved.
If the target’s explanatory statement only provides disclosure as if the bidder’s restructure scheme is approved and the restructure scheme is subsequently not approved, then a target may be required to provide a supplementary explanatory statement updating its disclosure and obtain court approval for the supplementary explanatory statement.
We observed a scheme of arrangement where a fee was to be paid to the target by the bidder in circumstances where the bidder’s shareholders did not approve a reverse takeover resolution. Although such fees are distinguishable from naked no vote break fees payable by a target to a bidder, ASIC may consider whether they are coercive to the bidder’s shareholders and whether or not they are acceptable.
In this case, ASIC accepted that the fee was not detrimental or coercive to the bidder’s shareholders because the fee:
- was not fixed
- reimbursed expenses actually incurred by the target, and
- was capped at a maximum amount.
There was a significant increase in both the number of merger and acquisition transactions this period and their total value:
- July to December 2021 – 46 independent control transactions (17 takeover bids and 29 schemes) estimated at $64.28 billion
- January to June 2021 – 33 independent control transactions (17 takeover bids and 16 schemes) estimated at $30.29 billion.
The increased value of transactions was predominantly due to several large individual scheme transactions over this period.
Below is a summary of the outcomes of applications for relief from the requirements of Chapter 6 of the Corporations Act.
Table 2:Outcome of merger and acquisition relief applications determined in the period 1 July – 31 December 2021
Note: The statistics reported are based on individual relief decisions, rather than a singular head of power under which several decisions may be made (as demonstrated in our previous reporting).
All company directors are now required by law to apply for a director identification number (director ID).
A director ID is a unique identifier which will help prevent the use of false or fraudulent director identities.
When people must apply depends on when they became a director for the first time:
- New directors must apply within 28 days of their appointment.
- From 5 April 2022, intending new directors must apply before being appointed.
- Existing directors appointed before 1 November 2021 have until 30 November 2022 to apply.
Australian Business Registry Services is responsible for administering the director ID initiative – visit their website for information on how to apply.
ASIC is responsible for enforcing director ID offences set out in the Corporations Act.
The JobKeeper consolidated report is available on the ASIC website. ASIC is required under section 323DC of the Corporations Act to publish a consolidated report of all the JobKeeper notices that have been given to the market operators under section 323DB and released to the market.
ASIC will update the consolidated report at the beginning of each month, capturing information disclosed to the market through to the end of the previous month. As at 28 February 2022, 598 listed entities have lodged their JobKeeper notices with the market operator.
ASIC reminds those listed entities that have received a JobKeeper payment that JobKeeper notices are due 60 days from when their annual financial report is lodged with ASIC.
ASIC has granted relief to allow additional time for companies and registered schemes to hold virtual-only meetings, subject to conditions. Listed companies, and all registered schemes will continue to have the option to hold virtual-only meetings until 31 May 2022. Unlisted companies will have until 30 June 2022, to align with the extended deadline for unlisted public companies with 31 December 2021 year ends to hold their annual general meetings.
Before relying on the relief, the directors of the entity must pass a resolution that it would be unreasonable to hold a meeting of members wholly or partially at one or more physical venues, because of the impact of the COVID-19 pandemic. Boards and responsible entities remain accountable to their members for the chosen format and conduct of their meetings.
While there have been improvements in the COVID-19 situation across Australia, the risks of COVID-related impacts on meetings remain, including the need to respond quickly to sudden changes in conditions.
The relief is in addition to permanent changes to the Corporations Act which apply from 1 April 2022 to permit hybrid meetings and virtual-only meetings if allowed under the entity’s constitution, among other measures.
The Corporations Act provides protections when virtual technology is used, including giving those eligible to attend, as a whole, a reasonable opportunity to participate.
We have recently published FAQs to assist companies and registered schemes seeking to hold meetings between 1 April 2022 and 30 June 2022.
On 10 February 2022, the Treasury Laws Amendment (Greater Transparency of Proxy Advice) Regulations 2021 (Cth) (proxy regulations) were disallowed by the Senate, after commencing three days before on 7 February 2022. For Australian financial services (AFS) licensees who obtained an authorisation to provide the proxy advice financial service, the disallowance of the proxy regulations has led to their AFS licences no longer including that authorisation – reverting to how they were before 7 February 2022.
All obligations imposed by the proxy regulations are no longer in force, including the obligations to provide proxy advice to the subject of the advice and to be independent of certain entities. Subregulation 7.1.30 of the Corporations Regulations 2001, which was repealed by the proxy regulations, is in force again – allowing certain information and advice about voting to be provided without an AFS licence.
We granted relief to allow a large proprietary company to present combined financial reports for a broader operating stapled group (comprising the proprietary company and an unregistered trust), alongside the company’s own financial results for an initial three-year period.
The applicant could not rely on the class relief provided by Class Order [CO 13/1050] and ASIC Corporations (Stapled Group Reports) Instrument 2015/838 because the stapled securities were unlisted, the unregistered trust did not have financial reporting obligations under Chapter 2M of the Corporations Act, and neither entity controlled the other for the purposes of the accounting standards.
We approved the application because combined accounts would provide the users of the financial reports with more meaningful and transparent information on the wider operating group.
Our relief was subject to the following conditions:
- the applicant lodge a financial report which included its own statutory financial statements with comparatives, as well as combined statements for the broader stapled group
- the financial reports include separate audit reports and director declarations for each reporting entity, and
- the financial report include a directors’ report which provides the relevant required information for each entity of the stapled group.