ASIC has today issued a consultation paper seeking feedback on proposals to address concerns with offers of ‘stub-equity’ to retail investors in control transactions.
The proposals seek to restrict certain structures that would result in retail investors not being covered by the normal protections available under Australian law when participating in a broad offer of securities. This can occur when shares in a proprietary, rather than public, company are offered as consideration under a takeover bid or scheme of arrangement. It can also arise when scrip consideration is required to be held by a custodian. ASIC is concerned offers of consideration of this kind, often known as ‘stub-equity’, deny retail investors important rights.
As foreshadowed in 18-376MR, ASIC is proposing to execute a legislative instrument which will modify the law to address its concerns with offers of proprietary company scrip under a takeover bid or scheme of arrangement.
‘Proprietary companies are restricted from making public offers to retail investors under a prospectus and are generally required to be closely held. In recognition of this they are not subject to the same disclosure and governance requirements that apply to public companies,’ said ASIC Commissioner John Price. ‘Offers of their securities to the typically large and diverse shareholder base of a takeover target or scheme company runs counter to the underlying policy of the provisions governing proprietary companies.’
Since publication of the media release we have also observed stub-equity offers of public company scrip on terms that mandate the use of nominee or custody arrangements or entry into securityholder agreements. Consequently, ASIC is also consulting on a proposal that the legislative instrument additionally seek to restrict such arrangements being used in a way that deprives investors of the protections they would otherwise have under the takeover and disclosing entity provisions.
ASIC is keen to fully understand and assess the financial and other impacts of our proposals and any alternative approaches. The consultation is open until 17 July 2019 and we encourage feedback from all interested parties.
‘Stub equity’ is sometimes offered as consideration under a takeover or scheme of arrangement. It typically consists of securities or interests in an unlisted bid or holding vehicle that provides offerees the option to retain continued economic exposure to the performance of the underlying business of an entity as an alternative to another form of consideration (such as cash) that does not provide the same exposure.
In December 2018, ASIC announced that it intended to consult on a proposed legislative instrument to modify the Corporations Act with the effect that stub-equity offers of scrip in a proprietary company could no longer be made to all target holders under the general exceptions for offers of securities under control transactions in s708 (see 18-376MR).
ASIC also advised that it would consider modifying the Corporations Act to similar effect in the event a transaction involving an offer of proprietary scrip was announced after the date of its media release but before the conclusion of the proposed consultation. To date ASIC is not aware of any such transaction being announced.
Following our media release, we observed control transactions which offered ‘stub-equity’ in public companies on terms which required investors to hold that scrip via a custodian. While in some circumstances the public company structure maintains the investor protections and rights which flow from the public company status, these arrangements can reduce the number of investors included, or entitled to be included, in the issuer’s register below certain thresholds, with the effect that the issuer is not subject to the takeovers regime or the disclosing entity provisions of the Corporations Act. Additionally, the mandatory custody arrangements would allow for the issuer to subsequently convert to a proprietary company, re-enlivening the policy concerns regarding offers of proprietary company scrip outlined above.
ASIC’s announcement followed its appearance as amicus at the approval hearing for the scheme of arrangement to effect the acquisition of Capilano Honey Limited: see Capilano Honey Limited (No 2)  FCA 1925.