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ASIC Releases Consultation Paper on Policy on Downstream Acquisitions.

28 November, 2011

 

ASIC has released Consultation Paper 170 Downstream acquisitions: Update to RG 71 (CP 170) which proposes changes to ASIC’s regulatory guide on downstream acquisitions.

 

The revised regulatory guide will take into account legislative changes since ASIC’s core policy was published in 1996 and the recent Takeovers Panel decisions in relation to Leighton Holdings and Cape Lambert. Much of the policy proposed in the draft updated regulatory guide (RG 71) is not new, but is merely a consolidation or clarification of existing policy which is currently spread across a number of regulatory documents. The consultation paper can be found here.

 

ASIC has sought submissions from stakeholders on the proposed revised RG 71. Submissions are due by 16 January 2011.

 

Overview

 

An update of ASIC’s written policy is long overdue and will bring the policy in line with current law and in particular the changes to the Corporations Act since 1996 relating to downstream acquisitions.

 

Some of the changes to the revised regulatory guide have already been articulated by ASIC in other regulatory guides and an information statement. This guidance will now be consolidated into a revised omnibus regulatory guide. Consolidation of the policy will also simplify the policy framework and provide clearer guidance for the market.

 

Broadly, the draft regulatory guide covers the following key topics:

 

  • ASIC’s approach to downstream acquisitions;

  • ​factors relevant to ASIC’s decision whether to grant relief where the Corporations Act exemption allowing downstream acquisitions is not available;

 

  • ​conditions that may be imposed by ASIC when granting that relief; and

 

  • ​when ASIC may apply to the Takeovers Panel for a declaration of unacceptable circumstances in relation to a downstream acquisition (even where the Corporations Act exemption is available).

Further details are set out below.

 

What is a downstream acquisition?

 

A downstream acquisition occurs where a person acquires a relevant interest in securities of a downstream Australian entity as a result of an acquisition in an upstream entity. The issues arise because tracing provisions in the Corporations Act deem the acquirer of the upstream entity to have the same relevant interest in all securities that the upstream entity has.

 

An exception is available where the upstream entity is listed on a prescribed financial market (such as the ASX) or an approved foreign exchange. ASIC’s list of approved foreign exchanges is set out in Class Order CO 02/259 Downstream acquisitions: foreign stock markets.

 

How will the new regulatory guide work?

 

Factors relevant to ASIC’s decision whether to grant relief where the Corporations Act exemption is not available

 

There are a number of factors that ASIC considers relevant to its decision whether to grant relief where the Corporations Act exemption is not available. Consistent with its current policy, if a person can be shown to have a “control purpose” in relation to the downstream entity, ASIC may refuse to grant relief. Whether the downstream securities are a substantial part of the upstream entity’s assets and considerations of international comity will continue to be relevant to ASIC’s considerations.

However, ASIC has flagged some key changes or clarifications to its approach in granting relief:

 

  • One of the tests ASIC will apply is whether control of the downstream entity may be regarded as “a significant purpose” of the upstream acquisition. The regulatory guide currently requires the control purpose to be “a main purpose” of the acquisition. The current test was criticised by the Takeovers Panel in Leighton Holdings Limited 02R [2010] ATP 14 and ASIC’s proposed policy change is likely to be a direct response to that decision. In considering whether there is a control purpose, ASIC will also consider whether the upstream acquisition is designed to avoid complying with the Corporations Act in relation to the downstream entity (ie, an anti-avoidance test).

 

  • ​ASIC has clarified that it will consider the alternatives that are available to the acquirer and if there is an alternative transaction structure that does not require ASIC relief (eg if the downstream assets can easily be separated from the upstream entity), it may refuse to grant relief.

 

  • ​ASIC will also consider whether the upstream entity is widely or closely held – it is less likely to grant relief if the upstream entity is unlisted or closely held.

Applicants will also be required to demonstrate that the market for securities in the downstream entity is “adequately informed about the upstream acquisition” and may require disclosure to the downstream entity about details of the upstream acquisition.

 

Conditions that may be imposed on ASIC relief

 

In most cases, ASIC relief will continue to be subject to conditions and any conditions will be aimed to ensure that the Eggleston principles in the Corporations Act are upheld. Conditions that may be imposed include requiring a downstream bid, voting and disposal standstills or requiring a shareholder vote on the acquisition. ASIC has also flagged that it may consider imposing a sell-down condition in limited circumstances.

 

CP 170 indicates that ASIC will only grant relief without conditions in “rare and exceptional circumstances”.

 

Under the current regulatory guide, when granting relief ASIC will normally require a downstream bid where the downstream shares constitute more than 50% of the voting shares in the downstream entity (and the conditions for “unrestricted” relief are not otherwise met). The updated regulatory guidance will provide greater detail on the other factors that may impact on any additional conditions imposed by ASIC when granting relief, many of which are similar to the considerations to which ASIC will have regard in deciding whether to grant relief in the first place.

 

Importantly, even if effective control of the downstream entity will not be obtained, conditions (such as standstill and voting conditions) can still be imposed. The updated regulatory guide sets out information on the types of conditions that will be imposed in different control situations.  For example, if absolute or effective control of the upstream entity is obtained, the relief will generally be subject to both standstill and voting conditions.

 

What circumstances may ASIC consider constitute “unacceptable circumstances” and warrant an application to the Takeovers Panel?

 

ASIC proposes to consolidate its guidance on the circumstances in which it may consider applying to the Takeovers Panel for a declaration of unacceptable circumstances in connection with a downstream acquisition despite the Corporations Act exemption applying. This includes circumstances where:

 

  • control of the downstream entity is a significant purpose of the upstream acquisition (currently the guidance focuses on whether the downstream acquisition is “a main purpose” of the acquisition); or

 

  • ​the downstream acquisition technically satisfies the exemption in the Corporations Act but subverts or otherwise does not meet the policy basis for reliance on that exemption, such as where the upstream entity is listed in name only and is closely held.

Again, this guidance is not new, but has been consolidated and updated to reflect the Takeovers Panel decisions in Leighton Holdings Limited 02R, Leighton Holdings Limited 01, 02 and 03 [2010] ATP 13 and Cape Lambert Minsec Pty Ltd [2009] ATP 12.

 

 

For further information, please contact:

 

David Bryant, Mallesons Stephen Jaques

david.bryant@mallesons.com

 

Kate Johnson, Mallesons Stephen Jaques

kate.johnson@mallesons.com

 

Joseph Muraca, Mallesons Stephen Jaques

joseph.muraca@mallesons.com

 

 

 

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