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Australia – ASIC Releases Revised Regulatory Guidance On Takeovers.

10 December, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Regulatory & Compliance

 

Summary

 

ASIC has released Consultation Paper 193 (Takeovers, compulsory acquisitions and substantial holdings: Update to ASIC guidance). As part of the consultation process, ASIC has released four new draft Regulatory Guides to consolidate 17 of ASIC’s existing Regulatory Guides into the following categories:

 

  • Relevant interests and substantial holding notices
  • Takeovers: Exceptions to the general prohibition in s 606
  • Takeover bids
  • Compulsory acquisitions and buyouts

 

ASIC has sought submissions on the draft Regulatory Guides by 22 February 2013 and anticipates it will publish the final form of the new Regulatory Guides in May 2013.

 

While much of the updated guidance reflects ASIC’s existing policy as it is applied in practice, there are a number of changes, clarifications and elaborations which will provide greater certainty for market participants.

 

In addition, ASIC is proposing to provide new class order relief on a number of issues, with the result that the time and expense of applying for case-by-case relief on these issues will be avoided. These include class orders:

 

  • reversing the Full Federal Court’s decision in Australian Pipeline Limited v Alinta Limited that CHESS acceptances are not effective until processed;
  • confirming the lawfulness of acceptance facilities (albeit subject to a proposed condition confining institutional facilities to institutions otherwise precluded by their mandates from accepting into a conditional bid – which may well mean most facilities in future will be extended to all shareholders); and
  • clarifying the operation of the 90% threshold for follow-on compulsory acquisition, and the interaction of compulsory acquisition with the compulsory buy-out provisions.

 

What do I need to know about ASIC’s proposed substantive changes?

 

The following tables outline ASIC’s proposed substantive changes and briefly discuss their implications.

 

Relevant interests and substantial holding notices
Topic Proposed change or key matter Implications
Relevant interests in securities – “money lending exemption” (s 609(1)) ASIC proposes retaining the current relief (updated to reflect the Personal Property Securities Act amendments), but has invited submissions on this and whether there should be additional limitations on relief for persons who purchase security interests in the secondary market.

Section 609(1) – the “money lending exemption” – can facilitate a “loan to own” scenario for a secured creditor in some cases – for example, Brookfield’s bid for Thakral which took advantage of the appointment by an affiliate of Brookfield’s of receivers and managers over entities holding more than 38% of the target. ASIC’s queries appear to invite arguments that the exemption may be too broad.
Associates ASIC provides an expanded discussion of association, noting that it will often be necessary to draw inferences, and listing circumstances that may be relevant in determining whether an association exists.

This addition, and the reference to association in Treasury’s recent scoping paper may suggest an increased focus on this issue.
Disclosure of substantial holdings (s 671B) New guidance specifically identifies that entering into an earlier agreement with limited terms (triggering the substantial holding disclosure) does not avoid the need for associates to disclose “substantive details of the overall transaction on the basis that a formal or collateral written agreement was (or will be) finalised at a later time” to meet their obligations under s 671B(4).

In our experience, ASIC has begun to focus its attention on parties which it believes are attempting to “accelerate” their association to avoid disclosure of the primary document that they intend to govern the terms of their agreement and which they intend to keep confidential. This has particular relevance to joint bid scenarios. The practical implication of this guidance is that ASIC will continue to closely monitor disclosure of an association in the context of joint bids and will use its powers to make requests for information to relevant parties to enforce its policy.
No substantive changes are proposed in the areas of Options, Warrants and Escrow arrangements.

 

Takeovers: Exceptions to the general prohibition in s 606
Topic Proposed change Implications
Creeping acquisitions (s 611 item 9) ASIC states that full and ongoing compliance with substantial holding and other disclosure requirements is essential to ensure that creeping takes place in an efficient, competitive and informed market, and indicates that it may apply to the Takeovers Panel if that is not the case. ASIC’s additional comments, and the reference to creeping in Treasury’s recent scoping paper may suggest an increased focus on this issue.

 

Takeovers: Exceptions to the general prohibition in s 606
Topic Proposed change Implications
 

ASIC also confirms existing policy that:

  • it may give relief to enable reliance on the 3% creep exception if a holder has had its voting power diluted to below 19% in the six months before a creeping acquisition, provided, the holder did not have an opportunity to participate in the diluting securities issue on terms no less favourable than those available to other holders; and
  • the 3% creep provision is not cumulative with other exceptions to the 20% rule (ie cannot exclude from the 3% calculation, shares acquired in reliance on other exceptions, for example as an underwriter).
 
Rights issues (s 611 item 10 & 10A)

 

ASIC has signalled that it will take a more active approach in relation to rights issues which have the potential to affect the control of an issuer. In particular, the draft Regulatory Guide anticipates that ASIC may:

 

  • make inquiries of directors, underwriters and others to determine whether all reasonable steps have been explored and put in place to minimise the potential effect on control of the rights issue; and
  • request that the parties take further action, such as offering other parties an opportunity to underwrite part of a shortfall, modifying the terms or structure of a rights issue or seeking member approval.

 

More broadly, ASIC has aligned its policy with the Panel’s equivalent guidance in this area, picking up on a number of terms and approaches to rights issues which may contribute to “unacceptable circumstances”. ASIC has also expanded on the disclosure which it expects to see provided to members in relation to rights issues which have a potential effect on control. Under the draft Regulatory Guide, this may now have to include details on the arrangements and the potential impact any change in control may have on the issuer’s future direction and prospects. In terms of enforcing its views, ASIC has indicated that it will take all of these additional matters into account when considering: 

 

  • relief applications related to the rights issue (eg in respect of a shortfall facility); 
  • approving a nominee for excluded foreign holders (something which is generally required where any foreign holders are to be excluded from a rights issue and the entity has, or as a result of the issue may have, holders with >20%); and 
  • in determining whether to seek to commence proceedings in the Panel in respect of the rights issue.

 

 

 

Issuers with holders >20% (or who may have holders >20% as a result of the issue) or who otherwise require ASIC relief will need to provide more information to ASIC when requesting that ASIC exercise its discretionary power or approve a nominee for foreign holders, in order to convince ASIC that there is no “unacceptable” control effect from the offer.

ASIC was already withholding relief from, or refusing to approve nominees for, issuers who were proposing to structure rights offering in a way which ASIC considered had an unacceptable control effect. This policy has now been formalised.

 

Where a rights issue is likely to have an effect on control of an issuer, the issuer will have to be ready to provide details on what impact the change in control may have on the issuer’s future direction and prospects – this will require input from the party who may come to control the issuer.

 

Underwriting (s 611 items 10, 10A and 11)

ASIC has reiterated that the central element of an underwriting arrangement for the purpose of s 611 is the assumption of risk by the underwriter. In its draft Regulatory Guide, ASIC has stated its view that underwriting arrangements that depend on sub-underwriting or are subject to termination events within the underwriter’s control will not be considered “underwriting” for the purposes of s 611, as they do not involve the necessary assumption of risk.

 

Issuers will have to ensure that, where a potential underwriter or sub-underwriter will require the benefit of one of the underwriting exceptions to be able to take up the shortfall in an issue of securities, the underwriting agreement gives rise to the genuine assumption of risk by that underwriter.

 
No substantive changes are proposed in the areas of On-market purchases during the bid period and Acquisitions by brokers as principal.

 

Takeover bids
Topic Proposed change Implications
Collateral benefits (s 623)

 

The draft Regulatory Guide introduces a new criteria that ASIC will consider in determining whether a benefit is “likely to induce” acceptances under a takeover

 

 

A bidder, associate of the bidder or a target holder who is a party to an arrangement that benefits the holder will need to consider the new criteria

 

 

bid, and confirms that ASIC’s policy on collateral benefits will be applicable to schemes.  

Transactions involving the bidder, associate of a bidder and a target holder  which are beneficial to the holder will need to be considered against ASIC’s (non-exhaustive) criteria. 

 

ASIC also confirms that relief from the collateral benefits prohibition will be granted only in limited cases.

 

(summarised below) in view of possible regulatory scrutiny under the collateral benefits prohibitions. Given ASIC’s policy is to look at the “overall circumstances” other factors may also become relevant.

 

Is there a link (direct, implied, informal or undocumented) between the transaction and the holder’s acceptance of a takeover bid?

 

Is the transaction likely to have a material effect on the holder?

 

Can the benefit be explained by the context, such as by reference to normal commercial matters independent of the holder’s holding in the target? Does it go further than necessary to address the effect of a successful bid on a pre-existing interest? Are there objective indicators suggesting a benefit that is likely to induce a holder’s acceptance into a bid, such as an arrangement which is unnecessarily complex or circuitous or inconsistent with its stated purpose, or an arrangement which has been entered into selectively with certain holders, unnecessarily favouring larger holders?

Bidder’s intentions (s 636)

ASIC updates its existing discussion of this topic with references to decisions of the Panel, noting that the Panel has found that a failure to formulate intentions may amount to a departure from the purposes of Chapter 6.

 

 

ASIC has abbreviated its discussion of the case law on this issue (which was important in the pre-Panel era) but supplemented that with references to Panel decisions on this issue.

Acceptances

 

New class order relief that will treat CHESS acceptances as being effective as soon as they are received by the bidder (rather than requiring those acceptances to then be processed to be effective, as was held in Australian Pipeline Limited v Alinta Limited)

 

 

ASIC has long been willing to grant this relief on a case-by-case basis, but it is typically only sought where the time at which the acceptance is effective is critical (eg to achieve the minimum acceptance condition or trigger an automatic extension in the closing phase).

 

Acceptance facilities

 

New class order relief confirming that a bidder does not obtain a relevant interest in acceptances held in a compliant acceptance facility. One of the conditions imposed is that participation in the acceptance facility must be unrestricted or only restricted to institutional investors who confirm that their mandate prevents them accepting a conditional bid.

 

 

ASIC appears to have taken the view that an acceptance facility available only to institutions runs the risk of offending the s 602 equal opportunity principle (despite the Panel’s decision in Patrick 03), and is only justified if confined to institutions whose mandates would otherwise prevent acceptance. In our view, if this requirement is maintained, bidders may be likely to err on the side of caution and make the facility available to all shareholders (as was the facility in Brookfield’s recent takeover bid for Thakral Holdings Group).

 

Closing phase tactics (s 624(2)(b))

 

New guidance in respect of case-by-case relief to allow acceptances in an acceptance facility to be counted toward the automatic 14 day extension triggered by achieving a relevant interest above 50% in the last seven days of a bid.

 

 

We query whether, rather than continue to give case-by-case relief as it has in the past, it would be more efficient to simply give class order relief.

 

Joint bids

 

ASIC proposes to broaden its policy on joint bids to apply to schemes of arrangement (joint bid relief was previously granted to joint bids structured as schemes on a case-by-case basis).

 

In addition, ASIC proposes to modify its policy to facilitate a joint bid without the condition requiring the joint bidders to accept or match a higher rival bid or scheme where one of the joint bidders has less than a 3% relevant interest in the target securities, although ASIC will have regard to the overall situation and potential deterrent effect of any joint bid before granting relief without this condition. If an “accept or match” condition is not imposed, ASIC will require joint bidders to consult with ASIC regarding any bona fide third party proposal that arises.

 

 

The extension of joint bid relief to bids structured as schemes of arrangement in ASIC’s policy confirms relief which ASIC has generally been willing to grant on a case-by-case basis. The policy provides clarity regarding the application of the joint bid policy to schemes.

 

The possibility that joint bid relief may be granted without requiring an “accept or match” condition where one joint bidder has less than a 3% interest in target securities may provide additional flexibility in limited circumstances but the accept or match condition will remain a significant disincentive for the majority of entities considering seeking joint bid relief. Proceeding by way of shareholder approval of the joint bid arrangements under item 7 of s 611 remains a viable alternative

 

No substantive changes are proposed in the areas of Takeover offers generally, Bids for multiple classes, Conditional offers, Target’s statements, Consents, Supplementary statements, Variation of offers, Non-compliant bids.

 

Compulsory acquisitions and buyouts
Topic Proposed change Implications
Post-bid compulsory acquisition

 

New class order relief to modify the 90% relevant interest threshold test for post bid compulsory acquisition to clarify that:

 

  • deemed relevant interests arising from a controlling interest in a body corporate or managed investment scheme are counted when determining whether the 90% threshold test is met;
  • deemed relevant interests of the bidder’s associates under s 608(3)(a) (ie relevant interests held by a body corporate or managed investment scheme in which the bidder’s associate’s voting power is > 20%) are excluded from the 90% threshold test.

 

 

The new class order relief is relevant to determination by bidders as to whether the 90% relevant interest test for post-bid compulsory acquisition is met. It is helpful in clarifying that deemed relevant interests in bid class securities held by body corporates controlled by the bidder will be counted when determining whether the 90% threshold test is met.

 

No substantive changes are proposed in the areas of General compulsory acquisition, Buyout rights, Expert reports, Lodging compulsory acquisition and buyout documents.

 

 

  











For further information, please contact:

 

David McManus, Partner, Ashurst

 

Carl Della-Bosca, Partner, Ashurst

 

Anton Harris, Ashurst

[email protected]

 

Ben Langford, Ashurst

[email protected]

 

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