Jurisdiction - Australia
Reports and Analysis
Australia – Corporations Amendment (Simple Corporate Bonds And Other Measures) Bill 2013.

18 January, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Capital Markets


Summary

 

The Government has released new legislation aimed at facilitating the growth of the retail corporate bond market in Australia. The Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 (Cth) (‘draft legislation’) was released on 11 January 2013 and is intended to simplify regulation governing the issue of ‘simple corporate bonds’ to retail investors by:

  • introducing a special disclosure regime for simple corporate bonds; and
  • removing the presumptive civil liability for directors of issuers of simple corporate bonds under a defective prospectus.

The amendments also introduce due diligence-type defences to certain criminal liabilities that can arise in connection with disclosure documents.

‘Simple corporate bonds’

‘Simple corporate bonds’ are debentures in relation to which the following conditions are satisfied:

  • they are or will be quoted on ASX or another prescribed financial market;
  • they are denominated in Australian currency and issued for a maximum price of $1,000 each. The price payable must be the same for all investors under the offer;
  • they are issued under an offer which raises at least $50 million;
  • they have a fixed term of not more than 10 years and are only redeemable early (other than at the option of the holder) in limited circumstances;
  • they bear interest at a fixed interest rate, or at floating interest rate plus a fixed margin. The fixed rate or margin cannot be decreased during the term;
  • interest must be paid periodically, no later than the end of the fixed term and cannot be deferred or capitalised;
  • they have a higher priority than unsecured creditors of the issuer in a winding up of the issuer. In effect, this will require simple corporate bonds to be secured and can be expected to significantly limit the appeal of the new regime, particularly to well rated corporate issuers who borrow on a negative pledge basis;
  • they are not convertible into another class of securities;
  • the auditor’s report in respect of the issuer’s most recent annual or semi-annual financial report must not have been qualified;
  • if the issuer is a wholly owned subsidiary of another body corporate, the bonds must be guaranteed by that body corporate; and
  • either the issuer or parent guarantor have continuously quoted securities on issue that have not been suspended from trading for more than 5 days during the past 12 months.

ASIC has the power to determine that certain bodies do not qualify to issue simple corporate bonds under the new regime. Further conditions may also be specified in the regulations.

Disclosure regime

Offers of simple corporate bonds for issue will be subject to a new, 2-part prospectus regime.

A 2-part simple corporate bond prospectus consists of a ‘base prospectus’, with a 3 year shelf life, and an offer-specific prospectus.

The draft explanatory memorandum indicates that the base prospectus will be required to contain general company information. It will be valid for three years and must be available on the issuer’s website for the whole of that time. It will not be required to be updated.

The offer-specific prospectus will be required to be issued for each tranche of notes, and the explanatory memorandum indicates that it will be required to outline the key details of the offer. The offer-specific prospectus will be required to have an expiry date, which must be no later than 13 months after the date the document is lodged with ASIC. The offer-specific prospectus may also modify or supplement the base prospectus. The offer-specific prospectus must be available on the issuer’s website during the offer period.

Together the two parts will constitute a prospectus in relation to the securities to which the offer-specific prospectus relates. The date of the prospectus is when the offer-specific prospectus is lodged with ASIC.

It is not yet clear what information will be required to be included in a 2-part prospectus. The draft legislation excludes 2-part prospectuses from most of the prospectus content requirements of the Corporations Act, providing instead that such prospectuses must contain information to be prescribed in regulations. However, it is notable that section 716(2) will continue to apply: section 716(2) contains the expert consent requirement and provides the basis upon which ASIC objects to the inclusion of credit ratings in retail prospectuses. This may indicate that calls for reforms to facilitate credit ratings to be made available to retail investors have not found favour.

During the first 2 years after commencement, issuers will be able to choose between proceeding under the existing prospectus regime and the 2-part simple corporate bond prospectus regime; after that time, the two-part simple corporate bond prospectus regime must be used. The policy rationale for mandating the use of the 2-part prospectus regime is unclear, and given this inflexibility it is to be hoped that the new regime is not unduly prescriptive.

Exposure period

Offers of simple corporate bonds under a 2-part prospectus will not be subject to the exposure period (7 to 14 days) where securities being offered are in the same or a similar class as existing securities that are quoted on a prescribed financial market. For this purpose the offered bonds may differ from the existing quoted class only with respect to their term, interest rate and interest payment dates.

Directors liability

The Government has responded to submissions to ease the liability standard on directors in the context of bond issues by removing directors from the class of persons automatically liable (subject to due diligence defences) for a defective 2 part prospectus under section 729.

This means that directors will only have civil liability in respect of a defective 2 part simple corporate bond prospectus if personally involved in the defective statements. This also means (perhaps unintentionally) that directors are absolved from the obligation under section 730 to notify the issuer if they become actually aware of the defect during the offer period.

However, directors are still required to consent to the issue of a 2 part simple corporate bond prospectus. This potentially engages the criminal liability provision contained in section 1308 and 1309 whereby directors who authorise the issue of a misleading or deceptive disclosure document may be presumed guilty of an offence if they fail to take reasonable care to ensure that the document is not misleading or deceptive. Whilst the amendments also include the addition of due diligence defences to liability under these provisions, the extent to which those defences add anything to the existing reasonable care element of the offences themselves is questionable.

Consultation

The draft legislation introduces a number of changes likely to ease the regulatory burden on companies seeking to issue bonds to retail investors, but there is room for improvement. In particular, the apparent failure to address the use of credit ratings and restriction of the new regime to secured bonds are likely to limit the utility of the amendments. Directors are also likely to be interested in amendments to the criminal liability provisions, and the required content of the new prospectuses remains to be addressed in regulations.

Interested parties have until Friday, 15 February 2013 to comment on the draft bill.

 

 

For further information, please contact:

 

Patrick Lowden, Partner, Herbert Smith Freehills

[email protected]

  

Philippa Stone, Partner, Herbert Smith Freehills

[email protected]

 

 Herbert Smith Freehills Capital Markets Practice Profile in Australia

 

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