ASIC's Review of Corporate Finance Activities: Observations and Key Areas of Focus
The Situation: The Australian Securities and Investments Commission ("ASIC") recently released its half-yearly report on its corporate finance regulatory activities for the second half of calendar year 2019 (1 July–31 December 2019). Although the COVID-19 outbreak means we are now operating in a different M&A environment, ASIC's insights remain valuable for dealmakers.
The Result: Of particular interest in ASIC's statistics was the marked increase in transactions led by Australian acquirers—accounting for 47% of all deal value during the period. Given the recently introduced temporary changes to Australia's foreign investment laws, we expect that through 2020, the level of foreign involvement in Australian M&A will be subdued.
Looking Ahead: Along with continuous monitoring of schemes of arrangement to ensure the equality and fairness principles are upheld in public M&A transactions, ASIC has shown a willingness to intervene where they consider that parties have not accurately disclosed equity derivative positions. Separately, ASIC is keeping a close watch on the circumstances of any trading of target securities by an acquirer during a control transaction.
Observations on Public M&A Activity Based on ASIC's Reported Deal Statistics
While the six-month period to 31 December 2019 seems to be an entirely different world to what we are now experiencing in light of COVID-19, the following statistics are worth noting:
- The number of control transactions for the six-month period ending December 2019 increased by 41.38% from the prior six months.
- Continuing previous trends, there was a larger number of deals executed by way of a scheme of arrangement rather than a takeover bid. Again, larger control transactions were generally implemented via a scheme of arrangement, whereas lower value deals (under $50 million) were undertaken via a takeover bid.
- There was a notable increase of 86.67% in the number of control transactions led by domestic offerors relative to foreign offerors (which decreased by 7.14%). Domestic offerors were responsible for 47% of all deal value—an increase of 20% from the previous period. However, foreign offerors still represented 53% of all deal value, being behind the larger deals (including the largest deal—China Mengniu Dairy Company's acquisition of Bellamy's Organic).
- Of the 10 largest transactions reported by ASIC, almost half involved private equity bidders, although in contrast to the prior period, the PE transactions were not aggregated at the top of the list.
- Consistent with the previous period, four of the top five transactions involved cash only offers (as opposed to scrip offers).
ASIC's Key Concerns and Areas of Focus in Public M&A
Shareholder Equality Is a Primary Concern in Schemes of Arrangement. ASIC reported that shareholder equality is a primary concern when reviewing schemes of arrangement. ASIC's report pointed to two examples.
- Class Composition and Voting: Two entities associated with directors proposed to invest in a joint venture into which assets of the scheme company were to be sold. Those directors proposed to vote in the same class as other members, but would not provide a voting recommendation. ASIC considered this to be inappropriate, given that no other members were to be given the ability to maintain an investment in a material portion of the scheme company's business. Ultimately, ASIC did not formally intervene, as the target directors undertook to not vote in the same class as other members, the arrangements were disclosed in the scheme booklet, an expert opined that the investment opportunity provided no "net benefit", and the director entities made appropriate disclosures identifying their association with the acquirer.
- Collateral Benefits: In a scheme proposed by an externally managed investment company, an expert report stated that three members who held shares in the external manager would obtain a net benefit. This was because the external manager would be novating its management rights and certain transitional services to the relevant acquirer. ASIC intervened to require two of the three members to not vote, and to tag the votes of the remaining member (so that it could be considered by the court at the approval hearing if necessary) as ASIC accepted that the benefit to that remaining member was likely immaterial. ASIC's concerns were also mitigated by disclosure.
ASIC reminds practitioners to be on the front foot in taking proactive steps where collateral benefit concerns may arise.
Market and Procedural Integrity—Disposal of Shares in the Scheme Company Held by the Acquirer. When an acquirer sells shares which it holds in the scheme company, before the scheme meeting, questions may well be raised. In that regard, ASIC mentioned the trust scheme involving Australian Unity Office Fund ("AOF"), where the Abacus Property Group and Charter Hall Group ("Consortium") divested its existing 19.9% stake off-market, at a discount, before the scheme meeting.
ASIC was concerned that the discounted sale by the Consortium gave the new share owners an incentive to vote in favour of the scheme (whereas had the Consortium retained the shares, they would have been precluded from voting those shares). ASIC applied to the Takeovers Panel for a declaration of unacceptable circumstances—alleging that the Consortium had intervened in the market for AOF securities in a way that undermined the integrity of the trust scheme mechanism, and not all unitholders in AOF would have had an equal opportunity to participate in the benefits offered under the scheme, given the nature of the discounted sale process.
ASIC sought orders that if the scheme were approved, the Consortium should make a cash payment to all AOF unitholders (other than those that acquired units from the divestment) in an amount equal to the "benefit"—the difference between the sale price under the divestment and the prevailing market price. Otherwise, ASIC asked that AOF should determine whether the requisite majorities for the scheme resolutions would be achieved by subtracting 19.9% of units from all votes cast in favour of the resolutions and treating those units as if they did not cast a vote.
Ultimately, ASIC withdrew its application as the scheme vote did not succeed. However, practitioners should note that ASIC will continue to keep a close watch on the circumstances of any trading of target securities by an acquirer during a control transaction.
Accurate Disclosure of Equity Derivative Positions. ASIC continues to raise concerns about the use of equity swap arrangements in the context of control transactions.
In a recent example, ASIC intervened where it found that a shareholder had failed to adequately disclose its total economic exposure acquired through various swap positions. ASIC further uncovered that the shares that the writer of a swap purportedly held to hedge its position were in fact held beneficially for the shareholder—with the result that the shareholder's relevant interest exceeded the 20% takeovers prohibition at an earlier point in time. To remedy the situation, the shareholder agreed to reduce its total economic interest (i.e. both physical holdings and swap positions) to below 20% and to provide proper substantial holding disclosures.
Restructuring Transactions—Relief for Share Transfers Using Section 444GA of the Corporations Act
In the current environment where COVID-19 restrictions are expected to result in a number of corporations needing to restructure, it is important to remember the relief provided by ASIC on share transfers utilising section 444GA of the Corporations Act. Under 444GA, the administrator of a deed of company arrangement may transfer shares in the company if it has the share owner's written consent or the permission of the court.
Where this transfer would result in a person acquiring shares carrying voting power of more than 20% in a public company, ASIC may grant relief to facilitate the transaction if the administrator prepares the required explanatory materials, including an expert report prepared in a manner consistent with ASIC's policy expert reports and on a liquidation basis.
ASIC has been consulting with the market in relation to its proposed guidance on when it will grant relief of the type mentioned above, and expects to release its final position later this year.
ASIC'S Focus on Prosecution Extends to Public M&A
ASIC's stricter approach to enforcement extends to contraventions in connection with control transactions, or the acquisition of a substantial interest in shares.
The Commonwealth DPP is currently prosecuting a former director of Bellamy's Australia Limited for failing to disclose her relevant interest in Bellamy's. ASIC alleges that the director's initial substantial holder notice was misleading as it failed to properly disclose her relationship and association with another party—the Black Prince Foundation.
The report also mentioned a conviction for a person providing false and misleading information to ASIC in relation to interests in shares in Northwest Resources Limited.
Five Key Takeaways
- In contrast to the first half of 2019, domestic acquirers accounted for the clear majority of the number of public M&A deals executed in the Australian market, with schemes of arrangement continuing to be the clear choice for executing substantial deals. Offshore acquirers, however, still account for over half of total transaction value. It will be interesting to see how the recent changes to Australia's foreign investment laws may skew these figures in 2020.
- ASIC's M&A regulatory priorities include: fairness and equality in schemes of arrangement (consistent with the previous period), market and procedural integrity in relation to control transactions, and accurate disclosure of equity derivative positions in takeover bids.
- ASIC will intervene where it has identified deal structure, disclosure or conduct issues in relation to control transactions. Class composition, voting arrangements and collateral benefits continue to remain in focus.
- The trading of target securities by an acquirer during a control transaction will continue to attract ASIC's attention—and potentially intervention, particularly if it appears that target shareholders are not being given an equal opportunity to participate in any benefits under a control transaction.
- ASIC's "why not litigate" approach is extending to contraventions in connection with control transactions and acquisitions of a substantial interest in shares, noting that such contraventions can attract criminal liability under the Corporations Act.
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