Highlights From ASIC's December Corporate Finance Update
The Situation: The Australian Securities and Investments Commission ("ASIC") recently released its third Corporate Finance Update for 2020 ("Update").
The Result: During September-December 2020, ASIC actively intervened in multiple fundraising activities and public M&A transactions, which by itself is a sign of the times. The Update also highlights various temporary COVID-19-related corporate governance regulatory relief measures that have been extended, as well as new guidance across fundraising and M&A.
Looking Ahead: Many of the temporary COVID-related regulatory relief measures introduced during 2020 should remain until well into 2021—these include capital-raising initiatives and a raft of corporate governance measures. However, the policy around use of those measures has been tightened and refined. For those pursuing capital raises or public M&A deals, attention should be given to those activities which attracted ASIC intervention during the review period.
ASIC's Observations on Fund Raising
Technical Practice Points
ASIC's Update discusses a range of technical points, including:
- The need for balanced disclosure when including financial forecasts: ASIC does not permit inclusion of a single headline ratio in an offer document but requires balanced disclosure with other ratio analysis based on audited or reviewed financial statements.
- Use of non-IFRS financial information: ASIC suggests that prominence should not be given to management's view of ‘underlying profits’ which are derived from pro-forma financial statements (although the use of pro-forma financial statements is accepted by ASIC).
- Use of a reduced-disclosure prospectus requires compliance with other disclosure laws: ASIC mentioned that it had restricted a company's eligibility to issue a reduced-content prospectus because the company had failed to comply with its ongoing disclosure obligations.
- ASIC won't accept Prospectuses where the company is not yet a public company: If a proprietary company lodges a prospectus with ASIC or otherwise engages in activity that would require disclosure (unless permitted by the Corporations Act 2001 (Cth) ("Corporations Act")), ASIC will not accept the document, may seek an injunction for a contravention, or issue a stop order on the document. Companies looking to IPO should remember that this can affect selling shareholders, not just the entity seeking listing.
Regulatory Relief—Extension for 'Low Doc' Offers
Due to continuing uncertainty caused by COVID-19, ASIC has extended the temporary 'low doc' relief for capital raisings until 1 January 2021.
It will be interesting to see whether COVID-related fund raising relief measures continue to be extended in 2021. Anecdotal evidence suggests reliance on the relief is decreasing, and regulatory policy around use of relief measures may be tightening, but regulators are being cautious about withdrawing relief entirely.
ASIC's Recent Regulatory Guidance and Areas of Focus in Public M&A
Areas of Intervention
ASIC actively intervened in particular M&A transactions where it was concerned with structural or conduct elements, as follows:
- Election of consideration on contingent events: In a recent scheme of arrangement where shareholders were able to make a cash or scrip election, ASIC required the scheme timetable to be amended so that target shareholders would have sufficient time to submit proxies following the target's announcement of indicative consideration election results and also of whether any contingent consideration was payable (this was subject to certain preconditions).
- 'No increase' statements: ASIC referred to a competitive takeover scenario in which a bidder made a 'no increase' statement subject to a higher competing offer qualification. Relevantly, a competing bidder then increased its bid to a value equal to that of the first bidder—following which the target issued an announcement to the market which did not make it clear whether the higher competing offer qualification had been enlivened (and whether the original bidder could then depart from their earlier 'no increase' statement). ASIC required the first bidder to immediately clarify their position (noting that the issue was also taken to the Takeovers Panel), and in that context, ASIC reminds market participants to be mindful of the risk of uncertainty arising from unclear public disclosures.
- Assessment of fairness: Independent expert's reports have long attracted ASIC's attention. Recently, ASIC raised concerns with an expert's fairness assessment in a scrip merger scenario – specifically, inconsistencies with the value range of the target in comparison to that of the merged entity scrip value range. Ultimately, the expert revised its fairness opinion from 'fair' to 'not fair'.
Regulatory Developments and Guidance
- Stub equity: Although it has been on ASIC's radar for a few years, in late September 2020, ASIC introduced an instrument to modify the Corporations Act with the intention of preventing the offer of stub equity scrip in a proprietary company being made to large numbers of retail target shareholders in takeover bids or schemes of arrangement. Acquirers who offer target shareholders stub equity should expect that ASIC will scrutinise related disclosure materials.
- Distressed M&A—ASIC relief for share transfer transactions: Section 444GA of the Corporations Act allows shares of a company in administration to be transferred as part of a deed of company arrangement, for no consideration—provided the consent of the owner of the shares is obtained or the court grants leave. ASIC has released updated guidance confirming when it will grant takeover (Chapter 6) relief for such transfers. ASIC will require explanatory materials to be provided to shareholders, including an IER which confirms that shareholders have no residual equity in the company (and otherwise in accordance with ASIC's regulatory guides 111 and 112).
Corporate Governance Relief Measures
ASIC has been active throughout 2020 in granting regulatory relief and demonstrating flexibility in working with companies to navigate various legal formalities which have taken on increased complexity as a result of COVID-19. ASIC's Update confirms that the following relief measures have been extended:
- Financial reporting deadlines: ASIC has extended the deadlines for lodgement of financial reports by listed and unlisted entities under Chapters 2M and 7 of the Corporations Act by one month for certain balance dates up to and including 7 January 2021.
- AGM 'no action' position: Public companies that do not hold their AGMs within five months after the end of financial years that end from 31 December 2019, to 7 January 2021, but do so up to seven months after year end, will be afforded the relief of ASIC taking a 'no action' position. This is not a modification of the law, but offers some comfort as to the regulator's attitude.
- Continuous disclosure provisions: Treasury has extended the existing temporary relief in relation to the continuous disclosure provisions of the Corporations Act so that companies and officers are only liable where there has been "knowledge, recklessness or negligence" with respect to updates on price sensitive information to the market for a further six months until 23 March 2021.
- Financially distressed businesses: Treasury has extended the temporary insolvency and bankruptcy protections until 31 December 2020.
ASIC has extended the ability to electronically sign and lodge by email deeds of cross-guarantee, assumption deeds, and certificates until 21 March 2021. Further, proposed legislation for permanent modification of the Corporations Act to facilitate use of electronic signatures and virtual meetings is through the consultation stage, and the market awaits the final form of the reforms.
Interestingly, for U.S.-based corporates, we also note that the U.S. Securities and Exchange Commission ("SEC") has recently ruled to permit the use of electronic signatures in authentication documents filed with the SEC through its Electronic Data Gathering, Analysis, and Retrieval system.
Four Key Takeaways
- Noting the flood of fund raising activity into the end of 2020, ASIC has issued some timely reminders, including in relation to the presentation of financial information and also that the ability to utilise a reduced-disclosure is a privilege not a right.
- ASIC actively monitors market activity, and has a variety of intervention tools at its disposal should it become concerned, and it is using them.
- ASIC is focused on both structural and conduct elements of public M&A deals. Providing target shareholders with clear disclosure and sufficient time to make decisions remains key.
- In 2020, Australian corporates and practitioners welcomed the introduction of a suite of COVID-related capital raising and corporate governance regulatory relief measures which made a meaningful difference to the stability and accessibility of Australian markets throughout the year. Pleasingly, substantially all of these have been rolled forward into 2021.
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