This article was written by Heath Lewis. This first appeared in Business News.
Much has been written about the Hayne Royal Commission, from a variety of perspectives.
Commentary has focussed on organisational behaviour considered to be less than what the community expected, highlighting a raft of cultural shortcomings in the process.
Other commentary has explored the respective roles of board and management which has, for many directors, given rise to the spectre of an unhelpful blurring of the lines of responsibilities, including legal ones.
Yet other commentary picked up on the reasonably forceful dressing down delivered by Commissioner Hayne to Australia's regulators suggesting, potentially unfairly, a degree of drowsiness at the wheel of regulation.
Arguably, that was not in fact the case, with Australia's corporate regulators doing the best they can with what has been, in recent history, limited resources.
For corporates not directly impacted by the outcomes of the Hayne Royal Commission - such as many in Western Australia, operating on mine sites or in paddocks far away from retail consumers – there have been few immediate or burdensome outcomes other than a forceful reminder that corporate culture is critical and, perhaps, a sense in NED-land of "there but for the grace of God goes I".
However, one thing that should be on everyone's radar, directors, executives and advisers alike, and regardless of the industry in which they operate, is the potential for, or indeed likelihood of, Australia's primary corporate regulator, ASIC, adopting an increasingly interventionist stance, and a greater willingness (supported, no doubt, by an improved funding position) of ASIC to involve itself in transactions.
In transactional terms, we have recently observed this increased appetite to intervene in 2 areas relating to corporate takeover activity:
- intention statements
- stub equity arrangements
Albeit these are not areas of daily concern for corporates, we are treating these (and other instances) as the "canary in the coal mine" of intervention, as ASIC has committed to "maintain the rage" on these issues by committing to revisiting (or making) enforceable policy notwithstanding the issues raised by ASIC were dismissed when first raised.
Intention statements
In the context of ASIC's longstanding "truth in takeovers" policy that applies to all participants in takeover activity (ie. bidders, targets and substantial shareholders alike) making public statements of intention, ASIC has warned market participants to exercise caution when inviting shareholders to make "intention statements" where the makers of the statements speak for more than the 20% of the shares on issue.
During 2018, ASIC raised this issue in the Tawana Resources scheme of arrangement under which Alliance Mineral Assets Limited acquired all of the shares in Tawana.
Prior to the release of Tawana's scheme booklet, five Tawana shareholders, collectively holding approximately 35.9% of Tawana shares, confirmed to Tawana their individual intentions to vote in favour of the scheme.
In the hours leading up to the first court hearing with ASIC's interrogation of the circumstances surrounding the voting intention statements not having been concluded, ASIC required Tawana to include an unflattering disclosure in its scheme booklet to the effect that the intention statements might constitute arrangements that breach the Corporations Act. This, notwithstanding fulsome disclosure in the public documents and the likely insurmountable legal challenges to establishing ASIC's position.
The issue ultimately fell away following a re-set of the transaction that allowed a re-gathering of the intention statements through a process on which ASIC was afforded visibility.
Nevertheless, it demonstrated ASIC's preparedness to latch onto an issue and pursue it, even where there was arguably little support for ASIC's contention or concern.
Not that ASIC's position in the Finders Resources takeover bid fell into that category, but no doubt the outcome of Takeovers Panel and Court review proceedings in that matter (in which a substantial shareholder was ultimately permitted to accept a takeover bid following a statement that it would not do so) has have further catalysed ASIC's stated intent to review its "truth in takeovers" policy and act on intention statements.
Stub equity
Along similar lines, ASIC has recently strongly raised an issue with the use of "stub equity". In the context of its usual role assisting the Court on a scheme of arrangement, ASIC's position was not ultimately adopted by the Court, in response to which it has come out saying it would be consulting on a proposed modification of the Corporations Act to achieve its desired outcome.
ASIC has expressed a concern with takeover bidders offering "stub equity", being shares in an Australian proprietary company, in circumstances where the stub equity is held on behalf of an accepting shareholder through a custodian or nominee.
This structure, which was deployed by the bidding consortium in the Capilano Honey Limited takeover, was impugned by ASIC on that occasion on the basis that it has the effect of depriving accepting shareholders of protections associated with holding shares in widely held companies (which are necessary and appropriate due to the often lower degree of knowledge, oversight and involvement by shareholders in widely held entities).
Once again, whilst the Court managed to overcome the concerns expressed by ASIC, ASIC has taken up the running on the issue and intends to commence a consultation process which we tend to expect to result in a modification to the law which limits the circumstances in which stub equity structures can be deployed
The takeaway
Although these are fairly specific issues of M&A / corporate law and policy, we're now on notice – directors, companies and advisers should expect ASIC to adopt a more active and interventionist approach to transactions, and to corporate regulation more broadly.
