21 July 2015

Same same, but useful - ASIC’s refreshed guidance on collective investor action

This article was written by David Friedlander, Rhys Casey and Akshay Naran.

ASIC has recently updated its guidance on collective action by investors in light of the significant uptick in global shareholder activism.

While the updated guidance (contained in Regulatory Guide 128) reinforces existing principles and provides some useful practical clarifications, it does not signal a shift in the existing regulatory landscape and is unlikely to change the behaviours of, or the levers used by, activist investors in Australia.

Our experience with activist hedge funds (those who make trouble for a living as distinct from ‘long-only’ funds or aggrieved long-term shareholders) is that they typically seek support from institutional shareholders, because they generally never have a sufficient stake to achieve an outcome alone. In this context, the revised guidance does serve as a significant reminder that Australia takes its 20% takeovers threshold seriously.

Why has ASIC revised its guidance?

Investor engagement is recognised as having a positive impact on an entity’s governance. However, the Corporations Act 2001 (Cwth) sets limits (principally through the takeovers and substantial holding regimes) on investors acting collectively where the intention is to illegitimately obtain control.

RG 128 is intended to provide specific guidance to encourage collective action where the purpose is to promote corporate governance improvements for the benefit of all shareholders. It also assists investors to determine whether their proposed conduct will give rise to a ‘relevant interest’ in another investor’s shareholding or indicate an ‘associate’ relationship. The guidance highlights the types of behaviours that will most likely attract regulatory scrutiny.

Examples of specific conduct

ASIC has highlighted a number of common scenarios to assist market participants to ‘find the line’ when seeking to act, or agitate, collectively.

Conduct unlikely to give rise to a relevant interest or indicate an associate relationship

Conduct more likely to give rise to a relevant interest or indicate an associate relationship

Holding discussions and exchanging views and intentions on voting where each investor is not bound to act in a certain way.

Jointly signing a notice to:
(1) requisition a general meeting; or
(2) request the addition of a resolution to be considered at a general meeting,
where the notices relate to the board or entity’s affairs.

Recommending to other investors to vote a certain way, provided that no agreement or understanding to follow the recommendation is obtained.

Agreeing on a plan concerning voting.

Discussing issues about the entity, including problems and potential solutions.

Accepting an inducement to vote or act in a specific way.

Discussing possible matters to be raised with the entity’s board.

Formulating joint proposals relating to board appointments or a strategic issue.

Making representations to the entity’s board about the entity’s policies, practices, or actions that the entity might consider taking (particularly if focused on corporate governance issues or long-term strategic or commercial risks the entity is facing).

Investors limiting their freedom to vote (eg by granting another investor their irrevocable proxy).

ASIC points out that these examples are illustrative only. Combined with other relevant factors, any particular action may still trigger the takeover or substantial holding provisions, irrespective of whether the conduct, when considered individually, is unlikely to raise a concern.

What are the key areas of interest to ASIC?

RG 128 outlines the key areas ASIC is likely to scrutinise, including action that:

  • involves an actual or proposed control transaction;
  • involves the replacement of directors of an entity;
  • concerns proposals that have benefits for particular investors rather than investors as a whole; and
  • involves investors who have a history of collective action.

What are the areas ASIC is less interested in?

Provided the relevant action is temporary and does not give rise to control implications, ASIC is less likely to examine collective action that is focused on corporate governance improvements, such as encouraging:

  • better disclosure to the market;
  • more comprehensive board evaluation processes;
  • more sophisticated risk management systems; and
  • changes to executive remuneration structures.

Final thoughts

While the revised guidance does not signal a shift in the regulatory landscape in Australia or the policy approach of ASIC, the update is welcome and serves as a useful practical guide for market participants. The refreshed guidance certainly underscores the importance of the 20% takeovers threshold in Australia, however we do not think it will have any significant bearing on M&A activity or shareholder behaviour in the context of a control transaction.

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