16 April 2019

Panel shores up position on equity derivatives

This article was written by Michelle Siekierka and David Friedlander.

On 10 April 2019 the Takeovers Panel (Panel) released for consultation a draft revised guidance note on equity derivatives (GN 20).  The Panel proposes to clarify its position in relation to the disclosure of equity derivatives.

The consultation paper makes it clear that all long positions of 5% or more – whether held as a physical position, in equity derivatives or a combination of both – should be disclosed.  The Panel has, in the draft revised GN 20, reflected its position that economic interests should be disclosed, irrespective of whether a control transaction is on foot or being contemplated.

Background

GN 20 was first published by the Panel 11 years ago, following 3 years of internal consultation and public consultation regarding equity derivatives.  While the public consultation version of the 2008 GN 20 contemplated that all holdings which had a combined physical position and equity derivative holding of 5% or more should be disclosed, following public consultation the focus of GN 20 was narrowed so that it was limited to ‘control transactions’.

This limitation of GN 20 was in part due to the sophistication of the market at the time (equity derivatives had only recently become more commonly used), a desire for consistency with the position adopted in the United Kingdom’s takeovers regime, and the concern that the Panel's powers were limited to control situations.

However, the world has changed since 2008:

  • Many overseas jurisdictions (such as the United Kingdom, Hong Kong and New Zealand) now require aggregation of equity derivatives with physical holdings when determining whether disclosure of substantial holdings is required; and
  • Equity derivatives are now widely used in Australia (and internationally) – recent examples include:
    • KKR taking a position in MYOB Group Limited by way of an equity derivative, before acquiring a physical position and making a takeover bid for MYOB Group Limited;
    • Mr Bruce Gordon using cash-settled equity swaps to maintain and increase his position in Nine Entertainment Co. Holdings Limited when it merged with Fairfax Media Limited (in observance of media ownership laws); and
    • Spotless Group Holdings Limited’s disclosure in relation to Coltrane Asset Management’s interest in it during Downer EDI Services Pty Ltd’s bid for Spotless Group Holdings Limited.

    Summary of draft revised GN 20

    The draft revised GN 20 states the Panel’s expectation that all long positions over 5% should be disclosed (irrespective of whether there is a control transaction) and provides guidance on the matters the Panel will take into account in considering what orders should be made if the Panel finds that non-disclosure of equity derivatives is unacceptable.

    The key aspects of the draft revised GN 20 are summarised below:

    Amendment

    Overview

    Recognition of effect of hedging

      Chapter 6C of the Corporations Act 2001 (Cth) (Act) creates the regime for the disclosure of a substantial holding where a person has a relevant interest in securities. A person will not usually have a relevant interest in securities if they do not have a right to the underlying security, the right to control disposal of the underlying security or any voting rights in respect of that underlying security.

      The draft revised GN 20 reflects the Panel’s view that a taker of a long equity derivative (even one that is cash-settled) may affect supply (and therefore perhaps price) in the market for the underlying security, and that this may in turn affect the acquisition of, or market for, control or a substantial interest in the entity.

    Disclosure of equity derivatives

    The Panel expects disclosure to be made where the long position of a person and their associates is 5% or more of the voting rights of an entity. Further, if a person (and their associates) holds 5% or more and this position then changes by at least 1% (or falls below 5%), then the Panel expects this change to be disclosed. This aligns with the disclosure requirements of Chapter 6C of the Act.

    While this practice is, in our experience, generally observed, the Panel also notes that there may be circumstances in which the Panel would consider non-disclosure to be unacceptable where the taker does not have a long position of 5% or more.

    Extension of 20% prohibition

    Footnote 2 raises the possibility that the Panel may make a declaration of unacceptable circumstances in relation to a person acquiring a long position of 20% or more by way of equity derivatives (in circumstances where, if the person had have acquired a physical position, that person would have breached the prohibition in section 606 of the Act).

    The Panel has specifically sought comments on this proposal.

    Information to be disclosed

    The Panel considers that the information should be disclosed includes the identity of the taker, details of the underlying security and the derivative, and any offsetting short position.

    Comments are being sought on the information to be disclosed, particularly whether the identity of the writer should be disclosed.

    Remedies

    If the Panel makes a declaration of unacceptable circumstances in relation to equity derivatives, the Panel may order disclosure of the derivatives, disposal of and securities, cancellation of agreements, and seek to reverse any benefits obtained, including the acquisition of control or a substantial interest.

    The draft revised GN 20 contemplates that the Panel will consider any control effect, the nature of the equity derivative and the timing of any disclosure made, when considering whether to make orders.


    Submissions

    The draft revised GN 20 has been published for consultation, with submissions due by 31 May 2019. However, stakeholders who do not disclose their long positions in equity derivatives in line with the Panel’s draft guidance in the interim will do so at their own risk.

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