Corporate Finance Update - Issue 12

Issue 12, March 2023

Sustainable finance

ASIC takes first court action against greenwashing

ASIC has launched its first court action against alleged greenwashing conduct, commencing civil penalty proceedings in the Federal Court against Mercer Superannuation (Australia) Limited (Mercer) for allegedly making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options. ASIC alleges that Mercer made statements on its website about seven ‘Sustainable Plus’ investment options offered by the Mercer Super Trust, of which Mercer is the trustee. These statements marketed the Sustainable Plus options as suitable for members who ‘are deeply committed to sustainability’ because they excluded investments in companies involved in carbon intensive fossil fuels like thermal coal. Exclusions were also stated to apply to companies involved in alcohol production and gambling. However, ASIC alleges members who took up the Sustainable Plus options had investments in companies involved in industries that were excluded in the website statements. For more information, see Media Release (23-043MR) ASIC launches first Court proceedings alleging greenwashing (28 February 2023).

ASIC also issued seven infringement notices for greenwashing misconduct over the period, including:

• three infringement notices to investment manager Vanguard Investments Australia Ltd in relation to ASIC’s concerns that the Product Disclosure Statements for the Vanguard International Shares Select Exclusions Index Funds overstated a tobacco-related investment exclusion. For more information, see Media Release (22-336MR) ASIC issues infringement notices against investment manager for greenwashing (2 December 2022)
• an infringement notice to superannuation trustee Diversa Trustees Limited in relation to ASIC’s concerns that statements on the website for their product Cruelty Free Super (CFS) overstated the extent of the investment screening applied by CFS. For more information, see Media Release (22-379MR) ASIC issues infringement notice against superannuation trustee for greenwashing (23 December 2022), and 
• three infringement notices to listed energy company Black Mountain Energy Limited in relation to ASIC’s concerns with sustainability-related statements made to ASX. For more information, see Media Release (23-001MR) ASIC issues infringement notices to energy company for greenwashing (5 January 2023).

Action against greenwashing is one of ASIC’s 2023 enforcement priorities. ASIC is closely monitoring the market for misleading conduct and will take enforcement action where necessary. We remind listed issuers and their advisers to ensure that sustainability-related statements or plans have reasonable grounds and to consider the guidance set out in Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products.

Treasury’s consultation on mandatory climate reporting closes 

Treasury’s consultation on Climate-related financial disclosure closed on 17 February 2023. The consultation sought feedback on key considerations for the design and implementation of standardised, internationally-aligned requirements for disclosure of climate-related financial risks and opportunities in Australia.

The Government will consider the views submitted in response to the consultation paper and set out a specific design proposal for further consultation in 2023. This next consultation paper will provide greater detail on the new reporting requirements and their implementation and sequencing.

ASIC encourages listed companies to continue to participate in the consultation process to ensure the proposed standards are appropriate and workable for our market and economy and provide ‘decision-useful’ information for investors.

For more information about the consultation process and next steps please see Climate-related financial disclosure on the Treasury website.

Consultation and commencement of proposed reforms to the Safeguard Mechanism

Consultation on the Government’s proposal to reform Australia’s Safeguard Mechanism closed on 24 February 2023. Feedback was sought on the proposed approach for setting baselines for existing and new facilities including the rate of decline, arrangements for issuing and using ‘Safeguard Mechanism Credits’ and providing access to flexible compliance arrangements (such as access to credits, offsets, banking and borrowing arrangements, multi-year monitoring periods and a cost containment measure).

The proposed reforms have been designed to deliver emissions reductions that are consistent with Australia’s updated Nationally Determined Contribution under the Paris Agreement and strengthen Australia’s competitiveness in a decarbonising global economy.

The Safeguard Mechanism reforms will commence on 1 July 2023. ASIC encourages listed companies to start considering and preparing for how these proposed changes will affect them and reminds listed companies of their various disclosure obligations under the Corporations Act 2001 (Corporations Act).

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Fundraising

DDO regulatory action

One of ASIC’s strategic priorities is ensuring compliance with the design and distribution obligations (DDO). ASIC recently commenced civil penalty proceedings for alleged breaches of DDO against:

• Firstmac Limited, a distributor of interests in a registered managed investment scheme called Firstmac High Livez. ASIC alleges that in marketing and distributing High Livez to term deposit holders, Firstmac failed to take reasonable steps to ensure that the product was distributed in accordance with the target market determination (TMD). For more information, see Media Release (22-361MR) ASIC takes further civil penalty action for breaches of design and distribution obligations (16 December 2022), and
• American Express Australia Limited, an issuer of a credit product. This case concerns two credit cards issued by Amex that were co-branded with retailer David Jones. ASIC alleges the target market determinations for these products were deficient. ASIC also alleges that the issuer failed to cease issuing these products in circumstances where it knew or ought to have known that the determinations were no longer appropriate. For more information, see Media Release (22-338MR) ASIC takes civil penalty action against American Express Australia in first court case alleging breaches of design and distribution obligations (6 December 2022).

We also continue to conduct targeted surveillances to check compliance by issuers and distributors. Under the DDO provisions, ASIC can take urgent action to protect retail investors. To date, ASIC has made 26 stop orders against issuers of investment products for a defective TMD and has also achieved a number of negotiated outcomes where the offer was not yet open. We will continue to prioritise regulatory action on products that pose the greatest risk of consumer harm.

We will shortly publish a report providing observations on how issuers of investment products are complying with DDO and ‘Areas for improvement’. 

Changes for employee share schemes 

Employee share schemes (ESS) are now regulated by Part 7.12 of the Corporations Act (ESS provisions).

The ESS provisions are intended to replace two ASIC instruments: Class Order [CO 14/1000] Employee Incentive Schemes: Listed bodies and Class Order [CO 14/1001] Employee Incentive Schemes: Unlisted bodies.

From 1 March 2023, entities are no longer able to make new offers under the class orders: see ASIC Corporations (Amendment) Instrument 2022/1022.

The ESS provisions reflect the Parliament’s preferred regime for employee share schemes. If entities wish to apply for individual relief, they must explain why they cannot comply with the ESS provisions. We recently refused an application because it only explained why the company could not comply with [CO 14/1000]. One exception is where an entity has undergone a restructure and needs relief so that it can deal with eligible products that were issued under [CO 14/1000].

ASIC has given minor legislative relief to fix technical issues with the ESS provisions: see ASIC Corporations (Employee share schemes) Instrument 2022/1021. We consulted on this relief in Consultation Paper 364 Modifications to the ESS regime and have published Report 759 Response to submissions on CP 364 Modifications to the ESS regime, which provides some guidance on stakeholder queries relating to the ESS provisions. We have also made a determination of foreign financial markets for the purposes of s1100K. These are the same as approved foreign markets under ASIC Corporations (Definition of Approved Foreign Markets) 2017/669: see ASIC Corporations (Amendment) Instrument 2023/160.

Fundraising activity from July to December 2022

Table 1: Public fundraising activity (July to December 2022)

July to December 2022	Previous period (January to June 2022)
289 original disclosure documents lodged, $3.54 billion sought	245 original disclosure documents lodged, $7.23 billion sought
40 IPOs, $0.54 billion sought (value by original disclosure document)	56 IPOs, $0.79 billion sought (value by original disclosure document)
Top 10 fundraisings completed raised $4.30 billion	Top 10 fundraisings completed raised $7.56 billion

The aggregate amount raised by the top 10 completed fundraising transactions ($4.3 billion) exceeded the total sought to be raised under the original disclosure documents lodged with ASIC ($3.54 billion) because some issuers increased the amount sought to be raised using a replacement document.

The largest offers over the period included the Commonwealth Bank of Australia hybrid security offer (raising $1.77 billion), the Macquarie Group Limited hybrid security offer (raising $0.75 billion), the Insurance Australia Group Limited hybrid security offer (raising $0.5 billion) and the Bank of Queensland Limited hybrid security offer (raising $0.40 billion). The remaining offers included offers of notes or shares by unlisted issuers, an IPO and an entitlement offer by a listed issuer.

Disclosure relief

Below is a summary of the outcomes of applications for relief from the requirements of Chapter 6D of the Corporations Act to provide prospectuses and other disclosure documents for the period from 1 July to 31 December 2022.

Table 2: Outcome of disclosure relief applications determined (1 July – 31 December 2022)

Approved	Refused	Withdrawn
38	0	7
84%	0%	16%

Note: The statistics reported are based on individual relief decisions, rather than a singular head of power under which several decisions may be made (a change in approach to our previous reporting).

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Mergers and acquisitions

Relief granted to allow a bidder’s statement to quote from the target’s website

We granted relief from the ‘consent to quote’ requirement in section 636(3) of the Corporations Act in connection with an off-market takeover bid to allow a bidder to use information from the target’s website in its bidder’s statement. The information related to private treaty sales of securities in the target and shareholder announcements relating to the bid. 

Section 636(3) of the Corporations Act prohibits the inclusion in a bidder’s statement of a statement by a person without the person’s consent. ASIC has granted class order relief under Class Order [CO 13/521] Takeover bids so that the bidder’s statement may include a statement by a person without the person’s consent if the statement was made in a document that has been lodged with either ASIC or a prescribed market operator. ASIC Corporations (Consents to Statements) Instrument 2016/72 provides similar relief for the use of trading data. 

The bidder was unable to take advantage of ASIC’s class order relief as the target was an unlisted public company. We granted individual relief due to the essentially factual nature of the target’s information, and because we were satisfied that the bidder’s statement fairly represented the information each time it was used. 

Relief from item 6 of section 633 to facilitate a variation of the terms under a takeover offer

We required a bidder to apply for individual relief to vary the terms of its off-market takeover bid before dispatching the bidder’s statement to target shareholders. Although the bidder purported to increase the consideration offered by way of a supplementary bidder’s statement and notice of variation, this did not technically comply with the process as set out in section 633 of the Corporations Act. 

Generally, it is not possible to vary the proposed terms of an offer before dispatch of the offer documents by way of a supplementary or replacement bidder’s statement without ASIC relief. This is because the offer dispatched to target shareholders must be on the same terms as those set out in the bidder’s statement which is lodged with ASIC under item 2 of section 633 of the Corporations Act. While Part 6.6 enables a bidder to vary the terms of an off-market takeover bid, no offers have in fact been made until offer documents have been dispatched to shareholders. 

Regulatory Guide 9 Takeover bids (RG 9) indicates that we may consider granting relief if: 

• the altered documents would have been accepted for lodgement 
• the target’s opportunity to make a pertinent response in its target’s statement is not prejudiced, and 
• the proposed variation is not contrary to the purposes of Chapter 6 set out in section 602. 

See RG 9.573–RG 9.575. We will normally consult with the target before granting this relief.  

Termination and liability clauses in scheme implementation deeds

We recently observed a scheme of arrangement where the bidder became the subject of a non-binding takeover proposal conditional on the scheme not proceeding, leading to opposing interpretations of the negotiated liability and termination clauses in the scheme implementation deed (SID). The target and bidder sought a declaration from the Supreme Court of New South Wales as to their respective positions under the SID. 

The bidder considered that, despite no express termination right, the maximum liability for a breach of the SID, if it was in the best interests of the bidder’s shareholders to pursue an alternative transaction, was the reverse break fee under the SID, and that termination under the SID was the only remedy available to the target.  

In summary, the court in Pendal Group Ltd, Re [2022] NSWSC 1575 held:  

• the target may be able to obtain specific performance to enforce compliance with the bidder’s obligations under a SID in the event of a breach, in addition to liquidated damages  
• the fiduciary-out did not relieve the bidder from all of its obligations while the SID remained on foot, and
• liquidated damages paid to the target may not compensate for the loss of opportunity for the target’s shareholders if the transaction does not proceed.   

We remind prospective bidders and targets to exercise caution when drafting transaction documents with negotiated liability and termination clauses to ensure they reflect the parties’ intentions, and their effect is properly disclosed to target shareholders and the market at the outset.  

Timely disclosure of material information in de-SPAC transactions

We recently intervened to object to a court’s approval of a scheme of arrangement in VID777/2022 involving the acquisition of an Australian-listed company, Security Matters Limited, by a US-based special purpose acquisition company (SPAC). The scheme was the first de-SPAC transaction with an Australian-listed company. 

We were concerned that the target’s securityholders were not adequately informed before the vote within the principles of section 602 of the Corporations Act, where: 

• the actual redemption rate in the SPAC was unknown at the time the scheme booklet and independent expert’s report were dispatched to securityholders 
• after the redemption rate was known, the independent expert’s opinion was updated based on the actual redemption rate such that that the proposed scheme was ‘not fair, not reasonable and not in the best interests of scheme securityholders’, and 
• the expert’s supplementary report disclosing this opinion was not released to securityholders until six days before the scheme meeting and five days before proxy votes were due. 

While the court ultimately approved the scheme, ASIC will continue to monitor similar transactions closely. ASIC considers that the redemption rate should be known and considered by the independent expert before the scheme booklet is dispatched. However, should the circumstances of the transaction change, members require at least 10 days to consider any new material information before voting, consistent with Regulatory Guide 60 Schemes of arrangement. This is particularly important in the context of novel or complex transactions, such as a de-SPAC scheme of arrangement. 

Disclosure considerations when a board critiques an independent expert’s report

In the de-SPAC transaction discussed above, we also raised concerns about a supplementary scheme booklet where the directors disagreed with the independent expert’s opinion. The board’s critique related to the basis for the expert’s opinion and suggested that additional value relating to certain factors had not been properly assessed.

Our concerns were heightened because the board’s views were based on competing ‘expert’ opinions which did not accord with the approach to the assessment of fairness and reasonableness that is standard market practice in Australia as set out in Regulatory Guide 111 Content of expert reports (RG 111). Neither of the competing ‘experts’ held an Australian financial services licence so their opinions and associated reports could not be provided to members. In our view, members did not have sufficient information to assess the basis of the board’s contrary opinion and the reasons behind it.

Where a board proposes to critique an expert’s material assumptions or highlight apparent factual inconsistencies in the report, we will closely consider the disclosure. A board must disclose a reasonable basis for its opinion and ensure that members are properly informed before voting.

Boards should generally avoid giving an opinion on what the expert should have concluded regarding the value of target securities (whether by substituting and valuing changes in key assumptions, correcting perceived valuation errors, or otherwise) or including their own valuation that does not meet the equivalent disclosure and independence standards of RG 111 and Regulatory Guide 112 Independence of experts: see Report 589 ASIC regulation of corporate finance: January to June 2018.

Extending creep relief following involuntary dilution

ASIC may give relief to preserve a substantial holder’s ability to make acquisitions under the 3% creep exception (creep) if the substantial holder:

• has had its voting power diluted to below 19% during the six months immediately before an acquisition, and
• did not have the opportunity to participate in the diluting issue of securities on terms no less favourable than those available to other holders.

See Regulatory Guide 6 Takeovers: Exceptions to the general prohibition (RG 6) at RG 6.60–RG 6.61.

We will not give relief to allow a substantial holder to rely on the 3% creep exception if the holder’s voting power was diluted more than six months before the proposed acquisition. The six-month period is designed to minimise uncertainty for the market in understanding when a substantial holder might be able to rely on creep and to ensure that creeping acquisitions take place as far as possible in an efficient, competitive and informed market: paragraph 602(a). The six-month period mirrors the rolling reference period in item 9 of section 611 and provides a reasonable opportunity for the substantial holder to consider and act on the consequences of the involuntary dilution: see RG 6.63.

We received an application for relief from a company (who required additional time to obtain regulatory approvals for an acquisition) to permit reliance on the creep exception within:

• 12 months after its involuntary dilution, or
• six months after obtaining the regulatory approvals.

We were not minded to give this relief because it was uncertain if or when the company would obtain the necessary regulatory approvals and we considered relief would mean greater uncertainty for the market in understanding when the company may be able to rely on the 3% creep acquisition.

Merger and acquisition activity from July to December 2022

Table 3: Merger and acquisition activity (July to December 2022)

July to December 2022	Previous period (January to June 2022)
34 independent control transactions comprising:   13 takeover bids  21 schemes	36 independent control transactions comprising:   14 takeover bids  22 schemes
Total estimated value: $8.48 billion	Total estimated value: $29.95 billion

The average value of merger and acquisition transactions in this period was much lower across bids and schemes ($249 million in this period, compared to $936 million in the previous period).

There weren’t as many billion-dollar megadeals (only two deals in this period, compared with five deals in the previous period). The previous period also had one deal of $8.87 billion, which is more than the total estimated value for the current period.

Merger and acquisition relief

Below is a summary of the outcomes of applications for relief from the requirements of Chapter 6 of the Corporations Act for the period from 1 July to 31 December 2022.

Table 4: Outcome of merger and acquisition relief applications determined in the period 1 July – 31 December 2022

Approved	Refused	Withdrawn
53	0	23
70%	0%	30%

Note: The statistics reported are based on individual relief decisions, rather than a singular head of power under which several decisions may be made (as demonstrated in our previous reporting).

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Corporate governance

Changes for companies that have previously lodged ‘special purpose’ financial statements

In March 2020, AASB 2020-2 removed the ability for certain for-profit entities to prepare special purpose financial statements (SPFS) for the financial years ending after 1 July 2021. This includes entities who prepare financial statements under the Corporations Act such as:

• large proprietary companies
• unlisted public companies other than small companies limited by guarantee 
• small proprietary companies controlled by a foreign company
• financial service licensees, and
• small proprietary companies with crowd-sourced funding.

These entities will need to prepare general purpose financial statements (GPFS) with expanded disclosure requirements when compared to SPFS. Of particular significance, some of these entities may now need to prepare consolidated financial statements for their ultimate Australian parent entity.

It is very unlikely that ASIC will grant relief to allow a company not to apply these reporting changes. For further information see Media Release (22-128MR) ASIC announces financial reporting changes for AFS licensees (3 June 2022).

Reminder to enter new deeds of cross guarantee on time

ASIC made an in-principle decision to refuse to provide notice under section 7(3)(f) of ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (ASIC Instrument 2016/785) that preparation and lodgement of financial statements was not required, to a group of companies that ceased to be wholly-owned companies of a holding company.

The companies were acquired by a new holding company but they did not enter into a new deed of cross guarantee until five months after ceasing to be wholly-owned entities of the previous holding company (instead of within one month as required by ASIC Instrument 2016/785). In addition, the companies did not prepare and lodge financial reports and directors’ reports within two months of ceasing to be wholly-owned entities of the previous holding company.

We could not give notice under section 7(3)(f) because the time for entering into the new deed of cross guarantee or lodging the financial reports for the relevant financial year had already passed.

Companies should ensure they satisfy all the requirements and observe any time frames applicable under ASIC Instrument 2016/785 to benefit from financial reporting relief under a deed of cross guarantee. We remind companies that ASIC generally does not have the power to grant retrospective relief: see Regulatory Guide 51 Applications for relief. In circumstances where ASIC cannot provide relief, it may be open to companies to apply to the court for orders under section 1322 of the Corporations Act.

Financial reporting requirements for companies that have raised funds using crowd-sourced equity funding

We remind companies that complete crowd-sourced funding (CSF) offers that they must comply with corporate governance and reporting obligations under the Corporations Act.

These obligations include preparing and lodging an annual financial report and directors’ report with ASIC (and in some cases having that financial report audited), complying with the rules on related party transactions, and maintaining information about CSF offers and CSF shareholders on the share register.

In relation to financial reporting, companies that have raised funds under the CSF regime and have one or more CSF shareholders must comply with their financial reporting obligations contained in Part 2M.3 of the Corporations Act on an ongoing basis. This is to ensure shareholders have access to timely, accurate and complete financial information.

ASIC will continue to monitor financial reporting compliance by CSF companies and will take further action if required.

For further information, companies with CSF shareholders should refer to Regulatory Guide 261 Crowd-sourced funding: Guide for companies and Crowd-sourced funding on the ASIC website.

ASIC releases Good practices for handling whistleblower disclosures report

On 2 March 2023, ASIC released Report 758 Good practices for handling whistleblower disclosures, highlighting the good practices we observed during our review of whistleblower programs of seven firms in 2022.

The review was conducted as part of ASIC’s staged approach to overseeing firms’ compliance with the whistleblower protection regime under Part 9.4AAA of the Corporations Act. We looked into the firms’ arrangements for handling and using information from whistleblower disclosures, and the level of executive and board oversight of those arrangements. The review involved analysing internal documents about the firms’ programs, and interviews with officers and employees responsible for implementing or overseeing the firms’ whistleblower programs.

The report provides examples of good practices that ASIC has observed in the review. It is designed to help all firms consider, review, and improve their arrangements for managing whistleblowing consistently with the Corporations Act.

We strongly encourage firms to consider how to scale and tailor these good practices to suit their operations.

ASIC warns on cyber incident disclosure

Listed companies should review their continuous disclosure plans to ensure they comply with their continuous disclosure obligations in the event of a material cyber security incident.

Listed entities are required under the Corporations Act to disclose in a timely manner information that is not generally available, where a reasonable person would expect that knowledge of that information would have a material effect on the price or value of their securities.

The dynamic nature of both the extent and impact of a cyberattack means planning is critical. In some cases, it can be difficult in the early days of a response to determine the extent and materiality of a cyber incident. In circumstances where the nature and extent of a cyber incident are evolving, companies should:

• closely and quickly engage with their ASX adviser, and
• consider if more than one announcement is required when additional information becomes known.

It should be noted that entities are not precluded from voluntarily disclosing information, where they consider it in the interests of the market and their shareholders to do so.

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