Corporate Finance Update - Issue 14

Issue 14, September 2023

Sustainable finance

ASIC commences additional court actions against greenwashing

ASIC has launched its second and third court actions against alleged greenwashing conduct, commencing civil penalty proceedings in the Federal Court against Vanguard Investments Australia on 25 July 2023 and LGSS Pty Ltd (Active Super) on 11 August 2023.

The Vanguard proceedings concern alleged false and misleading statements about certain environmental, social and governance (ESG) exclusionary screens applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (the Fund). ASIC alleges that, as a result of inadequate ESG research, investor funds were exposed to investments which had ties to fossil fuels, contrary to how the Fund was marketed to investors. For more information, see Media Release (23-196MR) ASIC commences greenwashing case against Vanguard Investments Australia (25 July 2023).

Separately, ASIC alleges that Active Super exposed its members to investments it claimed to restrict or eliminate, including tobacco manufacturing, oil tar sands and gambling. ASIC claims the relevant ESG representations were made on Active Super’s website, disclosure documents and on Facebook, Instagram and LinkedIn. For more information, see Media Release (23-215MR) ASIC commences greenwashing case against Active Super (11 August 2023).

We continue to remind listed issuers and their advisers to consider the guidance set out in Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products in assessing whether sustainability-related statements or plans have reasonable grounds.

Next steps following Treasury’s second round of consultation on mandatory climate reporting

Treasury’s second consultation on climate-related financial disclosure closed on 21 July 2023. The consultation sought feedback on proposed positions for the implementation of standardised, internationally aligned requirements for disclosing climate‑related financial risks and opportunities in Australia.

Proposed next steps are as follows:

• the Australian Government will consider the views submitted in response to this second consultation paper and release a draft of the proposed climate-related disclosure legislation once prepared
• the Australian Accounting Standards Board (AASB) is expected to consult on draft climate-related disclosure standards in late 2023. These are intended to be aligned as far as practicable with the final standards developed by the International Sustainability Standards Board: IFRS S2 Climate-related Disclosures (IFRS S2) and the parts of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) relevant for applying IFRS S2.

ASIC continues to encourage stakeholders to participate in the consultation process to be undertaken by the Government and the AASB.

For more information, please see Climate-related financial disclosure on the Treasury website.

International developments on global sustainability reporting and assurance standards continue to progress

On 25 July 2023, the International Organisation of Securities Commissions (IOSCO) formally endorsed both IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2 Climate-related Disclosures (IFRS S2) as appropriate global frameworks for use in capital markets and for users of sustainability-related financial information to assess relevant sustainability-related risks and opportunities. For more information, see IOSCO/MR/19/2023 IOSCO endorses the ISSB’s Sustainability-related Financial Disclosures Standards (25 July 2023).

On 2 August 2023, the International Auditing and Assurance Standards Board (IAASB) released a draft of its proposed International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements (ISSA 5000). Once finalised, ISSA 5000 is intended to become the global baseline for sustainability-related assurance standards. The IAASB intends ISSA 5000 to apply to sustainability-related information reported across any sustainability topic and prepared under multiple frameworks, such as under IFRS S1 and IFRS S2.

For more information on ISSA 5000 and to provide feedback on the draft sustainability-related assurance until 1 December 2023, see Understanding International Standard on Sustainability Assurance 5000.

The Auditing and Assurance Standards Board (AUASB) is also seeking public comment from Australian stakeholders on ISSA 5000 in order to inform its response to the IAASB. The AUASB’s consultation paper closes on 10 November 2023.

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Fundraising

Stop order publicity

ASIC is committed to communicating transparently and publicly about our regulatory activities.

All activities in relation to prospectuses (including lodgement, extension of exposure periods and stop orders) are recorded on the Offer Notice Board. However, we also report significant regulatory activities and outcomes through a variety of other channels to:

• be transparent and accountable for what we do
• warn potential investors
• inform our regulated population and the public of expected standards as well as our priorities and areas of focus.

In addition, the 2021–22 Senate Economics References Committee Inquiry in relation to Sterling Income Trust recommended that ASIC develop a framework to promote greater awareness and understanding among retail investors and financial consumers on buying financial products and services.

Our response to this recommendation includes taking greater steps to inform investors about significant actions we take in relation to fundraising offers. As a result, our general approach moving forward will include issuing media releases in relation to all interim and final stop orders. For further details, please see Information Sheet 152 Public comment on ASIC’s regulatory activities and Regulatory Guide 8 Administrative hearings: Principles and conduct.

Approach to disclosure about reliance on artificial intelligence

Artificial intelligence (AI) technology continues to receive attention in the financial and wider press. With growing interest in AI innovations, we expect many issuers whose core business involves AI-based products or services, or who use AI to deliver their core business, may seek to raise capital from retail investors using a prospectus or other offer document.

Offer documents should disclose sufficient and clear information about the issuer’s AI technology and the importance of it to the issuer’s business model. Examples of relevant disclosures include:

• how its AI technology was developed, operates in a practical sense and is distinguished from similar existing technology in the market
• any key dependencies to be met before the issuer’s AI technology can be commercialised (such as regulatory approvals, or how that technology will be deployed commercially and scaled-up to meet demand)
• any inherent risks arising from the issuer’s use of AI (such as risks of biased or erroneous results, or exposure to legal liability if the outputs are inaccurate or incorrect).

Issuers should not over-emphasise the value of AI to its business if it is not actually a central part of its current operations. We will closely assess claims about an issuer’s use of AI and use our powers where we are concerned an offer document may contain misleading statements.

Using offer information statements

On a regular basis, we receive offer information statement (OIS) documents for offers by issuers of unlisted securities that do not comply with the disclosure requirements in section 715 of the Corporations Act 2001 (Corporations Act). Most often, the non-compliance relates to the requirement in section 715(2) to provide a 12-month audited financial report, with the balance date not more than six months before the securities are first offered under the OIS.

In circumstances where the financial information does not comply, we may refuse lodgement of the OIS on the basis that it does not comply with the law, or seek to impose a stop order on the OIS.

As described in Regulatory Guide 254 Offering securities under a disclosure document (at RG 254.95–RG 254.114) the nature and extent of the concessions provided by parliament strike a balance between facilitating small-to-medium size enterprise fundraising and ensuring an adequate level of investor protection. We are therefore unlikely to grant an application for relief in relation to an OIS to facilitate a departure from the disclosure requirements.

APRA releases a discussion paper on hybrids (Additional Tier 1)

On 21 September 2023, APRA released a discussion paper seeking feedback on improving the effectiveness of Additional Tier 1 (AT1) capital instruments, often referred to as hybrid capital bonds.

APRA is concerned that AT1 capital instruments may not operate as originally intended due to certain design features and market practices in Australia, including that more than half the bonds are held by small retail investors. In the discussion paper, APRA calls for feedback by 15 November 2023 on a range of options outlined in the paper.

For more information see Discussion paper – Enhancing bank resilience: Additional Tier 1 Capital in Australia.

Fundraising activity

Table 1 summarises public fundraising activity for the period 1 January to 30 June 2023.

Table 1: Public fundraising activity in the period 1 January to 30 June 2023

January to June 2023	Previous period (July to December 2022)
229 original disclosure documents lodged, $3.66 billion sought	289 original disclosure documents lodged, $3.54 billion sought
19 initial public offerings (IPOs), $0.55 billion sought (value by original disclosure document)	40 IPOs, $0.54 billion sought (value by original disclosure document)
Top 10 fundraisings completed raised $4.42 billion	Top 10 fundraisings completed raised $4.30 billion

The aggregate amount raised by the top 10 completed fundraising transactions ($4.42 billion) exceeded the total sought to be raised under the original disclosure documents lodged with ASIC ($3.66 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 $1.55 billion), the Australia and New Zealand Banking Group Limited hybrid security offer (raising $1.5 billion) and the Redox Limited IPO (raising $0.4 billion). The remaining offers included offers of hybrid securities, shares and CHESS Depositary Interests (CDIs) by listed issuers.

Disclosure relief

Table 2 summarises the outcomes of applications for relief from the requirements of Chapter 6D of the Corporations Act 2001 (Corporations Act) to provide prospectuses and other disclosure documents for the period 1 January to 30 June 2023.

Table 2: Outcome of disclosure relief applications determined in the period 1 January – 30 June 2023

Approved	Refused	Withdrawn
19	0	10
66%	0%	34%

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 in connection with UBS Group AG’s acquisition of Credit Suisse AG

We granted novel relief for UBS Group AG (UBS)’s acquisition of Credit Suisse Group AG (Credit Suisse) through a merger agreement governed by the substantive laws of Switzerland (Merger). The Swiss Federal Council issued a special decree tailored to the Merger, which provided exemptions regarding the application of the Swiss Federal Act on Mergers, including removing the otherwise necessary approval of shareholders.

UBS and Credit Suisse have deemed relevant interests in securities of various ASX-listed entities through their controlled entities and related bodies corporate. Under the Merger, UBS acquired an anticipatory relevant interest in the securities, and the relevant interests, of Credit Suisse. Without relief, UBS or Credit Suisse may have contravened section 606 of the Corporations Act 2001 (Corporations Act) and would have been required to aggregate the relevant interests in substantial holding notices.

Having considered the special circumstances surrounding the Merger, we granted a temporary exemption from section 606 in respect of the Merger. Temporary ancillary relief was also provided to exempt the companies from section 671B of the Corporations Act with respect to any changes in substantial holdings because of the Merger.

ASIC notes that the relief in this matter was novel and that relief from section 606 will continue to be granted in only limited and select circumstances.

Intervening to reduce the control implications of underwritten rights issues

We recently intervened in pro rata rights issues undertaken by listed companies that may have resulted in control in the company passing to the underwriter. The underwriter in each case was a substantial shareholder or related party of the company.

In normal circumstances, we will examine a proposed rights issue closely if it is underwritten by a person who already controls the company, or is likely to control the company after the transaction. This is because a transaction designed to give control to a holder or underwriter that is presented to the holders and the market as a rights issue will generally be contrary to the purposes in section 602 of the Corporations Act 2001 (Corporations Act). We expect issuers to explore reasonable options and take available steps to minimise the potential effect of the rights issue on control of the issuer. This includes, for example, making genuine attempts to procure alternative underwriting arrangements.

In the recent matters, our intervention resulted in the control impact of the rights issues being significantly reduced. The issuers agreed to extend the offer period, procure additional sub-underwriters and provide further disclosure.

We also remind issuers that seeking approval from shareholders in accordance with item 7 of section 611 is another way that issuers can address the potential that a rights issue or underwriting may have an unacceptable control effect.

Independent expert reports – Bidder’s ‘fact-checking’ may undermine expert’s independence

We recently observed a scheme where the scheme implementation deed included a clause requiring the target to provide the bidder with successive drafts of the independent expert’s report (IER) to enable the bidder to review the factual accuracy of the IER.

Communications and interactions between the expert, the commissioning party and any other interested party can potentially compromise the independence of experts. Targets and bidders should be mindful when including and relying on these types of clauses in schemes as well as takeover bids – such clauses, and any comments provided, should be limited to ‘fact-checking’ purposes only.

We highlight the need for experts to be independent and care should be taken by all interested parties to preserve that independence. To help maintain independence and negate any inference of bias, we consider that an expert should direct and lead all meetings and discussions with the commissioning party, its advisers and any interested parties (as well as keep proper file notes of discussions and retain copies of documents worked on in discussions).

We also remind targets and bidders that all relevant working papers and records relevant to the preparation of an IER (including the independence of the expert) may be subject to review by ASIC. Where we have concerns about the independence of an expert, we will consider regulatory action.

For more information, please refer to Regulatory Guide 111 Content of expert reports (RG 111) at RG 111.140–RG 111.144 and Regulatory Guide 112 Independence of experts (RG 112) at RG 112.46–RG 112.58.

Combining the 3% creep exception with other exceptions

Section 606 of the Corporations Act 2001 (Corporations Act) prohibits a person from acquiring a legal or equitable interest in securities if the person’s voting power, or another person’s voting power, in the company increases from a starting point that is above 20% and below 90% (Prohibition). Item 9 of section 611 (the creep exception) exempts a person from the Prohibition if:

• throughout the six months before the acquisition that person, or any other person, has had voting power in the company of at least 19%, and
• as a result of the acquisition, none of those persons would have voting power in the company more than 3% higher than they had six months before the acquisition.

We reminded a securityholder that the creep exception is not cumulative with the other exceptions in section 611. All acquisitions that lead to an increase in a person’s voting power during the preceding six-month period are counted under the creep exception.

Accordingly, if a person has increased their relevant interest by more than 3% under a different exception to section 611, they must wait six months from the date of that acquisition before acquiring an interest in additional voting shares in reliance on the creep exception.

Merger and acquisition activity

Table 3 summarises merger and acquisition activity for the period 1 January to 30 June 2023.

Table 3: Merger and acquisition activity in the period 1 January to June 2023

January to June 2023	Previous period (July to December 2022)
23 independent control transactions comprising: 11 takeover bids 12 schemes	34 independent control transactions comprising: 13 takeover bids 21 schemes
Total estimated value: $14.93 billion	Total estimated value: $8.48 billion

There were fewer merger and acquisition transactions (23 in this period, compared with 34 in the previous period). However, the total value of these transactions was higher ($14.93 billion in this period, compared with $8.48 billion in the previous period). This represents an average transaction value of $649 million in this period (compared to $249 million in the previous period).

Merger and acquisition relief

Table 4 summarises the outcomes of applications for relief from the requirements of Chapter 6 of the Corporations Act 2001 (Corporations Act) for the period 1 January to 30 June 2023.

Table 4: Outcome of merger and acquisition relief applications determined in the period 1 January to 30 June 2023

Approved	Refused	Withdrawn
34	0	15
69%	0%	31%

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

Cyber Pulse Survey highlights areas for improvement

ASIC recently conducted a survey to measure cyber resilience in Australia’s corporate and financial markets.

Open to all ASIC-regulated organisations, the survey was designed to help organisations better understand their cyber resilience and allow ASIC to assess the market’s cyber maturity, provide feedback and work with industry to uplift cyber resilience.

Initial findings from participating listed companies indicate that:

• 43% have an advanced understanding of their organisation’s cyber risk landscape
• 38% have secure customer access management controls
• 34% have cyber incident response plans in place that are regularly reviewed and updated.

However, there’s still a lot of work to be done. In particular, a significant proportion of listed companies indicated that they did not test their cyber security incident response with critical third-party suppliers. Other areas of concern include a failure to encrypt confidential information at rest and a lack of data destruction policies in place.

ASIC will publish a public report later this year with our findings from the survey, including sectoral insights, the better practices identified and areas for improvement. Observations from the survey will also be discussed with an expert panel at ASIC’s Annual Forum in Melbourne on 22 November.

Participating organisations that opted for an individual report will have received an email with the attached report to their nominated email address.

ASIC Annual Forum 2023

In our time of constant change, we have the opportunity to explore how we adapt and evolve.

How do we respond ambitiously and effectively to disruption drivers such as geo-political and economic change, AI, and cyber?

Join thought leaders and experts to explore strategies for navigating disruption and delivering great outcomes.

The ASIC Annual Forum and Annual dinner return to Melbourne for the first time since 2009.

Highlights include:

• a welcome address from The Hon Dr Jim Chalmers MP, Treasurer of Australia
• ‘State of the economy’: a panel session featuring ASIC Chair Joe Longo, incoming RBA Governor Michele Bullock and more
• ASIC Deputy Chair Sarah Court releases our enforcement priorities for 2024, followed by a panel including US SEC Enforcement Director Gurbir Grewal
• ‘Taking Australia’s cyber pulse’: a panel session with Rachael Falk, CEO, Cyber Security Cooperative Research Centre and Air Marshal Darren Goldie AM CSC, National Cyber Security Coordinator, Department of Home Affairs

The full program is now available.

Register now to secure your place. Early bird pricing is available for a limited time.

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Financial reporting

Adding or substituting an alternative trustee under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785

Section 6(1)(q)(iii) of ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 contemplates that a Deed of Cross Guarantee may be varied to permit the substitution of a trustee, or the addition or substitution of an alternative trustee. However, section 6(1)(q)(iii) does not in itself provide the power for such variations. Similarly, Pro Forma 24 Deed of cross guarantee does not provide the power to add or substitute an alternative trustee.

The general law permits parties to a deed, if all agree, to vary its terms.

Consequently, an alternative trustee may be added or substituted by a deed of variation executed by all parties to the deed of cross guarantee. Deeds of variation for this purpose should be lodged with ASIC in the same way as deeds of cross guarantee.

Execution of assumption deeds under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785

Assumption deeds must be in exactly the same terms as Pro Forma 27 Assumption deed except for the variations permitted under the definition of ‘certificate’ in ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 and Pro Forma 24 Deed of cross guarantee (PF 24). The variations permitted under the definition of ‘certificate’ do not contemplate inclusion of an alternative trustee as a party to an assumption deed.

Clause 5.1 of PF 24 states:

‘5.1 The Holding Entity may by executing an Assumption Deed to which the Trustee and any further controlled entity or controlled entities of the Holding Entity eligible for the benefit of the ASIC Instrument are party join a further Group Entity or further Group Entities to this Deed.’

This clause provides clarity about the entities required to be a party to an assumption deed in order for it to be effective. It specifically contemplates that the holding entity, trustee and controlled entities being joined to the deed of cross guarantee will be parties to the assumption deed. However, there is no requirement for an alternative trustee to be a party to an assumption deed.

Special purpose financing subsidiaries (debenture issuers) are excluded from relief under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785

We remind entities that borrowers in relation to debentures and their guarantors are excluded from financial reporting relief under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (ASIC Instrument 2016/785) – see section 6(1)(b)(ii) and (iii).

We are aware that some groups with special purpose financing subsidiaries may have taken the view that the ‘borrower in relation to debentures’ exclusion did not apply to their special purpose financing subsidiary and any guarantor. However, we consider that special purpose financing subsidiaries receive money invested with them in the ordinary course of carrying on a business that comprises (or forms part of) a business of borrowing money and providing finance, even though the finance is only provided to the holding company and/or other companies in the corporate group.

ASIC does not currently intend to provide a formal or informal no-action position or other relief in response to this issue. Special purpose financing subsidiaries and their guarantors that have previously purported to rely on relief under ASIC Instrument 2016/785 and that are in this position should, at the very least, take steps to bring themselves into compliance with their respective financial reporting obligations under the Corporations Act 2001 (Corporations Act) moving forward as soon as possible. Any affected companies that want to formally address any past breaches or non-compliance as a result of incorrectly interpreting the exclusions in the legislative instrument can either prepare and lodge the relevant outstanding financial reports or seek their own legal advice on any other potential remedies, such as relief from the court under section 1322 of the Corporations Act. We do not express any views in relation to any potential application to the court for relief under section 1322 at this time.

Using the Regulatory Portal

New transactions added to the ASIC Regulatory Portal

If the directors of a proprietary company fail to appoint an auditor under section 325(2) of the Corporations Act 2001 (Corporations Act), or a public company fails to appoint an auditor under section 327D(2) or (3) of the Corporations Act, the company must notify ASIC in writing within seven days, commencing on the day of the auditor replacement failure: section 327E(2) of the Corporations Act.

The notification should be submitted through the ASIC Regulatory Portal – Notify ASIC, or apply to ASIC about company auditor appointments. ASIC must appoint an auditor as soon as practicable after receiving the notice: section 327E of the Corporations Act.

ASIC also has the general power to appoint an auditor of a public company, or a proprietary company that has one or more crowd-sourced funding (CSF) shareholders, if the company or its directors fail to appoint an auditor when required by the Corporations Act to do so and a member of the company applies to us for the appointment of an auditor: section 327F of the Corporations Act. The application should also be submitted through the ASIC Regulatory Portal – Notify ASIC, or apply to ASIC about company auditor appointments.

See Information Sheet 62 Removal of an auditor of a company for more information.

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