Corporate Finance Update – Issue 4

Issue 4, March 2021

Corporate governance

New measures to combat illegal phoenixing take effect

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 was passed by Parliament in February 2020, introducing new offences and granting additional powers to ASIC and liquidators to help combat illegal phoenixing and avoid systemic fraud.

These changes aim to deter and disrupt the core behaviours of phoenix operators in several ways. For example, from 18 February 2021, a director will not be able to resign if they are the last remaining director on ASIC records.

To enforce this, we will reject lodgements submitted to cease the last appointed director without replacing that appointment. This will apply to:

Form 484 Change to company details
Form 370 Notification by officeholder of resignation or retirement.

Climate-change-related disclosure

We recently undertook a surveillance exercise to examine the climate-change-related disclosure and governance practices of a cohort of large listed companies.

The exercise, focusing on the Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD recommendations), resulted in the following primary observations:

the quantity of climate-related disclosure has increased materially, but quality still varies significantly
there is limited consistency in the adoption, application and disclosure of specific scenarios and underlying assumptions
board oversight of climate risk was evident across all surveillance targets
‘greenwashing’ was prevalent in some disclosures reviewed.

Issues for boards to consider

For listed companies disclosing, or working towards disclosure, under the TCFD recommendations

Has the company carefully reviewed and applied the principles for effective disclosure set out in Appendix 3 of the TCFD recommendations?

We consider that:

disclosing material assumptions underpinning scenario analysis of physical and transitional risks increases transparency
obtaining independent assurance supports the reliability of disclosures
updating material climate-related disclosures may be necessary and appropriate when underlying facts change.

For all listed companies

We remind all listed companies to:

consider both physical and transitional climate risk
develop and maintain strong and effective corporate governance, which supports prudent risk management
comply with the law where it requires disclosure of material climate risk
where climate risk is material, consider the TCFD recommendations when reporting.
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Fundraising

Fundraising interventions

We recently had two issuers withdraw offers after we raised concerns.

Lack of information

In the first offer, we were concerned with a lack of information about the issuer’s business model and prospects.

The sole intention of the unlisted company was to acquire a property that could be developed into serviced apartments in Penang, Malaysia. However, investors were not provided with adequate information, given that no asset had been identified, there were no building plans, and no construction approvals or contracts were in place.

The company withdrew the offer after we imposed an interim stop order and conducted a stop order hearing.

‘Materially adverse’ supplementary information

In the second offer, we raised concerns that supplementary information was ‘materially adverse’ and that withdrawal rights should be offered. The new information noted that:

directors had to significantly increase their personal participation in the offering to meet the minimum subscription, as they had not been otherwise able to raise the funds
the costs of the offer had significantly increased.

We also restricted Regional Express Holdings Limited (REX) from issuing a reduced-content prospectus and using exemptions for reduced disclosure in fundraising documents until 14 December 2021.

Our decision was based on REX’s failure to disclose to the market that it was considering the feasibility of commencing domestic operations, such as flying to capital cities in addition to its regional operations. This information was first released publicly to a journalist on 11 May 2020.

Duration of forecasts in disclosure documents

We recently noted the difficulties that issuers faced in demonstrating that forecast assumptions are based on reasonable rather than hypothetical grounds.

We observed many issuers including shorter duration forecasts, most not extending beyond 30 June 2021.

As markets stabilise, many potential issuers may have had enough time to understand the impact of COVID-19 and government assistance on their entity. In that case, some potential issuers may be able to forecast for longer periods than we have seen recently.

We continue to work through these issues with potential issuers or advisers.

Relief to enable use of the on-sale provisions to facilitate capital raisings

We recently provided relief to allow companies to rely on the on-sale exception in section 708A(5) of the Corporations Act 2001 where they subsequently released information equivalent to that provided by a prospectus.

This relief was provided despite the companies being suspended for significantly longer than five days.

This relief extended the maximum five-day suspension period in section 708A(5) where the applicant had been suspended for:

83 trading days and had only been reinstated for 35 trading days. While we would normally require applicants’ trading to be reinstated for at least three months, in this instance we considered a longer period was unnecessary in light of the information disclosed to the market and the liquid nature of the applicant’s shares
187 trading days following a backdoor listing. The effect of our relief was to put the company in the same position it would have been in if it was a new listing by permitting further suspensions of up to five days within the next 12 months (after a three month re-quotation period had been established).

Fundraising activity from July to December 2020

There was a significant increase in the number of original disclosure documents lodged with ASIC from July to December 2020 (358 lodged, $8.75 billion funds sought) compared to the previous period, January to June 2020 (198 lodged, $2.18 billion funds sought).

This increase was caused by renewed initial public offering (IPO) activity ($5.41 billion, up from $132 million in the previous period), as well as hybrid, capital note and other secondary market offerings under prospectus documents.

We saw a significant increase in the size of the top 10 fundraisings completed under disclosure documents, with total amounts raised increasing to $5.63 billion, from $1.01 billion in the previous period.

The two largest offers in the period included the Dalrymple Bay Infrastructure Limited IPO, raising $1.26 billion, and the Nuix Limited IPO, raising $953 million. The remaining offers included several large capital note issuances from banks and other financial firms.

Disclosure relief

Table 1 provides a summary of the outcomes of applications for relief from the requirements of Chapter 6D to provide prospectuses and other disclosure documents.

Table 1: Outcome of disclosure relief applications (27 July to 31 December 2020)

Approved	Refused	Withdrawn
46	0	12
79%	0%	21%

Note: We are implementing a new reporting regime in line with our transition to the ASIC Regulatory Portal on 27 July 2020. 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 regime).

Mergers and acquisitions

Interventions in schemes

Our recent engagement with scheme transactions includes:

Getswift Limited

We opposed the scheme proposed by Getswift to re-domicile from Australia to Canada. We appeared in Re Getswift Ltd (No. 2) [2020] FCA 1733 on behalf of the Commonwealth and on our own behalf as contingent creditors.

We were primarily concerned that the proposed scheme would materially prejudice the interests of contingent creditors. A class action plaintiff who also has proceedings against Getswift appeared with similar concerns.

During proceedings, the Court accepted undertakings by Getswift to allay the concerns raised by ASIC in its opposition to the scheme.

Fort Street Real Estate Funds

We appeared in Walsh V W Arthur (As Responsible Entity of Fort Street Real Estate Capital Fund I, Fort Street Real Estate Capital Fund II, Fort Street Real Estate Capital Fund III and Fort Street Real Estate Capital Fund IV) [2020] NSWSC 1746 in connection with trust schemes proposed by E&P Investments (formerly Walsh & Co Investments) as responsible entity for various funds.

We were concerned that a related entity of E&P Investments also made recommendations to unitholders about the trust schemes, and these communications were dispatched with the trust scheme booklet to unitholders. These communications were not subject to prior review by ASIC or the Court. This gave rise to the risk that this conduct compromised the integrity of the voting process.

The Court expressed considerable concern with the conduct. Given the parallels between trust schemes and company schemes as noted by the Court, we remind scheme proponents that all communications sent to members in relation to a scheme are subject to review by ASIC and the Court.

Shareholder intention statements

We continue to closely monitor shareholder intention statements made in connection with schemes of arrangement.

We recently raised concerns that an acquirer may have contravened section 606 by soliciting a shareholder intention statement in connection with an increase in consideration offered under a proposed scheme of arrangement.

The shareholder had previously stated that it would vote against the scheme but announced a change of stated intention at the same time as an increase in consideration was announced. We were concerned this meant there may be an agreement, arrangement or understanding regarding voting. In aggregate, the party making the statement and the acquirer held a substantial portion of the scheme company. We were therefore concerned that the acquirer obtained a relevant interest in the substantial holder’s shares above the limits of section 606.

We requested that the scheme company tag the substantial holder’s votes at the scheme meeting. Ultimately, we did not object to the scheme because the substantial holder’s votes did not determine the outcome.

Although parties may canvass shareholders’ views on a proposed transaction, where those interactions involve more than mere canvassing, parties must ensure they do not obtain a relevant interest that would breach section 606.

Convertible note relief giving rise to control implications

We refused to grant relief to treat an entitlement offer of convertible notes as if item 10 of section 611 applied. The relief would have permitted a holder of convertible notes acquired through (or after) the entitlement offer to convert those securities to potentially hold more than 20% of the issuing company.

We considered that the relief sought was not consistent with the protections in Chapter 6. The relief would have enabled a person to acquire convertible notes that, if converted, would have given the person an interest in more than 20% of the issuing company, without disclosing their effective interest in the company until the notes were converted and without following any other acquisition method permitted by Chapter 6. This is because:

the convertible notes would be tradeable and quoted
the acquisition of the convertible note itself did not give rise to the acquisition of a relevant interest and voting power
the proposed relief meant that the conversion of the notes was not subject to section 606 of the Corporations Act 2001.

Relief to facilitate simultaneous takeover bids

We provided relief from section 623 to facilitate on-market and off-market takeover bids, so that the off-market bid was excluded from being a collateral benefit prohibited by section 623.

The bidder wished to make two simultaneous takeover bids, each of which was for all of the shares in one target company for cash consideration at the same price. The bidder required relief because the mechanical differences in the market and off-market bid under the Corporations Act 2001 may have constituted a collateral benefit prohibited by section 623.

We granted relief because we did not consider that the simultaneous offer structure offended the equality principles of Chapter 6 in section 602(c), or prevented the acquisition from occurring in an efficient, competitive and informed market.

Mergers and acquisition activity from July to December 2020

We observed an increase in mergers and acquisitions (M&A) activity during the period.

While the total value of M&A transactions was marginally smaller this period, there was a considerably greater volume of transactions, including:

July to December 2020 – 33 independent control transactions (20 takeover bids and 13 schemes) estimated at $11.02 billion
January to June 2020 – 15 independent control transactions (10 takeover bids and five schemes) estimated at $14.43 billion.

Like last period, we continue to see proportionally more takeovers, moving away from recent trends towards schemes. We will continue to monitor deals to see if acquisition mechanism preferences have changed.

Mergers and acquisitions relief

Table 2 provides a summary of the outcomes of applications for relief from the provisions of Chapter 6.

Table 2: Outcome of mergers and acquisitions relief applications (27 July to 31 December 2020)

Approved	Refused	Withdrawn
47	2	22
66%	3%	31%

Experts and mining

Disclaimers in specialist reports

We remind company directors that specialist reports written to accompany offers, meetings, or takeover or scheme documents should be prepared for each specific purpose. This includes:

solicitor reports
geologist reports
other expert reports.

Users of these reports should be able to rely on them to assist in making decisions. Specifically, experts:

should not disclaim or limit their liability within a report
are responsible for updating a report if new material information comes to their attention while it is still being considered by users.

Some examples of unacceptable disclaimers we identified in specialist reports include:

‘The Solicitor’s Report has been prepared for the purpose of the Prospectus and disclosure of the Report in the Notice of Meeting is on a non-reliance basis.’

‘We assume no duty or responsibility to anyone other than the company and its directors in respect of any of the issues addressed in this report or the transactions referred to herein.’

‘We have no duty to update this report or to inform you of any changes to facts or laws occurring after the date of this report.”

Expert reports in related party transactions

We recently intervened in a related party transaction which resulted in the independent expert report opinion being changed from ‘fair and reasonable’, to ‘not fair but reasonable’.

The transaction involved a related party acquisition of shares in an unlisted foreign company (Foreign Co) for scrip consideration in an Australian listed company (Aus Co). Aus Co was also conducting a separate capital raising, which would only occur if the related party acquisition was approved by shareholders and completed.

The expert had originally reached a ‘fair’ opinion by comparing the value of an Aus Co share before the acquisition, and the value of an Aus Co share following completion of the acquisition. We did not consider that this methodology was appropriate in the circumstances of a related party transaction. It was also contrary to Regulatory Guide 111 Content of expert reports (see paragraph 58).

In the context of a related party transaction that is not a control transaction, the relevant information or consideration for non-associated shareholders depends on whether the value of the benefit being given to related parties (e.g. the number of Aus Co shares) is in excess of the value of the assets being acquired (e.g. Foreign Co shares).

As a result of our intervention and amendments made in response to our various concerns, the expert revised its opinion to ‘not fair but reasonable’.

ASIC