Australian Company & Securities Update | Issue One
This update provides directors, in-house counsel and company secretaries with an up-to-date snapshot of the key Australian legal and regulatory developments, reforms, decisions and governance issues.
KEY LEGAL AND REGULATORY DEVELOPMENTS
Legislative and Regulatory Reform
Permanent reforms in respect of virtual meetings and electronic execution
On 19 October, the Federal Government released for consultation exposure draft legislation that makes permanent changes to the Corporations Act 2001 (Cth) ("Corporations Act") in relation to virtual meetings and electronic document execution. The reforms make permanent the temporary relief, which allows companies to hold meetings virtually, send meeting-related materials electronically and validly execute documents electronically. In response to stakeholder feedback, the reforms also propose additional enhancements to ensure corporate accountability and transparency. Public consultation closed on 30 October. The Treasury's media release can be found here.
2020–2021 Federal Budget
On 6 October, the Federal Government released the Budget for 2020–2021. The Budget deficit is estimated to be $213.7 billion, or 11% of Australia's GDP. Net debt is expected to be 36.1% of GDP at the end of 2020–21, peaking at 43.8% of GDP at the end of the forward estimates. Real GDP is forecast to fall by 3¾% in 2020 before recovering in 2021 to grow by 4¼%. An overview of the Budget can be found here.
Takeovers Panel consults on the remaking of Procedural Rules
On 2 October, the Panel opened a consultation period in relation to its updated draft Procedural Rules. The current Procedural Rules are due to expire on 1 April 2021. The Panel's intention is that the existing procedures in Panel proceedings will remain fundamentally the same following the implementation of the new Procedural Rules. The Panel's media release can be found here.
Reforms to Australia's insolvency framework for small business
On 24 September, the Federal Government announced significant reforms to Australia's insolvency framework. The reforms, which draw on features from Chapter 11 of the Bankruptcy Code in the United States, will aim to help more small businesses restructure and survive the economic impact of COVID-19. Key elements of the reforms include: (i) the introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million; (ii) moving from a one-size-fits-all "creditor in possession" model to a more flexible "debtor in possession" model; (iii) a 20 business day period for the development of a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan; and (iv) a simplified liquidation pathway for small businesses to allow faster and lower cost liquidation. The Treasurer's media release can be found here.
Tranche 2 of proposed FIRB reforms
On 18 September, the Federal Government released for consultation exposure drafts of the Foreign Investment Reform (Protecting Australia's National Security) Regulations 2020 and the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020, which give further effect to the major reforms to the Foreign Acquisitions and Takeovers Act 1975 (Cth) announced on 5 June. The Treasury's media release can be found here.
Federal Government releases Australia's cyber security strategy
In August 2020, the Federal Government provided details on Australia's Cyber Security Strategy ("CSS") in which it proposes the introduction of an enhanced legal framework to protect critical infrastructure and systems of national significance and which builds upon the Telecommunication and Other Legislation Act 2017 (Cth) and Security of Critical Infrastructure Act 2018 (Cth). The enhanced legal framework will see security obligations imposed on nine new sectors: banking and finance; communications; data and cloud; defence; education, research and innovation; energy; food and grocery; health; space; transport and water. Australia's CSS can be found here.
Review of the Legislative Framework for Corporations and Financial Services Regulation
The Australian Law Reform Commission ("ARLC") has been asked to inquire into the potential simplification of laws that regulate financial services in Australia. The Inquiry is part of the Government's response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry released in February 2019. The Inquiry will seek to facilitate a more adaptive, efficient and navigable framework of legislation within the context of existing policy settings. The ultimate goal is to achieve meaningful compliance with the substance and intent of the law. The Hon Kenneth Hayne AC QC is on the Advisory Committee, and there will be three interim reports focusing on different aspects of the Inquiry to be released during the course of 2021–2023, with the final consolidated report due on 30 November 2023. The ALRC's statement can be found here.
Relief Measures
Extension of the continuous disclosure relief
On 23 September, the Federal Government confirmed that it would be extending the continuous disclosure relief for a further six months until 23 March 2021. The continuous disclosure relief amends sections 674 and 675 of the Corporations Act such that companies and their officers will only be liable for a civil penalty where there has been "'knowledge, recklessness or negligence' with respect to updates on price sensitive information to the market". The Treasurer's media release can be found here.
ASIC extends COVID-19 relief for certain capital raisings and release of superannuation
On 23 September, ASIC extended the temporary capital raising relief which assists listed entities affected by the COVID-19 pandemic to raise capital in a quicker and less costly way. The temporary relief enables certain "low doc" offers (including rights offers, placements and share purchase plans) to be made to investors without a prospectus, even if they do not meet all the normal requirements. ASIC is also extending the financial advice relief related to the COVID-19 early release of superannuation scheme in light of the extension of the scheme by the Government. ASIC's media release can be found here.
ASX temporary emergency capital-raising measures
On 15 September, ASX confirmed that it would be extending the Temporary Extra Placement Capacity Class Waiver and the Non-renounceable Offers Class Waiver ("Class Waivers") which seek to help listed entities affected by the COVID-19 pandemic to raise urgently needed capital. The Class Waivers were introduced on 31 March and are due to expire on 30 November. From 16 September, any entity wishing to rely on the Class Waivers must satisfy ASX that it is raising capital predominantly for the purpose of addressing the existing or potential future financial effect on the entity from the COVID-19 health crisis, and/or its economic impact. ASX's media release can be found here.
Extension of temporary relief for financially distressed businesses
On 7 September, the Government said that it intends to extend the temporary insolvency and bankruptcy relief protections contained in Schedule 12 of the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) to 31 December. The relief amends the Corporations Act to: (i) relieve directors from personal liability for insolvent trading with respect to debts incurred in the ordinary course of business; and (ii) increase the minimum threshold at which a creditor can issue a statutory demand on a company or initiative bankruptcy proceedings. The Treasurer's media release can be found here.
Other Regulatory Developments
Product intervention order in relation to contracts for difference ("CFDs")
On 23 October, ASIC made a product intervention order imposing conditions on the issue and distribution of CFDs to retail clients. ASIC's order strengthens consumer protections by reducing CFD leverage available to retail clients and by targeting CFD product features and sales practices that amplify retail clients' CFD losses. It also brings Australian practice into line with protections in force in comparable markets elsewhere. ASIC's media release can be found here.
Regulatory guidance on share transfers under s 444GA of the Corporations Act
On 22 October, ASIC released updated regulatory guidance to formalise its policy on when ASIC will give Chapter 6 relief for share transfers under s 444GA of the Corporations Act, which allows shares of a company in administration to be transferred by an administrator as part of a deed of company arrangement. As these transfers involve expropriation of shares from shareholders, often for no consideration, many of these have resulted in shareholders exerting their rights to object in court. ASIC's media release can be found here.
ASIC's Market Integrity Updates for September and October
ASIC's monthly Market Integrity Update sets out the latest regulatory developments and issues affecting financial intermediaries. The key items in the September issue include: (i) guidance issued by the Australian Cyber Security Centre on cyber resilience; (ii) ASIC's best practices for conduct risk management; and (iii) changes to the ASIC Derivative Transaction Rules (Reporting) 2013. The key items in the October issue include: (i) ASIC and the RBA's joint expectations regarding the Clearing House Electronic Sub-register System ("CHESS") replacement; (ii) a reminder to market participants to act appropriately and take reasonable steps to ensure Australia's equity markets remain resilient; and (iii) ASIC recommencing work on finalising its position for the proposals outlined in Consultation Paper 314 Market integrity rules for technological and operational resilience. ASIC's latest Market Integrity Updates can be found here.
Australian institutions urged to adhere to the ISDA IBOR Fallbacks Protocol and Supplement
On 13 October, ASIC, with the support of APRA and the RBA, strongly urged Australian institutions to adhere to the ISDA IBOR Fallbacks Protocol and Supplement released on 23 October. ASIC stressed that industry-wide adoption of the protocol and supplement would significantly reduce the risk of contractual disputes, litigation and frustration of contracts by creating a consistent approach to fallback rates. Accordingly, all financial and corporate institutions that use derivatives contracts referencing LIBOR have been strongly encouraged to review and adhere to the protocol by its effective date of 25 January 2021. ASIC's media release can be found here.
ASIC restricts certain retail offers of "stub equity" in takeovers to maintain investor protection
On 24 September, M&A practitioners welcomed ASIC's clarification of its position on stud equity offers. Relevantly, ASIC announced modifications to the Corporations Act to prevent stub equity offers of scrip in a proprietary company being made to large numbers of retail target holders in takeover bids and schemes of arrangement. ASIC's media release can be found here.
AUSTRALIAN LEGAL DECISIONS
Alto Metals Limited [2020] ATP 17
On 6 October, the Panel published its reasons for making a declaration of unacceptable circumstances in relation to the affairs of Alto Metals Limited ("Alto"). The Panel considered that an announcement by Alto recommending rejection of Habrok (Alto) Pty Ltd's ("Habrok") bid was misleading or had the potential to mislead shareholders, and the entitlement offer, together with Alto's announcement recommending rejection of Habrok's bid, gave rise to unacceptable circumstances. The Panel noted that the lack of deliberation around the directors' recommendation was "curious", and the fact that the Board minutes did not record, in any substance, the factors the Alto Board considered when making their recommendation was of particular concern. See the Takeover Panel's decision here.
In the matter of Lotus Property Fund No 8 Pty Ltd [2020] NSWSC 1349
On 2 October, Stevenson J considered an application from a former director to take a derivative action on behalf of the company under section 237 of the Corporations Act. In granting leave, Stevenson J found that the former director remained a current officer of the company by reason of the fact that he is a member of the Management Committee established under an Investors Agreement. The judgement of Stevenson J can be found here.
"Ode to a dying corporation": Master Sanderson delivers final orders in the Bell Group litigation
On 22 September, Master Sanderson delivered the final orders in the Bell Group litigation, which has swirled for more than two decades. Following a series of appeals and counter-appeals, the matter was settled for $1.75 billion to be distributed amongst creditors. Accordingly, Master Sanderson ordered that the application to wind up the Bell Group be dismissed. Master Sanderson's judgement can be found here.
In the matter of Webcentral Group Limited [2020] NSWSC 1279
On 21 August, Black J granted orders under section 411 of the Corporations Act to convene a meeting of Webcentral shareholders to approve a scheme of arrangement. His Honour's judgement provides a neat discussion of "standard" exclusivity and break-fee terms, as well as "deemed warranties" by scheme shareholders. Helpfully, his Honour also refers to the string of recent cases in which virtual scheme meetings consistent with Corporations (Coronavirus Economic Response) Determination (No 1) 2020 (Cth) were accepted. The judgement of Black J can be found here.
Keybridge Capital Limited [2020] ATP 16
A relatively novel aspect of the applications to the Takeovers Panel included an application under section 656A of the Corporations Act to review a decision by ASIC to grant certain relief from Chapter 6. See the Takeover Panel's decision here.
Australia Securities and Investment Commission v Mitchell (No 2) [2020] FCA 1098
In our Commentary "ASIC v Mitchell: Another Reason for ASIC Not to Litigate", released in August 2020, we discussed the key takeaways from the highly publicized judgement of Justice Beach in Australia Securities and Investment Commission v Mitchell (No 2) [2020] FCA 1098, in which His Honour rejected 41 of ASIC's 44 allegations against two former directors of Tennis Australia.
CORPORATE GOVERNANCE ISSUES
Conflicts of interest within debt capital raising process
On 22 September, ASIC released its report Allocations in debt capital market transactions which sets out findings from ASIC's surveillance of debt capital raising. ASIC has observed: (i) some AFS licensees have overly generic arrangements to manage conflicts of interest; (ii) mixed approaches for identifying and managing inside information; (iii) instances where inflated bids were not identified as such in bookbuild information, in addition to differing methods for disclosing the interests of the joint lead manager to investors; (iv) instances of "light touch" or reactive oversight; and (v) investors seeking more meaningful post-transaction information on how securities were allocated. ASIC's report follows the 21 September release of the "Final report on Conflicts of interest and associated conduct risks during the debt capital raising process" by the Board of the International Organisation of Securities Commissions. ASIC's report can be found here.
ASIC monitoring financial reporting disclosures
On 17 September, ASIC noted the decisions made by four companies to amend their financial reports following concerns raised by ASIC with respect to: (i) the recognition of the equal and offsetting contract assets and deferred revenue; (ii) the amount of the gain on the sale and leaseback of a property under a new standard on lease accounting; (iii) the reasonableness and supportability of free cash flow forecasts used in assessing goodwill for impairment having regard to historical performance and market conditions; and (iv) the classification of liabilities and recognition of fair value gains on liabilities in the financial report. ASIC expects assumptions underlying estimates and assessments for financial reporting purposes should be reasonable and supportable. Assumptions should be realistic, and not overly optimistic or pessimistic. ASIC's media release can be found here.
Guidance on virtual AGMs and electronic execution
On 14 September, the Governance Institute of Australia ("GIA") and the Australasian Investor Relations Association, with the assistance of the Business Law Section of the Law Council of Australia, released new guidance that will assist the ASX-listed organisations holding their meetings before the end of the year, as well as anyone else still grappling with holding a meeting during the pandemic. The new guide provides key tips on how to hold a virtual meeting in line with the current legislative requirements and ASIC guidelines. The guide can be found here.
GIA's statement on electronic storage and execution of documents and electronic meetings
The COVID-19 pandemic has highlighted the shortcomings of the Corporations Act in an increasingly digital age, and as a result the GIA sought counsel's opinion on issues relating to electronic storage and execution of documents and electronic meetings under the Corporations Act to assist its members. Its findings are set out in a statement released on 24 September, which can be found here.
MARKET DEVELOPMENTS
RBA reduces cash rate and commences formal quantitative easing program
On 3 November, the RBA decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic. These measures included: (i) a reduction in the cash rate to 0.1%; (ii) a reduction in the target for the yield on the three-year Australian Government bond to around 0.1%; (iii) a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1%; and (iv) the purchase of $100 billion of government bonds of maturities of around five to 10 years over the next six months, which is Australia's first formal quantitative easing program. The RBA's media release can be found here.
Securitisation market conditions improve but are not fully recovered
On 12 October, the Australia Office of Financial Management ("AOFM") reported that public securitisation market conditions continued to improve, reducing the need for Structured Finance Support Fund ("SFSF") support for primary and secondary markets. The SFSF invests in rated term securitisations and in rated and unrated securitisation warehouses in structured finance markets used by smaller lenders. The AOFM has also established an SPV to assist SFSF eligible lenders impacted by forbearance in their securitisation vehicles. The AOFM's media release can be found here.
The AOFM has reported that whilst Australian securitisation market conditions continue to improve, they are not fully recovered. As a result, market conditions do not yet support a call for restarting Australian Business Securitisation Fund ("ABSF") investment activity. The ABSF seeks to deepen the SME securitisation market, including via warehouse facilities. The AOFM's media release can be found here.
ASIC and RBA announce expectations for CHESS replacement
On 1 October, ASIC and the RBA outlined their expectations of ASX for the replacement of CHESS. The announcement coincided with the RBA's release of the 2020 Assessment of ASX Clearing and Settlement Facilities. ASIC and the RBA expect the ASX to demonstrate the readiness of the CHESS replacement system and will be required to provide supporting independent assurances before migrating to the new system. At a minimum, the new system must meet requirements which CHESS meets today for system availability, resilience, recoverability, performance and security. The joint ASIC-RBA media release can be found here.
ASIC's observations on M&A trends
On 2 September, ASIC released its Corporate Finance Update in which it noted a decrease in the number of disclosure documents lodged in the first half of 2020 (198 lodged, $2.18 billion funds sought) compared to the previous period of July to December 2019 (307 lodged, $6.93 billion funds sought). Despite a subdued first half of M&A activity, ASIC expects an increase in corporate finance activity in the second half of the year. ASIC has provided guidance on how issuers may deal with these uncertainties from a disclosure perspective, including: (i) shortening the duration of forecast periods; (ii) increasing the prominence of sensitivity analysis; and/or (iii) if unable to provide a forecast, disclosing in more detail the most recent trading of the issuer before lodgement and the key factors and variables that will affect the company's prospects. ASIC's Corporate Finance Update can be found here.
INTERNATIONAL DEVELOPMENTS IMPACTING AUSTRALIAN COMPANIES
ECB issues supervisory guidance to consolidation in the banking sector
The European Central Bank ("ECB") issued a guide for consultation in which it sets out how it will make use of its supervisory tools in order to facilitate sustainable consolidation projects involving euro area banks. The ECB will: (i) not penalise credible integration plans with higher capital requirements; (ii) look to the use of badwill by banks for risk reduction and value-added investments; and (iii) accept the temporary use of existing internal models, subject to a strong rollout plan. The ECB has stated several times that a certain degree of consolidation would be useful in addressing some of the structural challenges that euro area banks are currently facing. Any consolidation involving euro area banks would have implications for foreign bank branches and subsidiaries based in Australia. The consultation period closed on 1 October. The ECB's media release can be found here.
