ASIC speaks on fundraising takeovers and CLERP
An address by Richard Cockburn, National Coordinator Fundraising Mergers & Acquisitions, Australian Securities and Investments Commission, 18 February 2000.
On 13 March this year amendments made by the Corporate Law Economic Reform Program (CLERP) Act 1999 to important parts of the Corporations Law (Law) will commence operation. In the area of fundraising and takeovers those amendments are very substantial and introduce significant policy changes.
The Australian Securities and Investments Commission is prepared for those changes. We have largely completed consultation and development of our policy responses to those amendments. We have added a heading for CLERP under the Policy & Practitioners section of our website www.asic.gov.au. This heading will give people access to the latest information from the Commission on CLERP developments within ASIC.
We have adapted our enforcement and regulatory policies as a result of the changes to the underlying policy of the Law which CLERP has brought. I want to explain those changes and our reasons for implementing them.
We will exercise our discretionary powers both in respect of fundraising and takeovers in line with existing policy to assist a smooth transition to the new provisions and to promote certainty regarding compliance with amended Law.
To that end we have, for example, executed a class order to put it beyond doubt that a bid commenced before 13 March under the old Law may then proceed to use the compulsory acquisition provisions under the old Law if they have met the pre-conditions. We did that because there is some doubt about whether the transitional provisions adequately address this issue, and most of the conditions in current bids assume they will proceed to compulsory acquisition under the old Law upon completion.
We have taken similar steps in the fundraising area to ensure that the new more liberal advertising provisions apply to prospectuses issued before 13 March. Our legal advice was that the old provisions would otherwise have continued to apply. We have also provided transitional relief for pastoral companies and other excluded corporations to allow them to continue to take deposits pending an outcome of their application to the Australian Prudential Regulation Authority (APRA) for approval as an approved deposit taking institution. That relief is expected to be for a period of up to two years.
We have implemented new internal administrative procedures designed to provide practitioners with a greater degree of consistency. In both takeovers and fundraising, staff have access to new computer databases which enable us to identify CLERP issues and to provide consistent answers in each region across Australia. The National Coordinator Mergers Acquisitions and Fundraising has the task of achieving even greater levels of consistency from ASIC in the administration of the new provisions.
Policy statements, practice notes and class orders
Policy Statement 151 Fundraising: Discretionary powers [PS 151] lists those policy statements, practice notes and class orders which continue, those which are the subject of review and those which are superseded.
We expect that our new takeover and fundraising policy statements will be out in the marketplace some weeks before the commencement of the new provisions. They cover:
profile statements [PS 153];
lodgment of disclosure documents [PS 152];
transitional relief for excluded corporations [PS 156];
qualified accountants [PS 154];
debenture prospectuses [PS 155];
financial reports for offer information statements [PS 157]; and
fundraising: discretionary powers [PS 151].
Our policy statement on how we will exercise our discretionary powers in relation to takeovers should be out very soon and we are hopeful of putting out a policy proposal paper on the new s621. This section poses some interesting problems because it requires script bids to be valued at no less than the highest price paid in the previous four months for the bid class securities. This raises questions of how to value scrip, particularly unlisted scrip. It also creates potential difficulties as the bidder may not be certain of how much scrip it will have to offer at the time the bid is announced. On the other hand, there needs to be certainty for both the bidder and target about what the scrip component of the bid will be.
We have already published a number of information releases on transitional issues. Information release [IR 00/3] on managed funds for example makes it clear that responsible entities have a few matters to attend to in their compliance plan, including issues surrounding substantial securities holder notices, beneficial interest tracing and target statements under a bid.
To avoid doubt, we have made it clear that we believe a holder already at or above the 5% level in a listed managed investments scheme must lodge the notice within the two business days after 13 March, whether or not they have a change in their holding after 13 March.
One issue that creates a temporary anomaly is that listed registered managed investments schemes will be subject to the takeover rules under the revised Chapter 6. It is possible we will still have a listed managed investments scheme which has not yet transferred to the new managed investments provisions until about 30 June this year, and its members will not have the protection of the new takeovers regime.
We have called upon those people who have the benefit of ongoing relief from the takeovers and fundraising provisions of the Law to review the continuing need for that relief. This relief will need to be renewed on 13 March if it is still necessary. We are attending to the rollover of class orders that are still required. The type of relief that you should review is case by case relief which you want to continue to rely upon. In the takeovers area, that may be relief allowing you to disregard an entitlement for substantial shareholding purposes or relieving you of some of the disclosure details required by the section. With fundraising, it is probably an exemption from the prospectus requirements that has not been taken up in the CLERP amendments.
As a consequence of a late amendment the Law now contains an additional step for those seeking to use compulsory acquisition outside a takeover. A controlling shareholder seeking to move to compulsory acquisition must provide an expert's report on the fairness of the offer price. That expert must be appointed from a number of experts nominated by ASIC.
We have established a register of persons to be nominated for the purposes of preparing reports under the new compulsory acquisition provisions. Information release [IR 00/2] issued earlier this month sets out some of the processes and policy we intend to apply when exercising that function. Practitioners have told us to expect between 10-20 applications when these provisions commence.
Corporations and Securities Panel
There has been a major overhaul of the old Chapter 6 which regulated changes in control of companies. The prime body for resolving disputes is the Corporations and Securities Panel (Panel). This Panel also takes over from the Administrative Appeals Tribunal the function of reviewing ASIC decisions in relation to a takeover. ASIC is one of the few bodies able to take enforcement action to the courts during a takeover bid commenced after 13 March 2000.
We are only likely to seek relief in a court in unusual circumstances. These would probably be where:
the outcome we seek is compliance with the requirements of a section in Chapter 6;
the Panel cannot give orders of the type we seek;
compliance with a Panel order by the affected party is doubtful; or
there are inconsistent interpretations of the Law and a definitive outcome is required.
A copy of all applications made to the Panel will be served upon the Commission. In addition we anticipate that from time to time the Panel itself may decide to draw a particular matter to our attention. We propose to seek to be heard before the Panel when we are not otherwise a party where:
the matter raises significant policy issues;
these issues relate to an undesirable trend or development in takeover activity; or
the interests of investors and the markets may not otherwise be served.
It may also be the case that we appear because we are in possession of information or other material which is otherwise not available to the parties or the Panel.
We welcome the new role for the Panel and expect that more litigants will take to it for determination, issues going beyond mere compliance with the letter of the Law. In particular we will be encouraging the Panel to use its rule making powers to assist the corporate community to know the boundaries of acceptable corporate behaviour in takeovers.
Last year our Chairman, Alan Cameron, identified our expanding consumer protection role and how in the context of takeovers that could well see us enter the debate to protect investors, particularly in the case of popularly held listed companies. We will continue to do that when we see it as necessary. That intervention may well go beyond merely acting as umpire/regulator between the target and bidder. A possible area for concern is with minimum acceptance conditions and capital gain tax rollover relief. We would not want target shareholders to confuse the implications of a minimum acceptance condition which can be waived by the bidder and the 80% threshold condition for rollover relief.
Bidders statements are no longer registered by ASIC. These documents are lodged with us. That means any defects must be corrected by a supplemental statement. In the case of bidders, we propose issuing relief to make it clear that issuing a supplemental statement after service on the target but before dispatch to shareholders does not of itself start the 14-28 day period again.
We do not believe that a takeover document can be withdrawn after lodgment, even where it is found to be defective.
It is proposed that bidders and target statements will be quickly reviewed to see if they are 'high risk', that is, if based upon past experience they are likely to be worthy of examination. Those found wanting in a material respect will be the subject of enforcement action.
Those practitioners among you may have noticed a change in our enforcement strategy over the past year. It is now very common for us to query statements reported in the press that may be material to an investor's decision. Some examples of when we are likely to question players are when you:
talk of discussions with a potential rival bidder; or
suggest that there will be no extension to the bid, or that the last offer is a final one.
We frequently indicate to bidders that we expect an extension of the bid in certain circumstances. That will be less frequent now that there are provisions for mandatory extensions of bids. If you have add a conditional increase in the consideration especially with a time condition attached to it, you should generally expect us to require that those who have accepted after the announcement are provided with an opportunity to withdraw their acceptances if the preconditions are not met.
There are some 68 listed managed investments schemes of which about 56 are property schemes. Chapter 6 will apply to them from 13 March 2000 unless they have not yet made the transition to the new managed investments provisions. Taking over a scheme is one thing, becoming its manager may present another hurdle for the responsible entity. Our licensing conditions usually limit the responsible entity to managing named funds so that we can ensure it retains the capacity to manage the funds it is responsible for.
The Commission has increased the use of enforceable undertakings in the last year or so and we expect that trend will continue. We will also seek to do more than merely enforce the Law in takeovers. We will continue to push at the boundaries of acceptable conduct as we did in the Panel referral in relation to the Bristile & Wesfi bid. In takeovers it is not sufficient to devise a legal structure to avoid the takeover requirements, you must comply with the spirit behind the Law so everyone has a fair go.
What do we think the main issues in takeovers will be this year? We think they will be:
the willingness of the business community to support the expanded role of the Panel;
international comity and the increasing presence of foreign resident shareholders in Australian companies;
the increased capacity for parties to challenge activity by both bidder and target that may be unacceptable even though in strict compliance with the Law;
for supplemental bidders and target statements, greater harmony between fundraising and takeover documents and increasing focus on the adequacy of disclosures in bids;
consumer issues, eg small investors feeling disadvantaged because bids and most of the tactics in them are pitched at institutional holders and capital gains tax conditions in script based bids.
Perhaps the biggest single change is the abolition of the registration process for fundraising documents. Last calendar year we registered 828 prospectuses and refused registration of 93. The figures actually have a higher rejection rate for non-managed investments schemes, usually initial public offerings. In the managed investments area, new and tax driven schemes were disproportionally represented in the refusals.
About 10% are refused registration annually, that is, we can ascertain from merely reading the document that 10% are non complying. If we refused registration it was usually because the defects could not be corrected within the statutory period of 14 days in which we must make a decision. The most common reasons for the Commission taking enforcement action in relation to fundraising documents are:
problems with inadequate explanation of the reasons why particular sensitive assumptions are used by an expert; and
in the case of managed investments, overly optimistic projections, a lack of adequate risk disclosure or failure to benchmark performance. Usually the asset class risk is discussed but not the risks particular to the scheme or the investment strategy to be adopted in that scheme. There are also common errors which are difficult to understand because they relate to a failure to meet specific requirements in the Law such as:
failing to make a statement about the expert's consent (s1032);
not disclosing fees and commissions paid to directors and the expert (s1021(6)); and
referring to a listing on the ASX, but not addressing the requirements in s1031 of the Law.
Benchmarking is a developing issue where a managed investments scheme has a strategy of outperforming or matching a particular index or other measure of performance in the financial sector. We expect to see the scheme's performance tracked against that benchmark so that investors can determine how well the investment strategy in the scheme meets its stated objective.
Examining offer documents
We do not expect to examine many prospectuses during the seven day exposure period unlisted issuers under CLERP. We will however undertake examinations based on our assessment of risk or on receipt of substantive complaints both during and after the exposure period.
Our process will be to quickly review most disclosure documents lodged with us by unlisted entities to determine if they fall into a high risk category. Those in a high risk group, eg those which are to be subject of an issue specific focus or national campaign, will be examined. That examination may occur during the exposure period. If it does and a defect is discovered in the seven day period, our usual practice will be to communicate that to the issuer and provide them with an opportunity to rectify it by supplemental or replacement prospectus.
If at the end of the seven days the issue is not resolved we will extend the exposure period for another seven days to the maximum 14 day period. If the problem still exists you can expect stop orders to be implemented. It is not wise to assume that the document is satisfactory merely because nothing happened in the exposure period.
We will also extend the seven day exposure period to 14 days if the disclosure document was not generally available to the public during that period. [PS 152] discusses the exposure period and the issues associated with lodgment of fundraising documents. It is the Commission's view that a disclosure document once lodged cannot be withdrawn.
These changes place the onus back on those advisers preparing the disclosure documents to get them right and not rely upon ASIC to double check them during the exposure period. We expect your client's competitors to continue to be a valuable source of information about fundraising documents.
Issuers can expect that we will significantly increase the frequency with which we issue stop orders. To that end current market practice of having an escape clause for a stop order in an underwriting agreement may be a greater cause of friction between the issuer and the underwriter in the future.
Public exposure through OfferList
To assist both issuers and those seeking to examine these fundraising documents, we have established a register called OfferList which can be accessed on our Internet site (www.asic.gov.au). This will provide contact details for obtaining a copy of a document. We will also give priority to docimaging these documents on our public search system. Our aim is to have documents publicly searchable about three business days after lodgment. We encourage issuers to place their document on an Internet site during this period and to implement procedures to quickly distribute hard copies upon request.
In the absence of a complaint or sufficient details to complete the entry on OfferList, we will assume the document was 'generally available' and thus will not usually extend the exposure period.
Issuers will soon have a facility so they can enter the details on OfferList via our internet site in advance of lodging the documents. If a complaint suggests it is too costly to access a copy or there is excessive delay in obtaining a requested hard copy of the document, we will usually extend the exposure period. We will also extend it if requested by applicants who may seek some greater certainty as to the time when they can accept applications.
We interpret the requirement that an issuer not accept applications for securities during this period to mean you may receive them and where required (for example by s722), bank them in a trust account but may not use receipt during this period to bestow any advantage upon the applicants. That means if there is a first come first served regime in place for an oversubscribed prospectus we suggest that the applications received during the period be regarded as received at the conclusion of business on day one of the offer period. We would expect that most issuers would not usually circulate application forms during this period with their disclosure document.
We have given relief in [PS 151] to encourage the use of profile statements, primarily for those managed investments products that had the benefit of relief under the Simpler Managed Investments Prospectus (SMIP) project. It will be possible to badge and tailor the statements and thus have a number of different profile statements in relation to one prospectus. The policy statement sets out the criteria we will use if asked to extend the use of profile statement to other industries such as debentures.
We have exercised our powers with profile statements to require some additional material for inclusion beyond that set out in s714. Our decision to do that flows from the investor market research we undertook for the SMIP project. Investors wanted better detail on a number of matters, so we have required the following questions to be answered in the statement:
How will the scheme generate returns for investors and what form will those returns take?
How can an investor invest in the scheme?
How and when can an investor withdraw their investment from the scheme?
How can an investor switch into other schemes (if relevant)?
We have required the risk disclosure to include a graphic illustration of the schemes returns over a ten year period (or the life of the scheme if that is shorter). The fees and charges disclosure must provide separate figures and the aggregate of all entry, on going and exit fees, charges and commissions. We think that investors will then have the type of information they need to make the comparisons and that they may increasingly subscribe based only on the profile statement.
To assist in clarifying the obligations of those preparing offer information statements (OIS) we have clarified the requirements to prepare the financial report required by s715 in [PS 157]. The entity's accounts must be prepared on the basis they are a reporting entity for the purposes of the accounting standards and prepare reports under Chapter 2M of the Law. The audit requirement in s715(2) must be undertaken by a registered company auditor as if performing the audit under Chapter 2M of the Law. We have also set out the extent to which we will vary the OIS requirements for financial reports.
Continuous debenture issues
In [PS 155] we have provided relief for continuous debenture issuers to avoid printing interest rate and term details in the prospectus. They have the option of including that information on the application form where the most recent application form has also been lodged with us. The alternative is to use an application form where the applicants themselves complete those details based on information supplied by the issuer. We are prepared to consider extending the use of profile statements to these offers, but many issuers have their prospectuses down to four pages or so and may obtain very little advantage from that option.
Certification by a 'qualified accountant'
The CLERP amendments allow offers of securities to be made to sophisticated investors without a prospectus or OIS. To qualify, the investor needs a certificate (not more than six months old) from a 'qualified accountant' that they have net assets of more than $2.5 million or have had a gross income of at least $250,000 for the last two years.
In [PS 154] we have approved most categories of membership of a number of accounting bodies as 'qualified accountants' for the purposes of certifying an investor's assets or income position. Full members of the Institute of Chartered Accountants in Australia, the Australian Society of Certified Practising Accountants and the National Institute of Accountants currently qualify to undertake that task.
The Australian Securities and Investments Commission will continue to use its discretionary powers to make as smooth a transition to the new CLERP provisions as is possible. We intend to review a large number of our policies in the fundraising and takeovers areas in the next 12 months to ensure that they remain relevant to the policy underlying the CLERP amendments. In the case of employee share schemes, this may also include changes to take account of the government's response to the current Parliamentary inquiry into that area.
Our wide consultative processes will continue and I want to thank the large number of you who make yourselves and the resources of your firms available to comment on our policy proposals.
We will continue various enforcement strategies designed to promote compliance with the Law and consolidate our consumer protection functions. On the fund raising side, that means unless issuers improve the quality of their documents we can expect to see many more stop orders in the future. In takeovers, it means bidders and targets must not use tactics in the takeover which disadvantage retail shareholders.