Focus: Funds Management Update on listed managed investment scheme buy-backs
5 February 2008
In brief: In our Focus: Funds Management March 2007, we reviewed an ASIC consultation paper regarding a proposed policy on the regulation of buy-backs of interests in listed managed investment schemes. ASIC has now issued class order relief which enables the responsible entity of a listed scheme to buy back interests that are traded on the Australian Stock Exchange. Partner Lynne Jensen discusses the conditions of relief.
- What changes were made to the proposed policy?
- What schemes does the relief apply to?
- What are the conditions of relief?
- What are the consequences of non-compliance?
How does it affect you?
- Conditional relief is provided from requirements that restrict the ability of listed managed investment schemes to undertake on-market buy-backs to avoid placing listed managed investment schemes at a disadvantage to listed companies in relation to capital management techniques.
- The relief in Class Order 07/422 applies to listed non-liquid managed investment schemes, including property trusts and infrastructure funds.
- The responsible entity of a listed managed investment scheme can now buy back interests that are listed on the Australian Stock Exchange on the conditions set out in Class Order 07/422, without seeking case-by-case relief.
On 19 December 2006, the Australian Securities and Investments Commission (ASIC) released a consultation paper on a proposed policy to address industry concerns that the regulation of managed investment scheme buy-backs makes it difficult for listed schemes to use the capital management techniques available to listed companies. After considering comments on the proposals in the consultation paper, ASIC issued Class Order CO 07/422 (CO 07/422), effective from 13 December 2007. The relief given in CO 07/422 is explained in Regulatory Guide 101: On-market buy-backs by ASX-listed schemes.
CO 07/422 provides conditional relief from the following provisions of the Corporations Act 2001 (Cth):
- section 601GA(4), which requires withdrawal rights to be specified in the scheme's constitution;
- Part 5C.6, to the extent that it deals with withdrawal procedures for non-liquid schemes; and
- s606, which contains a prohibition on acquisitions of certain interests in listed schemes.
In the absence of relief, these provisions may have the effect of preventing a non-liquid listed managed investment scheme from engaging in an on-market buy-back because:
- ASIC considers that s601GA(4) requires the scheme's constitution to include an independently verifiable method for calculating the withdrawal price;
- withdrawal offers must remain open for at least 21 days;
- only one withdrawal offer may be open at a time;
- withdrawal requests cannot be satisfied while the offer is still open; and
- withdrawal requests must be satisfied proportionately if funds are not available to satisfy all requests.
A scheme is non-liquid if more than 20 per cent of the value of scheme property cannot be realised for market value within the timeframe specified for satisfying withdrawal requests in the constitution. In particular, property trusts and infrastructure funds are likely to be non-liquid schemes having regard to the nature of the assets they hold.
CO 07/422 aims to align the policy in relation to on-market buy-backs by schemes listed on the Australian Stock Exchange (the ASX) with the arrangements in place for listed companies. According to ASIC, the policy objectives behind additional restrictions on buy-backs by non-liquid managed investment schemes are less relevant for listed schemes because members are able to liquidate their investment at any time by selling their interests on the ASX.
The provisions of CO 07/422 differ from the policy that was proposed by ASIC in its consultation paper, dated 19 December 2006, in the following ways:
- class order relief is limited to managed investment schemes with one class of interests. ASIC will consider relief for schemes with multiple classes of interests on a case-by-case basis because there is a risk that on-market buy-backs by these schemes may not be fair to all members and may dilute the value of another class's interests;
- the period of notice that must be given before commencing buy-backs that do not require member approval has been reduced from 21 to 14 days under CO 07/422. This is consistent with the on-market share buy-back requirements under s257F(1) of the Corporations Act; and
- the method for determining the buy-back price will not need to be specified in the scheme's constitution. CO 07/422 aligns provisions in relation to listed managed investment schemes with arrangements in place for listed companies by requiring the responsible entity to comply with ASX Listing Rules in relation to the buy-back as if the scheme were a listed company. ASX Listing Rules place restrictions on the buy-back price and require the scheme's interests to have traded on the ASX on at least five days in the three months before the buy-back.
Relief under CO 07/422 applies to a purchase by the responsible entity of a listed managed investment scheme (including schemes that form part of a listed stapled group) of interests in that scheme, where:
- the purchase price is paid out of scheme property;
- the purchase is made in the course of ordinary trading on the ASX; and
- the scheme does not have more than one class of interests.
Relief for schemes with multiple classes of interests or for schemes listed on other financial markets will be considered by ASIC on a case-by-case basis. In deciding whether relief should be granted to schemes that are listed on other financial markets, ASIC will take into account the financial market's operating rules, the level of market liquidity and trading volumes of interests in the scheme.
The conditions of relief under CO 07/422 are:
- The power to buy back interests must be specified in the scheme's constitution.
- The buy-back must be carried out in the ordinary course of trading on the ASX. A responsible entity must not purchase interests through special or priority crossings when carrying out an on-market buy-back.
- The responsible entity must comply with the ASX Listing Rules as if the scheme were a listed company. The ASX Listing Rules prevent the responsible entity from setting a buy-back price that is more than five per cent above the average market price of the interests. The average market price is calculated over the last five days on which sales in the interests were recorded. In addition, ongoing market disclosure must be made to the ASX and transactions in the scheme's interests must have been recorded on the ASX on at least five days in the three months before the buy-back.
- The responsible entity must document any discretions it exercises in setting the buy-back price. When exercising a pricing discretion, the responsible entity must either follow its documented pricing policy or prepare a document that, among other things, explains why the exercise of the discretion was reasonable. The policy or document must be kept for seven years after it ceases to be current.
- Member approval is required if buy-backs exceed the 10/12 limit. If the responsible entity wishes to buy back more than 10 per cent of the smallest number, at any time during the past 12 months, of interests in the scheme (the 10/12 limit), it must obtain member approval for the proposed buy-back. A proposed buy-back would exceed the 10/12 limit if the number of bought-back interests in the past 12 months and the number of interests proposed to be bought back would exceed the 10/12 limit. Approval by ordinary resolution at a members' meeting can be obtained up to 12 months before the buy-back. A statement setting out all information known to the responsible entity that is material to the voting decision must be included with the notice of meeting. If an event occurs in the 12 months after members approve the buy-back that makes any previously disclosed information misleading or deceptive, the responsible entity can no longer rely on that approval to carry out the buy-back.
- Buy-backs within the 10/12 limit must not commence until at least 14 days after the ASX notice. The responsible entity must give a notice to the ASX disclosing its intention to buy back within the 10/12 limit, the source of funds for the buy-back and the number of interests in the scheme held by the responsible entity or its associates. The responsible entity must commence buying back interests by the date specified in the notice or, if no date is specified, within two months of the date of the notice. Buy-backs must only occur within the 12-month period from the date of the notice, unless a further notice disclosing the responsible entity's intention to continue buying back interests is given to the ASX. If an event occurs in the 12 months after the ASX is notified of the buy-back that makes any previously disclosed information misleading or deceptive, the responsible entity can no longer rely on that notice to carry out the buy-back.
- The buy-back must not materially prejudice the responsible entity's ability to pay its creditors.
- Interests that are bought back must not be disposed of and must be cancelled immediately after registration of the transfer.
ASIC will review certain documents relating to buy-backs by listed managed investment schemes in response to complaints or as part of surveillance activities. If a responsible entity fails to comply with the requirements for carrying out on-market buy-backs, it will breach the Corporations Act as modified by CO 07/422.
ASIC may take the following actions in relation to any non-compliance:
- requesting the responsible entity to take remedial action;
- taking civil or criminal action against the responsible entity or the officers involved; or
- applying to the Takeovers Panel.
If you have any questions about this or any other related issue, feel free to contact us.
- John BeckinsalePartner,
Ph: +61 7 3334 3520