Corporate law developments

By Vijay Cugati
Mergers & Acquisitions

In brief

Welcome to our monthly snapshot of regulatory updates and other developments in corporate law. We know you are busy, so our focus is on capturing key issues.

We'd love to hear from you. Please do let us know if you need more detail about an issue, or if there is something in particular you'd like to hear about, and feel free to call any of your Allens contacts.

What you need to know

ASIC: Themes from the Royal Commission in the regulator's sights
  • The lead up to the Interim Report of the Financial Services Royal Commission saw ASIC release a wave of reports and updates striking at the heart of many of the issues unearthed at the Commission hearings. In particular:
    • ASIC released Report 594 – Review of selected financial services groups' compliance with the breach reporting obligation, which identifies significant delays in the time taken to identify, report and correct breaches by 12 of Australia's largest financial services groups, including the big four banks. In particular, the report confirms ASIC's view that legislative reforms are required to make breach reporting laws less subjective, and includes calls for substantial increases in criminal and civil penalties that may be applied to increase the deterrent effect. In the meantime, the corporate regulator has called for urgent investment by financial services institutions in systems and processes as well as commitment and oversight from boards and senior executives to address the issues identified in the Report.
    • ASIC released Report 591 – Insurance in Superannuation, which examined the provision of insurance cover through superannuation and particularly focused on claims and complaints handling, disclosures, insurer rebates paid to trustees and whether members were defaulted into demographic categories that resulted in higher premiums.
    • In light of financial advice professional standards reforms that will include obligations for financial advisers to comply with a code of ethics and be covered by an ASIC-approved scheme to monitor and enforce compliance with that code of ethics from 1 January 2020, ASIC has released Regulatory Guide 269 – Approval and oversight of compliance schemes for financial advisers. The guide sets out the process and criteria ASIC will follow to determine whether to grant approval to a compliance scheme. The code of ethics is currently being developed by the Financial Adviser Standards and Ethics Authority.
    • ASIC released its Corporate Plan 2018-22, articulating the regulator's 'vision, mission and strategic plan' for the years ahead. Practitioners will note the regulator's focus on better identifying and acting on instances of poor culture and professionalism, poor governance and incentives and practices targeting financially vulnerable consumers.

      Given the Royal Commission's observations about ASIC's role as a regulator, we think that financial institutions and other market participants can expect a sharp focus on the issues identified in these updates and reports in the near future.

  • ASIC continues to crack down on initial coin offerings and token-generation events targeted at retail investors, with a number of ICOs being halted by the regulator in the past six months. ASIC has indicated that it is concerned by consistent issues around the use of misleading or deceptive statements in sales and marketing materials, the operation of illegal unregistered managed investment schemes and not hold appropriate AFS licences. ASIC has updated Information Sheet 225 – Initial coin offerings and crypto-currencies to guide market participants about the requirements for ICOs.
  • ASIC has released Report 593 – Climate risk disclosure by Australia's listed companies. The report found limited climate-related risk disclosures outside ASX 200 companies, with disclosures often being too general, of limited use to investors and approached inconsistently across the spectrum of listed entities. The report represents a continuation of ASIC's recent focus on climate-related risk disclosures and indicates that this is likely to be a focus area for ASIC in the medium-to-long term.
  • ASIC has updated Regulatory Guide 192 – Licensing: Wholesale equity schemes. The guide has been updated to reflect recent changes to the relief provided to trustees of wholesale equity schemes reflected in Class Order [CO 13/760] Financial requirements for responsible entities and operators of investor directed portfolio services, Class Order [CO 13/761] Financial requirements for custodial and depository services and Class Order [CO 13/1410] Holding assets: Standards for providers of custodial and depository services. The updated guide will assist trustees of wholesale equity schemes operated by a manager holding an AFSL in understanding how they can be eligible to take advantage of the updated relief.
  • ASIC has approved the Australian Financial Complaints Authority Complaint Resolution Scheme Rules and the Terms of Reference of the AFCA Independent Assessor, ahead of the formal commencement of the AFCA complaints handling scheme on 1 November 2018. The approval came shortly ahead of the 21 September 2018 deadline for financial firms including AFS licensees, Australian credit licensees, authorised credit representatives and superannuation trustees to join the AFCA.
ASX: Peer comparisons and 'over-subscribed' placements
  1. Peer comparison information

    In its September Compliance Update, ASX reported that it had experienced a number of issues with listed entities releasing potentially misleading peer comparison tables in presentation slides. Examples of this type of information include comparisons of market capitalisation or of resources and reserves.

    ASX noted that listed entities should take care in preparing peer comparison information to ensure that it is based on accurate, up to date and objectively verifiable information. Peer comparison information should not be presented in a way that is designed or likely to mislead. Examples of potentially misleading disclosure include:

    • inappropriate reference points for the comparison, such has different balance dates for comparing market capitalisation;
    • comparing resources or reserves under the JORC Code without disclosing the different categories of resources or reserves (such as comparing inferred resources to measured resources) and grades; and
    • choosing data points for comparison which benefit the entity disclosing the peer comparison.

    Where a listed entity discloses an objectionable peer comparison ASX may require the entity to publish an announcement withdrawing or retracting the objectionable material.

  2. Over-subscribed' placements

    In its September Compliance Update, ASX noted that placements of new securities should only be described as 'over-subscribed' where applicants applied and paid for more securities than were ultimately allocated to them (with excess funds being remitted back to the relevant applicants).

FIRB: Revised guidance on open and transparent sale process requirement for foreign purchases of agricultural land

This month FIRB released revised guidance on the policy, introduced in February 2018, that foreign persons seeking to purchase agricultural land must demonstrate that the land has been subject to an open and transparent sale process and marketed widely for a minimum of 30 days. The purpose of the requirement is to ensure that Australians have sufficient opportunity to bid in any sale process of agricultural land. The guidance has been updated following feedback from stakeholders.

The key changes include the following:

  • the requirements originally applied to all agricultural land, with some exceptions. Now the requirements will apply only to acquisitions of agricultural land that are intended to be used for a primary production business or residential development.
  • the requirements will no longer apply to acquisitions of leasehold or licence interests in agricultural land, except where they have freehold characteristics (eg, indefinite term, or option to acquire a freehold interest at the end of the term).
  • the requirements can now be satisfied via alternative forms of sale process (ie, other than a 30 day public marketing campaign as per the original policy) that provide an equivalent level of participation by Australian parties.
  • The requirements will generally no longer apply to foreign persons who acquire agricultural land and who allow significant Australian participation in the operation of a primary production business on the land.
ACCC: Green-light given to pharmaceutical merger and energy acquisition

In September the ACCC decided not to oppose two deals and expressed concerns over a third. It also issued a draft determination proposing to authorise a joint procurement application from four councils.

Generic pharmaceutical companies Arrow and Apotex have received the all-clear to merge, despite the fact that the combined entity will supply around half the market for generics to pharmacies in Australia. The ACCC considered that a merged Arrow-Apotex will still face significant competition from Mylan, Sandoz and other suppliers, particularly given that most of its competitors are owned by large international manufacturers.

The ACCC will not oppose the CK Consortium's proposed acquisition of APA Group, after the CK Consortium gave a court-enforceable undertaking to divest gas assets in WA. The CK Consortium is comprised of Hong Kong listed companies with interests in electricity and gas infrastructure assets in Australia. APA Group owns and operates energy and gas infrastructure in Australia.

The proposed merger of Siemen AG's Mobility Division and Alstrom SA is being scrutinised by the ACCC, which has signalled concerns in its Statement of Issues published on 6 September 2018 that the combined Siemens-Alstrom entity would be by far the largest supplier of heavy rail signalling in Australia. Interested parties have until 20 September 2018 to respond. The proposed merger is also being reviewed by overseas regulators, including the European Commission. The ACCC has indicated that it would issue its final decision on the merger on 29 November 2018.

Takeovers Panel: Substantial holder notifications in focus

This month the Panel made a declaration of unacceptable circumstances in relation to affairs of Tribune Resources Limited. The application alleged that the substantial holder notices lodged by the three largest shareholders of Tribune were defective and that various other persons had undisclosed voting power in Tribune in excess of 5%.

The Panel granted interim orders prohibiting various parties from disposing, transferring, charging or otherwise dealing with their shares in Tribune. These orders remain in effect while the Panel considers its final orders (which could include an order vesting's an individual's shares in ASIC for sale). While the reasons for decision have not yet been published, the Panel has also raised concerns that there may be contravention of the takeovers prohibition in s606 of the Corporations Act.

Interestingly, the Molopo saga continued, with the review Panel varying the final orders of the initial Panel in Molopo Energy Limited 10 & 11. In an unusual turn of events, the review Panel has made orders against certain former directors of Molopo personally for the payment of costs in connection with the Molopo Energy Limited 10 & 11 proceedings.

The review Panel stated it considered the orders as appropriate for protecting the rights or interests of Molopo shareholders who have been affected by seriously deficient disclosure in relation to transactions of great significance that caused or contributed to proposed acquisitions of substantial interests in Molopo not proceeding. The review Panel will publish its reasons in due course.

In other news, ASIC withdrew its application in relation to an entitlement offer being conducted by Poseidon Nickel Limited. ASIC was concerned that the potential control effects of the sub-underwriting arrangements the entitlement offer exceeded what was reasonably necessary for the fundraising purpose but withdrew its application after the results of the entitlement offer were announced.

Employment: Government extends family and domestic violence leave to all Fair Work Act covered employees

The Federal government has introduced the Fair Work Amendment (Family and Domestic Violence Leave) Bill 2018 (the Bill) into parliament. The Bill seeks to amend the Fair Work Act 2009 (Cth) to provide five days' unpaid leave per year to employees to allow them to deal with the impacts of family and domestic violence. The proposed legislation follows the Fair Work Commission's decision earlier this year to introduce a domestic violence leave clause into all modern awards.

Under the current drafting of the Bill:

  1. full-time, part-time, casual and fixed term employees will be entitled to access the leave;
  2. employees may take unpaid family and domestic violence leave if:
    1. the employee is experiencing family and domestic violence;
    2. the employee needs to do something to deal with the impact of the family and domestic violence;
    3. it is impractical for the employee to do that thing outside the employee's ordinary hours of work; and
  3. 'family and domestic violence' is defined as violent, threatening or other abusive behaviour by a close relative that seeks to coerce or control the employee and causes the employee harm or to be fearful.

If passed, the amendments will become part of the National Employment Standards.

To access the leave, employees will be required to comply with the same notice requirements as for taking personal leave, and also provide their employer with evidence of their need to take this type of leave (if requested by their employer). As the current drafting of the Bill does not provide practical guidance about the types of evidence that may be required of employees seeking to access this leave, employers will need to consider what they will require from employees to establish their need to access family and domestic violence leave.

While the Minister for Jobs, Industrial Relations and Women has called for support for the Bill, Labor does not support the Bill in its current form, and has urged for the Bill to go further.

News & Other developments

    • The interim report into Misconduct in the Banking, Superannuation and Financial Services Industry was released at the end of the month, covering consumer banking, financial planning, small-to-medium business banking and rural and indigenous banking. A key question raised in the Interim Report is whether incentive payments based on revenue or profit are appropriate at any level of a financial institution. The report also says that ASIC should seek civil and criminal penalties for breaches of the law, unless the public interest is against doing so. The interim report consists of three volumes. Volume 1 contains the issues Commissioner Hayne has identified relating to the first four rounds of hearings, his conclusions about causes, and possible responses; Volume 2 contains his findings on the case studies, including where he has found that there may have been breaches of the law and conduct that failed to meet community expectations; Volume 3 contains the list of entities invited to provide submissions, and lists of witness statements and exhibits. See the special October edition of Allens Unravelled for more detail.
    • The Council of Financial Regulators, comprised of the RBA, APRA, ASIC and the Commonwealth Treasury, has called for submissions on their Issues Paper on Retail Payments Regulation: Stored-value Facilities. The Issues Paper is part of a review into the regulatory framework for 'stored value facilities', which are payment products that allow users to pre-load money for future purchases (such as a travel money card). While the CFR's review will primarily consider how stored-value facilities are regulated, the review will also focus on identifying opportunities for improvements or clarification to other aspects of the regulation of retail payments service providers retail payments regulation. ASIC in particular has indicated it is interested in ensuring the regulatory framework contains appropriate consumer protections. Submissions are due by 19 October 2018.