Crackdown on offers of stub-equity, the Banking Royal Commission Final Report and other developments

By Vijay Cugati
Mergers & Acquisitions

In brief

ASIC to crack down on offers of stub-equity; the Banking Royal Commission Final Report is handed down and an increase to FIRB approval monetary thresholds.

What you need to know

ASIC: Crackdown on offers of stub-equity, review of allocations in equity raising transactions, and continued scrutiny of financial services misconduct
  • ASIC has foreshadowed that it will clamp down on offers of stub-equity in proprietary companies as an alternative form of consideration in public control transactions. It has identified a number of concerns with the use of stub-equity, including:
    • the loss of disclosure and governance protections that would ordinarily be available to retail shareholders in public companies – in particular, restrictions on related party transactions, conflicted director voting and the requirement to hold an AGM; and
    • the potential for stub-equity offers to, in practice, give a collateral benefit to major shareholders that will not be available to ordinary shareholders with small holdings electing to accept a scrip offer (eg by granting additional governance or information rights that will only be available to major shareholders in the new proprietary company).
    A consultation paper on the use of stub-equity is expected in early 2019. ASIC's new approach, and the contents of the consultation paper, will be of particular interest to private equity firms. (See our Client Update: Private equity under the spotlight – ASIC cracks down on offers of stub-equity in proprietary companies.)
  • ASIC has released its review of allocations in equity raising transactions, in which it underscores the potential impact conflicts of interests might have in allocation decisions. Report 605 – Allocations in equity raising transactions (released together with a summary version of the same report) highlights areas where ASIC sees scope for improvement for both financial services licensees and issuers when raising equity on listed markets; and, in doing so, ASIC has emphasised its view that an issuer's objectives should be the primary driver of allocation decisions. With an increased focus on conflicts generally, following the conclusion of the Royal Commission, we expect ASIC to continue to monitor allocations in IPOs and placements in 2019.
  • In the lead-up to the release of the Royal Commission's Final Report, ASIC took two separate actions relating to 'fees for no service' issues, which continue to demonstrate the regulator's willingness to take a firmer stance against financial services industry participants. In the first case, the regulator took action against a major law firm to compel the production of documents where the firm claimed legal professional privilege in the documents. The second case saw ASIC prohibit Commonwealth Financial Planning Limited (CFPL) from charging any service fees after the regulator was not satisfied that CFPL's compliance systems and processes were adequate to prevent a repeat of earlier 'fee for no service' issues. Following the delivery of the Final Report, we expect ASIC to continue to take firmer stances against all industry participants in matters involving conduct that the regulator considers unsatisfactory.
  • ASIC has released a consultation paper seeking feedback on proposed changes to the fees and costs disclosure regime for superannuation and managed investment schemes. Consultation Paper 308 – Review of RG 97 Disclosing fees and costs in PDSs and periodic statements represents ASIC's response to recommendations from a review of the regime by Darren McShane in July 2018. It includes proposals to adopt recommendations from the McShane report to simplify the presentation of fee and cost information to consumers, and to make disclosure for managed investment schemes more consistent with disclosure for superannuation. Comments on the consultation paper are due by 2 April 2019.
ASX: Correcting errors in announcements

ASX, in its monthly compliance publication, Listed, has emphasised the importance of listed entities checking announcements carefully for errors and for acceptable content before they are submitted to the ASX Market Announcements Office (MAO) via ASX Online. The ASX stressed that a listed entity cannot rely on the MAO to detect errors in announcements, and it is a requirement under ASX Guidance Note 14 section 17 that listed entities ensure their market announcements are correct and unobjectionable.

It is unusual for ASX to agree to a request to remove or replace an announcement once it has been released on the ASX Market Announcements Platform (MAP), as the removal or replacement of an announcement is not a straightforward task; and market integrity issues can also arise if the information has been read and acted upon by some readers before its removal or replacement.

If a listed entity releases an erroneous market announcement, generally the only available course of action is to lodge a further announcement correcting the error. The corrective announcement should clearly state it is withdrawing or correcting a previous announcement.

To correct or withdraw an announcement, contact the ASX Market Announcements Office on 1800 021 965 or +61 2 8298 8044 during MAO office hours; or by emailing, with a cc to, outside of MAO office hours.

FIRB: Increased monetary thresholds and additional free trade agreement countries

The FIRB approval monetary thresholds were slightly increased, with effect on 1 January 2019, following annual indexation. The changes include the general threshold for foreign persons acquiring 20 per cent+ interests in Australian entities increasing from A$261 million to A$266 million (and for investors from free trade agreement countries, the general threshold increasing from A$1,134 million to A$1,154 million).

In December 2018 and January 2019, Canada, Mexico and Vietnam were added as 'free trade agreement countries' for FIRB purposes, as a result of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership coming into effect for those countries and Australia. Those countries join the pre-existing free trade agreement countries: Chile, China, Japan, South Korea, New Zealand, Singapore and the United States of America.

ACCC: Proposal to introduce regulator to oversee algorithms and updates on recent decisions

The ACCC released a preliminary report in its digital platforms inquiry in which it made 11 preliminary recommendations and identified eight areas for further analysis. Some of the preliminary recommendations would result in increased regulatory oversight of digital platforms and their activities. However, the recommendations are still subject to further review, with a final report due in June 2019 – watch this space for further developments.

On the transaction front, the ACCC cleared Thales's proposed acquisition of Gemalto, despite the companies' overlap in general-purpose hardware security modules and decryption technology. The ACCC's approval came after Thales provided a court-enforceable undertaking to sell its global general purpose hardware security modules business to an ACCC-approved purchaser, which is linked to the commitment made by Thales to obtain the European Commission's approval for the transaction. The merger has also been approved in New Zealand, the United States, Canada, China, Israel and Turkey.

Meanwhile, the ACCC has – for the second time, in both cases – delayed its decision on two ongoing merger reviews:

  • In relation to the Vodafone-TPG merger, the ACCC now expects to publish its decision on 11 April 2019. The proposed merger combines Vodafone's 5000 site mobile network with TPG's 27,000 kilometres of fibre assets. On 29 January 2019 ,TPG announced it was abandoning its plan to build its own mobile network in Australia, citing the Federal Government's Huawei 5G ban. It remains to be seen how this might affect the ACCC's decision-making regarding the merger.
  • In relation to the proposed merger of Siemen AG's Mobility Division and Alstom SA, the ACCC has not publicised a revised decision date. In September 2018, the ACCC expressed its concerns that the combined Siemens-Alstom entity would be, by far, the largest supplier of heavy rail signalling in Australia. The proposed merger is also being reviewed by overseas regulators, including the European Commission.

The ACCC also commenced two informal merger reviews into DLF Seeds' proposed acquisition of PGG Wrightson Seeds Holdings Limited (which concerns the breeding and supply of grass seeds for use in fodder and turf applications) and QANTM's proposed merger with Xenith (which concerns the supply of intellectual property-related services and products). Submissions for each transaction have now closed, and, while no decision date has been publicised for the QANTM-Xenith merger, the ACCC expects to announce its decision on DLF's acquisition of PGW Seeds on 21 February 2019.

Takeovers Panel: Bidder and target statements – a case study of content and timing

December and January were fairly quiet for the Panel, but saw it make declarations of unacceptable circumstances in response to applications by shareholders of Benjamin Hornigold Limited (BHL) and Henry Morgan Limited (HML) in two separate but related decisions. Both companies were subject to off-market takeover bids by John Bridgeman Limited (JBL), and the declarations were in relation to circumstances surrounding the preparation and timing of lodgment of target's and bidder's statements.

In the bid implementation agreements, each of BHL and HML represented that their respective voting directors would unanimously recommend the bids, in the absence of a superior proposal and subject to, among other things, consideration of matters detailed in an independent expert's report.

Each company also agreed to early despatch of bidder's statements without qualification. After the bids were announced, BHL agreed to certain loan arrangements with JBL. JBL subsequently lodged bidder's statements that stated the voting directors of BHL and HML unanimously recommended that shareholders accept the offer in the absence of a superior proposal, but did not amend the statements to reflect the conditionality of the recommendations, despite being requested to do so by the targets.

Following discussions with ASIC, JBL lodged supplementary bidder's statements and offered withdrawal rights to shareholders who had previously accepted the bids. The voting directors of BHL and HML then recommended to shareholders, for the first time, that they take no action in relation to JBL bids before the release of their respective target statements. The target statements, when released, contained independent expert reports concluding that the bids were not fair but reasonable.

The Panel made declarations of unacceptable circumstances for multiple reasons:

  • the bidders' statements did not adequately disclose material information, including the various relationships and transactions between the parties;
  • the loan arrangements between BHL and JBL diminished the value of important assets of BHL, making it less attractive to other potential acquirers;
  • the bidder and the targets failed to promptly correct the misrepresentation of the conditions of the voting directors' recommendation in the bidders' statements; and
  • both targets delayed in giving clear advice to shareholders to take no action in relation to the bids before considering the target's statement and the independent expert's report.

The Panel's decisions reinforce the principles that bidders' statements must not misrepresent the conditionality of voting directors' recommendations; and statements should be released in a timely manner, in accordance with timetables in bid implementation agreements with which parties have agreed to comply.

Employment: an emerging trend – class action claims

In the past few years, we have seen an increase in the number of class action claims filed against businesses on behalf of current or former workers.

Businesses with operations in the retail, hospitality and mining sectors have been a particular focus, with class action claims alleging that businesses have engaged in sham contracting and / or underpaid their workforce.

Late last year, one of Australia's biggest private entities, Tandem, became the subject of a significant class action claim in the employment space. The claim alleges that Tandem misclassified workers as independent contractors, rather than employees, resulting in thousands of technicians allegedly being underpaid. If successful, the claim threatens to expose Tandem to substantial compensation orders and penalties for breaching the Fair Work Act 2009 (Cth).

More recently, a class action claim has been threatened against hospitality giant Merivale. Canberra-based law-firm Adero has indicated that it has been investigating potential underpayments of current and former Merivale employees, with a view to filing a class action claim against it. Adero is investigating alleged underpayments of hourly rates of pay and loadings of Merivale employees engaged at 70 hospitality venues. The firm has recently filed similar claims against other businesses, including Hays Recruitment and WorkPac.

In light of this emerging area of class action risk, businesses that engage large numbers of contractors and those with low-paid employees, such as those in the hospitality and retail sectors, should consider their susceptibility to class action claims from their workforce.

If you wish to discuss the potential risk of an employment-related class action against your business, please get in touch with our Employment & Safety team.

For further information about class action risk and the general developments in the class action landscape, please see our Class Action Risk 2018.

Other developments

The Banking Royal Commission Final Report

The Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was released on 4 February 2019. The report contains 76 recommendations, including on banking, financial advice, superannuation, insurance, culture, governance and remuneration, and the regulators. Allens has launched a microsite responding to the report, which includes both summaries and detailed analysis, along with thought leadership pieces on the key themes.

New UK corporate governance code for large private companies

The UK Wates Corporate Governance Principles for Large Private Companies were launched on 14 December 2018. The principles provide guidance to those large private UK companies that have 2000+employees (whether UK based or not); or a turnover of more than £200 million and a balance sheet total of more than £2 billion. The principles provide a voluntary framework for boards on how to achieve good governance.

The principles operate via 'apply and explain' compliance – ie companies should explain how they apply the principles. Alternatively, if a company does not apply a principle, it should explain why.

The principles are high-level and the Financial Reporting Council has provided guidance on how companies can apply the principles in their particular circumstances.

The six principles are:

  • Purpose and leadership: the board is responsible for ensuring companies have a well-defined purpose, that directors promote the success of the company, and that the company's purpose and values inform behaviours and practices throughout the organisation.
  • Board composition: board chairs should promote open debate and constructive discussion; boards should be diverse (and there should be a company policy on diversity and inclusion) and have balanced skillsets; the board's size and structure should suit the company; and the company should be committed to ongoing development and regular evaluation of its board.
  • Director responsibilities: the company should have clear policies in place to ensure the company's internal affairs are clearly set out and that it has transparent governance policies; it should consider using committees to help with matters such as financial reporting, risk, and remuneration; and have formal processes to maintain the integrity of its information.
  • Opportunity and risk: the board is responsible for assessing how the company creates value and for identifying opportunities, as well as for managing risk, and developing appropriate risk management controls and systems.
  • Remuneration: the board is responsible for setting appropriate and fair executive remuneration levels, aligned with the company's purpose, values and strategy.
  • Stakeholder relationships and engagement: boards should establish good relationships with stakeholders (such as the company's workforce, customers and suppliers). Eg boards should have channels for engaging in meaningful dialogue with the company's workforce.

The principles are additional to other regulatory mechanisms, such as the law of directors' duties, and aim to help companies subject to compulsory reporting thresholds under The Companies (Miscellaneous reporting) Regulations 2018 (UK) effectively report on corporate governance.