ASIC seeks to restrict stub equity, ACCC's Acacia Ridge rejection overturned and other developments

By Vijay Cugati
Mergers & Acquisitions

In brief

ASIC seeks to restrict stub equity in control transactions; ASX reiterates its position on naming counterparties when announcing material transactions; ACCC's Acacia Ridge rejection overturned by Federal Court; and what the Coalition's election win means for employers.

What you need to know

ASIC: Consultation on the use of stub equity and custodian arrangements in control transactions; updates from ASIC's Annual Forum; consultation on new internal dispute resolution standards

ASIC has released its much anticipated Consultation Paper 312 – Stub equity in control transactions. The Consultation Paper, as expected, calls for a ban on offers of stub equity in proprietary companies. However, the Consultation Paper goes beyond what was foreshadowed when ASIC first announced its intention to clamp down on the use of stub equity in December 2018, with a proposed ban on the use of mandatory custodian structures, even where scrip is offered in an Australian public company. You can read about our concerns with the proposed ban on the use of custodian structures in our Client Update: ASIC steps up its attack on the use of stub equity in control transactions. ASIC has called for responses to the Consultation Paper by 17 July 2019.

ASIC's Annual Forum took place in May, with the theme for this year being 'Other people's money'. The Forum included 13 sessions on how financial market participants can meet community expectations when dealing with other people's money, representing a clear continuation of ASIC's post-Royal Commission focus on customer protection and preventing misconduct in the financial services industry. ASIC Chair James Shipton's closing remarks also demonstrated ASIC's continued focus on making sure fairness is a front-of-mind issue for all participants in the financial services sector, with Shipton urging participants to always ask themselves 'is this practice or product going to cause harm, be detrimental or have a negative consequence?' before taking action.

In a continuation of the themes explored at ASIC's Annual Forum, the regulator has released Consultation Paper 311 – Internal dispute resolution: Update to RG 165. Accompanying the Consultation Paper is a proposed redraft of Regulatory Guide 165 – Internal dispute resolution. The Consultation Paper and draft of RG 165 aim to address issues that ASIC perceives as 'consumer fatigue' in financial firms' internal dispute resolution (IDR) processes, which consumers go through before escalating a complaint to the AFCA. ASIC's view is that consumers do not have access to effective redress under current IDR processes and that IDR processes are not adequate to address systemic complaints, which was a key finding of the Royal Commission. The proposed new standards cover a range of matters, including:

  • reduced maximum times for IDR responses;
  • a framework for identifying complaints, including where made on social media;
  • standards about the contents of written reasons for decisions;
  • bolstered requirements for financial firms to take a systemic focus to handing complaints; and
  • a new framework for recurrent complaints data reporting.

Comments on the Consultation Paper are due by 9 August 2019, with ASIC aiming to formally update RG 165 by the end of 2019. A separate consultation on the publication of IDR data is expected in early 2020.

ASX: Naming counterparties when announcing material transactions; deferral of Listing Rule changes; update to Guidance Note 33

ASX has reiterated its position on listed entities announcing material transactions without disclosing the identity of the counterparty, including binding and non-binding term sheets, memoranda of understanding for acquisitions or disposals of assets, off-take agreements, distribution agreements, strategic investments and financing arrangements. ASX considers that if a transaction is sufficiently material to warrant disclosure under Listing Rule 3.1, the identity of the counterparty will generally be material information. In addition, where there is little or no information regarding the counterparty in the public domain, a summary of the due diligence undertaken by the listed entity on the counterparty's financial and other capacity to perform should also be announced. ASX noted its powers to suspend trading until relevant information is released to the market.

ASX has deferred the implementation date for changes to the Listing Rules and various guidance notes, as foreshadowed in its Consultation Paper: 'Simplifying, clarifying and enhancing the integrity and efficiency of the ASX Listing Rules' to 1 December 2019 after ASIC advised that the rule changes cannot be processed before the original 1 July implementation date. Subject to receipt of the necessary regulatory approvals, ASX expects to release a consultation response together with a final version of the listing rule and guidance note changes in September or October 2019. ASX will conduct a national roadshow about the rule and guidance changes in October or November 2019. We reported on the scope of the changes in our December 2018 edition of Nucleus. However, ASX nevertheless finalised the update and release of Guidance Note 33 – Removal of Entities from the ASX Official List, as foreshadowed in the Consultation Paper.

FIRB: Federal Government out of caretaker mode

Following the re-election of the Coalition, the Federal Government has ceased to be in caretaker mode. However, given the usual disruption of the campaign, we continue to expect that decisions regarding foreign investment proposals that are significant or sensitive (eg involving critical infrastructure or sensitive sectors, or are large scale or high profile), or that involve agricultural land or acquisitions involving foreign government investors, may still be subjected to delays.

ACCC: Rod Sims flags recommendations to update merger laws for digital platform transactions; ACCC's Acacia Ridge rejection overturned by Federal Court; update on merger reviews

ACCC Chair Rod Sims has delivered a speech indicating that the Final Report of the ACCC's Digital Platforms Inquiry, due at the end of June, will propose changes to Australia's merger laws. Sims explained that he considers there to be challenges in applying merger laws in relation to digital platforms, particularly those mergers involving the removal of a potential competitor. Sims said that the ACCC has formed the preliminary view that 'Google and Facebook have commercial incentives to strategically acquire nascent firms even if the chance of these firms ultimately posing a competitive threat is small'. Sims appeared to question the adequacy of the legal test for assessing mergers under section 50 of the Competition and Consumer Act, which focuses on whether a merger would be likely to have the effect of substantially lessening competition in the market. Sims queried 'whether this is sufficient to capture acquisitions where the likelihood of a lessening of competition may be low or uncertain, but if the acquisition does lessen competition, the lessening is likely to be very substantial indeed'. Sims said that small startups at their early stages where there are considerable uncertainties about how they are likely to evolve means the likelihood of lessening competition may be too uncertain to be properly regulated under the law as it stands.

Just as competition agencies around the world have been grappling with similar issues, Sims expressed his view that merger laws must be reframed to protect the process of competition for market share and put greater weight on potential for competition, particularly 'if the prospect that the target will become an effective competitor is small, but the potential increase in competition and consumer welfare is large'. Sims appeared to support the proposal from the UK Furman Review of Digital Competition, which recommended the introduction of a 'balance of harms' approach for assessing mergers under UK competition law, which enables the regulator to take into account the magnitude of the foregone benefits to competition the target could bring, and the likelihood of these benefits being achieved.

The Prime Minister issued the terms of reference to the ACCC to conduct the Digital Platforms Inquiry when he was Treasurer as part of a deal struck with the Nick Xenophon Team (now the Centre Alliance) to secure Senate support for the Government's changes to media ownership laws. It will be interesting to see the Government's response to the report, particularly given the Coalition's strengthened position in the Senate following the election.

The re-elected Coalition Government has not indicated it is taking any particular position on competition law or policy. It appears that responsibility for competition law and policy will remain with the Treasury and there will be no separate spokesman on competition matters. However, the Minister for Water, David Littleproud, has called for the ACCC to inquire into irrigation water trading in the southern Murray-Darling basin and has said he will launch a study on the socio-economic impact of the Murray-Darling Basin Plan within weeks. The terms of reference are likely be issued under section 95H of the Competition and Consumer Act, just like the Digital Platforms Inquiry, giving the ACCC powers to compel the production of documents and for witnesses to give evidence.

In other news, despite opposition from the ACCC, Pacific National has been cleared by the Federal Court to buy the Acacia Ridge rail terminal in Brisbane from Aurizon. This comes after the Court approved an enforceable undertaking offered by Pacific National which was originally rejected by the ACCC, demonstrating that seeking a declaration from the Federal Court remains an option for merging parties. The decision will no doubt be closely reviewed by parties facing adverse ACCC rulings. With Vodafone commencing an appeal against the ACCC's decision to block its proposed merger with TPG, the stage appears to be set for increased court action involving the regulator.

Meanwhile, the ACCC has started to assess an application lodged by AP Eagers Limited for formal merger authorisation to acquire Automotive Holdings Group Limited. Both companies are listed on the ASX. This is the first merger authorisation considered by the regulator since the 2017 Harper reforms were introduced, which gave the ACCC the power to review merger authorisation applications in the first instance, instead of the Australian Competition Tribunal. 

In addition, the ACCC is conducting four new informal merger reviews, including:

The ACCC has also given the green light to three acquisitions:

Takeovers Panel: Shareholders' Association

The Panel's decision in Australian Whisky Holdings Limited has once again highlighted the difficulties faced by applicants in gathering evidence in association matters. In its reasons for the decision, the Panel noted that shareholders discussing their concerns about the governance of a company is not necessarily representative of them sharing a common goal of seeking control of the company and does not support an inference of association.

The Panel reiterated it might be difficult for an applicant to demonstrate a sufficient body of probative material where it is alleged many parties have recently commenced acting in concert. In such cases, if there is an association and it continues, it might become easier over time to demonstrate patterns of conduct or other material to satisfy that requirement. Where that it is the case, shareholders or ASIC may seek to apply to the Panel again. In this particular application the Panel refused to make a declaration of unacceptable circumstances as there was no real evidence of a voting agreement between the requisitioning shareholders.

Similar facts also arose in a recent application in relation to the affairs of Aguia Resources Limited. However, in that case, the Panel made a declaration of unacceptable circumstances. While the Panel's reasons for that decision are not yet published, the Panel's media release noted the shareholders were acting in concert and associated for the purpose of controlling or influencing the board of Aguia by reason of structural links and exchange of correspondence. The Panel's reasons for that decision (when eventually published) may provide some insight into the evidence required to establish associations between parties in cases involving board spills.

Employment: What does the Coalition's election win mean for employers?
Further protections for vulnerable workers

In response to the findings of the Migrant Workers' Taskforce, the re-elected Coalition Government has committed to take further measures to protect vulnerable workers. In particular, the government has signalled its focus on workplace exploitation in the form of underpayments of workers and sham contracting. This focus is reflected in the Government's increased funding for the Fair Work Ombudsman (FWO). In the last budget, the Government committed an extra $10.8 million over the next four years to enhance the FWO's capacity to conduct investigations into underpayments and related issues. It also allocated the FWO an extra $9.2 million to establish a dedicated sham contracting unit to more effectively undertake compliance and enforcement activities, including education, investigation and litigation.

Significantly, the Government has signalled it will introduce criminal penalties for the deliberate and systematic exploitation of workers, and may also consider further increases to the existing civil penalty provisions for underpayments.

The Government has also indicated it will consider extending the accessorial liability provisions of the Fair Work Act and introducing a national labour hire registration scheme in high-risk sectors such as the horticulture, meat processing, cleaning and security industries.

New entitlements for casual employees

It is likely the Government will reintroduce its lapsed Fair Work Amendment (Right to Request Casual Conversion) Bill 2019 to parliament. If passed, the Bill will include a new entitlement in the National Employment Standards for eligible casual employees to request conversion to permanent employment. This will extend existing entitlements to employees who are not currently employed under an industrial instrument and those employed under instruments that do not contain a casual conversion clause.

Other developments

  • Law Council responds to ASIC's approach to litigation: One of the key recommendations in the Royal Commission's Final Report was that ASIC should adopt a 'why not litigate?' approach to enforcement. ASIC Deputy Chair Dan Crennan QC is challenging litigants who use 'time-wasting legal tactics', urging them not to 'battle us for years upon end in the court because … we're resolute and part of our business is litigating. It doesn't interrupt our business model. We will fight it all the way to the High Court if we need to'. The Law Council of Australia has issued a strong response, arguing it is 'entirely appropriate' for a person subject to ASIC-led litigation to 'rely on the rights and protections' afforded to them by the courts, and that if ASIC has concerns with the conduct of a particular piece of litigation it should raise them with the court and 'not by making broad statements to the media which may be read as veiled threats to litigants and business'.
  • Disclosure of climate-related financial risks: ASIC, APRA and ASX have all recently released guidance on how companies should be managing, and reporting on, climate change related risks, and we continue to see an increased regulatory focus on climate risks. The 4th edition of the ASX Corporate Governance Principles and Recommendations (which you can read about in our Client Update: ASX Corporate Governance Principles and Recommendations: 4th edition – what do they mean for you?) includes a provision that boards of listed entities should ensure their 'risk management framework deals adequately with contemporary and emerging risks such as…climate change'. If companies consider they have a 'material exposure to climate change risk', they should be complying with the recommendations of the Task Force on Climate-related Financial Disclosures. In March 2019, APRA stated it 'expects to observe a continuous improvement in the sophistication of entities' management of climate change risks and preparations for the transition to a low-carbon economy'. At the CMI Emissions Reduction Summit on 8 May 2019, APRA Board Member Geoff Summerhayes confirmed APRA and ASIC are moving from 'awareness' to 'intervention' on how regulated entities disclose climate-related financial risks. This follows a report by ASIC in September 2018 setting out ASIC's expectation that companies maintain a clear and robust framework for corporate governance in relation to climate change risk and meaningful disclosure of strategy to manage climate-related financial risk.