INSIGHT

ASIC Corporate Governance Taskforce report; ASX listing rules update; ACCC cartel immunity and cooperation policy update; High Court considers financial assistance prohibition; and other corporate law developments

By Vijay Cugati
ACCC ASIC Mergers & Acquisitions Technology

In brief 11 min read

ASIC issues Corporate Governance Taskforce report; ASX flags updates to listing rules; ACCC updates cartel immunity and cooperation policy, and expresses concerns with consumer loyalty schemes; Government foreshadows changes to Fair Work penalty regime; and High Court considers prohibition on financial assistance.

What you need to know

ASIC: Corporate Governance Taskforce report; first ever product intervention order issued
  • ASIC has released its Corporate Governance Taskforce – Director and officer oversight of non-financial risk report. In its first year, the Taskforce has focused on reviewing director and officer oversight and monitoring of non-financial risk, together with discretionary decision making in variable executive remuneration. The Taskforce reports that oversight and management of non-financial risk has generally not received sufficient attention, and that important elements of this management and oversight were found to be 'less mature than needed'. The report's key findings were that:
    • boards failed to engage substantively with risk appetite statements;
    • material information on non-financial risk was often 'buried in board packs';
    • metrics for non-financial risk were generally immature, compared with financial risk equivalents; and
    • the directors of board risk committees failed to engage actively with the substance of proposals submitted by management.

Interestingly, the Taskforce engaged an organisational psychologist from Kiel Advisory Group to observe board meetings and investigate the relationship between board behaviours and management of non-financial risk; these findings are attached to the report. For more details on the Taskforce's report, see our Insight: ASIC Corporate Governance Taskforce Report.

  • ASIC has issued its first product intervention order (PIO) to ban a model of short-term credit where a lender and its associates charge fees under separate contracts. The ban initially applies for 18 months. As we foreshadowed in the August edition of Nucleus, the banned product could result in a borrower paying fees equivalent to 990% of the loan amount. Although one of the issuers of these products, Cigno Pty Ltd, is seeking court orders to have the PIO declared invalid, the relatively swift process to consult and issue the PIO, and ASIC's consultation on other proposed product intervention orders, confirms that the regulator will not hesitate to use its new post-Royal Commission powers.
  • ASIC has also taken the opportunity to provide its second ASIC Royal Commission implementation update. The update outlines measures taken by ASIC to implement priorities from its Corporate Plan for 2019-23, and focuses particularly on the investigation of referrals from the Royal Commission, and the establishment of an 'Office of Enforcement' to focus on operational discipline.
  • Finally, ASIC has released Report 630 – ASIC regulation of corporate finance: January to June 2019. The report provides a snapshot of ASIC's regulation of fundraising transactions, the use of experts, M&A transactions and corporate governance issues. The findings reflect consistent focus areas for ASIC over the six-month period, including:
    • fundraising transactions: a similar rate of intervention by ASIC in fundraising transactions, with a particular focus on inadequate disclosure around business models and use of funds;
    • M&A: a decrease in the number of control transactions, but with a consistent preference by bidders to undertake large transactions via schemes, particularly cash schemes; and
    • corporate governance: a continued focus on disclosing climate-related risks.
ASX: Reforms to Listing Rules and Guidance Notes and increased SPP class order relief

ASX has released the Consultation Response to its November 2018 consultation paper, 'Simplifying, clarifying and enhancing the integrity and efficiency of the ASX listing rules'. The Consultation Response sets out a range of listing rule amendments, and details new and updated guidance. The updates include a number of wide-ranging reforms aimed at making the listing rules simpler and easier to follow and improving disclosures, as well as updating timetables and improving market disclosures, as set out in the Consultation Response. The listing rule amendments, and the new and updated guidance notes, are expected to come into effect on 1 December 2019.

In particular, ASX has drawn the attention of listed entities to its proposed amendments to Listing Rule 15.12 to accommodate new escrow arrangements, which require certain provisions be included in the constitution of an entity for so long as it has any restricted securities on issue. Eg a Constitution must include terms that:

  • a holder of restricted securities must not dispose of the restricted securities during the escrow period except as permitted by the listing rules or ASX; and
  • if restricted securities are in the same class as quoted securities, the holder will be taken to have agreed that the restricted securities are to be kept on the entity’s issuer sponsored subregister and are to have a holding lock applied for the duration of the escrow period.

Entities seeking admission to the official list, or seeking to issue restricted securities, after 1 December 2019, should consider if their constitution complies with the amended listing rule.

In addition, ASX notes that ASIC has made ASIC Corporations (Share and Interest Purchase Plans) Instrument 2019/547, which remakes the relief in Class Order [CO 09/425] relating to security purchase plans. As a result, ASX listed issuers of shares and interests under purchase plans will be relieved from the requirement to prepare a prospectus or PDS if certain conditions are met. As part of this update, the 12-month participation limit for each registered holder has been increased from $15,000 to $30,000.

ACCC: Cartel immunity and cooperation policy updated; ACCC expresses concerns with loyalty schemes; update on merger reviews

The ACCC has updated its Immunity and Cooperation Policy for cartel conduct, which came into effect on 1 October 2019. Under the revised policy, applicants will be required to enter into a cooperation agreement early in the immunity process. In addition, the policy only applies to cartel conduct, and no longer allows applicants to seek immunity for other anti-competitive arrangements, including concerted practices. As a result, if the ACCC forms the view that the conduct reported by an applicant is not cartel conduct but would otherwise be an anti-competitive concerted practice, conditional immunity would not be granted under the policy and the applicant could instead consider seeking to cooperate with the ACCC under its Cooperation Policy for Enforcement Matters. For more detail, see our Insight: Cartel Confessions: the latest Cartel Immunity Policy commences.

The ACCC has also released a draft report into customer loyalty schemes market study. The regulator highlights in the draft report a number of concerns with the operation of loyalty schemes, including:

  • loyalty scheme terms that allow the scheme operator to unilaterally change terms, such as reducing the 'earn rate', or the value of points;
  • loyalty schemes that allow the expiry of loyalty points without providing adequate warning to consumers about the expiry date; and
  • consumers having limited ability to control data collected about them, including how such data is delivered to third-party advertisers.

These draft findings reinforce similar findings in the ACCC's recent Digital Platforms Inquiry. The ACCC is expected to release a final report in its customer loyalty schemes market study in late 2019.

Finally, the ACCC has made a number of decisions on merger reviews.

  • Saputo's proposed acquisition of Lion Dairy and Drinks' cheese business has been approved, despite a finding that the companies overlap in the acquisition of raw milk in Tasmania and the supply of cheese in Australia, with the ACCC finding that the combined entity will continue to face competitive constraints from other market participants.
  • Elders' proposed acquisition of AIRR has also been cleared, after the ACCC considered the effect of the transaction on both retail and wholesale supply of rural merchandise. The ACCC noted that Elders is primarily a retailer and AIRR is predominately a wholesaler, and so focused its analysis on whether Elders' increased vertical integration might negatively impact independent rural merchandise retailers. The ACCC concluded that while Elders could preference its own retail sites when supplying wholesale goods, the transaction would not prevent independent retailers from competing effectively, as they can continue to source products from other suppliers.
  • In contrast, the ACCC has opposed B&J City Kitchen's proposed acquisition of Jewel Fine Foods, noting that the transaction would concentrate the two largest producers of chilled ready meals, in circumstances where the ACCC considered it uncertain whether rival manufacturers could compete effectively in the short to medium term. The ACCC initiated its review in July, despite the fact that Jewel was in administration and the B&J City Kitchen had not initially sought clearance from the ACCC. This case is a reminder that the ACCC may initiate review of merger transactions from sources other than the merging parties, and that not seeking ACCC clearance of transactions with potential competition concerns may risk ACCC enforcement action.
Takeovers Panel: Examination of break fees in competing offers

The Panel has declined to make a declaration of unacceptable circumstances in relation to an application made by QGIF Swan Bidco Pty Ltd regarding the affairs of Pacific Energy Limited. QGIF Swan Bidco submitted that Pacific Energy's entry into a proposal deed with a competing bidder was unacceptable because (among other things) it constituted a breach of an implementation agreement between QGIF Swan Bidco and Pacific Energy (denying QGIF Swan Bidco the full benefit of its matching right); and the break fee payable to the competing bidder under the proposal deed imposed an impermissible payment trigger and caused a diminution in the value of Pacific Energy, with the effect of making the company less attractive to an acquirer and less likely to attract competing proposals.

While the Panel's reasons will be published in due course, it considered that (among other things) as a result of entering into the proposal deed, Pacific Energy facilitated a rival proposal leading to a materially higher offer and that, in substance, the break fee under the proposal deed was not anti-competitive or coercive.

Employment: Government foreshadows changes to Fair Work Act penalty regime

Earlier this year, the Federal Government gave its in principle commitment to implement recommendations made in the Migrant Workers' Taskforce Report. The report made a number of recommendations relating to the adequacy of the existing penalty regime in the Fair Work Act 2009 (Cth) (the FWA).

In response to the report, the Federal Government recently announced that it is drafting legislation to criminalise the underpayment of employees. While the draft Bill has not been released, the Industrial Relations Minister, Christian Porter, has indicated that criminal penalties available under the Bill will not be targeted at employers who make inadvertent errors and mistakes, but will be focused on deliberate and systemic underpayment of wages.

The Government is also contemplating other changes to the penalties regime in the FWA. In particular, the Government has foreshadowed:

  • increasing civil penalties to be more consistent with penalties imposed under other business laws, such as consumer and corporations law;
  • changes to the accessory liability provisions of the FWA, to address compliance issues associated with complex subcontracting, outsourcing and labour hire arrangements; and
  • tougher penalties for contraventions of the sham contracting provisions of the FWA.

The Government has released a discussion paper on the proposed reforms. Submissions on the discussion paper were due by 25 October 2019.

News & other developments

High Court considers scope of prohibition on financial assistance

For the first time, the High Court has considered the financial assistance prohibition in section 260A of the Corporations Act 2001 (Cth) in Connective Services Pty Ltd v Slea Pty Ltd [2019] HCA 33. The High Court held that the term 'financial assistance' has a broad commercial meaning, and that the connection between any financial assistance and an acquisition or proposed acquisition of shares can be indirect and contingent.

In this particular case, Connective Services sought an injunction to prohibit Slea, a minority shareholder, from transferring its shares without first complying with a pre-emptive rights provision in Connective Services' constitution. The High Court found that Connective Services' commencement and funding of legal proceedings against one shareholder to enforce the pre-emptive rights for the benefit of a second shareholder amounted to giving the second shareholder a financial benefit, as the second shareholder did not have to commence proceedings itself. The High Court also found that the prohibition in s260A extends to all conduct in connection with the process of acquiring shares. Companies must now be even more alert to potential financial assistance issues, and be prepared to undertake a 'whitewash' procedure by obtaining shareholder approval to grant financial assistance under s260B. For more information about this important decision, see our Insight: If in doubt, get the whitewash out.