INSIGHT

Nucleus corporate law developments: rapid legal and regulatory responses to COVID-19; ASIC consults on pre-IPO relief for voluntary escrow and pre-disclosure communications; ACCC outlines enforcement priorities for 2020; and other corporate law developments

By Vijay Cugati
Corporate Governance COVID-19 Mergers & Acquisitions Technology

In brief 15 min read

Rapid legal and regulatory responses to COVID-19; ASIC consults on pre-IPO relief for voluntary escrow and pre-disclosure communications; ASX compliance update; FIRB flags potential fee refunds for COVID-19 application withdrawals; and ACCC outlines enforcement priorities for 2020 and permits coordination to respond to COVID-19.

COVID-19 News & Developments

COVID-19 and the rapidly changing rules that apply to corporate Australia: As the COVID-19 crisis escalates, governments and regulators around Australia are responding rapidly with emergency powers and temporary rules. The number of new announcements and policy changes makes it difficult to keep up with the regulatory landscape at times, so we are keeping track of these developments and what they mean for Australian businesses on our COVID-19 Insights Hub. Key developments to date that are of particular significance from a corporate law perspective include:

  • A temporary insolvent trading 'safe harbour' has been introduced, with a six month moratorium on insolvent trading liability for directors in respect of debts incurred in the ordinary course of a company's business.
  • ASX released a compliance update in which it provided practical guidance on the particular disclosure challenges for listed entities arising from COVID-19, including in relation to earnings guidance, entities in financial difficulty, operational impacts and decisions relating to the payment of dividends.
  • The Federal Treasurer has been given broad powers allowing him to make instruments that amend the Corporations Act in order to provide relief from, or modify, obligations under that legislation to deal with unforeseen COVID-19 circumstances. We are actively engaging with Treasury in relation to potential relief arrangements.
  • For companies due to hold their AGMs by 31 May 2020 (ie those with 31 December 2019 financial year ends), ASIC will not take action if they postpone their AGMs by two months. ASIC has also confirmed it is supportive of AGMs being held via appropriate technology where notices setting out the relevant details are provided to shareholders up to two business days before the scheduled meeting, but companies proposing to take this approach should ensure it is permitted by their constitution.
  • The scope of transactions requiring FIRB approval has been substantially expanded, with monetary screening thresholds for all transactions subject to FIRB legislation being reduced to $0 (except for transactions where agreements were executed before 10:30pm on 29 March 2020). Given FIRB's substantially increased workload, FIRB will also be working with applicants to extend statutory deadlines from 30 days to six months. FIRB has indicated that priority will be given to processing applications for investments that 'protect and support Australian businesses and jobs'.
  • The ACCC has granted a number of urgent interim authorisations to allow coordination and cooperation in a range of industries to facilitate various urgent responses to the unfolding COVID-19 crisis. The ACCC has, to date, granted authorisations to banks, supermarkets, medical technology companies, airlines, and telecommunications companies (including NBN Co).
  • The ASX has granted temporary emergency capital raising relief through a series of class waivers which are scheduled to apply until 31 July 2020 (unless removed earlier by ASX), including:
    • to allow back-to-back trading halts for a total of up to four trading days to consider, plan for and execute a capital raising;
    • a temporary uplift in the 15% placement capacity to 25%, subject to there being a follow-on accelerated pro rata entitlement offer or SPP offer to protect retail investors (with follow-on offer or SPP at an equal or lower price); and
    • a temporary waiver of the one-for-one cap on non-renounceable entitlement offers in listing rule 7.11.3.
  • ASIC and the ASX have also provided updated guidance on fair treatment in capital raisings in ASIC's Market Integrity Update – COVID-19 Special Issue – 31 March 2020, reminding directors of the need to act in the best interests of the company while balancing fairness between institutional and retail shareholders and carefully considering the timing, structuring and dilutive effect of any capital raising.
  • For the next six months, the threshold to issue statutory demands is increased from $2,000 to $20,000 (and the threshold to issue bankruptcy notices has similarly been increased from $5,000 to $20,000). The time to respond has also been increased from 21 days to six months.

Further COVID-19 responses from FIRB and the ACCC are outlined below.

What you need to know

ASIC: Suspension of non-time critical activities; consultation on pre-IPO relief for voluntary escrow arrangements and pre-disclosure communications; consultation on application of best interests duty for mortgage brokers

ASIC has announced it is suspending near-term activities that are non-time critical in order to prioritise COVID-19 responses. Suspended activities include consultation, regulatory reports and reviews and ASIC's enhanced on-site supervisory work, such as the Close and Continuous Monitoring Program. Prior to this suspension ASIC released a number of consultation papers including those summarised below. Although it is unclear when these consultations will progress, they remain relevant for market participants.

ASIC has released Consultation Paper 328 – Initial public offers: Relief for voluntary escrow arrangements and pre-prospectus communications. The paper seeks feedback on proposals to grant conditional relief in the context of an IPO:

  • to allow public companies, professional underwriters and lead managers who have obtained relevant interests as a result of voluntary escrow arrangements to disregard them for the purposes of the takeover provisions in the Corporations Act (but the relief would not extend to substantial holding provisions); and
  • to allow companies to communicate certain factual information to securityholders and employees before lodging a disclosure document.

The consultation paper notes that ASIC typically grants this relief when sought on an individual basis in the lead up to an IPO. The proposals seek to simplify the regulatory overlay and costs associated with undertaking an IPO by making this relief more readily available. ASIC previously announced its intention to commence legislative instruments and to update relevant regulatory guides in mid-2020, but this timing is likely to be delayed as a result of the suspension of non-time critical consultations.

The Financial Services Royal Commission highlighted how mortgage brokers can encounter difficulties satisfying their responsible lending obligations when they don't understand how far they are expected to go down their path of inquiry and verification. Earlier this year, in response to the Royal Commission's final report, the Federal Government passed legislation which creates (from 1 July 2020) a new duty for mortgage brokers to act in the best interests of consumers and, where there is a conflict, to prioritise consumers' interests when providing credit assistance. ASIC has subsequently released Consultation Paper 327 – Implementing the Royal Commission recommendations: Mortgage brokers and the best interests duty and draft Regulatory Guide – Mortgage brokers: Best interests duty. Through the consultation process, ASIC is seeking information from mortgage brokers about their current practices, potentially to assist ASIC in determining what 'acting in the best interests of consumers' might entail for mortgage brokers. See our Insight: Mortgage broker best interests duty for more details.

ASX: Compliance update; reminders on issuing shares and declaring dividends; consultation paper on tranche 2 of amendments to ASX Operating Rules for implementation of CHESS-replacement

The ASX has released compliance update 03/20 addressing a number of COVID-19 related matters including continuous disclosure issues, emergency capital raising relief, annual general meetings, reporting relief for ASX/NZX dual-listed entities and for listed entities with balance sheet dates of 30 September, 31 December and 31 March and misleading COVID-19 related announcements.

As entities adapt to the revised ASX Listing Rules that came into effect on 1 December 2019, the ASX has reminded listed entities of the new rules for notifying it of the issue of securities and to provide details on declaring a dividend or distribution for the period ending 31 March 2020. In particular, listed entities are reminded to notify the ASX:

  • via an Appendix 3B, immediately, of a proposed issue of:
    • equity securities (other than an issue to be made under a dividend or distribution plan or an employee incentive scheme (EIS) or as a consequence of the conversion of any convertible securities); or
    • debt securities intended to be quoted on the ASX (Listing Rule 3.10.3);
  • via an Appendix 2A:
    • within five business days of an issue of equity securities under an EIS (Listing Rule 3.10.3A) or if unquoted partly paid securities become fully paid securities in the same class as quoted fully paid securities (Listing Rule 3.10.3C); or
    • within 10 business days of an issue arising from the conversion of convertible securities (Listing Rule 3.10.3B); and
  • using ASX Online forms to announce the dividend or distribution.

The ASX has released CHESS Replacement – Tranche 2 Amendments Consultation Paper, on the second of three tranches of amendments to the ASX Operating Rules required to facilitate the implementation of the new system that will replace CHESS. This second tranche amendments covered by the consultation paper relate to corporate actions, mFund and RTGS payment aspects for 'Day 1' implementation. In particular, the consultation paper invites feedback on the draft rule amendments, including any unintended consequences. At the same time, the ASX has also advised it is reconsidering the timetable for implementation of the CHESS replacement system due to the unfolding COVID-19 pandemic and feedback received from users.

FIRB: Potential refunds of application fees for COVID-19-related withdrawals; release of Regulator Performance Framework Report for 2018-19

Aside from the expansion of the FIRB regime and extension of statutory deadlines (outlined above), FIRB has acknowledged that measures being implemented to address COVID-19 may affect the ability of investors to progress investment decisions as they usually would. Where these measures are resulting in delays to, or deferrals of, investment decisions that are currently the subject of FIRB applications, FIRB will consider refunding application fees if applications are withdrawn. FIRB has advised that applicants should clearly state the reasons for a remittance request at the time of withdrawal, and noted that FIRB retains its discretion not to refund fees where the withdrawal is not clearly linked to COVID-19 factors.

For more details on the latest changes and answers to the most pressing questions, see our FIRB Q&A on the COVID-19 hub.

In other news, FIRB has released its Regulator Performance Framework Report for 2018-19. The overall assessment concludes that Treasury and the ATO met FIRB's KPIs in 2018-19, but notes stakeholder concerns in a number of areas, including:

  • case processing times;
  • the process for agreeing and finalising conditions designed to mitigate national interest concerns; and
  • the need for appropriate resourcing and support for staff in FIRB agencies to enable them to manage the complexities of the foreign investment framework.
ACCC: Interim authorisations to allow coordination in response to COVID-19; ACCC enforcement priorities for 2020; update on merger reviews

Against the backdrop of the COVID-19 pandemic, the ACCC has granted a number of urgent interim authorisations to banks, supermarkets, medical technology companies, airlines, and telecommunications companies (including NBN Co). These authorisations allow the relevant entities to coordinate with each other to facilitate various urgent responses to the unfolding crisis. The authorisations are designed to provide statutory protection from certain enforcement actions that might otherwise arise under the competition provisions of the Competition and Consumer Act. You can read more about the ACCC's interim authorisations in our Insight: COVID-19: competition and consumer law.

ACCC Chair Rod Sims also highlighted the critical role that competition will play in the eventual recovery from COVID-19 in a speech to the Australian Financial Review's special edition Banking & Wealth crisis webcast. Mr Sims stated that the ACCC will monitor the effect of its short-term crisis response measures to avoid long-term structural damage to competition, increased market concentration and increased barriers to entry.

The ACCC has also released its 2020 Compliance and Enforcement Priorities, which were announced during a speech by ACCC Chair Rod Sims to the Committee for Economic Development Australia. Mr Sims announced that the ACCC will continue to prioritise cartels and anti-competitive conduct, and will also focus specifically on competition and consumer issues across a number of key areas. Those areas include digital platforms, essential services (energy and telecommunications), commercial construction, funeral services and small business and franchising. The ACCC also noted it will continue to advocate for merger reforms, the introduction of a general 'unfair trading prohibition' and a strengthened unfair contract terms regime. You can read more about the ACCC's compliance and enforcement priorities in our Insight: ACCC 2020 Enforcement Priorities.

The ACCC has released an issues paper for its inquiry into digital advertising services, responses to which are due on 21 April 2020.

On the mergers front, the ACCC has decided not to oppose seven mergers:

  • the merger between Spicers Limited and Directed Paper, two of the largest paper merchants in Sydney, Melbourne and Brisbane. The ACCC concluded that Spicers’ proposed acquisition was unlikely to substantially lessen competition in any relevant market because, among other reasons, larger customers could import paper directly from overseas paper mills for at least some of their supply;
  • China Mengniu Dairy's proposed acquisition of Lion Dairy & Drinks. The ACCC considered that the level of aggregation from the proposed acquisition would be relatively low, as the two other large raw milk buyers, Saputo and Fonterra, will remain in the Gippsland region, in addition to some smaller processors;
  • Australian Paper's proposed acquisition of Orora Fibre, a vertical merger in the paper packaging manufacturing industry. The ACCC stated that competition from both Australasian suppliers and via import would prevent vertical foreclosure by the merged entity;
  • Coles Group's proposed acquisition of Jewel Fine Foods (in voluntary administration), Coles being Jewel's customer and a retailer of chilled ready meals, on the basis that the alternative to the proposed acquisition would be liquidation of the Jewel assets and this would not be likely to result in more competitively beneficial outcomes than the proposed acquisition, and that Jewel will remain a major competitor in the supply of chilled ready meals. The ACCC previously objected to an acquisition of Jewel by its major competitor, B&J City Kitchen, when Jewel was also in administration at the time;
  • Bauer Media's proposed acquisition of Pacific Magazines, noting the significant circulation and revenue declines of magazine publishers in recent years as readers have increasingly turned to online sources of content, and are likely to do so in the future. In light of this, the ACCC said that despite close competition between some of the parties' titles, the combined firm would not be able to increase prices or decrease quality significantly. Competition for photography content is and will remain strong;
  • Bunnings' proposed acquisition of Adelaide Tools and Oaklands Mower Centre. Although the ACCC released a statement of issues in February, after consultation it concluded that the transaction is unlikely to substantially lessen competition in the retail supply of tools, equipment and outdoor power equipment in the Adelaide metropolitan region. ACCC Chair Rod Sims nonetheless noted Bunnings' 'very dominant position in the one-stop-shop warehouse format in Australia'; and
  • Asahi's proposed acquisition of Carlton & United Breweries, subject to undertakings to divest certain cider (Strongbow, Bonamy's and Little Green) and beer (Stella Artois and Becks) brands. After public consultation, the ACCC considered that the proposed undertakings would address its competition concerns in relation to the supply of cider products (due to the consolidation of cider brands) and the removal of Asahi as a vigorous competitor in the beer market.

The ACCC has also:

Takeovers Panel: Review Panel upholds declaration of unacceptable circumstances in ERA's rights issue

The review Panel handed down its reasons for decision in relation to the affairs of Energy Resources of Australia Limited (ERA), affirming the initial Panel's decision to make a declaration of unacceptable circumstances in relation to ERA's proposed entitlement offer. However, the review Panel removed the initial Panel's orders prohibiting Rio Tinto from compulsorily acquiring shares in ERA if Rio Tinto were to become a 90% holder in ERA's ordinary shares following ERA's entitlement offer on the basis that those orders were unfairly prejudicial. Instead, the review Panel required Rio Tinto to form intentions regarding compulsory acquisition if it becomes a 90% holder of ERA’s shares (as a result of the offer) and for ERA to further disclose Rio Tinto’s intentions to its shareholders. The review Panel noted that disclosure may be material information for investors in assessing whether to participate in the offer, particularly where the purpose of the offer is to fund payment of liabilities rather than to fund revenue generating activity.

The decision makes clear that it is open to the Panel to make findings of unacceptable circumstances even if an offer contains the dispersion strategies that are recommended in Guidance Note 17 – Rights Issues, as the Panel's approach is to consider, in totality, the company's situation and the structure and the effect of the rights issue. In this particular case, the Panel considered the combination of ERA's solvency position, the independence of the committee evaluating ERA's funding options and the commercial benefits to Rio Tinto of obtaining 100% ownership (via the compulsory acquisition provisions in the Corporations Act) as increasing the likelihood of there being unacceptable circumstances.