Nucleus: corporate law developments
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.
- More than four years after the Financial System Inquiry in 2014, the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth) has passed Parliament. Commencing in 2021, the Act requires issuers of financial products to make 'target market determinations' for their products, and requires issuers and distributors to take reasonable steps to ensure that retail products are marketed and distributed only to people in that target market. The Act also grants ASIC new product intervention powers where products are likely to result in significant detriment to retail clients or consumers. ASIC's intervention powers have already commenced, and we expect ASIC will not hesitate to make use of its new powers in the post-Royal Commission environment. For more details on the Act, see the latest edition of Unravelled.
- ASIC has published its enforcement update for July to December 2018. Although Report 615 – ASIC Enforcement Update examines enforcement actions undertaken before the delivery of the final report from the Hayne Royal Commission, the themes in the report are consistent with stricter attitudes that have emerged since the Royal Commission, with emphasis on ASIC's adoption of a 'why not litigate?' enforcement stance, and welcoming the recent enactment of stronger penalties for financial offences. We expect ASIC will continue to seek more stringent enforcement outcomes for some time to come. We have reported on ASIC's change of tone in undertaking investigation and enforcement activity in our Focus: ASIC's change of tone in action.
- ASIC has responded to the Financial Reporting Council's (FRC's) recent report, Auditor Disciplinary Processes: Review. The report made a number of recommendations to improve ASIC's processes relating to investigations of auditors, such as:
- clarifying application of the 'why not litigate?' enforcement stance to auditor investigations, including whether more matters should be referred to the Companies Auditors' Disciplinary Board; and
- publishing the results of audit inspections in greater detail, including naming audit firms.
ASIC's response to the FRC's report indicates that it is taking steps to adopt the recommendations. ASIC's response also welcomes a number of recommendations from the FRC, including one that ASIC should be given the power to compel remediation of defective audits.
Following the release of the 4th edition of the ASX Corporate Governance Principles and Recommendations, ASX will be conducting a national corporate governance roadshow in the first half of May, with presentations in Adelaide, Perth, Sydney, Melbourne and Brisbane. The roadshows are likely to focus on the implications of the new governance standards and provide guidance to listed entities now turning their minds to transitioning to the 4th edition. For more details on what the principles and recommendations mean for you, see our Client Update: ASX Corporate Governance Principles and Recommendations: 4th edition – what do they mean for you?.
In the meantime, ASX has reached a significant milestone in its work to replace the 25-year-old CHESS system with blockchain-style distributed ledger technology, with the recent launch of ASX's 'customer development environment'. The launch allows select customers to start experimenting with the system that will eventually replace CHESS in 2021, with an industry-wide test environment expected to be available next year.
The Federal Government has entered caretaker mode, pending the election on 18 May 2019. FIRB has published the following statement:
As a general rule, most foreign investment proposals can continue to be considered by Government during the caretaker period. However, the caretaker rules provide that significant decisions which may bind future governments should not generally be taken in a caretaker period. Therefore, proponents of larger or more significant/sensitive cases should contact Treasury to discuss such proposals during the caretaker period.
As a general rule, we 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 involve agricultural land or acquisitions involving foreign government investors, will be deferred until at least the second half of June 2019.
ACCC: Vodafone/TPG merger blocked, cooperation agreement signed with the FBI, updates on merger reviews
The ACCC has opposed the proposed merger between TPG Telecom and Vodafone Hutchison Australia, citing concerns over concentration in the Australian mobile services and fixed broadband markets. Despite the limited overlap between Vodafone and TPG in the mobile services, ACCC Chair Rod Sims said that a thorough examination has lead the Commission to the conclusion that if the merger does not proceed, there is a 'real chance' that TPG will roll out a mobile network of its own, in competition with Telstra, Optus and Vodafone. Vodafone and TPG have announced their intention to appeal the decision to the Federal Court and an extension of their merger deadline to August 2020.
The ACCC and the United States FBI signed a new Memorandum of Cooperation (MOC) in April. The MOC provides for the exchange of expertise and staff between the two agencies, and aims to strengthen the agencies’ joint efforts in the detection, investigation and prosecution of criminal cartel conduct. The MOC complements an existing intergovernmental agreement between Australia and the United States, and builds on the relationship between the ACCC and various competition law enforcement bodies in the United States.
In April, the ACCC commenced a new public market inquiry in relation to Viva Energy's proposed acquisition of a 50 per cent interest in Liberty Oil Holdings.
A number of significant reviews otherwise remain ongoing, including:
- GSK's proposed acquisition of Pfizer's consumer healthcare business;
- Qantas' proposed acquisition of a 19.9 per cent interest in Alliance Aviation Services;
- GFG Alliance Australia/Liberty House Group's proposed acquisition of Steelforce Holdings;
- APLNG's proposed acquisition of Origin's Ironbark gas project; and
- Landmark's proposed acquisition of Ruralco.
The Panel has released a Consultation Paper seeking public comment in relation to a rewrite of Guidance Note 20 – Equity Derivatives.
The Panel proposes to revise GN 20 to provide clearer guidance about the Panel's approach to equity derivatives, including the Panel's expectation that all long positions in equity derivatives (and any relevant interest in the underlying voting shares) of more than 5 per cent should be disclosed, regardless of whether there is a control transaction. The draft GN 20 is substantially shorter than the existing version, and aims to provide clearer guidance on the Panel's expectations regarding equity derivatives that may not require disclosure under Chapter 6C of the Corporations Act 2001 (Cth).
The draft guidance note is structured in four sections:
- Background: clarifying that GN 20 applies to equity derivatives that may not require disclosure under Chapter 6C;
- Equity derivatives and hedging: explaining the Panel's view on the nature of equity derivatives and how they operate – in particular, providing colour regarding how the economic incentive to hedge a long equity derivative position and then control its unwinding has the potential to affect the market in the underlying securities, which may, in turn, affect the control or potential control of the relevant entity;
- Disclosure of equity derivatives: outlining the Panel's expectations that long positions of 5 per cent or more, changes to long positions by at least 1 per cent and long positions that fall below 5 per cent must be disclosed, and setting out the information that must be disclosed; and
- Remedies: explaining the Panel's power to make any order it thinks appropriate, including order the disclosure of derivatives, the disposal of any securities and the cancellation of agreements if it finds that there are unacceptable circumstances.
Public comments on the draft GN 20 are due by 31 May 2019.
In the lead-up to the federal election, several factors are creating an environment where compliance with laws relating to workers is under close scrutiny.
- The Labor Party's industrial relations policy includes amending existing laws to crack down on sham contracting and labour hire arrangements and 'fake casuals', as well as abuse of 457 visas. In addition, Labor has said it will increase funding for regulators, including the Fair Work Ombudsman.
- The Coalition has also stated its intention to crack down on sham contracting. It has proposed giving the Fair Work Ombudsman an extra $9.2 million over the next four years to fund a dedicated sham contracting unit. The role of the unit will include increasing compliance and enforcement activity, and it will be given dedicated additional resources to investigate and litigate cases.
- More generally, corporations are facing unprecedented scrutiny in connection with misconduct within their organisations. Regulators are focusing on the adequacy of compliance systems, including the management of non-financial risks. The findings of the Financial Services Royal Commission very much focused on corporate 'culture' and the importance of seeking not only to comply with laws but to do 'the right thing'.
- The focus on culture in the findings of the Financial Services Royal Commission is consistent with 'culture' being a concept relevant to a range of legislative and regulatory frameworks. For example, the recently released 4th edition of the ASX Corporate Governance Principles also reflects this growing focus on culture and socially responsible business, with the amended principle 3 providing that a listed entity should instil and continually reinforce a culture of acting lawfully, ethically and responsibly.
Given this environment, we recommend that businesses review their compliance systems regarding laws relating to workers, to determine if improvements can be made.
Federal election update
With the election due to be held on 18 May, it is prudent for businesses to remember that the Federal Government has entered caretaker mode. The Caretaker Conventions, published by the Department of the Prime Minister and Cabinet, provide that the Government will now avoid making major policy decisions and significant appointments, and entering into major contracts or undertakings. As a result, businesses should factor in possible delays in dealings with Government departments until the result of the election is clear.
- Vijay CugatiPartner, Sector Leader, Investment Firms & Investment Management,
Ph: +61 2 9230 4940
- Kate ToweyPartner, Sector Leader, Real Estate,
Ph: +61 2 9230 5053
- Chris BlanePartner,
Ph: +61 2 9230 4298
- Andrew WongMergers & Acquisitions Counsel,
Ph: +61 2 9230 4141
- Charles AshtonManaging Associate,
Ph: +61 2 9230 5631
- Chris TraversSenior Associate,
Ph: +61 2 9230 4939
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