- The takeovers rules in the Corporations Act impose some restrictions on trading by a bidder (or its associates) during a takeover bid, but ASIC has identified that the ASX, Chi-X and APX Market Integrity Rules go further in restricting any special crossings during takeovers and schemes by parties unrelated to the bidder (or its associates).
- ASIC is now proposing to repeal these rules, recognising the unnecessary overlap between the Market Integrity Rules and Corporations Act in this area.
- We expect this change, if implemented, will provide investors with appropriate flexibility to effect legitimate crossing transactions during takeovers and schemes, where not otherwise prohibited by the takeovers rules or the insider trading rules.
Overview of proposals
The takeovers rules in the Corporations Act currently restrict the ability of the bidder (or its associates) to execute off-market trades (including out of hours trading and special crossings) in bid class securities during a takeover bid, through rules which prevent bidders (or their associates) from providing collateral benefits to target shareholders and limited exceptions to the 20% rule for on-market trades once a bidder goes above 20%. Some exceptions to this rule exist for on-market trades, however these exceptions do not extend to off-market trades including special crossings and out-of-hours trades. While bidders and their associates are restricted under these rules, the Corporations Act does not prevent other parties unrelated to the bidder or its associates from this sort of trading (where it otherwise complies with the broader takeovers rules including the 20% rule). ASIC’s Market Integrity Rules, however, do.
In line with the Federal Government’s well-publicised focus on streamlining government regulations, ASIC has made its own contribution to keeping the red-tape reduction drive rolling in 2014 with several initiatives designed to reduce unnecessary regulation and lower compliance costs for those which are within its regulatory constituency. In May 2014, when reporting on ASIC’s recent initiatives in the area, Commissioner John Price reaffirmed the corporate regulator’s commitment “to cutting unnecessary red tape through both [ASIC’s] business-as-usual work and specific deregulatory initiatives.”
ASIC has cast a critical eye over the Market Integrity Rules and identified areas which overlap with equivalent Corporations Act requirements and could be repealed or refined to reduce the regulatory burden on investors “without a substantial reduction in market integrity”.
In the M&A space, ASIC’s latest specific deregulatory initiative comes in the form of proposed changes to the Market Integrity Rules which apply to the ASX, Chi-X and APX which will lift the prohibition on off-market trades (including out of hours trading and special crossings) by investors during takeovers and schemes.
Under the present Market Integrity Rules, all investors are prevented from undertaking off-market trades in relation to a target company’s securities during the bid period or late trade session or out of trading hours crossings during the offer period under a takeover bid or scheme of arrangement. This effectively blocks any market participant from engaging in large crossing transactions for stocks which are the subject of a takeover bid or scheme.
By contrast, (as noted above) the takeovers rules in Chapter 6 of the Corporations Act only prevent the bidder or its associates from making such off-market trades during a takeover bid.
ASIC has identified that preventing other investors who are unrelated to the bidder or its associates from engaging in such transactions is a disruption to day-to-day business of those investors which is not driven by the policy objectives for imposing the prohibition and goes further than the trading restrictions imposed under the Corporations Act.
ASIC proposes to either repeal the rules in their entirety or amend the rules to make it clear that they only apply to the bidder or its associates, but is expected to favour a complete repeal to avoid any ongoing regulatory uncertainty. Investors would, of course, continue to be subject to the ordinary takeovers rules, including the 20% rule and the insider trading rules.
While not expected to open the floodgates to large-scale crossings during takeovers and schemes, the proposal by ASIC is a positive measure which will provide additional flexibility to investors and pays appropriate regard to the restrictions which already apply to trading in a target company’s securities by operation of the takeovers rules in Chapter 6.
In other good red-tape reduction news in the M&A space, legislation has been introduced into the Commonwealth Parliament which would allow Takeovers Panel members to take part in Takeovers Panel proceedings whether or not they are in Australia or overseas. This will help resolve administrative issues which have previously arisen where Takeovers Panel members are traveling.
ASIC has also welcomed industry views on ways to cut red tape without undermining underlying policy principles, so is likely to be receptive to proposals in the takeovers and schemes space. So if you have an ideas about other ways to cut red tape in the takeovers space without undermining existing policy principles, now is the time to share them with ASIC.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2019