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ASIC turns up the heat on expert independence, reverse takeover votes and shareholder intention statement solicitation

23 March 2017 | Australia
Legal Briefings – By Rebecca Maslen-Stannage, Courtney Dixon and Hilary Starr

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We look at the areas where ASIC is turning up the heat, as flagged in ASIC’s Corporate Finance Report for the second half of 2016.

In brief

  • ASIC remains concerned about expert independence and will test whether an expert has placed undue reliance on information from the company or its advisers without sufficient critical evaluation and enquiry.
  • ASIC may use its mandatory information gathering powers in addition to direct engagement with experts to test independence and the expert’s critical evaluation process.
  • The regulatory squeeze on reverse takeovers is tightening further. In a reverse takeover, a (relative minnow) bidder was already proposing an ASX listing rule vote on its scrip bid for a big fish. In response to ASIC’s concerns, the bidder commissioned a “fair and reasonable” expert report tested from the perspective of bidder shareholders.
  • ASIC has taken the view that “indirect solicitation” by a bidder of shareholder intention statements gave rise to a relevant interest between bidder and target shareholders. If above 20% this causes a breach of the takeovers rules. ASIC has signalled it will closely scrutinise shareholder intention statements above 20% in aggregate, even taking steps to override the “truth in takeovers” obligation on the shareholder where ASIC considers that necessary.

ASIC hot buttons

Independent expert independence

ASIC remains concerned about expert independence and will continue to test an expert’s independence and critical evaluation process – including through the use of ASIC’s mandatory information gathering powers where ASIC considers that to be necessary.

ASIC has signalled that it will assess whether an expert has placed undue reliance on information provided by the commissioning company with insufficient critical evaluation. This includes checking experts’ working papers to see whether they have made reasonable inquiries to establish the truth, accuracy and completeness of company information, as well as the supporting assumptions made by the expert. Reliance on forward-looking information such as management, directors’ or advisers’ forecasts will also be examined to ensure there is sufficient evidence that the information is based on reasonable grounds.

ASIC will also look at whether experts have been unduly influenced by commissioning parties and advisers in situations where the expert revises a report to address a change in transaction terms or a change made in response to commentary provided by ASIC. Experts should keep adequate records to demonstrate how they have maintained independence throughout the engagement.

In one situation, ASIC’s view was that its concerns with an expert report were unlikely to be resolved before the date for the first court hearing in a scheme. In that transaction, ASIC was prepared to consent (to the report accompanying the scheme booklet) on the condition that a letter from ASIC (outlining its concerns) accompany the expert report. Unsurprisingly this was not taken up, and the parties instead agreed to extend the deadline to allow further time to resolve ASIC’s issues.

Regulatory squeeze tightens on reverse takeovers – relative minnow bidder required by ASIC to obtain “fair and reasonable” independent expert report

The regulatory squeeze on reverse takeovers is tightening. In one example, a reverse takeover involved a scrip bid where the (relative minnow) bidder was offering up to approximately 370% of its issued capital, and one of the target shareholders would end up with around a 30% interest in the bidder post close of the bid.

Bidder shareholder approval was not sought under item 7 of section 611 of the Corporations Act 2001 (Cth) (due to reliance on another exception to the takeovers prohibition), although the bidder was proposing an ASX listing rule vote on its scrip bid. Given that the bidders’ shareholders were effectively having a say on the transaction, ASIC’s view was that a “fair and reasonable” expert report tested from the perspective of bidder shareholders should be included with the meeting materials even though it was not a takeovers law vote. The bidder adjourned its meeting and commissioned such a report.

Between this ASIC approach and ASX’s floated reforms to require listing rule 7 votes for reverse takeover bids, the gap continues to narrow between the approval processes imposed on a smaller company as bidder versus target

Shareholder intention statements solicitation

ASIC has taken the view that “indirect solicitation” by a bidder of shareholder intention statements can give the bidder a relevant interest in the shares of the shareholder. If above 20%, this causes a breach of the takeovers rules.

In one example, ASIC viewed a bidder as having indirectly solicited statements from target shareholders (in aggregate holding more than 20% of the target). ASIC scrutinised the statements, including information regarding the interactions between the parties, and formed the view that these statements gave rise to a relevant agreement between bidder and shareholder.

ASIC required the bidder to take all necessary steps to ensure that the bidder no longer had the benefit of this “relevant agreement”. To facilitate this, ASIC granted relief to allow the bidder to offer target shareholders (including those who had provided the intention statement) a right to withdraw their acceptance.

The fact that ASIC was willing to override its “truth in takeovers” policy by granting relief allowing the target shareholders to withdraw their acceptance in this case is significant – and signals how seriously ASIC takes this issue.

Other concerns raised by ASIC

Shareholder classes in schemes of arrangement

  • ASIC reviewed a scheme where a target had multiple classes of shares on issue. ASIC’s view was that the Class A and Class B shares in the target were in a different class, since those shares had different rights in relation to appointment of directors, access to company information and voting, but the same consideration was payable (shares carrying identical rights) to both types of shareholder. The Court agreed, and ordered separate scheme meetings for each class.

Disclosing bid conditions in takeover offers

  • ASIC objected to the description of a bid as ‘unconditional’, when it was actually subject to a ‘prescribed occurrences’ condition.
  • Disclosure of FIRB ‘pre-conditions’ is also on ASIC’s radar. It should be made clear that target shareholders may be entitled to withdraw their acceptance until the FIRB condition is fulfilled.
  • ASIC also flagged the importance of ensuring that ‘regulatory action’ conditions are not too broadly cast. For example, they should not allow a bidder or acquirer to abandon a proposed transaction because of its own non-compliance.

Disclosing interests arising through swap arrangements

  • Where an equity swap arrangement is used in a control transaction which allows a proposed acquirer to direct a counterparty to vote any securities acquired as a hedge, and that swap relates to more than 5% of the target’s voting shares, ASIC expects the acquirer to lodge a substantial holder notice on the basis of either:
    • the known holding and hedge position of the counterparty; or
    • the assumption that the counterparty has a position that would result in them acquiring the maximum voting power under the swap.

Rights issue disclosure requests

  • ASIC considers that in some cases, insufficient disclosure of the potential control effect of the offer and underwriting arrangements is being provided – particularly under the ‘low doc’ method (ie cleansing notice).
  • ASIC generally expects to see (in a table) disclosure of:
    • the identities and maximum possible holdings of major shareholders, underwriters and sub-underwriters who have post-offer voting power in excess of 20%; and
    • the outcome and different levels of take-up of the offer (eg 25%, 50% and 75%).

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