Key Points: Two recent ASIC changes will affect substantial holding
notices and borrowing rights under prime broking and securities
ASIC has created a legal fiction for substantial holding notices
by securities lenders.
Essentially, the fiction is that lenders continue to have
notifiable relevant interests in lent shares – even when
The relevant interest chain
To understand how this is intended to make life easier, consider
Person A owns 5% of a company and has lodged a substantial
notice in relation to that holding. He lends those shares to Person
B. Person A continues to have a relevant interest, because he can
demand that B return the shares. Person B has a relevant interest
in the shares because he's now the registered owner of
them. Person B is required to lodge a substantial holding
Person B then lends the shares to Person C. Person C joins A and
B in having a relevant interest in the shares and has to lodge a
substantial holding notice.
Person C then lends the shares to Person D. Person D sells the
shares. That extinguishes the relevant interest that A, B and C
have in the shares.
This may affect the substantial holding notification obligations
of A, B and C. The Corporations Act requires a person to lodge a
notice when it acquires or loses a substantial holding. However,
that notice only has to be lodged once the person becomes aware of
the change. A, B and C may not know that D has sold the shares.
Until recently, ASIC advised shareholders in this situation
simply to assume that they continued to retain their relevant
interests (Consultation Paper 107). Now it has acted to give legal
effect to that advice.
It has done this by making a class order which says that, as
long as the securities lending agreement remains in place, a lender
of shares retains a relevant interest in those shares, regardless
of whether the shares are sold off down the chain. In fact, the
lender keeps the relevant interest even if it knows that the shares
have been sold.
This only relates to the need to lodge and update substantial
holding notices. It does not affect other obligations and
restrictions applying to relevant interests.
Prime broking and securities lending
Another recent ASIC change relates to borrowing rights under
prime broking and securities lending programs.
A prime broker or custodian may have a right to borrow a
client's shares. That right gives the broker or custodian a
relevant interest in the client's shares, even if it is
ASIC has modified the application of the Act to allow the broker
or custodian to disregard that relevant interest unless and until
it actually borrows the shares. Again, this relief only applies for
the purposes of the substantial holding notice requirements.
It is important to note that this relief only applies to
borrowing rights acquired in the ordinary course of the
broker's or custodian's prime broking or custodial
business, and it will not apply where the client is subject to
restrictions on how it deals with the shares, other
a mortgage, charge or security taken over the shares in the
ordinary course of carrying on a prime broking business or
custodial business and on ordinary commercial terms; or
any restrictions of a "procedural or administrative
nature in relation to giving instructions to the service provider
for dealing in the securities".
This is intended to exempt standard industry restrictions.
Substantial holding documentation
Along with these changes, ASIC has modified the documentation
requirements for substantial holding notices related from
A substantial holding notice of a relevant interest arising out
of a securities lending agreement does not have to:
disclose the securities lending fees; or
include any relevant master lending agreement, provided a
summary is provided).
In the years following the global financial crisis of 2008 many Australian investors lost their life savings as financial products failed and the Australian Stock Exchange shed over 3,000 points.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).