ASIC has released Consultation Paper 170: Downstream Acquisitions: Update to RG71 (CP170) detailing its plans to update the guidance on the takeovers exception for downstream acquisitions which is set out in s. 611, Item 14 of the Corporations Act 2001 (Cth) (Corporations Act).
A downstream acquisition occurs where a person indirectly acquires a relevant interest in the shares of a downstream entity as a result of an acquisition in an upstream entity. This is because a person is deemed1 under s. 608(3) of the Corporations Act to have the same relevant interests in securities that an upstream entity has if they have voting power above 20% in, or control, the upstream entity.
Where the acquirer obtains a relevant interest in more than 20% of the securities of a downstream entity2, which is a listed company or an unlisted company with more than 50 members, the takeover provisions of the Corporations Act will be breached, unless the exemption in s. 611, Item 14 is available.
CP170 provides the following example of a downstream acquisition that may breach the takeover thresholds in s. 606 of the Corporations Act:
Example 1: Acquiring a relevant interest in an upstream entity
Company A acquires a relevant interest in 40% of the securities in Entity B, where Entity B has a relevant interest in 25% of the shares in Company C. This will result in Company A acquiring a relevant interest in 25% of the shares in Company C (by the application of s. 608(3)(a)).
Another example is as follows:
Example 2: Combining a direct interest and the relevant interests of an upstream entity
Company A has a relevant interest in 15% of the shares in Company C. Company A then acquires a relevant interest in 20% of the securities in Entity B, where Entity B has a relevant interest in 10% of the shares in Company C. This will result in Company A acquiring a relevant interest in 25% of the shares in Company C (by virtue of its direct relevant interest (10%) and indirect relevant interest (15%) in Company C by virtue of the application of s. 608(3)(a)).
The exception in s. 611, Item 14 provides that a downstream acquisition will not breach the takeover thresholds where the downstream acquisition results from the acquisition of relevant interests in a body corporate included in the official list of (a) a prescribed financial market (such as ASX); or (b) a foreign body conducting a financial market that is a body approved in writing by ASIC for the purposes of Item 14 (such as the London Stock Exchange or NASDAQ).
The proposed updated Regulatory Guide 71: Downstream Acquisition (Proposed RG71) released in conjunction with CP170 seeks to clarify that:
- notwithstanding that the exemption in s. 611, Item 14 may be available, ASIC will consider applying to the Takeovers Panel for a declaration of unacceptable circumstances despite the exception in s. 611, Item 14 applying where (a) control of the downstream company is a significant purpose of the transaction; or (b) the downstream acquisition technically satisfies the exemption in s. 611, Item 14, but subverts or otherwise does not meet the policy basis for reliance on the exception, such as where the upstream entity is listed in name only and is closely held;
- a downstream acquisition will not be considered exempt from the takeover prohibition in s. 606 merely because another exemption is available in s. 611 to the upstream acquisition e.g. the upstream acquisition is made under a takeover bid3; and
- the upstream entity must have a primary listing (and not only a secondary listing) on a prescribed financial market or an approved foreign exchange to be eligible for the exemption in s. 611, Item 14, unless ASIC provides specific relief otherwise.
The Proposed RG71 also sets out the circumstances in which ASIC may be prepared to grant relief to a downstream acquisition which does not satisfy the exception in s. 611, Item 14. Relief may be required where the upstream entity is unlisted or does not have a primary listing on a prescribed financial market or an approved stock exchange.
According to the Proposed RG71, the factors ASIC will consider in deciding whether to grant the relief, and any conditions of the relief that should apply, will include:
- whether the upstream entity is listed and whether it is widely or closely held;
- whether control of the downstream company appears to be a "significant purpose"4 of the upstream acquisition - Proposed RG71 sets out the factors that will suggest a control purpose;
- whether the downstream shares are a substantial part of the upstream entity's assets - this is generally taken to occur where the downstream shares constitute 50% or more of the upstream entity's assets. However this threshold may be lower in certain circumstances; and
- whether the acquirer will obtain effective control of the downstream company as a result of the upstream acquisition. Where the acquirer will obtain effective control of the downstream entity, which is generally taken to occur where the acquirer will have 50% or more of the voting power of the downstream entity, any relief will generally be subject to a condition that the acquirer make a downstream bid for the downstream entity.
As is presently the case under the existing RG71, it will be a prerequisite to such relief that the acquirer of the upstream entity has satisfied ASIC that the market for securities in the downstream entity is adequately informed about the upstream acquisition.
Proposed RG71 states that the following conditions may be imposed where relief is granted to allow a downstream acquisition that not does satisfy s. 611, Item 14:
- downstream bid condition - this condition will generally apply when (1) control of the downstream entity appears to be a significant purpose, (2) the downstream shares are a substantial part of the upstream entity's assets, or (3) effective control of the downstream entity will be obtained;
- standstill and voting conditions - these types of conditions will generally apply when (1) control of the downstream entity does not appear to be a significant purpose, (2) the downstream shares are not a substantial part of the upstream entity's assets, and (3) effective control of the downstream entity will not be obtained; and
- other types of conditions (including a sell down condition) - these conditions will be applied on a case-by-case basis.
The Proposed RG71 further sets out the terms on which a downstream bid will need to be made and the terms on which standstill and voting restrictions may be imposed.
ASIC is inviting comments on CP170 and the Proposed RG71 that are required to be submitted by 16 January 2012. ASIC proposes to publish the updated regulatory guide in May 2012.
1 s. 608(3) of the Corporations Act
2 Refer to s. 606 of the Corporations Act
3 s. 611, Item 1 of the Corporations Act
4 RG71 currently applies the 'main purpose' test
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