The Federal Government has proposed amendments to the Corporations Act 2001 (Cth) that are intended to reduce the compliance costs faced by bond issuers and make it more attractive for corporations to issue retail corporate bonds.
Partner Nicole Radice and associate Jessica McKenzie outline the key elements of the proposed amendments and their effect on Australia's current corporate governance laws.
The key changes proposed
The Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 aims to increase opportunities for retail investors, while still maintaining effective consumer protections, by reforming the current corporate governance regime as it relates to retail corporate bonds in three significant ways:
- Introducing a streamlined two-part prospectus for issuing simple retail corporate bonds
- Changing the civil liability provisions as far as they relate to corporate bonds issued to retail investors
- Clarifying the application of defences to claims of misleading and deceptive statements and omissions in disclosure documents
Interested parties are invited to provide comments and submissions on the proposed amendments by Friday 15 February 2013.
Rationale for the proposed amendments
The proposed amendments are part of the Federal Government's commitment to developing a deep and liquid corporate bond market in Australia, and follow three years of extensive negotiations with stakeholders including companies and financial regulators.
Those negotiations revealed that the current provisions for issuing retail corporate bonds were too onerous, leading to situations in which companies were biased towards structuring their fundraising either solely to wholesale investors, or only to retail investors in the form of a rights issue or share purchase plan.
The proposed amendments address these concerns, and if passed, will potentially make it easier for companies to raise debt funding, and provide a viable alternative to bank funding.
'Simple corporate bonds'
The proposed amendments have been drafted to ensure there is no reduction in the amount of information currently provided to retail investors to enable them to make effective decisions about the proposed investment. As such, the proposed regime is restricted to debt securities that satisfy a significant number of conditions, including, among others, the following:
- The securities must be debentures under section 9 of the Corporations Act.
- The securities must be quoted, or an application will be made for quotation on a prescribed financial market.
- A minimum subscription amount of $50 million must be raised under the offer.
- The fixed term of the securities cannot exceed 10 years.
- Interest payments under the security must be paid periodically and cannot be deferred or capitalised.
- The holders of the securities must have a priority to unsecured creditors if the issuing body is wound up.
- The securities must not be able to be converted into another class of securities.
- The offeror must have continuously quoted securities.
Streamlined disclosure requirements
The Corporations Act currently requires a corporation to prepare a full prospectus for the offer of corporate bonds to retail investors. The exposure draft proposes to simplify the disclosure obligations by replacing the full prospectus with a mandatory two-part prospectus for certain bond issuances.
The proposed two-part prospectus is to include both:
- a 'base' prospectus including general information about the issuer and the issue that is likely to remain constant for three years (the life of this prospectus); and
- an 'offer specific' prospectus, which will need to be released for each fund raising tranche. This prospectus will outline the key details of the offer and any information relevant to consideration of the investment that has not already been the subject of continuous disclosure. It is proposed that the 'offer specific' prospectus operate in a similar manner to the current cleansing notice regime for other offerings, including requiring a statement confirming that the issuer has complied with their continuous disclosure obligations.
The Bill also proposes that certain material be able to be incorporated by reference into both the 'base' and the 'offer specific' prospectuses, reducing the volume of information contained in these documents.
Directors' liabilities and defences
The proposed changes to the directors' liabilities provisions of the Corporations Act are designed to reduce the burden on directors when issuing corporate bonds to retail investors, and to provide directors with greater clarity on the steps required as part of the due diligence process in relation to certain offences.
There are two main components to the amendments proposed to the directors' liability and defence provisions.
The first component is specifically in relation to the issue of retail corporate bonds. Civil liability for directors is proposed to be removed from section 729 of the Corporations Act, which will do away with directors' personal civil liability for breaches of section 728 of the Corporations Act (which relates to misleading and deceptive statements in, or omissions from, disclosure documents for retail corporate bonds).
The second component of the proposed amendments, which will have a more general application, is the inclusion of specific tests for determining, under the offence provisions of section 1308(4), whether a person has taken reasonable steps to determine if there is any false or misleading information being provided. These tests are in line with the due diligence defence for civil liability for disclosure documents.
These amendments are not specific to misleading and deceptive conduct in the case of issuing retail corporate bonds and, accordingly, will be available to all directors where criminal liability may arise for false or misleading statements under section 1308 of the Corporations Act. Therefore, by adopting an appropriate due diligence process when undertaking a public offering, directors will be able to reduce potential exposure both to civil and criminal liability.
The closing date for submissions on the exposure draft is 15 February 2013. Please contact us if you would like more information on the proposed amendments or assistance in compiling a submission.
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