On 20 March 2013, the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 (Cth) (the Bill) was introduced to the House of Representatives.
Primarily the aim of the Bill is to reduce regulation around the issue of and to streamline the disclosure requirements for the issue of simple corporate bonds to retail investors to enable the Australian domestic market for corporate bonds to develop.
The Reserve Bank of Australia estimates the current value of the Australian non-government bond market at around $800 billion. However, approximately 69% of value of those outstanding bonds, or $530 billion, is held by foreign investors. Institutional investors hold approximately 31%. Less than 1% of the value of the corporate bond market is held by Australian retail investors. The Reserve Bank of Australia attributes this figure to the disclosure requirements which currently exist for the offering of securities in Australia. Due to the onerous disclosure obligations, many corporations consider it to be more cost effective to raise debt funding from institutional investors or overseas. Corporate bonds issued in respect of Australian companies are often issued in overseas markets, as these markets are considered by many to provide a more competitive price when companies are looking to raise large amounts of capital. Overseas markets are also generally considered to be more liquid.
Two-part simple corporate bonds prospectus
In order to develop the retail corporate bond market in Australia, it is intended that the disclosure requirements for the issue of simple corporate bonds in Australia to retail investors will be streamlined to encourage companies to raise capital domestically rather than in overseas markets.
In order for bonds to be simple corporate bonds (and therefore subject to the two-part simple prospectus regime), certain conditions must be satisfied:
- They must be debentures
- They must be quoted on a prescribed financial market
- They must be denominated in Australian dollars
- They must be for a fixed term of no greater than 10 years
- The principal must be repaid at the end of the fixed term
- The interest must be fixed (which cannot be decreased) or floating. Where the interest rate is floating, there must be a reference rate and fixed margin (which cannot be decreased)
- Interest must be paid no later than the end of the term, and cannot be deferred or capitalised by the issuing company
- The price of each bond must not exceed $1,000 and must be the same for each investor
- The bonds must not be redeemable prior to the end of the term, except at the option of the bondholder, acceptance by a bondholder of an offer to buy back the bond, a change in law which impacts tax liabilities, where there is a change in control of the company which issued the bonds, or where fewer than 10% of the bonds remain on issue
- The bonds must not be subordinated to the debts of unsecured creditors
- The bonds must not be convertible into another form of security
- The bonds must be guaranteed by a parent company if the issuing company is a wholly owned subsidiary
- The issuing company or its parent guarantor must have continuously quoted securities which have not been suspended for more than five days during the previously 12 months from the date the bonds are offered
- An auditor's report in respect of the issuing company's most recent financial statements must not be qualified
- The first offer by the issuing company has minimum subscription amount of $50 million
- The Australian Securities and Investments Commission (ASIC) hasn't previously determined that the issuing company cannot issue simple corporate bonds
In order to simplify the disclosure requirements for the issue of simple corporate bonds, the Bill will introduce a two-part prospectus regime. Initially, a company wishing to issue bonds into the Australian market must lodge with ASIC a base prospectus, which contains general information about the issuing company. The base prospectus must state that bonds will not be issued unless the minimum subscription amount is raised. The base prospectus will need to be available on the company's website and will have effect for three years.
During that three-year period, each time the company wishes to make an offer of simple corporate bonds to retail investors, a shorter offer-specific prospectus will need to be lodged with ASIC, which may modify or supplement the information contained in the base prospectus. This two-staged process should be of benefit to retail investors who are not interested in reading a lengthy prospectus. An issue under an offer-specific prospectus must have an expiry date not greater than 13 months from the date the offer-specific prospectus was lodged with ASIC.
Together the two documents will form one prospectus and will be considered issued on the date the offer-specific prospectus is lodged with ASIC.
It is currently unclear precisely what information must be contained in the two-part prospectus as the amending provisions in the Bill simply refer to the as yet unknown requirements specified in the regulations. However, both the base prospectus and the offer-specific prospectus may incorporate information by reference to documents which have been previously lodged with ASIC.
During the initial two years after the Bill comes into effect, issuing companies may elect to use the existing disclosure regime or the new two-part disclosure regime to issue corporate bonds in Australia. Following this transition period, the new proposed rules would apply.
Relief from director liability for simple corporate bonds
The Bill also seeks to develop the retail corporate bond market in Australia by providing relief to directors from liability arising from deficient prospectuses for the issue of simple corporate bonds.
Currently under the Corporations Act 2001 (Cth) (Corporations Act), each director of a company is automatically personally liable for a prospectus which contains misleading or deceptive statements or which lacks required information. The Bill seeks to relieve directors of that automatic personal liability in relation to defective prospectuses for simple corporate bonds, where the director can demonstrate that they were not involved in the contravention (through the due diligence defences).
However, the Bill requires that all of the directors of an issuing company (of simple corporate bonds) must consent to the lodgment of the prospectus. Therefore criminal liability may be imposed on all directors under Part 9.4 of the Corporations Act, where the prospectus is false or misleading. Although the Bill introduces due diligence defences for criminal liability arising under Part 9.4 of the Corporations Act, it is unclear whether those defences in fact add anything to the 'reasonableness' requirement which already exists as an element of the criminal offences and as such the Bill may not provide the level of relief from liability which was intended.
The question remains as to whether the steps set out in the Bill will be sufficient to ignite the market in Australian corporate bonds. In our view, whilst the Bill is certainly a step in the right direction, broader questions remain as to whether the gap between issuer and investor expectation and the currently low demand in Australia for bonds can be overcome.
We will provide updates on this Bill as we continue to monitor and track its progress.
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com