The Australian Securities and Investments Commission (ASIC) recently released ASIC Report 423 ASIC regulation of corporate finance: July to December 2014 (Report). The Report highlights and discusses the key information and observations of ASIC in their regulation and oversight of fundraising, mergers and acquisitions transactions, corporate governance and other general corporate finance areas for the period of 1 July 2014 to 31 December 2014.
Here, Partner Michele Muscillo and Solicitor Luke Dawson examine the issues raised by ASIC in the Report and the areas on which ASIC will continue to focus in 2015.
ASIC is responsible for the regulation and oversight of corporate finance activity in Australia. Specifically, the Corporations and Emerging Mining and Resources teams are responsible for regulating disclosure and conduct by corporations in Australia (such as assessing applications for relief from certain parts of the Corporations Act 2001 (Cth) (Corporations Act) and reviewing certain documents lodged with ASIC in various corporate transactions).
Fundraising disclosure issues
ASIC review fundraising disclosure documents and review applications for relief from Chapter 6D of the Corporations Act. In their review of prospectuses and offer documents, ASIC:
- raised disclosure concerns with over 33% of the documents lodged;
- extended the exposure period1 35 times; and
- issued 27 interim stop orders and seven final stop orders.
While these statistics may be attributable to an increase in fundraising activity (including backdoor listings which can be technically challenging for foreign companies and start-up companies), ASIC noted that a number of prospectuses appeared to be prepared in haste, potentially in order to take advantage of favourable market conditions for initial public offerings.
Some specific disclosure concerns raised by ASIC include:
- financial information not being sufficiently complete or adequately reviewed by a third party (such as an auditor); and
- a poor quality of information about companies operating in an emerging market.
ASIC stressed that in order to produce effective disclosure for retail investors, it is important that disclosure documents are carefully tailored to the particular business of the company and are not prepared in a formulaic way. ASIC were also concerned that the due diligence practices can vary widely and ASIC have questioned the reliability of the information provided in some prospectuses. In order to avail themselves of the due diligence defence provided by section 731 of the Corporations Act, companies (and directors) must ensure that the due diligence processes that they run are sufficiently robust and of a quality so as to ensure that accurate and reliable information is provided to investors. A proper due diligence process will ensure that in the event of ASIC scrutiny, a company is able to be confident in the content of its prospectus. HopgoodGanim can assist in the preparation of a rigorous and appropriate due diligence program for any fundraising activity that a company may wish to undertake.
ASIC reported an increase in companies seeking admission to ASX by way of a backdoor listing. In brief, a backdoor listing is where a company seeks access to capital by selling their business into a company that is already listed on the ASX. ASIC noted that businesses offering web-based products and services or start-up technologies were the most common type of backdoor listing. Relevantly, ASIC raised concerns in 73% of the backdoor listing offer documents it received. ASIC have noted that such a high percentage is likely due to the fact that these types of companies often have businesses requiring technical explanation of a high proportion of intangible assets in their financial statements. As a result of this, it is difficult for investors to make an informed decision unless:
- considerable care is taken in explaining the business without the use of jargon; and
- a justification for the valuation of intangible assets is provided.
ASIC have advised that with the slowdown of the mining sector, they expect backdoor listing activity to remain strong and accordingly that this will be an area of focus for them in 2015.
For further information in respect of backdoor listings, please see HG Corporate Advisory Alert: Backdoor listings are back in vogue - Five key tips if you are considering undertaking one - 25 February 2015, or contact a member of HopgoodGanim's Corporate Advisory and Governance team.
Mergers and Acquisitions
ASIC review and monitor conduct in takeover transactions to ensure that adequate information is provided and all parties act in a way that promotes a fair and efficient market (this mirrors the purpose of Chapter 6 of the Corporations Act).
The statistics provided by ASIC in respect of documents lodged with them from 1 July 2014 to 31 December 2014, reveal unsurprisingly that off-market takeover bids remain a popular control mechanism given their structural flexibility (as opposed to on-market takeover bids).2 However, schemes of arrangements also appear to be increasing in popularity as a mechanism for corporate restructures.
A number of issues were highlighted by ASIC arising from the misuse of takeover exceptions, including:
- item 4 of section 611, where a scrip takeover results in a reverse takeover by a person;
- item 10 of section 611, where participants in rights issues had control intentions and were abusing the exception;
- item 13 of section 611, where some underwriting arrangements involved little assumption of risk by the underwriter, or the underwriter or sub-underwriter had control intentions; and
- item 14 of section 611 where ASIC had concerns that some downstream acquisitions may have resulted in an inappropriate change of control.
ASIC have also raised concerns in respect of the quality of independent expert's reports being produced at the lower price points and also the experience of those experts. ASIC have noted that it is incumbent on the commissioning party to ensure that the engaged expert is suitably experienced, licensed and qualified to provide an independent expert report for the relevant transaction. Companies should carefully consider and weigh up the cost benefit of engaging an expert at a lower price point against the potential for transaction delay and the possibility of having to commission a second independent expert's report.
Corporate Governance – Employee Incentive Schemes
In late 2014, ASIC amended the scope of its relief offered in respect of employee incentive schemes. In short, ASIC have expanded the types of products that can be offered, the categories of people who can participate in such schemes and the structures that can be used for those schemes. Please see the HG Corporate Advisory Alert: Employee Incentive Schemes: Update on ASIC relief – 26 November 2014, or contact a member of HopgoodGanim's Corporate Advisory and Governance team, for further information in respect of employee incentive schemes.
Some trends appear to emerge from the Report, which can be distilled as follows:
- Companies must ensure that disclosure documents are carefully tailored to their particular businesses and not prepared in a formulaic way. This is no different to the pre-existing position at law which requires disclosure documents to contain all information that investors and their professional advisers reasonably require to make an informed assessment of the risks and other relevant matters relating to the offer. However, it appears that ASIC are taking a more active approach in reviewing the underlying due diligence activities which sit behind disclosure documents, and accordingly companies should ensure that their internal and external due diligence programmes are robust and sufficient to withstand ASIC scrutiny.
- Backdoor listings will continue to be popular in 2015 and will accordingly receive a proportionate amount of ASIC attention as a result.
- The exceptions to the takeover prohibition in Chapter 6D of the Corporations Act must not be used as an artifice of acquiring control of a company in circumstances where a takeover bid (or some other mechanism) is the more appropriate method.
1The exposure period is the period after lodgement of a disclosure document, during which a company must make the disclosure document generally available to potential investors. The exposure period runs for a minimum of seven days and can be extended to 14 days. The company must not accept any applications from investors during this period.
2 HopgoodGanim acted for the target (Orbis Gold Limited) in the 10th largest control transaction (an off-market takeover bid) based on the documents lodged with ASIC (see Table 3 of the Report).
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