In this first-blog series, we examine the obligation of AFSL holders to determine whether there has been a change of control in their entity, and subsequently report any changes to ASIC.

ASIC has recently been clamping down on AFSL holders who become aware of any changes in control over their entity but have failed to notify ASIC of this change.

You may be aware that companies have to notify ASIC when their shareholders or officeholders change, which could denote a change of control. However, these notifications do not constitute a notification to ASIC to satisfy the obligations under your AFSL. If the change also results in a change of the licensee's ultimate holding company, a single transaction could result in three separate notifications to ASIC!

We also note that the Government is concerned about the prevalence of secondary trading in AFSLs, and has just announced an intention to grant ASIC the power to approve changes of control for AFSL holders, so the procedures for notification will likely change soon.

Has a change of control occurred?

Regulation 7.6.04(2) of the Corporations Regulations 2001 provides details on how you can determine if a change of control has taken place.

A 'change in control' includes a transaction, or a series of transactions, in a 12-month period that results in a person having control of the financial services licensee (either alone or together with associates of the person).

Under the regulations, 'control' means:

  1. Having the capacity to cast, or control the casting of, more than one half of the maximum number of votes that might be cast at a general meeting of the financial services licensee; or
  2. Directly or indirectly holding more than one half of the issued share capital of the financial services licensee (not including any part of the issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or
  3. The capacity to control the composition of the financial services licensee's board or governing body; or
  4. The capacity to determine the outcome of decisions about the licensee's financial and operating policies, taking into account:
    1. the practical influences the person can exert (rather than the rights it can enforce)
    2. any practice or pattern of behaviour affecting the financial services licensee's financial or operating policies to be taken into account (whether or not it involves a breach of an agreement or a breach of trust)

It is important to note that there can be (and often are) several parties that have control under one or more of the tests, and a change in any of these tests triggers the requirements to notify ASIC.

For example, you may have a majority shareholder that controls the casting of votes at a general meeting, but there may be a related entity that controls the composition of the licensee's board as well as a powerful CEO that can practically influence the outcome of decisions about the licensee's policies. A change in either:

  • a majority shareholding;
  • the power to compose the board; or
  • the identity of the CEO would, in this case, trigger the need to notify ASIC under the AFSL.

There may also be a case where there is a technical, but not substantive, change of control. For example, imagine a licensee that is a wholly owned subsidiary of

Company B, where Company B is wholly owned by Company X. Company X owns a range of businesses, and would prefer that the licensee is instead owned by Company C. In this case there is no change of ultimate control, but the entity with the capacity to cast votes at a general meeting is no longer Company B, but now Company C. Therefore, this is a change of control under the first limb of the definition, and would generally trigger the need to notify ASIC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.