ASIC has recently updated its guidance on collective action by investors (contained in Regulatory Guide 128 Collective action by investors (RG 128)).
Effective investor engagement can enhance corporate governance and the long-term performance and corporate value of a listed entity. However, the takeover and substantial holding provisions in the Corporations Act 2001 (Cth) (Corporations Act) place limits on cooperation between investors to avoid control over an entity being acquired in ways that are considered inappropriate.
RG 128 is intended to provide guidance on how the Corporations Act provisions apply specifically to collective action by investors and to provide more clarity on the types of behaviours that are more likely to attract scrutiny from ASIC.
Examples of specific conduct
ASIC has provided a number of illustrative examples of conduct where collective action is unlikely or more likely to give rise to a 'relevant interest' in another investor's shareholding or indicate that an 'associate' relationship exists.
According to ASIC, conduct that is unlikely to give rise to a relevant interest or indicate an associate relationship includes:
- holding discussions and exchanging views and intentions of voting where each investor is not bound to act in a certain way;
- discussing issues about the entity, including problems and potential issues;
- discussing matters to be raised with the entity's board;
- discussing and exchanging views on a resolution to be voted on at a meeting;
- recommending to other investors to vote a certain way, provided that no agreement or understanding to follow the recommendation is obtained; and
- making representations to the entity's board about the entity's policies or practices, or actions that the entity might consider taking.
According to ASIC, conduct that is more likely to give rise to a relevant interest or indicate an associate relationship includes:
- where the notice is related to the composition of the entity's board or the entity's affairs, jointly signing with other investors a notice to:
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- requisition a general meeting; or
- request the addition of a resolution to be considered at a general meeting;
- formulating joint proposals relating to board appointments or a strategic issue;
- accepting an inducement to vote or act in a specific way;
- agreeing on a plan concerning voting; and
- limiting their freedom to vote (e.g. by granting another investor their irrevocable proxy).
What sort of conduct is more likely to attract scrutiny from ASIC?
RG 128 also outlines the key areas of interest for ASIC to examine in relation to potential collective action, including action that:
- involves an actual or proposed control transaction;
- involves the replacement of directors of an entity;
- concerns proposals that have benefits for particular investors rather than investors as a whole; and
- involves investors who have a history of collective action.
ASIC is less likely to examine collective action that:
- relates solely to the improvement of the company's corporate governance or issues that can properly be determined at a general meeting;
- is temporary and purely related to the resolution of that issue; and
- is not concerned with the acquisition of a substantial interest in, or the exercise of control of, the company where there is no ongoing undisclosed association between the investors involved.
Conclusion
Provided that investors do not breach the Corporations Act provisions and their intention is the improvement of an entity's corporate governance, investors' collective action should not attract the scrutiny of ASIC. While the updated guidance does not represent a change in the existing regulatory landscape and is unlikely to have any influence on the behaviour of activist shareholders in Australia, it serves as a useful practical guide for shareholders and the clarification as to what type of behaviour ASIC is more likely to examine is certainly welcome.
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.
