The purpose of this paper is to highlight and discuss some of the proposed amending bills set down for the 2007 Commonwealth Government autumn sittings1. Whilst this paper is not meant to be an exhaustive overview of all of the content of all amending bills, we have endeavoured to identify and concentrate on those amendments which may likely have a tangible effect on companies. In addition, we have sought to identify certain changes in the legislative landscape which, if passed within Parliament could be utilised by companies to reduce associated compliance costs.
Scope of the Paper
The legislation to be discussed within this paper includes provisions within:
(a) Simpler Regulatory System Bill - to simplify compliance with corporate and financial services regulation within the Corporations Act 2001 (Cth) (Corporations Act);
(b) Corporations Amendment (New Zealand Closer Economic Relations) Bill 2006 - to facilitate mutual recognition between Australia and New Zealand of prospectuses and similar disclosure materials that authorise and effect the offering of securities and interests in managed investment schemes;
(c) Corporations Amendment Bill (No. 2) 2006 - to amend the Corporations Act to remove the "100 member rule" and instead require a minimum 5% of total voting shares to requisition a special general meeting.
Simpler Regulatory System Bill
In 2006, the Federal Government focused on implementing regulation with a view to improving and simplifying corporate and financial services regulations. In April 2006 the Federal Government released the corporate and financial services regulation review consultation paper seeking feedback from key market participants. This culminated in the Federal Government releasing the Corporate and Financial Services Regulation Review Proposals Paper (Proposals Paper) in late 2006, outlining its revised strategy for simplifying and reducing the complexity of laws governing corporate and financial services regulation. These proposals are to be embodied in the Simpler Regulatory System Bill.
Some of the key proposed amendments contained within the Simpler Regulatory System Bill (SRS Bill) include:
(a) Amending the disclosure requirements for a quoted securities rights issue offering;
(b) Increasing the maximum threshold fundraising under an offer information statement;
(c) Adding a new exemption to the "secondary sale" prohibitions in Chapter 6D of the Corporations Act, to cover on-sales following a transfer by a controller;
(d) Increasing the scope for employee share scheme disclosure exemptions to apply to unlisted companies; and
(e) Certain other amendments to the Corporations Act, dealt with in some detail below.
Quoted Securities - Rights Issue Disclosure
SRS Bill Proposal
The SRS Bill is proposing to:
(a) Remove the requirement for a quoted rights issue to be accompanied by a disclosure document (such as a prospectus or a Product Disclosure Statement (PDS)) in respect of an offer for quoted securities or financial products;
(b) Instead, require issuing companies to prepare and release a "cleansing notice" which would be modelled on the provisions within Section 708A of the Corporations Act 2001 (Cth) (Act) (the secondary sale provisions) prior to any rights issue offer being made; and
(c) Oblige issuing companies to include within the cleansing notice all appropriate information on the consequences of and potential effect of the rights issue on the control of the entity.2
Quoted Securities Rights Issue Disclosure - Current Legislative and Listing Rule Landscape
Prior to providing an analysis of the proposed changes to the rights issue regulatory regime under the SRS Bill, it is necessary for us to give a broad overview of the current legislative landscape as well as any considerations under ASX Listing Rule regime.
What is a rights issue?
A rights issue is a capital raising mechanism generally employed by companies listed on a recognised stock exchange (such as the ASX) under which an offer is made to all ordinary shareholders to acquire more shares (or other securities) on a pro rata basis. For example, an offer to subscribe for an additional two (2) ordinary shares for each five (5) ordinary shares currently held in the company at a predetermined price per share.
Disclosure Requirements Under a Quoted Rights Issue Prospectus
As a rights issue involves an offer of securities it requires disclosure pursuant to Chapter 6D of the Corporations Act.3
The rights issue offering is classically utilised by companies that have been listed for a continuous period of at least twelve months.
If a company has been continuously quoted for a period of twelve months, and has not been excluded by ASIC from the reduced disclosure requirements within the Corporations Act, it may take advantage of the special prospectus content rules for continuously quoted securities found within Section 713 of the Corporations Act.
Section 713 of the Corporations Act provides that a prospectus for a continuous quoted security (such as a rights issue prospectus) must contain all information investors and their professional advisers would reasonably require to make an informed assessment of:
(a) The effect of the offer on the body;
(b) The rights and liabilities attaching to the securities offered;
(c) If the securities are options - the rights and liabilities attaching to both the options themselves and the underlying securities (generally shares).4
The prospectus must contain this information owing to the extent to which it is reasonable for investors and their professional advisers to expect to find the information within the prospectus.
The information disclosure requirements for a continuously quoted rights issue prospectus are significantly lower than the general prospectus requirements found within Section 710 of the Corporations Act. These general requirements are typically used when a company is pursuing an IPO and seeking listing on ASX or in instances where a company is unable to avail itself of the content rules for continuously quoted securities (for example where an entity has not been listed for twelve months). The general prospectus requirements require a prospectus to contain all information investors and their professional advisers would reasonably require to make an informed assessment of:
(a) The rights and liabilities attaching to the securities offered;
(b) The assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue the shares.
The rationale for the reduced disclosure threshold contained within Section 713 of the Corporations Act is that the company has been listed for a period of at least twelve months and, as such, has been subject to the continuous disclosure regime within the Corporations Act and ASX Listing Rules for that time. To discharge its continuous disclosure obligations, the company should immediately notify ASX and the market generally once it becomes aware of any information that a reasonable person would expect to have a material effect on its share price.5
With this rationale in mind, the Corporations Act does prescribe including within any continuously quoted prospectus (such as a rights issue prospectus) any information that otherwise would fall within the general disclosure requirements (as set forth above) to the extent that this information:
(a) Has been excluded from releases to the market and discharge of a company's continuous disclosure obligations; and
(b) The information would be something that investors and their professional advisers would reasonably require to make an informed assessment of those matters6.
As indicated above, the Corporations Act empowers ASIC to exclude a body from being able to rely on the reduced disclosure requirements, if it is satisfied in the previous twelve months that certain provisions within the Corporations Act have been contravened including failure to:
(a) lodge financial accounts under Part 2M;
(b) abide by the continuous disclosure regime within the Corporations Act;
(c) correct a defective secondary sale notice; and
(d) rectify a defect in a disclosure document pursuant to the relevant provisions of the Corporations Act).
Liability exposure under a rights issue prospectus will arise under the Corporations Act and the common law7 for the issuing company, its directors and other persons involved in its preparation and issue.
In summary, the issuing company (and any person involved in any relevant contravention) may be exposed to:
(a) criminal liability8 in respect of misleading or deceptive statements, the omission of prescribed information in the prospectus, or the failure to disclose the occurrence of a new circumstance that would have required disclosure in the prospectus had the circumstance arisen prior to lodgement (each a Liability Event). However, liability only arises if the Liability Event is materially adverse from the point of view of an investor; and
(b) civil liability9 if any person suffers loss or damage caused by a Liability Event.
Liability under the Corporations Act is subject to the defences set out in sections 731, 732 and 733 of the Corporations Act.
Corporations Act Defences
Liability under the Corporations Act arising out of the use of disclosure documents is subject to three categories of defence contained within the Corporations Act being:
(a) A general due diligence defence;
(b) The absence of knowledge defence in respect of information statements and profile statements; and
(c) The reasonable reliance defence.
All categories of persons involved in the preparation and issue of a prospectus may avoid liability, to the extent that they can show they took reasonable precautions to avoid a statement either being misleading or deceptive or for a document to contain an omission. Under the due diligence defence, it is necessary to show that the person made all reasonable inquiries and reasonably believed there was no omission or that the statement was not misleading or deceptive.10
As a rights issue offer is by way of a short form prospectus, in our opinion the normal due diligence inquiries required will not be as onerous or rigorous as would be the case with a full prospectus. This is because the mandatory content requirement of a short form prospectus focuses upon a much narrower range of content than for a full prospectus issued pursuant to Section 710 of the Corporations Act. We consider that the scope for a disclosure document being misleading or deceptive or containing an omission of that kind where the content is narrower, is itself necessarily reduced.
When advising a company in relation to the preparation and distribution of a rights issue prospectus, we recommend an appropriately tailored due diligence program be established to give the company and its directors the utmost protection under the due diligence defence.
Lack of Knowledge Defence
Under the lack of knowledge defence, a person is exonerated from liability for contravening section 728 in respect of offer information statements and profile statements only, if they can show that a misleading or deceptive statement or an omission arose without their knowledge. This defence will therefore, not be relevant to the short form prospectus.11
Reasonable Reliance Defence
Supplementing the other defences, is the reasonable reliance defence which enables a person who participates in the issue of a prospectus to avoid liability if that person can prove that, notwithstanding the existence of a misleading or deceptive statement or an omission from a prospectus, the person placed reasonable reliance on information given to them by an adviser.
This defence is not available:
(a) to the issuing company, if the reliance was on information provided by a director, employee or agent of the issuing company; or
(b) in the case of all other persons, if the reasonable reliance is on information given to that person by an employee or agent of that person.
Accordingly, a person is not able to use this defence where the information was provided to them by, for example, an employee geologist or in-house counsel.
Further Corporations Act Liability – Statements Outside of Prospectus
The SRS Bill is proposing that rights issue for quoted securities do not require the offer being made under a prospectus. It is therefore necessary to consider the consequential liability under the Corporations Act arising out of statements or information about a company's securities made outside of a prospectus.
The Corporations Act imposes both criminal and civil liability12 on a person making a statement which is false in a material particular or is material misleading and which:
(a) is likely to induce other persons to apply for securities; or
(b) is likely to induce other persons to acquire or dispose in those securities,
if when making the statement (or disseminating the information), that person either:
(c) did not care whether the statement or information was true or false; or
(d) knew or ought reasonably to have known that the statement was false in a material particular or materially misleading.
The Corporations Act also imposes civil liability13 for misleading or deceptive conduct in relation to securities of a company.
There are defences in the Corporations Act to liability for a civil penalty if the person potentially liable acted honestly and in the opinion of the court, ought fairly be excused. Given the broad wording of this defence, this defence is purely discretionary.
Common Law Liability
The issuer of a disclosure document (such as a rights issue prospectus) may be subject to various common law heads of liability. In our view it is more likely that any actions against the company or those persons involved in the issuance of a disclosure document would be taken under the Corporations Act. Moreover, whilst the due diligence defence is not a defence to common law liability, the due diligence undertaken would be of assistance to persons associated with the issue in defending any such allegations of liability.
Due Diligence Programme for Rights Issue Prospectus
Given the restrictions imposed on the issuance of a rights issue prospectus and the corresponding liability associated with issuing that document, we generally recommend to any issuing company that it is prudent for its board of directors and management to adopt and complete a limited due diligence programme. Such a programme would be on a smaller scale to say, a due diligence programme required to be completed as part of a company's initial public offering and would be specifically designed to address whether the company in question can safely issue a short form rights issue prospectus and in turn rely on the short form prospectus provisions contained within the Corporations Act.
In general, we would recommend that an audit be conducted in respect of disclosure made by the company over the past twelve months to ensure that it has adequately discharged its continuous disclosure obligations under the ASX Listing Rules and Corporations Act.
We would recommend that this audit programme involve, at a minimum, the following procedures:
(a) Being satisfied that the Company has not contravened any or all of the provisions in relating to financial reporting, continuous disclosure, defective secondary sale notices or defective disclosure documentation with a view to:
(i) ensuring ASIC has no potential to exclude the company from utilising the reduced disclosure requirement; and
(ii) including any information material which is otherwise within the rights issue prospectus that has previously been excluded from any ASX disclosure;
(b) Being satisfied that the company has complied with its continuous disclosure obligations over the past twelve months by conducting a review of the company's ASX disclosures against the company's files and directors' minutes;
(c) Confirming with the company's auditors that in respect of financial reporting in the past twelve months prior to the issue of any new prospectus, that nothing came to their attention which would give rise to non-compliance with Chapter 2M (financial reporting) on the part of the company; and
(d) In respect of any prospectus raising (or other share issue) in the past twelve months, being satisfied that there was no suggestion of non-compliance with Sections 724 (secondary sale notification) or 728 (defective disclosure documentation) of the Corporations Act.
ASX Listing Rule Considerations
Companies availing themselves of the continuously quoted short form prospectus requirements are necessarily listed on the ASX and are therefore subject to the Listing Rules of the ASX.
ASX Listing Rule 7.1 prohibits a listed company from issuing or agreeing to issue more securities than the number calculated in accordance with a formula set out in that ASX Listing Rule. That formula effectively prohibits the issue of equity securities (including shares and options to subscribe for shares) exceeding 15% of the number of issued ordinary shares in the company, in any twelve month period (the 15% Limit) unless prior shareholder approval is received.
ASX Listing Rule 7.2 contains a number of exceptions to Listing Rule 7.1 including an issue:
(a) to shareholders under a pro rata rights issue14;
(b) under an underwriting agreement to an underwriter of a pro rata rights issue15; and
(c) to make up the shortfall under any pro rata rights issue16. [To fall within this exception, the entity must make the issue within three months after the close of any rights issue offer and the directors of that offer must have stated that as part of the offer they reserve the right to issue the shortfall at their discretion. The issue price must not be less than the issue price at which the securities were offered under the rights issue.]
ASX Listing Rule 7.11 contains a number of general rules that apply to all pro rata rights issues and includes:
(a) A prohibition on changing the basis for any entitlements under the rights issued during the offer period;
(b) The issue price of each share must not contain a fraction of a cent;
(c) Generally, the ratio of securities offered must not be greater than one security for each security held17;
(d) The disclosure document, product disclosure statement or offer may allow offerees to subscribe for a greater number of shares than their pro rata entitlement only if:
(i) subscriptions in excess of the entitlements are made out of the shortfall;
(ii) for a renounceable offer, the entity complies with Listing Rule 7.1218.
SRS Bill mechanics
The Federal Government's Proposals Paper identified a number of issues relating to the regulatory regime governing rights disclosure, including:
(a) The use of a rights issue prospectus being superseded by other forms of fundraising with less disclosure requirements; such as a placement of shares to institutional investors which is able to be effected without a prospectus;
(b) Smaller shareholders are not generally able to participate in these placements and are not able to acquire shares at the discount typically offered under such an arrangement;
(c) A consequence of making an institutional placement is that existing members' governing rights issue disclosure are diluted and disenfranchised generally; and
(d) The requirement to produce a prospectus to effect a rights issue may lead to timing issues where the expedience of raising the capital is critical.
The Proposals Paper then recommends that the level of disclosure compliance be reduced by:
(a) Abolishing the requirement to issue a prospectus or PDS for a rights issue of continuously quoted shares or financial products; on the basis that the combination of the original IPO prospectus or PDS required to be issued on listing and subsequent market releases (to discharge an entity's continuous disclosure requirements) should ensure the provision of the appropriate flow of information to members to enable an informed decision making process under any rights issue offering; and
(b) Recognising, in some instances, a rights issue offering is a precursor to a significant transaction (where the raising of capital is a necessary requirement or pre-condition to that transaction proceeding) which may have not been fully disclosed to the market due to matters such as supposition and confidentiality. It would therefore be necessary to furnish the market with such information before a rights issue could proceed. The mechanism for achieving this disclosure as suggested under the SRS Bill is to provide a "cleansing notice" modelled on the requirements of Section 708A of the Corporations Act prior to the rights issue being made.
Cleansing Notice Requirements
The SRS Bill has indicated that any cleansing notice to be issued prior to any rights issue offering would be modelled on the requirements within Section 708A of the Corporations Act. On this basis, the requirements of such a cleansing notice would we suspect include the following:
(a) The issuance of such a notice before any rights issue offer document is distributed to a company shareholder;
(b) Provide a statement that any shares or other securities issued under a rights issue are issued without a disclosure document (such as a prospectus or PDS); and
(c) As at the date of the notice, the issuing company has complied with:
(i) the financial reporting provisions within Chapter 2M of the Corporations Act; and
(ii) its continuous disclosure obligations under the Corporations Act and Listing Rules; and
(d) Provide any additional information that:
(i) has been excluded from market releases to date under the ASX Listing Rules; and
(ii) investors and their professional advisers would reasonably require for the purpose of making an informed assessment of:
(A) the assets and liabilities, financial position and performance, profits and losses and prospect of the body; or
(B) the rights and liabilities attaching to the relevant securities.
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