This quarterly bulletin from the Corporate team aims to bring you pertinent commentary on key issues and interesting cases in the areas of Takeovers, Initial Public Offerings (IPOs), Listing Rules and the Corporations Act.
ASIC AND ASX RELEASE TWO COMPANIES UPDATES
ASIC and ASX guidance on the disclosure of financial arrangements, margin loans and information on trading halt or suspension.
On 29 February 2008, in response to recent share market activity, and particularly to certain high profile share price volatility, ASIC and the ASX released two Companies Updates (02/08 and 01/08), dealing with:
- Disclosure obligations in relation to financing arrangements of entities and directors (especially directors' margin loans).
- Disclosure obligations on making a request to the ASX for a trading suspension and/or halt.
ASX Disclosure Rules
By way of background, Chapter 3 of the ASX Listing Rules contains the disclosure requirements for ASX listed entities:
- Listing Rule 3.1 requires any information concerning an entity that a reasonable person would expect to have a material effect on the price or value of the entity's securities to be disclosed to the ASX immediately.
- Listing Rule 3.1B provides that where the ASX considers that there is, or is likely to be, a false market in an entity's securities, the ASX can request certain information from the entity
- Listing Rules 3.19A and 3.19B require notifiable interests of directors (or changes to them) to be disclosed.
Update 02/08 intends to ensure that entities have in mind the disclosure obligations noted above where they enter into, or have in place, financing arrangements which include terms that may be activated by the occurrence of specific events (especially market events out of the entity's control). If applicable, the disclosure may be required to include details of the relevant trigger events. The Update also reminds listed entities that where a director has entered into a margin loan or a similar funding arrangement in relation to a material number of shares, the ambit of Listing Rule 3.1 may extend to a requirement to disclose the detail of such loans including, again, the trigger points.
Following release of the Update, it has been argued that the disclosure obligations referred to in this Update could actually be prejudicial to shareholder interests in the relevant company because such disclosure could invite 'predatory assaults' by short sellers of the relevant stock. The recent events involving ABC Learning Centres Limited and Allco Finance Group Limited are cited as examples of this phenomenon.
Those who warn of such 'predatory assaults' argue that although full and timely disclosure is advantageous in many circumstances, disclosure of trigger points could inform and alert short-sellers intent on driving down share prices.
There is also a question as to how far the disclosure obligation should extend. For instance, if a director has taken out loans otherwise than to purchase shares (for example, a home loan), and the loan is secured by the relevant company's shares, query whether the entity should be required to make a disclosure in respect of the loan in such circumstances.
Directors or entities with financing arrangements in place, the terms of which might be influenced by market activity, should carefully consider whether those arrangements might reasonably be expected to have a material effect on the price or value of the entity's securities. If so, they should consider whether a disclosure obligation has arisen, or might arise at some point in the future.
In Update 01/08, the ASX advises that it will insist that requests for halts and suspensions of trading in their securities be made in writing by listed entities. Significantly, the Update also provides that the written request must include information on the reasons for the halt and those reasons must be more specific than simply stating that the halt or suspension is required 'pending an announcement'. The Update gives a number of examples of what might amount to an acceptable level of disclosure, which include 'proposed acquisition/disposal', 'significant capital raising' and 'merger discussion'.
The Update seeks to address the improper use of voluntary trading halts and suspensions (eg to arrest a share price decline). At a practical level, entities must now be prepared to disclose more than might previously have been the case on making the relevant application to the ASX.
POWERS OF THE TAKEOVERS PANEL - AN UPDATE
On 31 January 2008, the High Court handed down its reasons for decision in the matter of Attorney-General (Cth) v Alinta Limited  HCA 2. This was a special leave application by the Commonwealth Attorney- General concerning a Full Federal Court decision that had cast significant doubt on the powers of the Takeovers Panel (Panel).
In summary, the Panel has the power to declare circumstances in relation to the affairs of a company to be unacceptable. However, it can only make such a declaration in the limited circumstances set out in section 657A of the Corporations Act 2001 (Cth). These circumstances include a contravention of Chapter 6.
The Full Federal Court held, by a 2-1 majority, that the Panel's power to consider contraventions was invalid as it amounted to a conferral of judicial power other than in accordance with Chapter III of the Constitution. In a unanimous decision, the High Court overturned the Full Federal Court, and strongly endorsed the Panel's continued existence as the primary body for resolving takeover disputes during the bid period.
Ideally, the High Court would have declared section 657A to be valid in its entirety (which was what the Attorney-General had originally sought). In confining the decision to the validity of the 'contravention' limb of the Panel's power, the door has arguably been left ajar for future challenges. Accordingly, constitutional issues are likely to be a feature of future judicial review of Panel declarations and orders. The matter of Rinker Group Limited 02R  ATP 19 (in relation to the takeover of Rinker Group Limited by Cemex Australia Pty Ltd), which is due to be heard later this year, may provide a further chapter in the Panel's continued development.
However, for the time being, the uncertainty surrounding the Panel and its powers has been put to rest, and the Panel remains the primary forum for resolving takeover disputes during the bid period.
HUMAN RIGHTS IN CORPORATE LAW
New human rights laws not only govern individual - government interaction, but could affect corporations and corporate officers.
Victoria recently introduced the Charter of Human Rights and Responsibilities Act 2006 (Vic), now in full effect. It follows a similar Act in the ACT. Both the ACT and Victorian Acts are based on similar human rights legislation overseas. The Rudd Government plans community consultations about implementing similar Commonwealth legislation.
Corporate officers, as individuals, may have access to a number of human rights under the ACT, Victorian and upcoming Commonwealth legislation. Of particular interest are the right to non-interference with one's privacy, family, home and correspondence, the right to equality before the law (non-discrimination) and the right to a fair hearing and related rights. The right against self-incrimination, for example, has been used by corporate officers in proceedings relating to share-trading, bankruptcy and insolvency and various corporate law offences in a number of jurisdictions.
Traditionally, human rights laws aimed to protect the rights of individuals in their interactions with government. However, in comparable jurisdictions overseas, human rights arguments have altered well-settled interpretations of legislation, including law applying to corporations. Also, similar legislation has often had a 'horizontal effect', having been used in litigation between private parties which does not involve individual - government interactions.
While most human rights laws only bind governments, some, including the Victorian Charter, can bind private corporations, defining them as 'public authorities' if they exercise 'functions of a public nature' on behalf of government (as in some privatisation or outsourcing situations). If corporations are 'public authorities', they are subject to the same obligations under the Charter as government, and thus the same litigation risks.
SIGNIFICANT AMENDMENTS TO NEW ZEALAND'S INSIDER TRADING LAWS
Significant amendments to New Zealand's insider trading laws came into force on 29 February 2008. As certain contraventions of the insider trading prohibitions could result in imprisonment, it is important that directors and senior employees of listed companies understand these amendments.
Further, there is no longer the 'safe harbour' defence for trading by directors and officers who follow an approved procedure and get the issuer's permission to trade. It is therefore important that listed companies put in place Securities Trading Policies to explain these laws and ensure compliance with these by staff and directors to minimise allegations of insider trading.
Offences of insider trading are no longer limited to those with a defined relationship with the issuer. Rather the focus is on whether the possession of inside information makes the person an information insider. A person is an information insider of a public issuer if that person:
- Has material information about that public issuer that is not generally available to the market.
- Knows or ought reasonably to know that the information is material information.
- Knows or ought to know that the information is not generally available to the market.
Material information is information about a public issuer that a reasonable person would expect to have a material effect on the share price of the issuer if it were generally available to a market.
An information insider must not do any of the following:
- Trade securities of the relevant public issuer.
- Disclose the inside information, whether directly or indirectly to another person, if it is known or expected that the person will trade, or hold securities rather than trading, as the case may be.
- Advise or encourage another person to do either or both of the above.
Directors and officers will therefore need to be satisfied every time they trade in securities that they do not have material information about their issuer or any other issuer that is not available to the market.
Please contact us if you would like advice on the new laws or our assistance with drafting a Securities Trading Policy.
CLOSER SCRUTINY OF RETAIL DEBENTURE OFFERS
The recent negative publicity surrounding certain managed funds has caused Australia's regulatory bodies to take a hard line approach to compliance, especially in the context of offers to retail investors.
Recently, ASIC has issued new policy in the form of regulatory guides to impose restrictions on the issue of unlisted, unrated debentures to retail clients, and to regulate the contents of debenture advertising.
Clients should be aware that disclosure documents, especially those available to retail investors, will be more closely scrutinised than previously, and that ASIC will require them to be withdrawn from offer if they do not comply with ASIC policy.
Issuers who do not comply with the advertising guidelines also risk action for misleading or deceptive statements or conduct.
Regulatory Guide 69 requires issuers of unlisted, unrated debentures to retail investors, to disclose the following benchmarks, or explain why disclosure is not made:
- Equity capital (financial structure and ability to meet loan obligations).
- Transparency of the issuer's approach to rollovers and redemptions.
- Credit ratings.
- The issuer's loan portfolio and lending practices.
- Related party transactions.
- Practices in relation to valuations.
- Loan to valuation ratios.
The new policy affects new issuers and disclosure documents from 1 December 2007. From 1 March 2008, existing users must report against the benchmarks by lodging a continuous disclosure notice with ASIC.
Trustees for debenture holders and auditors are also expected to use the benchmarks as a basis for determining whether the issuer complies with its statutory and contractual obligations.
Regulatory Guide 156 sets out standards for advertising all debentures that are offered to retail investors, including ASIC's expectations of answering telephone enquiries about debenture products. These standards relate to risk of loss of investment, disclosure of interest rates and credit ratings, comparisons with bank deposits and 'risk free' suggestions and consistency with disclosure documents.
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