The Situation: The Australian Securities and Investments Commission ("ASIC") recently released its latest Corporate Finance Update, which covers ASIC's M&A and fundraising statistics, an overview of relief applications and ASIC's key regulatory concerns in the corporate finance space.
The Result: ASIC reported a material increase in the fundraising activity in the period from July to December 2020 compared to January to July 2020. Over the equivalent period, ASIC saw an increased volume of M&A activity but marginally less aggregate value. ASIC also reported on its concerns with two recent scheme transactions, issued some reminders to practitioners and mentioned some recently introduced corporate governance measures.
Looking Ahead: Participants in control transactions should note the case studies mentioned by ASIC in the Update for ongoing and proposed transactions. Schemes of arrangement, shareholder intention statements and independent experts' reports continue to attract ASIC's attention.
ASIC's Capital Raising and M&A Statistics
Fundraising Activity. In the six months to 31 December 2020, ASIC saw a significant increase in the number of disclosure documents lodged by issuers (358 documents, $8.75 billion funds sought) compared to the six months from January to June 2020 (198 documents, $2.18 billion funds sought).
ASIC attributes the material increase to a large bounce in IPO activity ($5.41 billion, up from $132 million), as well as a range of other secondary offerings, including hybrids and capital notes.
M&A Activity. In the six months to 31 December 2020, ASIC reported 33 control transactions (20 takeover bids and 13 schemes), with an estimated aggregate deal value of $11.02 billion.
In contrast, in the six months to 30 June 2020, while under half the number of control transactions were recorded (15-being 10 bids and five schemes), the estimated aggregate deal value was higher-$14.43 billion.
ASIC observed a trend toward takeover bids and away from schemes of arrangement-this may be attributable to lower deal values (with schemes typically more popular for larger deals). It will be interesting to see whether this trend continues to be borne out in ASIC's future statistics.
Areas of Intervention and Concerns with Schemes of Arrangement
ASIC mentioned having actively intervened in two schemes. ASIC also raised issue with a fairness assessment by an independent expert in a related party transaction.
Re-Domicile Transaction. In a recent scheme of arrangement, GetSwift Limited ("GetSwift") sought to re-domicile from Australia to Canada by way of interposition of a new Canadian holding company above the Australian corporate group ("Holdco"). (Jones Day acted for GetSwift in respect of the re-domiciliation.) Notably, GetSwift was the subject of a class action and, separately, ASIC proceedings at the time of the scheme approval hearings. While ASIC opposed the scheme on the grounds that the re-domiciliation to Canada would materially prejudice the interests of GetSwift's contingent creditors, the court ultimately granted orders approving the scheme after accepting certain undertakings from GetSwift and Holdco.
In very broad terms, the effect of the undertakings was that, until such time as the class action proceeding and ASIC proceeding were resolved, Holdco will provide GetSwift with sufficient funds in order to discharge any penalties and monetary liabilities that may be ordered against it or otherwise fall due, to the extent GetSwift is otherwise unable to discharge those liabilities.
Communications with Members. In a recent trust scheme, ASIC intervened in an application for judicial advice by E&P Investments Limited ("RE") as responsible entity for Fort Street Real Estate Capital Funds I to IV ("Funds").
In Fort Street, a related entity of the RE made several communications with members of the Funds without them having been reviewed or approved by ASIC or the court. Despite the court noting significant concerns regarding this and other matters, ultimately the court granted the judicial advice sought in relation to implementation of the trust schemes. This case is a useful reminder that communications with members in relation to a scheme, whether a company scheme or a trust scheme, should generally be subject to review by ASIC and the court prior to the communication being made. Failure to do so may give rise to a risk that the integrity of the scheme voting process may be compromised.
Assessment of Fairness. Following on from ASIC's prior corporate finance update, ASIC has again taken issue with an independent expert's assessment of fairness. The transaction involved a related-party acquisition of shares in an unlisted foreign company ("Foreign Co") for scrip consideration in an Australian listed company ("Aus Co"). The expert originally reached a "fair" opinion by comparing the value of an Aus Co share before the acquisition, and the value of an Aus Co share following completion of the acquisition. ASIC's view is that the correct assessment of fairness is whether the value of the benefit being given to related parties (e.g. the number of Aus Co shares) exceeds the value of the assets being acquired (e.g. Foreign Co shares). Ultimately, the expert revised its opinion from "fair" to "not fair".
Statements of Intention
Statements of intention made by shareholders in connection with schemes remain on ASIC's radar. Where a shareholder's interactions with other shareholders involve more than mere "canvassing", the parties must ensure that no relevant agreement is entered into that could give rise to the parties obtaining a relevant interest in each other's shares.
In the example mentioned, a shareholder had previously stated that it would vote against a scheme but announced a change of stated intention at the same time as an increase in consideration was announced. ASIC was concerned that there was some form of agreement, arrangement or understanding between the parties regarding voting-with the risk of the acquirer obtaining a relevant interest in the shareholder's shares above the limits in section 606. ASIC requested the proponent of the scheme tag the relevant shareholder's votes at the scheme meeting, but ultimately did not object given the relevant shareholder's votes did not determine the outcome.
ASIC mentioned the following new corporate governance measures:
Combatting Illegal Phoenixing. New laws passed in February 2020 introduce new offences and grant ASIC additional powers to help combat illegal phoenixing activity. Notably, ASIC will no longer process resignations of directors of companies if they are the last remaining director on ASIC records, unless a company is being wound up.
Climate Change-Related Disclosure. As we indicated in February 2021, climate change disclosure is a key focus for ASIC. It features again in the Update, with ASIC noting the following obligations of all listed companies:
- Consider both physical and transitional climate risk;
- Develop and maintain strong and effective corporate governance, which supports prudent risk management;
- Comply with the law where it requires disclosure of material climate risk; and
- Where climate risk is material, consider the Taskforce on Climate-related Financial Disclosure recommendations when reporting.
Convertible Note-Control Implications. ASIC refused to grant relief to apply item 10 of section 611 to an entitlement offer of convertible notes. The refusal was on the basis that it was inconsistent with Chapter 6 in that it would enable a person to acquire convertible notes that, if converted, would have given the person a greater than 20% interest (without disclosing their effective interest until conversion).
Simultaneous Takeover Bids. ASIC granted relief from section 623 to facilitate an on-market and off-market takeover bid, so that the off-market bid was excluded from being a collateral benefit prohibited by section 623. The relief was granted on the basis that the simultaneous offers did not offend the equality principles of Chapter 6.
Three Key Takeaways
- Schemes of arrangement, shareholder intention statements and independent experts' reports continue to attract ASIC's attention-and this was shown again in the latest review period.
- While ASIC's statistics draw out a recent trend toward takeovers, it will be interesting to see if this is also reflected in ASIC's next round of statistics, noting that many scheme proposals have been announced to the market since December 2020 (the end of ASIC's review period).
- ASIC highlighted the taking effect of recent measures to combat illegal phoenixing, while also drawing further attention to climate change-related disclosure matters, which add to the raft of corporate governance relief measures that are the subject of ASIC's previous Corporate Finance Updates.
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