The Situation: The Australian Securities and Investments Commission ("ASIC") recently released its quarterly Corporate Finance Update. Hot topics include Special Purpose Acquisition Companies ("SPACs"), electronic delivery of takeover documents and the importance of independent expert's reports for shareholder approved transactions.
The Result: SPACs remain ineligible for listing on the ASX, meaning that major legislative changes will be required before SPACs can come to Australia. ASIC also reports a rise in relief applications allowing electronic dispatch of Chapter 6 takeover documents, which is a welcome development for practitioners. And, ASIC provided guidance on when independent expert reports may be required for shareholder approved transactions.
Looking Ahead: SPACs are likely to remain in the sights of the key financial regulators the world over, while their financial merits also attract a range of views. The use of electronic communication methods in Chapter 6 takeovers will likely catch on—especially with the rebound in takeover activity in recent times, and we think the market would welcome a class order or other more permanent regulatory solution to facilitate electronic communication.
SPACs—Are They Coming to Australia?
Almost daily the financial and mainstream press reports on SPACs, with there being a divergence of views and storylines. Interestingly though, with the rapid rise in their popularity in the United States in particular, increased regulatory scrutiny and a broader commercial question about whether there are enough merger targets for SPACs means that we seem to almost be at an inflection point on SPACs.
These newly formed companies (with no assets or operations) which raise capital through an initial public offering, are unable to list on the ASX due to the Listing Rules restrictions on 'cash box' entities and ASX's requirements on the structural and operational requirements for a listed entity. So in that regard, the U.S.-style model is not readily able to be 'lifted' and transplanted to Australia without considerable changes to our laws and market operational matters.
ASIC says that it is continuing to monitor global regulatory developments, including in the United States, the United Kingdom and Singapore—and in that context, it has noted that increased regulatory scrutiny by the U.S. SEC may have been a factor which has contributed to a cooling in the SPAC market.
Despite the real regulatory challenges, here in Australia we are continuing to field queries from Australian targets, potential investors and corporate advisers around the different ways to play in the SPAC market. Our U.S. colleagues have seen a significant pause in new SPAC IPOs due in part to the increased regulatory scrutiny. That said, they observe that a significant amount of capital is available as the SPACs that went public in late 2020 and early 2021 continue to search for new targets. In the United States, we are continuing to watch for a rebound in the SPAC market, potentially with a more rigorous regulatory framework or otherwise enhanced investor protections.
Use of Electronic Communication Methods in Takeovers
Electronic Dispatch of Takeover Documents
Despite there being an established practice in schemes of arrangement to dispatch scheme booklets electronically (via emailing a hyperlink to a website where the scheme booklet can be accessed) to target shareholders who have provided an email address to the scheme company (with approval to utilise electronic dispatch forming part of the court order at the first court hearing), the Corporations Act contemplates that documents in relation to a Chapter 6 takeover (bidders and targets statements) are physically sent to shareholders.
In a pleasing development—and consistent with the other regulatory initiatives to facilitate the ease of doing business in light of COVID-19 disruptions—ASIC has been receptive to relief applications to allow parties to dispatch takeover documents electronically to shareholders. Our own experience with ASIC on this issue is that they have reacted quickly to these requests, particularly where genuine disruptions can be shown (e.g., border lock downs in a particular state potentially materially impacting on timelines).
Where parties to a takeover seek this relief, ASIC reminds parties the purpose of this relief is to facilitate electronic access to documents in lieu of hard copy. In that regard, the form of electronic communications should not be seen as an avenue to repackage or summarise information (e.g., how to accept or reject, or advantages and disadvantages) relating to the takeover bid. The electronic communication made to members should be limited to instructions to shareholders on how to access the electronic materials (with the common approach being to establish a 'transaction specific' website).
Electronic Acceptance of Takeover Offers
Separately—but keeping with the electronic theme—we have also seen a few examples of electronic (website based) acceptance of takeover offers. Although online forms for capital raising and also online voting for schemes of arrangement have been in use for some time, it seems that the trend of online acceptance for takeover bids is also catching on, given the real time saving advantages it provides.
Provision of Independent Expert's Reports for Member Approved Acquisitions
Independent expert's reports once again receive a mention from ASIC, although this time round, the focus is on when IERs should be provided.
- Defective directors' 'fair and reasonable' report replaced with an IER: Although the practice of directors providing their own 'fair and reasonable' opinion for the benefit of members is rare, ASIC cited a recent example in relation to which numerous concerns were raised. These included: questions about the directors expertise to express an opinion on financial and technical matters, the independence of one of the director authors of the report and reliance on industry experience of certain directors in relation to technical matters, despite those directors not having the appropriate technical qualifications. After ASIC's intervention, the company engaged an independent expert to opine on the transaction—which included a specialist technical report.
- Provision of IERs for the benefit of members: ASIC issued a broad reminder that, if members are being asked to approve the acquisition of a relevant interest (in this context, we assume ASIC is referring to, for example, a transaction involving a party acquiring >20% in another or increasing their holding from a starting point of >20%), then if members are not provided with an IER or a detailed directors' report on the transaction, this may be inconsistent with the directors' obligation to disclose all material information on how to vote on the resolution. ASIC go as far as to say that, if member approval is obtained without an IER or directors' report, then the approval may be invalid.
Three Key Takeaways
- Noting the current regulatory Australian restrictions on SPACs in Australia, ASIC is keeping a close watch on global regulatory and policy settings in relation to SPACs amidst a broader question of whether the SPAC market is cooling or just pausing for breath.
- Electronic communications methods in takeovers look to be gaining in popularity —with examples of electronic dispatch of bidder's and target's statements, and electronic acceptance facilities, emerging recently. Real time, cost and efficiency benefits exist from these developments.
- In circumstances where directors determine to produce their own report for members (rather than engaging an independent expert), these reports are likely to attract real scrutiny—with the technical expertise and independent of the authoring directors likely to be in ASIC's spotlight.
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