The Situation: The Australian Securities and Investments Commission ("ASIC") has released its quarterly report on its corporate finance regulatory activities for the third quarter of 2021. This update provides ASIC's observations on its public M&A deal statistics, outlines ASIC's recent concerns in M&A transactions and provides guidance to navigate these issues going forward.
The Result: ASIC reported that while the number of control transactions has remained consistent compared to the six months prior, the number of transactions has, unsurprisingly, increased markedly when compared to the first half of 2020. In terms of observed transactions, ASIC reported a more equal proportion of takeover bids vs. schemes of arrangement. ASIC's M&A priorities include: market integrity in relation to leaking or mishandling of information; target shareholders being provided with an opinion on an offer of stub equity and guidance on how to navigate foreign withholding tax requirements in a control transaction.
Looking Ahead: ASIC seems particularly focused on compliance, whether it is monitoring the market for insider trading or mishandling of information, or deep diving into documents to scrutinise if directors are following what ASIC considers to be best practice where there is an offer involving stub equity and the importance of observing the relevant foreign withholding tax requirements.
Observations on Public M&A Activity Based on ASIC's Reported Deal Statistics
ASIC has released its third quarter update on corporate finance regulatory activities. From an M&A perspective, the update includes ASIC's observations on its public M&A deal statistics, outlines ASIC's recent concerns in M&A transactions, and provides guidance to navigate these issues going forward.
In terms of ASIC's reported deal figures, key points include:
- ASIC recorded 33 independent control transactions for January to June 2021, which amazingly is the same number for the prior six months. However, as practitioners will have clearly observed, the aggregate value of these deals has increased substantially - by a multiple of nearly three times (from $11.02 billion for the period July to December 2020 to $30.29 billion for the period January to June 2021).
- In comparison to the first half of 2020, the period from January to June 2021 showed an increase of 220% in the number of independent control transactions.
- ASIC's statistics show a proportional shift during the period of January to June 2021 back in favour of schemes-this makes sense given the increased deal values. ASIC's reported statistics for period July through to December 2020, had shown a preference for takeover bids over schemes.
ASIC's Key Concerns and Areas of Focus in Public M&A
ASIC reminded listed entities and market participants to be vigilant in managing risks associated with leaking or mishandling information. Practical tips from ASIC, for listed entities involved in control transactions, include:
- Having a formal leaks policy which outlines steps to monitor and react to any leaks of proposed transactions;
- Requiring consultants and contractors to enter into confidentiality agreements;
- Having appropriate arrangements to handle inside information including on a 'need to know' basis; and
- Recording of whom and when inside information has been provided.
ASIC also suggests that advisers should have policies and controls in place to limit access to inside information of listed entities to those who require it.
ASIC will continue to monitor trading around significant market announcements to identify insider trading and other market misconduct.
Opining on Stub Equity Offered in Control Transactions
ASIC noted that it had identified a number of scheme booklets that did not include an opinion by an independent expert and target directors regarding scrip, notwithstanding the consideration payable under the relevant scheme included stub equity.
ASIC considers it best practice that the scheme booklet for control transactions involving stub equity clearly disclose:
- A valuation and opinion on the scrip by an independent expert and a recommendation on the scrip consideration by the directors or where the independent expert and directors do not provide such an opinion, the reason(s) for not including an opinion;
- The terms of the stub equity, including any mandatory custodial arrangements and securityholder agreement / arrangements;
- The rights and protections which will be available to target holders who elect to receive stub equity, compared with the rights and protections currently available from holding the target's securities; and
- The risks associated with accepting stub equity consideration.
Where the directors and expert provide an opinion in relation to other forms of consideration offered, ASIC advised that the scheme booklet should be clear that the opinion relates only to that form of consideration.
ASIC will continue to monitor stub equity offers and raise concerns with deficient disclosure.
Foreign Withholding Tax Requirements in a Control Transaction
Certain control transactions involving foreign parties may require the buyer to withhold a portion of the consideration to meet foreign withholding tax requirements.
ASIC emphasizes the importance of engaging early with the issue of foreign withholding tax, and gives the following guidance:
- The terms of any relevant tax arrangements should be sufficiently disclosed so that the target shareholders may examine if any foreign withholding tax obligations are applicable and the procedural requirements surrounding those obligations;
- The transaction documents must include appropriate provisions in relation to the foreign withholding tax arrangements between the parties and further, the parties must take steps to direct the target shareholders' attention to such provisions and ensure the shareholder has otherwise received a comprehensive explanation of such withholding tax arrangements;
- Keeping consistent and clear communications is vital, especially if certain target shareholders are required to provide documentation establishing their exemption from the foreign tax withholding arrangements and have not provided such documents before the deadline;
- Where agents have been engaged in schemes of arrangement to hold on trust any amount, such as the scheme consideration or the relevant withholding amount, it is important that an appropriate agreement is entered into with the agent to ensure the agent's obligations are binding and clear; and
- Any foreign exchange impacts, including their fluctuations, should be considered and prepared for when making payment to the relevant agents or when receiving refunds from the relevant foreign tax authority.
To ensure accuracy, buyers should obtain expert tax sign-off on descriptions of withholding tax obligations contained in transaction documents and other communications.
From our experience, target shareholders may need to obtain specific tax advice and/or engage with foreign tax authorities to understand withholding tax obligations and this can take time. Accordingly, engagement on these issues is best done as early in the process as possible so as to avoid unnecessary delays or roadblocks to deal completion.
ASIC Shows Flexibility by Granting Relief Against Takeover Requirements in a Unique Case
ASIC recently showed its flexibility in granting relief to allow a company to acquire an interest above the 20% takeover threshold, albeit in a very specific factual scenario.
In summary, a company ("Company A") sold one of its subsidiaries to a purchaser ("Company B") in return for an issue of shares in Company B. On the acquisition of those shares, while Company A's relevant interest in Company B would exceed the takeover's threshold, the shares would be held by Company A for only a short period of time in order for Company A to conduct an in-specie distribution of those shares to its holders.
ASIC granted relief based on the following considerations:
- The relevant interest acquired by Company A was temporary in nature and would not undermine any control in Company B, especially in a competitive, efficient and informed market;
- Company A was required to provide an undertaking enforceable by ASIC that it would not exercise, or seek to influence the exercise of, votes attached to the shares; and
- Company A was required by ASIC to take reasonable steps to ensure the shares were transferred to its relevant holders within three business days.
Four Key Takeaways
1. ASIC expects listed entities and their advisers to be vigilant in managing risks associated with leaking or mishandling information, which includes having appropriate policies and controls in place to limit and monitor access.
2. Scheme booklets for schemes with stub equity consideration should clearly and prominently disclose a valuation and opinion on the scrip by an independent expert and a recommendation on the scrip consideration by the directors; where no such opinions are included, the scheme booklet should clearly disclose the reasons for not including the opinions.
3. Foreign tax arrangements relating to a control transaction should be sufficiently disclosed to, and brought to the attention of, target shareholders to enable the holders to assess any tax amounts to be withheld and understand procedural requirements.
4. ASIC granted relatively novel relief to allow an entity to acquire an interest in an entity above the 20% takeover threshold where the interest was temporary, would not undermine any control in the entity that issues the shares, and would not require the approval of the issuing entity's shareholders.
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