ASIC has restricted certain ‘stub equity’ offers to retail investors in takeovers

Background

On 22 September 2020, ASIC executed ASIC Corporations (Stub Equity in Control Transactions) Instrument 2020/734 (Instrument 2020/734) to modify the Corporations Act 2001 (Cth) (Corporations Act) to prevent stub equity offers of scrip in a proprietary company being made to large numbers of retail target holders in takeover bids and schemes of arrangement.

In June 2019 ASIC issued a consultation paper seeking feedback on proposals to address concerns with offers of ‘stub-equity’ to retail investors in control transactions (Consultation Paper 312). Instrument 2020/734 is the result of this year long consultation process.

Modifications

In Consultation Paper 312, ASIC proposed two legislative instruments to modify:

  • (Modification One) Chapter 6D so that the disclosure exemptions in sections 708(17) and 708(18) of the Corporations Act do not apply to offers of securities in proprietary companies; and
  • (Modification Two) Chapter 6 so that the exemptions in items 1–4 (takeover bids) and 17 (schemes of arrangement) of s611 are not available where securities are offered as consideration on terms that require the securities to be held by a custodian and/or subject to a securityholder agreement or similar arrangement, where doing so results in the issuer avoiding the application of:
    • the shareholder limit in s113(1);
    • s606; or
    • the disclosing entity provisions in Pt 1.2A

In ASIC Report 669: Response to submissions on CP 312 Stub equity in control transactions (Report 669) ASIC addressed submissions from various stakeholders in relation to the proposed modifications. ASIC noted that while Modification One may result in an increase in the use of foreign company vehicles, this risk may have been overstated in the submissions. ASIC went on to state that, on balance, it considered Modification One as an appropriate proactive measure to uphold the intention and function of section 113 rights and protections of retail security holders. However, ASIC has indicated that it will consider, and may provide, individual relief to permit offers of proprietary company securities on a case-by-case basis if it considers it is in the target securityholders’ interests to do so.

ASIC noted in Report 669 that many respondents to Consultation Paper 312 argued that there is no underlying policy that Chapter 6 and the disclosing entity provisions must be made to apply to offers of stub equity. Further, respondents to Consultation Paper 312 argued that Modification 2 would reduce competition in the market for control of entities and would deprive target security holders of a reasonable and equal opportunity to participate in benefits which might accrue through stub equity, contrary to section 602 of the Corporations Act.

In respect of Modification Two, ASIC acknowledged that the application of Chapter 6 and the disclosing entity provisions may give rise to nuanced considerations in the context of stub equity. ASIC stated that it would not be pursuing Modification Two at this time, but expressed concern that bidders may circumvent Modification One by, for example, making offers through a public company with mandatory custodial arrangements and converting to a proprietary company after the control transaction. To address these concerns, Instrument 2020/734 inserts a new section 615A so that where consideration includes securities in a public company held under mandatory custodial arrangements, items 1–4 and 17 in s611 only apply if the custodial arrangements contain ‘conversion and termination provisions’.

Stub equity offers going forward

As might be expected, ASIC has expressed that it will be monitoring stub equity offers and will raise questions where it has concerns in relation to an offer. Bidders should be aware of this increased scrutiny.

While ASIC reiterated the limitations of disclosure in relation to stub equity offers, it provides the following best practice guidance for disclosure:

  • the expert opinion on the offer should include a valuation and opinion on the scrip; and
  • the directors should include a recommendation on the scrip consideration,

and these should be clearly and prominently disclosed in the scheme booklet.

This article is part of the October 2020 Equity Capital Markets Bulletin, click here to download.


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