ASIC has published its latest report on corporate finance regulation in
Australia, recently releasing Report 612 ASIC Regulation of Corporate
Finance: July to December 2018 ("Report").
The Report provides provides a useful overview of ASIC's key observations and actions in the period from 1 July 2018 to 31 December 2018. It also forecasts ASIC's focus on corporate governance for the next six months. A copy of the report can be accessed here.
The Report includes key observations and analytics in relation to:
- fundraising activity, including disclosure inadequacies;
- public M&A activity, including the use of 'novel' consideration (stub equity); and
- corporate governance matters, in particular in the financial sector.
These are discussed in more detail below.
1 Fundraising
Activity Levels
In the period from 1 July 2018 to 31 December 2018 (“current period”), 296 disclosure documents were lodged seeking to raise approximately $7.6 billion. This compares with 229 disclosure documents in the period 1 January 2018 to 30 June 2018 (“previous period”), seeking to raise $8.6 billion. The current period saw a significant decrease in the value of the ‘top 10 fundraisings’, decreasing from $9.4 billion in the previous period to $5 billion in the current period.
Disclosure
The main fundraising disclosure concerns which ASIC raised in the previous period were again noted, however, in the current period fewer concerns were found overall. The top five concerns related to:
- inadequate business model disclosure;
- misleading or deceptive disclosures and misleading or unclear statements;
- unclear or insufficient detail on use of funds;
- inadequate or insufficiently prominent or not tailored risk disclosure; and
- lack of ‘clear, concise and effective’ disclosure.
In relation to financial information disclosure, ASIC noted the market practice in fundraising is often not to include extensive notes to financial statements, but rather to include disclosures about key ‘accounting judgments and estimates’ that have been made. ASIC are encouraging issuers to include this type of information to give investors greater insight into the financial statements. In addition, ASIC re-emphasised its position that forecast financial information requires reasonable grounds, the basis of which must be disclosed with clear evidence.
On-Market Buy-backs
ASIC has put a particular focus on on-market buy-backs, in response to some companies attempting on-market buy-backs which are non-compliant. In particular, they have focussed on block trades, trades with price improvement and out of hours trades which are not ‘on-market’ nor carried out ‘in the ordinary course of trading’. Companies are advised that if the buy-back is not compliant with these requirements, it may be a selective buy-back requiring shareholder approval.
2 Mergers and Acquisitions
Activity
ASIC reported that during the current period, there were 44 independent control transactions (“ICOs”) commenced. This is up from 29 in the previous period. These 44 ICOs were made up of:
- 22 transactions via schemes of arrangements;
- 20 transactions via takeover bid; and
- 2 transactions via trust scheme arrangement.
Overall, the ICOs commenced by a scheme of arrangements shows a higher value for each transaction when compared to the overall value of ICOs commenced by takeover bid. ASIC reports that overseas bidders or acquirers were again a party to many (41%) of the takeovers during the period.
Use of 'novel or complex consideration'
ASIC highlighted its interventions in matters where there was ‘novel or complex consideration’, including:
- the use of ‘stub equity’ (where shares in a proprietary company are offered as consideration);
- where there is a split consideration structure; and
- where management shareholders were able to elect to receive different consideration from other shareholders.
ASIC intends to issue a consultation paper seeking views on a proposed legislative instrument to prevent the use of ‘stub equity’ in the future, with this being a key area of concern for the regulator.
3 Corporate Governance
Climate Risk
Climate risk disclosure was highlighted in the Report, with ASIC reiterating their recommendations to listed companies made in Report 593 (Climate risk disclosure by Australia’s listed companies, September 2018), namely that companies and their directors should include climate risks when considering emerging risks.
Corporate Governance Taskforce
ASIC also provided an update on its Corporate Governance Taskforce, which will conduct reviews into director and officer oversight of non-financial risk as well as decisions regarding executive remuneration. Information requests have been sent to a number of large financial services entities, and the Taskforce is currently reviewing the information they have received. The final report on governance practices is expected in August 2019.
4 Key takeaways
The Report provides key insights into ASIC’s corporate finance activities during the current period. As expected, ASIC remains focussed on disclosure in fundraising, governance measures and procedural fairness and equality in M&A transactions. We expect these to continue to be major focus areas in the coming year.
Please contact Rohan Harris or Rory Maguire from
our Corporate & Commercial team if you would like to learn more about the
Report, or if you would like any further information regarding corporate
regulatory and governance matters.
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