New proposed guidance on collective action by institutional investors
ASIC’s recent publication of Consultation Paper 228 and proposed Regulatory Guide 128 (RG 128) appears to be an acknowledgment of the growing trend in Australia towards shareholder activism, which may include collective action by institutional or other major shareholders. At the same time, ASIC has confirmed its focus on balancing legitimate shareholder engagement, to support good governance, against the potential for shareholders to take steps to obtain control inappropriately (e.g. without paying a control premium).
RG 128 is a useful reminder of the key compliance obligations that apply to shareholders taking such action – with a focus on the substantial holder disclosure obligations and 20% takeover threshold in the Corporations Act – which place limits on the ability for shareholders to act as a collective.
Chapter 14 of The Chairman’s Red Book provides an overview of the takeover threshold test, including an explanation of the key concepts of relevant interest, voting power and associates, which may apply to shareholders taking an activist role or engaging in conduct which may amount to collective action. If the 20% threshold is exceeded, this will prevent the applicable shareholders undertaking a transaction which would further increase their voting power.
The substantial holder provisions apply where a person and their associates have a relevant interest in 5% or more of the voting shares of a listed company, after which time a person must provide a substantial holder notice to the market, together with further notices for any change of 1% or more in the person’s and their associates holding. These provisions do not prevent a person holding a 5% (or greater) interest, but rather require disclosure to the market if the threshold is exceeded.
As the relevant interest and associate definitions are broad in scope, there is the potential for the applicable Corporations Act provisions to apply to collection action that relates to corporate governance matters not necessarily undertaken for a control purpose.
ASIC has sought to provide clarity on shareholder conduct likely to be subject to greater scrutiny with the potential to give rise to unacceptable circumstances, despite not contravening the Corporations Act, including:
- conduct involving an actual or proposed control transaction
- replacement of directors (in particular with nominees representing the applicable institutional shareholders)
- actions or resolutions which would benefit only some (but not all) shareholders, and
- situations where the applicable collective of shareholders has a history of taking action together.
RG 128 also provides examples of where ASIC is more likely to consider that an arrangement results in applicable shareholders becoming associates, as against alternative scenarios where ASIC considers that an associate relationship is unlikely to be created.
For example, ASIC has indicated that shareholders who jointly sign a section 249D requisition notice, to replace certain directors, are likely to have entered into a relevant agreement which would make the shareholders associates. We would, however, be surprised if this is sufficient in the absence of other relevant factors (e.g. a history of prior dealings). Examples of where ASIC considers collective action is unlikely to result in shareholders becoming associates include shareholders holding discussions or exchanging views on a resolution, or disclosing their individual voting intentions for an upcoming shareholders’ meeting.
Although RG 128 is a useful reference tool for relatively complex provisions of the Corporations Act, it is invariably a grey area which will often turn on the facts. This is reflected by ASIC’s move towards case-by-case (rather than class order) relief for collective action that may breach the substantial holder and/or takeover thresholds, where ASIC is comfortable such action does not relate to obtaining control over the company.
ASIC has also highlighted some other applicable legal considerations in this area, which include:
- considering the application of the insider trading provisions – in particular, where certain parties have knowledge of a voting agreement, which may itself be price sensitive, but which is not known more broadly by the market
- potential for the creation of shadow directors – where a shareholder or shareholders are exerting significant influence on the conduct of the board through collective action, and
- broader considerations in relation to directors’ duties – which will be an interesting area to monitor going forward, having regard to the fine balancing act between directors potentially acting at the behest of one or more specific shareholders (and so not in the best interests of shareholders as a whole), versus the potential for directors to misuse their position and company funds by taking an overly defensive approach to collective action and other forms of shareholder activism.
It will be interesting to see feedback from stakeholders and industry groups when the consultation process ends next week, with the current proposal for RG 128 to be released in final form in June or July this year.