ASIC increasing focus on shareholder activism in Australia

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.

Harper Review Final Report recommends significant new changes

The Commonwealth Government has been conducting a review of Australia’s competition laws to see if they are fit for purpose. (Click here to see what we had to say about the draft recommendations in The Handshake last October). The Minister for Small Business released the Final Report of the Competition Policy Review Panel on Tuesday (31 March 2015). While a number of the draft recommendations have made it into the Final Report, there are also some significant new changes. Some will fundamentally change the competition law landscape in Australia…if they eventually get into the legislation.

Government procurement

The Panel has recommended that all Government Procurement processes should be subject to competition law and promote competition. At the moment, competition law only applies to Government when it carries on a business. The Panel wants competition law to apply to Government whenever they are undertaking activity in trade or commerce. This will capture one-off transactions, and in particular, Government buying practices. For example, a contract with Government that contained anti-competitive exclusivity clauses would expose the parties to huge penalties if this change were made to the law.

Technology and disruption

The Panel has acknowledged that technology has often done more than competition laws and regulators to bring about competition in industries. A new killer app or device can completely up-end the competitive landscape, even in industries with market leaders who until then have had substantial market power.

In relation to the taxi industry in particular, the Panel endorsed the disruption caused by companies like Uber and essentially called for more of the same, rather than industry protection from disruption.

Key corporate reforms enacted as '100 member rule' finally abolished

On 2 March 2015, the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 (Cth) (Bill) was passed by the Senate and is now awaiting Royal Assent.

The Bill makes several significant changes to the Corporations Act 2001 (Cth) (Act) of which directors, shareholders and practitioners need to be aware. 

Abolition of the ‘100 member rule’

The Bill removes the ability for 100 or more of a company’s members to require directors to call and hold a general meeting at the company’s expense.

The so-called ‘100 member rule’ had previously been widely criticised on the basis that it allowed a very small proportion of a company’s members to disrupt management and impose significant transaction costs on the company even where the resolutions to be considered at a general meeting had little chance of being passed. 

The 100 member rule has not been abolished for managed investment schemes. 

Further, 100 or more of a company’s members are still able to:

• propose resolutions for inclusion on the agenda of general meetings, and
• require the distribution of statements, at the company’s expense, in relation to a proposed resolution or a matter that may be considered at a general meeting. 

The ability for members holding at least 5% of the votes that may be cast at a company’s general meeting to require directors to call and hold a general meeting also remains.

Reporting of executive remuneration

The Bill alters reporting requirements for executive remuneration in an effort to reduce compliance costs and red tape for companies. 

Unlisted disclosing entities no longer need to prepare a remuneration report.  While listed disclosing entities are still required to prepare a remuneration report, in relation to lapsed options, those entities are now only required to disclose the number of options granted to key management personnel as part of their remuneration that lapse during the financial year and the year in which the lapsed options were originally granted.

'Streamlining' amendments

Shortening the financial year

Under the Act, directors can reduce the ordinary 12 month financial year period for the company if the reduction is made in good faith in the best interests of the company, provided that the company’s financial year has not been shortened on that basis alone in any of the previous 5 financial years.

 

For the sake of clarity, the Bill states that, in determining whether a company’s financial year has been shortened in any of the previous 5 financial years, previous reductions of 7 days or less or that were required to synchronise the reporting period of controlled entities to provide consolidated financial reports (also allowed under the Act) are not to be considered.  

 

Auditors for companies limited by guarantee

The Bill clarifies that small companies limited by guarantee and companies limited by guarantee that elect to have their accounts reviewed rather than audited are not required to appoint or maintain an auditor.  This is a logical amendment consistent with provisions of the Act designed to reduce the regulatory burden on companies limited by guarantee.

 

Other amendments

The Bill also enables:

• the Remuneration Tribunal to determine the remuneration of the Chair and members of the Financial Reporting Council, the Australian Accounting Standards Board and the Auditing and Assurance Standards Board, and
• Takeovers Panel members to perform their functions while overseas.

Dividend requirements

The original exposure draft of the Bill contained provisions which:

• introduced a pure solvency test for the declaration and payment of dividends, and
• clarified that a company could make a capital reduction by way of a dividend payment, without the need for shareholder approval, so long as there was an equal reduction to all shareholders. 

Although these provisions were omitted from the Bill as passed, they are likely to be revisited by the Government after further consultation in the future. 

 

For further details on changes under the Bill, please refer to the recent article by Dr Kai Luck.

An overview of securities class actions

Since the first class action in Australia was brought in 1991, class actions have quickly become part of the Australian legal landscape.  Securities class actions in particular have become ‘big business’.  It is prudent now more than ever to review your governance procedures to mitigate the risk of a securities class action. 

A securities class action allows investors of an entity who share common ground for complaint to pursue a claim against the entity through a representative.  The popularity of such actions is at least in part because they allow investors to pursue a claim generally without risk to the investors of an adverse judgment, where they would not otherwise, individually, have the means for doing so.

In Australia, a class action may be brought by seven or more plaintiffs with claims arising out of the same or similar circumstances with a substantial common issue of fact or law – a relatively low threshold comparative to other jurisdictions.  Typically securities class actions are based on the argument that investors either:

• acquired or sold securities where they would not have but for the alleged conduct of the entity, or
• acquired or sold securities at a different price than they would have otherwise acquired or sold securities but for the alleged conduct.

These arguments are most frequently based on two causes of action, often pleaded together:

• misleading or deceptive conduct under section 1041H Corporations Act, by way of inaccurate or incomplete statements, or a failure to disclose or correct information in a timely fashion, and
• in the case of listed entities, breach of continuous disclosure obligations under section 674(2) Corporations Act and ASX Listing Rule 3.1, by way of a failure to disclose information where a reasonable person would expect that information to have a material effect on the price or value of securities in the entity.

Since 1999 there have been 30 securities class actions in Australia, of which only four have proceeded to trial and none to judgment.  Entities and their investors often elect to settle early due to the costs of litigation and the uncertainties as to the outcome of a judgment, particularly as the required evidence to establish causation in a securities class action has not yet been considered by the courts. 

A key feature of the Federal class action regime is that it is designed to allow an applicant to represent an ‘open class’ of investors without the need for investors to take steps to ‘opt in’ to proceedings.  Every person who satisfies the class definition as described in the originating process is represented in the proceeding subject to a right to opt out by a fixed date.  However, the inherent difficulties ascertaining the number of investors and the quantum of their cumulative damages means the open class model leads to a lengthy, uncertain litigation process.  The alternative approach adopted in some cases is a ‘closed class’ action, where the class is limited to those who have retained a specific law firm and/or entered into a funding agreement with a particular litigation funder.

Several circumstances have given rise to an increase in securities class actions in Australia.  Firstly, there has been an increase in the number of plaintiff law firms focusing on securities class actions, especially in the wake of a decline in personal injury practice following legislative reforms.  Secondly, there has been a steady increase in third party funding of securities class actions spurred by the High Court’s approval of such funding in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41.  Anyone can now fund litigation except the lawyers involved in the case, with IMF (Australia) Ltd, Legal Funding LLC, International Litigation Partners Pte Ltd and Harbour Litigation Funding facilitating some of the major class actions in the last decade.  Thirdly, there is a growing focus on private litigation as a means by which to enforce good corporate governance rather than relying on regulatory bodies.  Increased institutional investor participation, particularly in listed companies, will only heighten this focus.

Several entities have been the subject of multiple securities class actions, emphasising the need for entities to take precautions to protect themselves against the risk of litigation from investors.  Some common issues that have prompted securities class actions and that should be on the radar for entities include:

• lack of reasonable grounds for statements in financial reports about expected profitability of the entity ¹
• failure to properly disclose to the market the full extent of costs increases and delays associated with an entity’s projects²
• failure to disclose to the market the full extent of an entity’s debt obligations and refinancing options,³  and
• failure to disclose price-sensitive information relevant to an entity’s significant earnings downgrade.⁴

Securities class actions is a developing area of law that underlines the need for entities to be accountable to their investors.  Continuous disclosure obligations place listed entities in particular at risk of a securities class action and, as such, listed entities should have appropriate procedures in place to monitor and anticipate potential issues.  These procedures may include:

• maintaining an up to date, comprehensive and easily understandable continuous disclosure policy for the company
• establishing effective internal reporting networks to ensure price sensitive information is quickly communicated to the board, senior managers and other decision makers in the company, and
• ensuring that the board regularly considers information that may need to be disclosed to the market, such as by including continuous disclosure as a standing item on the board agenda.

 

1. Aristocrat; Sigma Pharmaceuticals; River City Motorway Group. 
2. Downer EDI; Multiplex.
3. Centro.
4. GPT.

Treasury invites feedback on crowd funding

Following on from our earlier posts (Australia has no time to waste in implementing crowd funding and Is crowd funding an alternative means for raising capital?) on crowd-sourced equity funding (CSEF), it is good to see that Treasury has recently released its discussion paper for further consultation.

Crowd-sourced Equity Funding – Discussion Paper, December 2014

Treasury has recognised that CSEF may present an important source of additional funding to promote innovation and productivity growth, particularly for small businesses and start-ups.  Treasury also notes (as previously suggested by CAMAC) that the current regulatory requirements present a barrier to the widespread use of CSEF in Australia.

Although a final decision has not been made on the preferred CSEF framework for Australia, Treasury is seeking feedback on potential CSEF models (and respective advantages and disadvantages of such models), including the model recommended by CAMAC in July 2014 reviewed in our last post, and the model that has recently been implemented in New Zealand which came into force in April 2014.  The discussion paper includes a useful comparison between these different models, such as the differing approach to individual investor caps.  The paper also provides an overview of considerations if the status quo is maintained.

The closing date for submissions is 6 February 2015 and we will be considering our responses, as well as any responses received from our clients, to the questions that have been raised by Treasury. 

Ben Wood

Publish what you pay: Australia's proposed mandatory anti-corruption reporting standards

In an attempt to eradicate bribery and corruption in the extractives industry, governments around the world, including the United States, Canada and the United Kingdom are introducing mandatory reporting requirements to increase revenue transparency and accountability for resource extraction companies.

The Corporations Amendment (Publish What You Pay) Bill 2014 (Cth) (Bill) sets the stage for Australia to formally align its governance standards with those of its closest allies.  If passed, it will require Australian-based extractives companies to report payments they make to governments on a country-by-country, project-by-project basis. 

The introduction of the Bill is consistent with Australia’s pilot of the Extractive Industry Transparency Initiative (EITI), a global benchmark which supports improved governance in resource-rich countries through the full publication and verification of payments to governments.

Who is affected?

The proposed legislation creates new mandatory reporting requirements for all ASX-listed companies, unlisted public companies, large proprietary limited companies, and controlled joint venture companies that are engaged in a resource extraction activity.  For the purposes of the Bill, ‘resource extraction activities’ include the following activities in relation to oil, gas, mineral mining and native forest logging:

• exploration
• prospecting
• discovery
• development, and
• extraction or logging.

What must be reported?

If the Bill is introduced, affected companies will be required to report any payment, or series of payments, of more than AUD$100,000 made to a domestic or foreign government (including an authority of, or a company owned by, that government entity) in relation to a resource extraction activity.

‘Reportable payments’ (including payments in kind) are broadly defined by the Bill and capture production entitlements, taxes, royalties, dividends, signing, discovery or production bonuses, licence fees, infrastructure improvements, social payments (e.g. payments relating to or given for community projects) and payments for security services.

To avoid concealment of smaller payments, the proposed Bill treats a series of related payments that together meet the threshold of AUD$100,000 as a single payment.

To comply with the reporting requirements, companies will be required to lodge an annual report with ASIC for each resource extraction project that the company is engaged in and for each government entity that the company makes a reportable payment to.  The specific details and rules surrounding the reporting requirements, however, are yet to be finalised.

The proposed legislation requires ASIC to make the company report available, free of charge, on its website not longer than 28 days after receiving it.

Penalties

A failure to take all reasonable steps to comply with or to secure compliance with these new financial reporting requirements will constitute a breach of the Chapter 2M of the Corporations Act 2001 (Cth) and will be subject to the civil penalty provisions of the Act.

Key takeaway

As a result of the heightened scrutiny of payments to governments globally, including with the proposed introduction of the Bill, Australian extractives companies should take a closer look at their existing anti-corruption policies and procedures to review their effectiveness.

Tiffany McLean

Ten tips for AGM season

With the AGM season in full swing, we felt it was timely to highlight some key considerations in the lead up to, and when conducting, your AGM.

While for many, conducting an AGM is a straight-forward process, there are times when contentious issues arise.  Set out below are ten tips for managing an effective AGM, and strategies for dealing with anticipated and unexpected issues.

1. Be prepared

By now the location and timing of the meeting will be set (see our earlier post: Time to start thinking about your AGM), but the preparations for the AGM will be ongoing.  In addition to addresses from the chairman and CEO, this may include preparing a chairman’s script for the formal part of the meeting and considering responses to key questions that may be asked of directors and management, and potentially the auditor.  Hot topics this year include:

• board performance and review processes
• excessive remuneration
• independence of directors - including long standing directors, substantial shareholders or those who have commercial dealings with the company, and
• effective contribution of directors who hold multiple board roles.

2. Review your meeting procedures

In addition to a refresher on some of the relevant provisions of the constitution; it is worth reviewing some of the general commentaries on procedures for conducting the meeting.  For example, the ‘rules of debate’ or procedural motions (see Chapter 11 of The Chairman’s Red Book) can greatly assist in managing questions and discussion at the AGM.  

3. Get to the point

The ‘point of order’ is a particularly useful tool for alerting the chairman to a matter requiring their attention or correction during the AGM.  It takes precedence over the discussion taking place and must be ruled on by the chairman immediately.  For example, alerting the chairman to a reference to a special resolution which is actually an ordinary resolution.

4. Take the AGM notice as read

It is generally no longer necessary to ask a shareholder to move a resolution and ask another to second the motion.  At the beginning of the meeting the chairman should confirm their intention to ‘take the notice as read (unless shareholders object)’.  This assists to streamline the consideration of resolutions. 

5. Understand the voting exclusions

Understand the voting exclusions that apply to each resolution under the Corporations Act, the Listing Rules (if applicable) and, potentially, the company’s constitution.  This is likely to be particularly important for the remuneration report (for a listed company) and other remuneration-related resolutions.  The chairman should be advised and understand who are the ‘key management personnel’ in the room excluded from voting on such resolutions.

6. Plan for spills

The remuneration report – although now a familiar process for many in the listed environment, for companies that may face a ‘second strike’ at the AGM, processes should be in place for considering and voting on a spill resolution at the AGM.

7. Disclose proxies

Monitor and disclose proxies as an early warning signal of a potentially contentious item of business.  Disclosure of proxy results (e.g. on a PowerPoint) can also assist in reducing protracted debate in the room (e.g. if it is clear that the proxies are overwhelmingly in favour).  This may also include engagement with voters in the lead up to the AGM, such as if the usual participants have not returned their proxies.  At the same time, knowing who is in the room is also vital, with voting more commonly conducted on a show of hands at the AGM.

8. Be prepared for a poll

For listed companies and large unlisted companies, your share registry should be on hand to assist with a poll, but it is also good for the chairman to understand when it is best for a poll to be called and the key steps involved in the process (e.g. the requirement for an adjournment for the poll to be counted).  The timing of the poll is often essential to ensure that shareholder engagement is maintained.

9. Consider the timing of questions

This may include taking questions as each resolution is considered, during or after the addresses of the chairman and CEO, and/or deferring to the end of the meeting.  Although shareholders as a whole should be given a reasonable opportunity to participate and ask questions at the meeting, the chairman should be wary of a shareholder that seeks to dominate proceedings and know when to bring an end to discussions or limit the number of questions.  A useful method can be to refer a shareholder to appropriate board members or executives for further clarification following close of the meeting.

10. Consider your compliance requirements

For listed companies, ensure any presentations or addresses are released prior to the start of the meeting and the results of the AGM made available as soon as practicable following the close of the meeting.

Finally, this year has illustrated the ongoing importance of engaging with institutions and their proxy advisers.  This is often left too late and can result in adverse ‘strikes’ on the remuneration report or votes against director re-elections.  Post-AGM may be a good time to review any proxy patterns and the quieter time between AGM seasons more conducive to constructive discussion.