1. REGULATORY STRUCTURE
The Australian capital markets provide liquidity for domestic and foreign capital in the form of ordinary equity, debt securities, hybrid securities and interests in trusts and other recognised managed investment schemes. These instruments are regulated under the umbrella term ‘financial products’. The acquisition of financial products, the takeover of issuers and the operation of market participants is regulated under the Corporations Act 2001 (Corporations Act). The primary public market is the Australian Stock Exchange (ASX). There are approximately 1,930 domestic and foreign entities listed on the ASX with a market capitalisation of about A$1,103 billion.
The Australian Securities and Investments Commission (ASIC) is the regulator responsible for the administration of the Corporations Act.
A financial product is broadly defined and includes a facility through which, or through the acquisition of which, a person makes a financial investment or manages a financial risk (s763A). A person (the investor) will make a financial investment if:
Certain things are specifically included as financial products under the Corporations Act, such as shares in, or debentures of, a body corporate or interests in a managed investment scheme.
2. FINANCIAL SERVICES AND MARKETS
A foreign entity that carries on a financial services business in Australia will need to obtain an Australian financial services licence (AFS licence). The AFS licence must authorise the provision of the financial services to be provided.
Financial services are defined to include various activities such as dealing in a financial product, which in turn includes issuing, acquiring, disposing or varying financial products, or arranging for another person to do so. Generally speaking, a company will not be taken to be dealing in a financial product if the extent of the company’s dealing (ie, issue or disposal) is restricted to its own securities.
In determining whether a company carries on a financial services business in Australia, the Corporations Act focuses on whether the company’s activities are intended to induce people in Australia to use the financial services the company provides, or are likely to have that effect. This means, for example, that no physical presence in Australia is required for the AFS licence provisions to be triggered. Accordingly, unless the entity is covered by a specific exemption set out in the legislation or granted by ASIC, a foreign issuer may be required to hold an AFS licence depending on the nature and extent of its activities.
The Corporations Act also provides a checklist of exceptions which may be taken into account when determining whether an entity is carrying on a financial services business in Australia.
Where a foreign company is taken to be carrying on a financial services business in Australia, the company must also be registered as a foreign company. The registration is relatively straightforward and inexpensive. In order to be registered, the foreign company must lodge prescribed details and its constituent documents with ASIC.
All companies must set up and maintain a register of members. The register of members must contain details of each member’s name and address, and the date on which the entry of the member’s name in the register was made. The register must also show the date on which every allotment of shares takes place, the number of shares in each allotment, the shares held by each member, the class of shares, the share numbers (if any) or share certificate numbers (if any) of the shares, the amount paid on the shares, whether or not the shares are fully paid and the amount unpaid on the shares (if any).
Apart from the requirements to record details of shareholdings in the company’s register of members, there are no other requirements to register shares under the Corporations Act.
ASIC’s role in the Australian financial market is to act as a consumer and corporate watchdog. ASIC has broad powers to make orders stopping the issue or sale of securities to which a disclosure document relates, commence representative or class actions for the recovery of damages on behalf of investors, launch investigative proceedings and examine persons under oath in relation to a range of securities-related issues.
ASIC has the responsibility of protecting consumers in relation to financial products (including securities) and the provision of financial advice. For example, ASIC can take action in relation to unconscionable conduct, misleading or deceptive conduct and false or misleading representations, and instigate representative (or class) actions on behalf of investors for the recovery of damages or property.
ASIC is also responsible for issuing various licences under the Corporations Act, including AFS licences, and providing policy guidelines on the operation and interpretation of the Corporations Act.
The function of determining disputes arising under the takeover provisions of the Corporations Act is assigned to the Takeovers Panel (the Panel) and to no other body. Thus, only ASIC (or another public authority) has access to the courts during the takeover bid period – the bidder, target and other interested persons are effectively shut out.
The Panel is entirely separate from ASIC. The Panel’s main role is to hear and determine disputes in relation to takeover bids and proposed takeover bids in a timely and cost-effective manner. The Panel may declare the circumstances surrounding the takeover bid for the target company to be unacceptable. The Panel may also make wide-ranging remedial orders, for example, to protect the rights or interests of shareholders in the context of the takeover bid.
The Australian Stock Exchange Ltd (ASX) operates Australia’s primary national stock exchange for the transfer of listed equities, derivatives and other financial products. The ASX is also charged with responsibility for maintaining an orderly market by ensuring that all listed entities, brokers and other participants comply with certain market-based compliance obligations.
The ASX is also required to notify ASIC of any irregular or illegal trading activity such as, for example, insider trading or market manipulation.
The main operating rules of the ASX are the Listing Rules, which have the force of law. The Listing Rules have effect as a contract between the ASX and each participant in the market, and between a participant and each other participant, under which those persons agree to observe the Listing Rules and to engage in conduct required by the Listing Rules.
The Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) requires certain types of acquisitions, transactions and proposals which may give rise to a change in control of Australian assets or businesses, so that they become controlled by a foreign person, or by a different foreign person or foreign corporation, to be notified to and approved by the Treasurer. Proposals which the Treasurer considers contrary to the national interest will be prohibited. Alternatively, the Treasurer may not object to a proposal subject to conditions.
FATA provides for two kinds of notifications: compulsory notifications and voluntary notifications. Notification is made to the Foreign Investment Review Board (FIRB).
Generally, where a foreign corporation acquires 15 per cent or more of an Australian company with total assets of more than A$100 million (or A$831 million for a US acquirer), compulsory notification is required. The notice must be given to FIRB sufficiently early for a 40 day time limit to expire or the Treasurer to give his approval before the acquisition is completed.
Voluntary notices should be given in relation to transactions in respect of which the Treasurer has a power to prohibit or otherwise make orders, if he considers the transaction contrary to the national interest.
In administering FATA, the Treasurer imposes additional requirements for investment by foreign interests in the banking sector, civil aviation (domestic and international), media (broadcasting and newspapers) and telecommunications industries. Some of these industries are also affected by industry specific legislation. As well as complying with FATA, a foreign investor must comply with these additional requirements and industry specific legislation.
The Australian Competition and Consumer Commission (ACCC) is Australia’s principal consumer watchdog. The ACCC has wide-ranging powers to prevent or unwind mergers and acquisitions if the transaction would have the effect, or likely effect, of substantially lessening competition in a market. These powers extend to both Australian incorporated and foreign incorporated takeover targets, provided the acquiring corporation is incorporated in or carries on business in Australia.
The ACCC has power to authorise a merger or acquisition. The effect of an authorisation is that while the authorisation is in force, the person will be able to complete the transaction in accordance with the authorisation. It also has informal and formal merger clearance procedures. However, prior notification of a merger is not mandatory.
3. FUNDRAISING
In order to access capital from the Australian capital markets, the issuer will need to prepare a disclosure document. The type of disclosure document which must be prepared will depend upon the type of financial product being offered and the type of investor to whom it is being offered. Where an offer of a financial product is being made to persons including retail investors the disclosure document will need to be prepared in accordance with the Corporations Act and lodged with ASIC before the offer can be made.
Broadly, there are two main types of disclosure documents: a prospectus or a product disclosure statement (PDS). In the case of an offer of shares or debentures (including options) a prospectus is required. In the case of an offer of financial products other than shares or debentures a PDS is required.
A prospectus must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of:
A prospectus must also be worded and presented in a clear, concise and effective manner. The Corporations Act provides that instead of setting out information that is contained in a document that has been lodged with ASIC, a prospectus may simply refer to the document or part of the document, provided that sufficient information about the contents of the document is provided to allow a person to whom the offer is made to decide whether to obtain a copy of the document (or part). A prospectus which incorporates by reference another document is known as a short-form prospectus. Similarly, where the issuer’s securities have been quoted on the ASX for at least 12 months, the prospectus may exclude any relevant information which has been disclosed to the market through the ASX. This type of disclosure document is known as a ‘transaction specific’ prospectus.
It should be noted that an offer of securities for which a prospectus is being used must be made in, or accompanied by, the prospectus. Moreover, it is an offence to issue securities unless they are applied for on an application form that was issued in or together with the prospectus.
Defects in a prospectus may be cured by the lodgement of a supplementary or replacement prospectus. Copies of disclosure documents lodged with ASIC are generally available from various sources including ASIC, the ASX, and commercial information providers.
The PDS content requirements are set out in the Corporations Act and represent a different approach to disclosure from the prospectus content provisions. They are a hybrid between a check-list approach and the general disclosure model, effectively a combination of both.
In addition the PDS must be worded and presented in a clear, concise and effective manner and contain any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the financial product.
An issuer may only issue a financial product to an investor if the issue is made pursuant to an application made by the investor to the issuer and the issuer is satisfied that the application was made using an application form which was included in, or accompanied by the PDS, or was copied by the investor from a form included in, or accompanied by the PDS. Failure to comply with this requirement is an offence.
Lastly, an issuer can prepare a supplementary PDS to correct a defect in the PDS.
The Corporations Act prohibits the offer of financial products under a defective disclosure document and liability attaches to persons involved in the issue of a defective disclosure document.
A disclosure document will be defective if it contains a misleading or deceptive statement or omits information required to be included, or if a new circumstance has arisen since the disclosure document was lodged and information about that new circumstance would have been required to be included. Moreover, a person is deemed to have made a misleading statement about a future matter if the person did not have reasonable grounds for making the statement.
The persons who may be civilly liable for a defective prospectus include:
A person does not commit an offence and will not be civilly liable for a defective prospectus if they can prove that they made all enquiries (if any) as were reasonable in the circumstances and, after doing so, believed on reasonable grounds that the statement was not misleading or deceptive or that there was no omission from the prospectus in relation to that matter. This is known as the ‘due diligence defence’.
Further, a person will not commit an offence and will not be liable for a defect in a prospectus if they prove that they placed reasonable reliance on information given to them by a person other than their employees, agents or, in the case of companies, their directors – the so-called ‘reasonable reliance defence’.
Similarly, a person is not liable for a defective PDS if the person took reasonable steps to ensure that the PDS would not be defective. This is known as the ‘reasonable steps defence’.
The Australian market has a very formal approach to the due diligence required to prepare a disclosure document, primarily because of the availability of a due diligence defence.
The due diligence process involves the establishment of a due diligence committee whose members will include the persons involved in the preparation of the disclosure document (ie, the issuer, any underwriter and financial and legal advisers).
The role of the committee is to:
Generally, where an offer, or intended offer, of securities requires a prospectus, a person must not advertise or publish a statement which refers (directly or indirectly) to the offer except in very limited circumstances.
In practice, the restrictions placed on the marketing of a large offer can be significant (although ASIC has power to modify the application of the advertising restrictions). For example, unless modified, the general prohibition would prevent research reports about the offer or the issuer being distributed to institutions before the lodgement of the prospectus.
Advertising is usually permitted after the prospectus is lodged with ASIC provided the advertisement or publication includes a statement that:
For advertising or marketing that is conducted before the financial products are available for issue to retail investors the content requirements are very similar. However, advertising and marketing can only start when it is reasonably likely that the financial products will be so available. Any advertisement or publication is, of course, subject to the general prohibition against misleading and deceptive conduct.
Where an issuer proposes to offer debentures to retail investors, it must appoint a debenture trustee and enter into a trust deed which complies with the Corporations Act.
4. LISTING
For an entity to be admitted to the official list of the ASX, the entity must comply with the ASX’s conditions for listing including the conditions that:
To meet the profit test, an entity must satisfy each of the following key conditions:
To meet the assets test, an entity must satisfy the following key conditions:
For an ASX Debt Listing, the entity must satisfy the following key conditions:
A foreign entity which is listed on a recognised foreign stock exchange may apply to ASX for admission as an ASX Foreign Exempt Listing. To be admitted under this category, the foreign entity must:
Fees for admission to the official list of the ASX vary according to the value and type of security. For example, the fees for admission and quotation of equity securities range from A$13,310 for securities to the value of up to A$3 million, to A$287,540 for securities to the value of A$1,000 million (plus 0.01331 per cent on excess). Annual fees for equity securities range from A$7,450 for securities to the value of up to A$3 million, to A$103,790 for securities over A$10,000,000,001 (plus 0.000067155 per cent for any excess but capped at A$147,500).
5. ONGOING COMPLIANCE REQUIREMENTS
All disclosing entities (ie listed entities), public companies (whether listed or unlisted), large proprietary companies and registered schemes must prepare a financial report and directors’ report for each financial year in accordance with Chapter 2M.3 of the Corporations Act. The financial report must be audited and an auditor’s report obtained.
Disclosing entities must also prepare a financial report and directors’ report for each half year, have the financial report audited and obtain an auditor’s report, and lodge the financial report, the directors’ report and the auditor’s report with ASIC.
Under Chapter 6CA of the Corporations Act, a listed entity must comply with the listing rules of a listing market (ie, the ASX Listing Rules) by notifying the market operator of information about specified events or matters as they arise for the purpose of the market operator making that information available to participants in the market.
The type of information which must be disclosed to the stock exchange is information which is:
Similar provisions apply to a listed entity where the listing rules of the entity’s listing market do not require the entity to notify the market operator of information about specified events or matters as they arise for the purpose of the market operator making that information available to participants in the market.
Information is generally available if:
For the purposes of continuous disclosure under the Corporations Act, a reasonable person is taken to expect information to have a material effect on the price or value of listed securities of a listed entity if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the securities.
Under Listing Rule 3.1 of the ASX Listing Rules, once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.
However, Listing Rule 3.1 does not apply to particular information while all of the following are satisfied:
has ceased to be confidential; and • one or more of the following applies:
Any person who has a substantial holding of voting securities (currently five per cent or more of the total votes attached to all voting securities) in a listed company or listed managed investment scheme is required to disclose certain information about their holding to the company or the scheme’s responsible entity and to the ASX. These disclosure requirements are often referred to as the substantial holding notice requirements.
The particular circumstances in which a substantial holding notice must be provided are as follows:
The person must provide a substantial holding notice to the company or responsible entity of the listed scheme (as the case may be), and to the ASX, within two business days after the person becomes aware of any of the above circumstances occurring. Where a takeover bid is made for voting shares in the company or voting interests in the listed scheme, and the person becomes aware of either of the circumstances described in (a) or (b) occurring during the takeover bid period, the substantial holding notice must be given by 9.30am on the next trading day of the ASX.
Failure to provide the substantial holding notice within the time required is a criminal offence. In addition, a person who fails to provide the required substantial holding notice is liable to compensate a person for any loss or damage suffered as a result of the breach.
6. PROHIBITED CONDUCT
Insider trading in financial products is prohibited under the Corporations Act. Where:
the insider must not (whether as principal or agent) acquire or dispose of any securities of the entity or procure another person to acquire or dispose of any such securities.
The insider trading prohibition only applies if:
Breach of the prohibition against insider trading can result in criminal and/or civil liability. A successful prosecution for a criminal breach of the insider trading provisions could be punishable by, in the case of a body corporate, a fine up to A$1.1 million. In addition, the court has wide discretionary powers in an insider trading situation to make various orders including cancellation of agreements for the acquisition and disposal of securities. The party with inside information may also have civil liability to the other party to the transaction to account for the profits made, or losses avoided by the transaction.
The Corporations Act provides several exceptions to the insider trading prohibition including, for example, exceptions for underwriters, where an entity has Chinese wall arrangements in place and transactions entered into by holders of an Australian financial services licence; there is also a general defence for publishers.
A person is prohibited from taking part in, or carrying out (whether directly or indirectly and whether in Australia or elsewhere) a transaction that has or is likely to have, or two or more transactions that have or are likely to have, the effect of:
The prohibition focuses on the effect of the transaction(s) alone in creating an artificial price or maintaining an artificial trading price for the securities. No intention on the part of the person need be established in order to prove a breach of the Corporations Act.
7. MANAGED INVESTMENT SCHEMES
In Australia, the funds management (or managed investment scheme) industry is one of the fastest growing areas in the financial services sector. One of the key factors driving this growth is Australia’s retirement income policy, which requires employers to invest an additional 9 per cent of an employee’s income into pension funds known as superannuation funds. As at March 2006, consolidated funds under management have broken though the A$1 trillion mark and it is estimated that this amount will reach A$2.4 trillion by 2015.
In broad terms, a managed investment scheme is defined as:
The Corporations Act regulates the creation and operation of managed investment schemes.
A managed investment scheme must be registered (‘registered scheme’) if it has more than 20 members, or is promoted by a person who is in the business of promoting managed investment schemes, or is subject to an ASIC requirement that it be registered.
Each registered scheme is operated by a ‘responsible entity’, which must be a public company under the Corporations Act and hold an Australian financial services licence authorising it to operate a managed investment scheme. A responsible entity assumes the role of both trustee and manager, such that a single entity has overall responsibility for each managed investment scheme.
A responsible entity must operate a registered scheme in accordance with the scheme’s constitution and the Corporations Act. A responsible entity is accountable to members for the operation of the registered scheme.
A responsible entity and its officers are subject to statutory duties which include:
A responsible entity wishing to retire must call a members’ meeting to explain its reasons for wishing to retire, and the members must also be given an opportunity to vote on a resolution to choose a new responsible entity. Also, a responsible entity may be unilaterally removed by resolution of the members.
Each registered scheme must have a constitution that:
The constitution of a registered scheme can only be amended or replaced by special resolution of the scheme members or by the responsible entity if the responsible entity reasonably considers the change will not adversely affect members’ rights. A special resolution must be passed by at least 75 per cent of the votes cast by members entitled to vote on the resolution. The question of whether a change adversely affects members’ rights should be judged on the basis of whether it is adverse in a commercial sense. For example, an increase in the fees payable to the responsible entity is likely to constitute an adverse change.
Each registered scheme must have a compliance plan which sets out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Corporations Act and the scheme’s constitution, including arrangements for:
An interest in a managed investment scheme (whether registered or unregistered) is a financial product. Generally, any public offer of interests in a managed investment scheme requires the preparation and issue of a PDS.
Ordinarily, foreign fund managers who offer their products in the Australian market need to comply with Australian regulatory requirements. It is ASIC policy, however, to exempt the operators of foreign collective investment schemes (which may include mutual funds) from certain Australian regulatory requirements if the scheme operator comes from a market with similar regulatory regimes.
8. TAKEOVERS
In Australia, the basic position is that a person cannot acquire more than 20 per cent of the voting securities in a listed company or scheme without making a takeover bid (or satisfying another exception set out in the Corporations Act).
In Australia, there are four main ways in which a takeover of a listed company can occur:
Of the four methods, the most commonly used in Australia for listed company takeovers are the takeover bid (which can be used in both friendly and hostile takeovers) and the scheme of arrangement (which can be used only in friendly takeovers). This chapter deals with the takeover bid method in the context of listed companies.
The basic ownership restriction is that a person must not acquire a relevant interest in voting shares of a listed company or in voting interests of a listed managed investment scheme and, because of that acquisition, that person’s or someone else’s voting power in the company or listed scheme increases from 20 per cent or below to more than 20 per cent or from a starting point that is above 20 per cent and below 90 per cent.
There are exceptions to the basic ownership restriction, key of which is making a takeover bid in accordance with the Corporations Act. The other exceptions include:
There are two types of takeover bids available to intending acquirers/bidders:
The Panel has broad powers. Its primary power is to declare ‘unacceptable circumstances’ in relation to a takeover bid. The Panel has the power to make orders to protect the rights of persons (especially target company shareholders) during a takeover bid and to ensure that a takeover bid proceeds (as far as possible) in a way that it would have proceeded if the unacceptable circumstances had not occurred. In exercising its powers, the Panel must have regard to the policy principles governing the takeovers provisions of the Corporations Act, which are:
The Panel also has powers to review certain decisions of ASIC to grant exemptions or modifications to the takeover provisions.
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