The situation: The Australian Securities and Investments Commission (“ASIC”) has released its quarterly report on its corporate finance regulatory activities for the third quarter of 2021. This update provides ASIC’s observations on its public statistics on corporate finance. M&A transactions, describes ASIC’s recent concerns about M&A transactions, and provides guidance for dealing with these issues going forward.
The result: ASIC reported that while the number of control transactions has remained constant compared to the previous six months, the number of transactions has, unsurprisingly, increased significantly compared to the first half of 2020. In terms of observed transactions, l ‘ASIC reported a more equal proportion. take-over bids versus arrangement schemes. ASIC’s priorities for mergers and acquisitions include: market integrity in the event of information leakage or mismanagement; target shareholders receive advice on an interim capital offer and advice on how to navigate foreign withholding tax requirements in a controlling transaction.
Looking forward: ASIC seems particularly focused on compliance, whether it’s monitoring the market for insider trading or mismanagement of information, or delving into documents to check whether admins are tracking what the ASIC considers it best practice when there is an offer involving equity and the importance of complying with applicable foreign withholding tax requirements.
Observations on public M&A activity based on transaction statistics published by ASIC
ASIC has released its third quarter update on corporate finance regulatory activities. From a mergers and acquisitions perspective, the update includes ASIC’s observations on its public M&A statistics, describes recent ASIC concerns in M&A transactions, and provides guidance for handle these issues in the future.
When it comes to transaction figures reported by ASIC, key points include:
- ASIC recorded 33 independent oversight transactions from January to June 2021, which is surprisingly the same number for the previous six months. However, as practitioners will have clearly observed, the overall value of these transactions has increased dramatically – by a multiple of almost three times (from $ 11.02 billion for the period July to December 2020 to $ 30.29 billion). dollars for the period January to June 2021).
- Compared to the first half of 2020, the period from January to June 2021 showed a 220% increase in the number of independent control transactions.
- ASIC statistics show a proportional change over the period January to June 2021 in favor of programs, which makes sense given the increase in transaction values. Statistics published by ASIC for the period July to December 2020 had shown a preference for take-over bids over programs.
Main concerns and areas of interest of ASIC in public mergers and acquisitions
ASIC reminded listed entities and market players to be vigilant in managing the risks associated with information leaks or mismanagement. ASIC’s practical advice, for listed entities involved in control transactions, includes:
- Have a formal leakage policy that outlines the steps to monitor and respond to any leaks from proposed transactions;
- Require consultants and contractors to enter into confidentiality agreements;
- Have appropriate arrangements for dealing with inside information, including on a “need-to-know” basis; and
- Record of who and when inside information was provided.
ASIC also suggests that advisers put in place policies and controls to limit access to inside information of listed entities to those who need it.
ASIC will continue to monitor trade around significant market announcements to identify insider trading and other misconduct in the marketplace.
Opinion on the provisional capital offered in control transactions
ASIC noted that it had identified a number of plan passbooks that did not contain an opinion of an independent expert and target administrators regarding the scrips, although the consideration payable under the relevant plan included provisional own funds.
ASIC considers it good practice that the scheme booklet for control transactions involving parent funds clearly discloses:
- An assessment and opinion on the script by an independent expert and a recommendation on the review of the script by the directors or where the independent expert and the directors do not provide such an opinion, the reason (s) for which an opinion does not was not included;
- The conditions of the stock line, including mandatory custody agreements and agreements / arrangements with security holders;
- The rights and protections that will be available to the target holders who choose to receive provisional own funds, compared to the rights and protections currently available to hold the securities of the target; and
- The risks associated with accepting a counterparty in provisional equity.
When the administrators and the expert advise on other forms of consideration offered, ASIC has indicated that the program booklet should make it clear that the opinion relates only to that form of consideration.
ASIC will continue to monitor provisional share offerings and raise concerns about insufficient disclosure.
Foreign withholding tax requirements in a control transaction
Certain control transactions involving foreign parties may require the buyer to withhold part of the consideration to meet foreign withholding tax requirements.
ASIC stresses the importance of tackling the issue of foreign withholding as early as possible and advises on the following:
- The terms of any relevant tax arrangement should be sufficiently disclosed for target shareholders to consider whether foreign withholding tax obligations apply and the procedural requirements surrounding those obligations;
- The transaction documents must include appropriate provisions regarding foreign withholding tax agreements between the parties and, in addition, the parties must take steps to draw the attention of target shareholders to these provisions and ensure that the shareholder has also received a full explanation of this withholding tax provisions;
- It is essential to maintain coherent and clear communication, especially if some target shareholders are required to provide documents establishing their exemption from the withholding tax system and have not provided these documents by the deadline;
- Where agents have been engaged in schemes of arrangement to hold an amount in trust, such as the scheme consideration or the relevant holdback amount, it is important that an appropriate arrangement be made with the agent to ensure that the the agent’s obligations are binding and clear; and
- Any currency impact, including their fluctuations, should be taken into account and prepared when paying to the relevant agents or when receiving refunds from the relevant foreign tax authority.
To ensure accuracy, buyers should obtain expert tax approval on descriptions of withholding tax obligations contained in transaction documents and other communications.
In our experience, target shareholders may need to obtain specific tax advice and / or engage with foreign tax authorities to understand withholding obligations, which can be time consuming. As a result, it is best to engage on these issues as early as possible in the process in order to avoid unnecessary delays or obstacles to completing transactions.
ASIC demonstrates flexibility by granting exemption against takeover requirements in a single case
ASIC has recently shown its flexibility in granting relief to allow a company to acquire a stake above the 20% takeover threshold, albeit in a very specific factual scenario.
In summary, a company (“Company A”) has sold one of its subsidiaries to a buyer (“Company B”) in exchange for an issue of shares of Company B. When acquiring those shares , while the relevant stake of Company A in Company B would exceed the takeover threshold, the shares would only be held by Company A for a short period of time so that Company A could make a distribution in kind of these shares to its holders.
ASIC granted an exemption based on the following considerations:
- The relevant interest acquired by company A was of a temporary nature and would not affect any control of company B, in particular in a competitive, efficient and informed market;
- Company A was required to provide an enforceable commitment by ASIC that it would not exercise or seek to influence the exercise of the votes attached to the shares; and
- ASIC asked Company A to take reasonable steps to ensure that the shares were transferred to its relevant holders within three business days.
Four key points to remember
1. ASIC expects listed entities and their advisers to be vigilant in managing the risks associated with information leaks or mismanagement, which includes putting in place appropriate policies and controls to limit and monitor access.
2. Plan booklets for plans with a provisional capital consideration should clearly and prominently indicate an appraisal and opinion on the script by an independent expert and a recommendation on the consideration by the directors; where no such notice is included, the program booklet should clearly indicate the reasons why the notices were not included.
3. Foreign tax arrangements relating to a controlling transaction should be sufficiently disclosed and brought to the attention of target shareholders to enable holders to assess any amount of tax to be withheld and understand the procedural requirements.
4. The ASIC granted relatively new relief to allow an entity to acquire an interest in an entity above the 20% takeover threshold where the participation was temporary, would not affect the control of the entity. entity that issues the shares and would not require the approval of the shareholders of the issuing entity.