Last week, ASIC released Consultation Paper 159 Acquisitions approved by members: Update to RG 74 (CP 159), proposing a number of changes to its policy in relation to acquisitions of relevant interests under item 7 of section 611 (item 7) of the Corporations Act. Item 7 provides an exception to the takeovers prohibition where an acquisition of relevant interests otherwise prohibited by section 606 of the Corporations Act is approved by the target’s members in a general meeting.
A brief summary of the proposals contained in CP 159 is set out below.
Relief for trust schemes
Since RG 74 was last updated in 1994, there have been a number of relevant legislative amendments and market developments resulting in the use of item 7 to implement takeovers of listed managed investment schemes. Typically, this involves members approving the acquisition for item 7 purposes and approving changes to the constitution of the managed investment scheme so that the responsible entity of the fund has the power under the fund’s constitution to implement the transaction (ie. ‘trust schemes’).
In practice, the implementation of a trust scheme commonly gives rise to technical non-compliance with provisions of the Corporations Act. CP 159 contemplates that ASIC will generally be prepared to give the following relief (on a case-by-case basis and subject to policy considerations):
- relief for the responsible entity from Part 5C.6 (which deals with members’ rights to withdraw from a scheme), where the managed investment scheme is illiquid and the transaction involves a redemption of members’ interests in the fund;
- relief for the responsible entity from the equal treatment requirement in section 601FC(1)(d), where foreign holders are excluded from receiving scrip consideration; and
- relief for the parties from certain provisions in Chapter 7 (including those that would otherwise require provision of a Financial Services Guide (FSG) or an Australian financial services (AFS) licence).
Item 7 approvals are subject to certain voting restrictions set out in item 7(a). CP 159 suggests that ASIC will generally be prepared to give relief:
- to permit the counting of votes for shares held by a trustee or nominee for a beneficial holder who is not an associate of the trustee and who directs the trustee to vote in favour of the item 7 resolution; and
- from the voting restrictions where there is a commercial or legal reason why it is not practical to structure the offer as a takeover bid or scheme of arrangement and the transaction will not undermine the principles or protections of Chapter 6.
The second of the points above is particularly relevant to managed investment schemes. Where a trust scheme involves an offer to acquire the interests in the fund held by all members, none of the members will be permitted to vote on a resolution to approve the acquisition under item 7. CP 159 contemplates that ASIC will give relief to allow members who are not associated with the acquirer to vote on the resolutions, if it is satisfied that the protections and principles of Chapter 6 of the Corporations Act will not be undermined.
Additionally, CP 159 proposes to affirm existing case law to the effect that restricted persons may vote against (but not in favour of) an acquisition, and that associates of an issuer of securities may vote on the issue of those securities.
Item 7 approvals are also subject to certain disclosure requirements set out in item 7(b) and RG 74 already provides guidance on the information that must be provided to members in relation to an item 7 resolution. CP 159 proposes additional guidance in relation to:
- how item 7 disclosure can be made more ‘clear, concise and effective’ including, in particular, the disclosure of changes in voting power as a result of the item 7 acquisition;
- updating RG 74’s existing reference to a ‘fair and reasonable’ analysis so that it is consistent with ASIC Regulatory Guide 111 Contents of expert reports; and
- the need for supplementary disclosure where a change in circumstances occurs after dispatch of the notice but before the meeting is held, or – in some circumstances – a fresh item 7 approval where a change in circumstances occurs after the meeting but before the acquisition is completed.
Other proposed guidance
CP 159 also proposes guidance in relation to the period of time between provision of draft documents to ASIC for review, member approval and the item 7 acquisition.
ASIC is seeking comments on the proposals in CP 159 and the draft revised RG 74 attached to CP 159 by 1 August 2011. ASIC has stated that a revised RG 74 is expected to be released in late 2011 and, once released, we will include an update in a future edition of this newsletter.
This article is from our June 2011 edition of Mergers & Acquisitions newsletter.