Regulatory
developments

In the last several editions of the Australian ECM Review, we have discussed ASIC’s continued and heightened focus on disclosure documents containing statements relating to “net zero” emissions and other climate commitments, as well as ASIC’s consistent focus on potential greenwashing.

This trend continued in 2024, with significant developments in the Mercer, Vanguard and Active Super greenwashing claims referred to in the 2023 ECM Review. ASIC brought proceedings against each of these entities, alleging that they had made false and misleading statements and engaged in conduct that could mislead the public in relation to:

• in the case of Mercer, several of its sustainable investment options;
• in the case on Vanguard, certain environmental, social and governance (ESG) exclusionary screens applied to investments in a Vanguard index fund; and
• in the case of Active Super, the exclusion of various investments based on ESG considerations.

In 2024, ASIC was successful in the Federal Court in each instance, with considerable civil penalties awarded by the Federal Court against Mercer ($11.3 million), Vanguard ($12.9 million) and Active Super¹ respectively.

ASIC has remained focused on this area in 2024, issuing infringement notices to a variety of market participants for alleged greenwashing, including against Morningstar, Northern Trust and MSC.

On 14 November 2024, Treasury released for consultation the Treasury Laws Amendment (Enhanced Disclosure of Ownership of Listed Entities) Bill 2024 (the Bill), which contains reforms that propose amendments to the Corporations Act to increase the disclosure of ownership information for listed companies and to broaden ASIC's regulatory enforcement powers.

The current legislation is, at this stage, only an exposure draft. It has been the subject of a consultation process that concluded on 13 December 2024. The Bill, if passed as drafted, would mark a considerable departure from the existing position and have broad implications for the takeovers provisions in Chapter 6 of the Corporations Act (Chapter 6).

Treatment of Derivatives

The most significant changes proposed by the Bill would have the effect that derivative interests referable to securities of a listed entity will be deemed to confer a ‘relevant interest’ in those securities, regardless of whether the derivative counterparty has control over the underlying securities and regardless of whether the derivative is physically or cash settled. Under the current regime, the interest held by a taker of an equity derivative generally only constitutes a ‘relevant interest’:

• where the writer of the derivative already has a relevant interest in the underlying securities (with this interest generally consisting of the hedged position of the writer); and
• only to the extent that the derivative is physically (and not simply cash) settled.

While existing Takeovers Panel guidance generally means that derivative interests will need to be disclosed when the combined relevant interests and derivative interests of a person and its associates reaches the 5% substantial holder disclosure threshold, this is framed as guidance on what conduct may be ‘unacceptable’ within the Panel’s jurisdiction to address unacceptable circumstances, rather than blackletter law, allowing the Panel to take a common sense approach in terms of how to ‘count’ derivative interests, including taking into account both short and long positions. The Panel is also not prescriptive in how it would treat derivative interests for the purposes of the 20% takeovers threshold in section 606.

By contrast, the proposed changes would treat all derivatives, whether physically or cash settled, and whether or not the derivative writer holds a hedge, as conferring a relevant interest. This is a significant change and could result in a person’s deemed relevant interests, both for the purposes of substantial holder disclosure and the 20% threshold, extending to situations well beyond the current control-based test. The new test would also apply for responses to tracing notices and for notification of director relevant interests, and there are also other proposed changes to the substantial holder disclosure rules requiring more segmented breakdown of disclosure between the new categories of relevant interest.

In the context of ECM transactions, the expansion of the relevant interest concept may also increase the instances in which a secondary capital raising may result in shareholders exceeding the 20% takeover threshold, or shareholders already above the 20% threshold further increasing their stake. Where this is the case, this will affect matters such as determinations as to whether an ASIC nominee is required for the transaction in order to fall within items 10 or 10A of section 611 of the Corporations Act and disclosures as to the control effects of an entitlement offer. It may also be relevant to a shareholders’ analysis as to whether they are able to rely on the ‘creep’ exception in item 9 of section 611 in certain circumstances.

The changes also propose that ASIC may develop principles, which are not yet available, for determining the number of underlying securities that cash settled equity derivatives would be deemed to confer a relevant interest in. These will obviously be very important, as the terms of cash settled equity derivatives can vary widely.

Other Proposed Amendments

In addition to the changes to the relevant interest concept, the following changes are also proposed:

1. Tracing notices: The Bill would significantly broaden the persons to whom tracing notices can be issued under section 672A of the Corporations Act to include persons suspected on reasonable grounds of having relevant interests in, or having given instructions about, securities (including associates of such persons).
2. Foreign entities: The Bill would also extend the substantial holding and tracing notice provisions to cover ASX-listed foreign entities not incorporated under the Corporations Act.
3. Enforcement powers: The Bill also proposes to grant freezing order powers to ASIC, enabling it to freeze securities where, in the regulator’s opinion, a person has failed to comply with its substantial holding notice or tracing notice obligations.

On 17 September 2024, the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 (Cth) (Act) received Royal Assent. The Act requires entities already covered by the financial reporting provisions in Chapter 2M of the Corporations Act (and certain companies limited by guarantee) to include climate-related financial information and disclosure in a sustainability report.

Entities who fall within one of the three reporting groups will need to deliver their first report as follows:

• Group 1 entities: in respect of their financial year commencing during the period 1 January 2025 – 30 June 2026.
• Group 2 entities: in respect of their financial year commencing during the period 1 July 2026 – 30 June 2027.
• Group 3 entities: in respect of their financial year commencing during the period 1 July 2027 – 30 June 2028.

The requirements introduced by the Act came into force for Group 1 entities on 1 January 2025. The reporting obligations for Group 2 and Group 3 entities will be phased-in progressively in accordance with the dates above.

The Act will require entities to disclose information including:

• a climate statement containing:
  • the entity’s material financial risks and opportunities relating to climate;
  • any metrics and targets of the entity relating to scope 1 emissions (being direct emissions from business operations), scope 2 emissions (being indirect emissions from the generation of purchased or acquired electricity, heat, cooling or steam) and scope 3 emissions (being indirect emissions occurring either upstream or downstream in an entity’s supply chain); and
  • further information about the entity’s governance and strategy in respect of the risks, opportunities, metrics and targets required above.
• notes to the climate statement;
• statements prescribed by the Minister (and notes to those statements); and
• a directors’ declaration.

This disclosure set out in the climate statement will be supplemented by disclosure required by AASB S1 and AASB S2, which were both formally pronounced by the Australian Accounting Standards Board on 20 September 2024. While both standards cover sustainability-related disclosure, AASB S1 is a voluntary standard and AASB S2 is a mandatory standard. Generally speaking, AASB S1 and AASB S2 require disclosure of information (or provide guidance in the case of AASB S1 given its voluntary status) about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term.

In November 2024, ASIC released Consultation Paper 380 (CP380) along with draft regulatory guidance to provide some initial guidance to entities that must prepare a sustainability report under Chapter 2M of the Corporations Act. CP380 indicates that issuers of disclosure documents under Chapter 6D should consider whether sustainability disclosures need to be included in the disclosure document to ensure that the general disclosure test in section 710 is satisfied, including considering:

• providing an overarching narrative and analysis in the investment overview explaining the significance of sustainability related financial information within the broader context of the issuer’s corporate strategy, business model and prospects; and
• disclosing sustainability related financial disclosures in the business model and investment risk sections.

ASIC has noted that it will consider updating Regulatory Guide 228 (including undertaking consultation if required) in due course. Final responses to CP380 and its draft regulatory guide were received on 19 December 2024. While this consultation is ongoing, our concern with the guidance provided in CP380 and the proposed regulatory guide is that it may generate an expectation that all issuers will include sustainability related disclosure in a disclosure document, regardless of whether this disclosure is relevant, or in fact whether it would be information that investors and their professional advisers would reasonably require to make an informed assessment of the prospects of the entity. We are concerned that this may lead to some issuer’s including more generic disclosure to “tick the box”. We look forward to ASIC releasing further information on this developing issue.

On 12 August 2024, the government released its independent review of amendments made to Australia’s continuous disclosure regime by the Treasury Laws Amendment (2021 Measures No 1) Act 2021 (2021 Amendments). The 2021 Amendments introduced a fault element requiring proof that a listed entity or its officers had acted knowingly, recklessly, or negligently in connection with a breach of the entity’s continuous disclosure obligations. The review assessed the impact of this change, in particular, the impact on ASIC's enforcement capabilities and shareholder class actions.

The review made six recommendations, and the government will implement four of them, including to amend the Corporations Act to:

• remove the requirement (introduced by the 2021 Amendments) for ASIC to prove that the listed entity acted knowingly, recklessly or negligently in civil penalty proceedings for a breach of continuous disclosure laws (while retaining that proof requirement for private litigants and, by extension, for shareholder class actions); and
• address more fully how knowledge, recklessness and negligence are to be attributed to the disclosing entity.

While not yet formalised, these changes will mean that disclosing entities should continue their vigilance surrounding compliance with the continuous disclosure regime, as ASIC’s ability to prosecute breaches of the regime will be materially increased.

On 26 February 2025, ASIC released a discussion paper examining the dynamics between public and private markets in Australia. Read more about this discussion paper here.

Relevantly for ongoing regulatory developments in public markets, ASIC disclosed that it was exploring opportunities with the ASX to refine the listing pathway and listing rules.

ASIC further confirmed an increased focus on targeting leaks and media reporting ahead of fundraising, merger and takeover activities.

ASX currently follows a T+2 settlement timeframe, meaning securities transactions complete two ‘business days’ after the trade date. Corporate action timetables therefore include a 2-day ‘ex period’, with the ex-date and record date occurring on consecutive business days. In 2024, a number of global securities markets, including the US, Canadian, Indian, Mexican, Argentinian and Jamaican markets shifted to T+1 settlement, compressing corporate action timeframes so that the ex-date and record date occur on the same business day. The effect of this compression is that investors can acquire a security on-market up until the day before the record date and still own the security on the record date. A number of other securities markets around the world (including the UK, other European markets and Asian markets including Hong Kong, Singapore and Japan) have expressed an intention to transition to T+1 settlement in the next 1-3 years.

In line with this global shift, ASX has also signalled a potential movement from T+2 to T+1 trading for cash equities settlement. In April 2024, ASX published an industry Whitepaper seeking feedback from a range of stakeholders on the potential move and published the results of that feedback in August 2024.

We anticipate further updates from ASX during 2025.

Other ASX initiatives in 2024 included:

• continuing its focus on cyber risks and the governance implications for listed entities, in particular through amendments in Guidance Note 8 to include a detailed example on a theoretical data breach and ransomware attack to guide listed entities on best practice to ensure compliance with the entity’s continuous disclosure obligations; and
• confirming it will adopt a staged implementation of the CHESS replacement system and that it intends to proceed with its overarching approach of implementing a CHESS replacement across two main releases, with Release 1 delivering the clearing services and Release 2 focusing on settlement and sub-register functionality.