ASIC’s views on stub equity: one year into new rules

One year after adopting new rules for stub equity scrip consideration in takeovers and schemes, ASIC has emphasised its view that target directors and experts should be including a recommendation or opinion on stub equity scrip consideration or giving reasons why no opinion is provided.

IN BRIEF

• ASIC has provided guidance on its view of best practice disclosure for stub equity arrangements.
• ASIC’s view is that target directors and experts should include a recommendation or opinion on stub equity scrip consideration or an explanation as to why no opinion is provided.

BACKGROUND

Last year, ASIC adopted new rules regarding stub equity offers in takeovers and schemes, banning the use of proprietary companies in stub equity deals but allowing stub equity to be offered in Australian public companies with compulsory custodian arrangements (subject to anti-avoidance measures to prevent the proprietary company restriction being circumvented).

DISCLOSURE BEST PRACTICE

A year on, and following a number of stub equity transactions in the market under these new rules, ASIC has used its latest Corporate Finance Update to restate its view on best practice disclosure of stub equity arrangements.

ASIC has confirmed its position that:

• target company directors should include a recommendation, and the expert (if applicable) should include a valuation and opinion, on the stub equity scrip consideration, which should be clearly and prominently disclosed in the scheme booklet;
• the disclosure document should clearly set out the terms of the stub equity (including any mandatory custodial arrangements and securityholder agreement), the rights and protections available to target shareholders who elect to receive stub equity (compared with the rights and protections currently available), and the risks associated with accepting stub equity consideration; and
• where the directors or expert do not provide an opinion on the stub equity scrip consideration, the reasons why no opinion is provided should be clearly disclosed.

Stub equity provides bidders and target shareholders a choice between a cash exit and continued exposure to the target business, as well as greater structuring and funding flexibility. Following the adoption of the new ASIC rules on stub equity scrip, the market continues to see stub equity transactions, which are often complex and subject to various market and transaction-specific factors. In this context, it may not always be possible for directors and experts to provide a recommendation or opinion, and it will be important for disclosure documents to address the reasons for this to meet ASIC’s expectations on disclosure.