Treasury consultation on changes to disclosure of interests in listed entities

In brief

Treasury is consulting on amendments to the Corporations Act to:

• extend the concept of relevant interest to include equity derivative arrangements (consistent with the existing Takeovers Panel guidance);
• update when substantial holding notices need to be lodged (again, consistent with the existing Takeovers Panel guidance); and
• reform the provisions relating to tracing notices, notably, expanding who is required to respond to a tracing notice, and to grant ASIC the power to make freezing orders for non-compliance.

Key changes proposed in the Draft Bill

Changes relating to equity derivatives

Currently, the Corporations Act only requires disclosure of an equity derivative when it confers a right to acquire the underlying securities. Despite calls for law reform since the late 1990s, a cash-settled derivative is strictly not covered by the legislation.

To overcome this lacuna, the Takeovers Panel released guidance stating that it expects persons to make public disclosures where the long position of a person and their associates under such arrangements:

• cover 5% or more of the voting power in an entity; or
• having such a position, it changes by at least 1% or falls below 5%,

We reported on the latest version of Guidance Note 20 shortly after its release in 2021 (link to article).

The Draft Bill largely codifies the principles in Guidance Note 20 by extending the concept of relevant interest to include cash-settled equity derivative arrangements.

In calculating the extent of a person’s relevant interest under such arrangements, the Draft Bill contemplates that, for physically settled derivatives, this would include the number of securities that would be acquired under the derivative, less the securities they already have a relevant interest in under section 608(8). There is no detail for how a person’s relevant interest is to be calculated for cash-settled equity derivatives, other than stating that ASIC may determine this method. Treasury has sought input on this point in its consultation questions.

These amendments are relevant for a person’s compliance with:

• the 20% rule in section 606 of the Act; and
• the substantial holder disclosure obligations under Chapter 6C of the Act, which are discussed below.

Importantly, the Draft Bill excludes interests under equity derivatives in determining whether a bidder (and their associates) has a relevant interest of at least 90% in the securities in a bid class, for the purposes of the post-takeover bid compulsory acquisition provisions.

Updates to the substantial holder disclosure regime

The Draft Bill largely preserves the substance of the existing substantial holder disclosure regime while seeking to simplify much of the drafting.

Under the proposed new formulation, a person must lodge a substantial holder notice if that person (and its associates):

• begins to have or ceases to have, a substantial holding in a ‘Chapter 6C body’;
• has a substantial holding in a Chapter 6C body when it begins to be a Chapter 6C body;
• has a substantial holding in a Chapter 6C body and there is a ‘disclosable movement’ in the person’s holding; or
• makes a takeover bid for securities in the Chapter 6C body.

The new concept of ‘Chapter 6C body’ includes any of the following entities to the extent they are listed on an Australian market: companies, registered schemes, notified passport, other bodies whether incorporated/formed in Australia, or not.

The new concept of a ‘disclosable movement’ refers to changes of 1% or more in a person’s interests across four different categories of derivative arrangements.

The explanatory material for the Draft Bill (EM, link to EM) also foreshadows that ASIC will be making changes to the form of the existing substantial holding notices, presumably to accommodate for the added complexity in disclosing equity derivative arrangements.

The disclosure triggers above also clarify that a person with a substantial holding in an entity immediately prior to its listing has an obligation to disclose this holding by the specified time period following the listing.

Tracing beneficial ownership reform and ASIC’s new freezing powers

The Draft Bill includes some significant updates to the tracing notice provisions in Chapter 6C.2 of the Act.

Who can receive a tracing notice?

Currently, both ASIC and Chapter 6C bodies can issues the same tracing notices to:

• members of that Chapter 6C body; and
• persons previously named in disclosures in response to tracing notices.

The Draft Bill expands the potential recipients to also include persons that it suspects on reasonable grounds:

1. has a relevant interest in voting securities in the Chapter 6C body;
2. has given instructions about the acquisition or disposal of, or exercise of voting or other rights attaching to, securities in the Chapter 6C body; or
3. (for tracing notices issued by ASIC only) is an associate of a person to which i. or ii. applies).

Form of the tracing notices and the register

It is proposed that ASIC will prescribe the form of the tracing notice register.

The EM also suggests that ASIC will be updating the form of the substantial holder notice and tracing notice to better align for data collation purposes.

Access to tracing notice registers

Currently, Chapter 6C bodies must maintain a register of information it receives in connection with tracing notices which is accessible by members of those bodies for free, and by all others for a prescribed fee.

The Draft Bill extends this fee-free access to the registers to journalists and academics on the basis that these professions "play a key role in initiating and encouraging public debate”.

ASIC’s freezing orders

ASIC already has broad powers under sections 72 and 73 of the Australian Securities and Investments Act 2001 (Cth) to make orders restraining people from dealing in, or exercising of rights attaching to, securities if, in ASIC’s opinion, it has been unable to obtain certain information for the purposes of its investigations under the ASIC Act.

The Draft Bill largely replicates these existing powers and applies them to securities in Chapter 6C bodies, as well as including a new power to order a person to dispose of certain derivatives.

The threshold for ASIC to exercise these powers is simply if, in ASIC’s opinion, a person has failed to comply with Parts 6C.1 and 6C.2 of the Act, which contain the obligations for persons to lodge substantial holding notices and to respond to tracing notices.

Other changes

As noted above, the definition of Chapter 6 body includes foreign bodies listed on an Australian market. This means that both the tracing notice regimes and substantial holder disclosure regimes apply to such entities.

ASIC will have power to exempt foreign bodies from complying with its obligations under the substantial holding regime to the extent that it complies with equivalent obligations in the foreign jurisdiction. How this will work in practice is unclear.

Commentary

The proposed new provisions are complex and will have wide-ranging implications for market participants who buy and / or sell equity derivatives.

The concept of “relevant interest” has been used in our takeovers code for around 50 years and is widely understood in the market to denote a degree of control and ownership over particular shares. The proposed changes to the definition of relevant interest, whilst well-intentioned, go too far and will have unintended consequences which need to be addressed before the new law comes into force.

Deeming equity derivatives interests, which are not relevant interests in the traditional sense, to be relevant interests will:

• cause confusion for market participants, particularly retail shareholders and sections of the media, who will simply assume that all relevant interests are akin to beneficial interests; and
• create an incentive for bidders to use derivatives in takeovers to exaggerate their real interest in a target company to (i) create the impression of a done deal and (ii) seek to discourage rival bidders from emerging.

We do not object to the disclosure of equity derivative interests in substantial holder notices once the 5% threshold has been reached. However, they should be separately disclosed in substantial holder notices to clearly distinguish them from relevant interests in the traditional sense. This will assist market participants to understand the true nature of the extent of a person’s ownership of, and influence over, a particular listed company.

Further, the mere enhanced disclosure of equity derivatives does not justify an expansion of the 20% rule. We are of the view that equity derivatives interests, which are not relevant interests in the traditional sense, should not automatically count towards the 20% takeover threshold. The nature of many such equity derivatives is such that they simply do not confer the requisite degree of control or influence over shares (this is a fact recognised in the draft legislation which says such equity derivatives cannot be counted for the purposes of the 90% compulsory acquisition threshold).

Instead, the Takeovers Panel should be left to continue to regulate this issue. Under the current regime, the Panel can make a declaration of unacceptable circumstances (and appropriate remedial orders) if a person acquires an aggregate long position and relevant interest over 20%. However, the Panel has (rightly) stated that won’t automatically make such a declaration – it will take into account all the facts and circumstances.

The proposed changes will also have other unintended consequences. For example, many commercial agreements (eg leases, joint venture agreements, co-ownership agreements etc) contain change of control termination rights which were drafted using the existing definition of “relevant interest”. Expanding the definition of relevant interest could have severe unintended consequences under such contracts.

ASIC's proposed new ‘freezing powers’ in cases where there has been non-compliance with the expanded tracing notice provisions need to be subject to some limitations and oversight. For example:

• isolated non-compliance which has no impact on an 'efficient, competitive and informed market’ should not, of itself, justify a freezing order; and
• those who have been the subject of a freezing order should be able to apply to the Takeovers Panel to have the order set aside.

It seems the Government is determined to pass this new law before the 2025 federal election. It is proposed that there will be a 6 month period before the new laws operate. This is a very short period of time for market participants to put in place new information gathering and reporting systems to ensure they are able to comply with the new regime. By way of contrast, the Takeovers Panel gave market participants over a year to get prepared for the introduction of its revised Guidance Note 20.