Introduction
Get your 5 Minute Fix on the latest legal trends in corporate law, designed for busy NEDs, GCs, members of the C-Suite and corporate law enthusiasts. In this edition, we have a roundup of the fortnight's top topics, everything from regulatory changes to emerging best practices, giving you a comprehensive overview of what's happening in the world of corporate law.
If you want to dig deeper into any of the issues we cover, we're always here to help. So, don't hesitate to contact us for more information, and our team will be happy to provide additional resources and assistance.
Ring ring! The Federal Court calls for disclosure of shareholder communications in schemes
Attention all scheme of arrangement participants! The Federal Court of Australia (WA District Registry) has just issued an important reminder about your obligations to keep the court informed about substantive shareholder communications. In a recent judgment, Justice Banks-Smith raised concerns about telephone campaign communications with shareholders by corporate communication firms using call scripts that deviate from the information contained in the scheme booklet.
But don't panic just yet! Her Honour noted that the use of call scripts for the purpose of encouraging shareholder voter engagement is not a problem per se.
The key is ensuring that all shareholder communications are fair by keeping them balanced and consistent with the material disclosed in the scheme booklet, drawing shareholders attention to the independent expert's report, and strongly encouraging them to read that report in context with the scheme booklet.
Recent cases cited by her Honour have shown that a broad approach is taken, meaning that scheme participants must disclose the fact and nature of intended communications with shareholders for the first court hearing, regardless of whether a formal order approving any script or other communication is sought at that time.
So, what does this mean for scheme participants? This judgment (and the recent cases it cites) is a reminder for scheme participants to disclose all shareholder communications (including via social media and call scripts in telephone campaigns) before disseminating explanatory material to shareholders.
It's also a reminder that all substantive shareholder communications must be consistent with material disclosed in the scheme booklet, to avoid compromising the integrity of the scheme voting process. In short, any new or misleading information provided to shareholders after the despatch of the scheme booklet may provide grounds for the court to oppose the scheme at the second court hearing.
News from the Australian Securities Exchange: listed entities, listen up!
The ASX has just issued a stern warning: Fail to lodge your periodic financial reports on time, and you will be automatically suspended from trading. ASX will be strictly enforcing its Listing Rule 17.5.
This means that documents such as:
- Appendix 4D and half-year report (Listing Rule 4.2A);
- Appendix 4E preliminary final report (Listing Rule 4.3A);
- Change of balance date 12-month period (Listing Rule 4.4A);
- Annual financial reports lodged with ASIC (Listing Rule 4.5);
- Annual report (Listing Rule 4.7);
- Quarterly cash flow reports (Listing Rule 4.7B);
- Quarterly activity reports (Listing Rule 4.7C);
- Investment entity’s net tangible asset backing (Listing Rule 4.12); and
- Quarterly reporting for mining producing entities, oil and gas producing entities, mining exploration entities, and oil and gas exploration entities (Listing Rule 5.1, 5.2, 5.3, 5.4 or 5.5),
must be lodged on time to avoid suspension in trading.
In the past, ASX allowed a grace period for entities that submitted reports before the market opened the day after the due date and would not suspend them if they lodged their reports before the market opened the day after the due date. However, the ASX is no longer following this market practice, since the 31 January 2023 market update.
Why the change in policy? ASX recognises the need for timely information dissemination to the market, giving market participants sufficient time to consider periodic reports before the market opens the next day and make informed decisions. So, a one-day suspension will now be imposed which will allow for market participants' decision based on material information provided in a timely manner.
In summary, it's crunch time for listed entities. Make sure you lodge your periodic financial reports on time, or else you may face the consequences of being suspended from trading. Stay on top of your game and keep your investors informed.
Thinking of breaking free? Time to check the liability and termination clauses…
In a recent scheme of arrangement, the bidder found themselves caught in an unusual situation after receiving a non-binding takeover proposal conditional on the scheme not proceeding. This led to a disagreement over the termination and liability clauses in the scheme implementation deed (SID), with both the target and bidder seeking a resolution from the Supreme Court of New South Wales.
While the bidder subsequently rejected the takeover offer, the parties sought to clarify their respective positions in the hypothetical circumstance that the bidder breached (or indicated it would breach) the SID in order to pursue a competing offer.
In the matter of Pendal Group Limited, the bidder's interpretation that termination under the SID was the only remedy available to the target was challenged when the Court found that the target could potentially enforce compliance with the bidder's obligations under the SID in the event of a breach. The Court made it clear that the fiduciary-out clause did not relieve the bidder of all its obligations while the SID remained on foot.
The Court also ruled that liquidated damages may not be enough to compensate for the loss of opportunity for the target's shareholders if the transaction falls through.
While limitation of liability and liquidated damages clauses in M&A transaction documents usually limit financial liability to a capped amount (ie., a break fee), prospective scheme participants should not let their agreements be open to interpretation. Take heed of the Court's ruling ,and ASIC has also reminded prospective scheme participants to exercise caution when drafting the relevant provisions to ensure that the terms reflect the parties’ intentions and are properly disclosed to target shareholders and the market from the outset.
ASIC's cyber crackdown: non-compliant listed entities beware of hefty fines for cyber incident disclosures
ASIC has issued a stern warning to listed entities regarding their continuous disclosure obligations in the event of a material cyber security incident.
Recent findings reveal that out of 36 cyber-attacks against listed companies reported by media in the past decade, only 11 were initially disclosed to investors. This lack of disclosure is a cause for concern for ASIC, and Deputy Chairman Sarah Court has emphasised that the regulator is elevating and focusing on cybersecurity as an enforcement priority.
The warning comes in the aftermath of a $15 million fine imposed by the Federal Court against GetSwift for continuous disclosure breaches, the largest fine in Australia for a company's failure to follow market disclosure rules. While this fine was unrelated to cyber breaches, Ms Court has signalled that following this, the regulator will consider pursuing higher fines in cases going forward.
The relevant obligation is simple: listed companies are required to immediately disclose a cyber incident or data breach to the ASX when a reasonable person would expect it to have a material effect on the price or value of the company's securities. Although "immediately" does not mean instantaneously, companies are expected to disclose promptly and without delay.
ASIC acknowledges that determining the extent and impact of a cyber-attack in its early stages can be challenging. However, listed entities must remember the continuous nature of their obligations and that a cyber-attack or breach may reach the threshold of a material event requiring disclosure. Additionally, listed entities can voluntarily disclose information where it is considered to be in the interests of the market and their shareholders.
ASX chief compliance officer David Moran has suggested that where a company is not aware of market-sensitive information, it is reasonable to seek a brief voluntary suspension while conducting investigations to gather facts for disclosure to the market.
What does this mean? In short, planning is absolutely critical. Listed companies should:
- review their continuous disclosure plans and ensure they comply with these obligations in the event of a material cyber security incident;
- closely and quickly engage with their ASX adviser where a cyber incident is evolving; and
- consider if more than one announcement is necessary or required, when additional information becomes known regarding the nature and extent of a cyber incident.