Corporate 5 Minute Fix 04: financial reporting, convertible securities, ASIC and NOPSEMA, FIRB, and the St Barbara saga

By Liz Humphry, Tashreen Tourabaly
13 Jun 2023
5 minutes

Uncertain market conditions: ASIC urges companies to assess impact on financial reporting

The Australian Securities and Investments Commission (ASIC) has recently issued a call to directors, financial report preparers, and auditors to carefully evaluate the influence of uncertain market and economic conditions on financial reporting for the full and half-year periods ending on 30 June 2023. In a rapidly evolving landscape, ASIC aims to ensure that investors receive accurate and transparent information about the "impact of changing and uncertain economic and market conditions, ‘net zero’ targets and other developments on financial position and future performance". The regulator has highlighted several key areas that require attention, ranging from asset values and provisions to solvency assessments and disclosures in financial reports.

Adapting to changing circumstances: According to ASIC Commissioner Danielle Press, directors are responsible for ensuring that investors are properly informed about the impact of economic and market uncertainties, as well as environmental and societal developments, on a company's financial health. Understanding the potential effects on asset values, provisions, and business strategies is crucial. Factors such as the availability of skilled staff, rising interest rates, inflationary impacts, geopolitical risks, climate change, technological advancements, and the ongoing repercussions of the COVID-19 pandemic can all significantly influence financial performance.

Assessing asset values: Asset valuation has become a critical focus area, with ASIC emphasizing the importance of accurately assessing the value of various assets. This includes considering the impairment of non-financial assets, valuing property assets, determining expected credit losses on loans and receivables, and appropriately classifying financial assets. In a time of heightened uncertainty, companies must ensure that valuation methods are reliable, assumptions are reasonable and supportable, and disclosures reflect estimation uncertainties and sensitivity analysis.

Provisions and subsequent events: Provisions for potential risks and obligations should be carefully evaluated, taking into account matters such as onerous contracts, leased property obligations, mine site restoration, and financial guarantees. Additionally, events occurring after the year-end but before completing the financial report should be thoroughly reviewed to assess their impact on assets, liabilities, income, and expenses. Timely and accurate disclosure of these events is essential.

Disclosure and Operating and Financial Review (OFR): Disclosures in financial reports play a crucial role in helping investors understand a company's approach, uncertainties, and changing key assumptions. Clear and comprehensive explanations about the impact of economic and market conditions, business strategies, risks, and future prospects should be provided. The OFR should complement the financial report by telling how the company's businesses are affected by both COVID-19 and non-COVID-19 factors. Directors should highlight the underlying drivers of results, financial position, and risks, ensuring the overall picture is understandable and supported by relevant information.

Auditors' role and new Auditing Standards: Auditors play a crucial role in the financial reporting process, bringing their business knowledge and risk assessment expertise to the table. While auditors do not provide an opinion on the OFR, they should review it for material misstatements of fact and inconsistencies with the financial report. Auditors should document their consideration of disclosures on key drivers, risks, strategies, and future prospects. Compliance with major new auditing standards, including risk identification and assessment, quality management, engagement quality reviews, and quality control for financial report audits, is essential. Auditors are also responsible for identifying any potential instances of greenwashing and ensuring that the environmental claims made by companies are substantiated and accurate.

The attachment to ASIC's statement provides additional information on ASIC's focus areas for the 30 June 2023 reporting period such as recognition of off-balance sheet exposures, impacts of tax reforms and operations in low tax jurisdictions, and the reporting requirements for large proprietary companies. Directors are reminded of their responsibility for the quality of the financial report and the need for appropriate processes, records, and analysis to support the information.

ASX compliance update: in-principle advice on convertible securities and FY24 listing fee announcement

ASX, in its latest compliance update, has issued a series of reminders to listed entities regarding their obligations under Listing Rule 6.1. This update focuses specifically on the application of the rule to convertible debt securities and seeking in-principle advice from ASX on the same.

Under Listing Rule 6.1, the terms applied to each class of equity securities must be appropriate and equitable. ASX has emphasised this overarching principle and provided a specific reminder to entities that issue convertible debt securities. This reminder is particularly pertinent when dealing with securities that possess "complex, potentially highly dilutive, or other unusual features."

Where the proposed terms of convertible debt securities are not market-standard, or any of the features noted in section 5.9 of Guidance Note 21 are present, ASX recommends that entities submit a formal application for in-principle advice, seeking confirmation that the terms of the security align with Listing Rule 6.1.

The application should contain comprehensive information, enabling ASX to form an accurate assessment. This includes:

  • a summary of the proposed convertible debt securities' material terms;
  • an explanation of any non-market-standard terms or features identified in section 5.9 of Guidance Note 21;
  • worked examples showcasing the practical application of repayment terms and conversion formulas under various assumptions, including worst-case scenarios;
  • an explanation of how the proposed issue will comply with Listing Rules 7.1, 7.1A, or 7.2;
  • detailed submissions outlining why the entity believes the proposed terms comply with Listing Rule 6.1, along with an examination of the circumstances behind the issue (taking into account the factors outlined in ASX compliance updates from 1 May 2020);
  • a draft of the intended market announcement; and
  • confirmation of legal advice obtained are essential components of the application.

ASX advises that any subsequent changes to the material terms after submitting an application for in-principle advice will require a fresh application. An applicant will be advised of ASX's decision within 20 business days of accepting an application for in-principle advice.

In addition to the compliance updates, ASX has also informed listed entities about changes to their annual and subsequent listing fees for the upcoming financial year. Invoices for these fees will be issued during the first week of July 2023. The new fee schedule will be available on the ASX website's listing fees page from 1 July 2023 to aid in planning and budgeting. It is recommended that listed companies review the new fee schedule promptly to assess its impact on their operations.

A synergistic partnership to enhance regulatory oversight: ASIC joins forces with NOPSEMA

The Australian Securities and Investments Commission (ASIC) and the National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) have recently formed an alliance by signing a Memorandum of Understanding (MoU). These bodies are set to collaborate in overseeing the operations of oil and gas companies in Australia, the MoU aims to guarantee the strict adherence of all parties involved to regulatory obligations and mandates, with a particular emphasis on the compliance of oil and gas companies with their accounting policies and remediation responsibilities.

The MoU is a conduit, facilitating co-operation and mutual assistance between ASIC and NOPSEMA. Through resource pooling and collaborative efforts, the regulators will enhance the landscape of oversight.

Additionally, the MoU;

  • establishes a framework for information exchange and matter referral between ASIC and NOPSEMA;
  • eliminates inefficiencies and execution gaps, supporting a regulatory environment that operates effectively;
  • empowers both ASIC and NOPSEMA to promptly notify each other of proposed changes to regulatory policies and guidance. This proactive measure ensures that both regulators remain well-informed and equipped to address impending alterations that could impact their regulatory responsibilities; and
  • mandates consultation and the exchange of confidential information between ASIC and NOPSEMA before initiating litigation. This consultative protocol enables each agency to leverage the insights and knowledge held by the other.

While the MoU is not legally binding, its significance should not be underestimated. By adopting good practices, ASIC and NOPSEMA lay the foundation for more effective planning in decommissioning oil and gas projects. The challenges encountered during the liquidation of the Northern Endeavor oil vessel, and the subsequent costs borne by taxpayers, highlights the need for improved oversight. The regulators' alliance represents a progressive step forward, as it enables heightened scrutiny and a more comprehensive rehabilitation process for exhausted projects.

ASIC's corporate finance update: clear direction on priorities for the upcoming quarter

As noted in our last Corporate 5 Minute Fix, ASIC has released its Corporate Finance Update – Issue 12, highlighting its strategic priorities in fundraising, M&A, and corporate governance.

The key takeaways from the update include:

Cybersecurity: ASIC aims to minimise consumer harm by promoting good cyber-risk practices. It emphasises the use of market announcements and trading halts to mitigate risks following data breaches. Companies should review disclosure policies, engage with ASX advisors during incidents, and disclose relevant information to ASIC.

Sustainable finance: ASIC has identified sustainable finance as a priority and aims to prevent greenwashing misconduct. It will closely monitor sustainability statements and encourages companies to follow guidelines to avoid making misleading claims.

Whistleblower protections: ASIC focuses on reviewing whistleblower policies and disclosure handling practices. It recommends companies adopt good practices outlined in its report and will enforce mechanisms to address serious harms identified.

Fundraising: ASIC's primary enforcement priority is compliance with design and distribution obligations (DDO). It initiated civil penalty proceedings and issued stop orders for alleged DDO breaches. ASIC will monitor the use of the target market determination template and ensure it matches the investment product's risk profile.

M&A: ASIC raised concerns about a de-SPAC transaction where directors criticized the independent expert's opinion without proper basis and disclosure. ASIC advises boards to disclose a reasonable basis for their opinions and ensure members are informed. It also emphasises caution in drafting liability and termination clauses and seeks clear, quantifiable standards for material adverse condition clauses.

Silver Lake's revised proposal sparks shareholder activism at St Barbara

Following on from our last update, Silver Lake Resources has submitted a revised proposal to acquire St Barbara Limited's Leonora assets. The new proposal offers a significant premium to St Barbara's existing deal with Genesis Minerals, prompting major shareholders to question the decision-making process and advocate for a thorough price discovery process. We examine the key developments, contrasting viewpoints, and the importance of transparency and engagement in addressing shareholder concerns.

Silver Lake's revised proposal: Silver Lake Resources presented a revised proposal to acquire St Barbara's Leonora assets, offering a substantial premium compared to the existing deal with Genesis Minerals. The proposal includes a fully funded $150 million credit approved acquisition facility through the Taurus facility. St Barbara's major shareholders have expressed support for engaging with Silver Lake to facilitate robust price discovery.

Silver Lake's concerns: Silver Lake has encouraged St Barbara shareholders to evaluate governance issues, particularly the lack of a comprehensive price discovery process for the Leonora assets. The board's reluctance to engage in such a process before the Genesis Proposal vote has raised concerns among shareholders. Silver Lake questioned the fairness of not considering a comparable binding offer from Silver Lake, especially after the Genesis Proposal's consideration was improved only when Silver Lake's interest became public. The timing raises concerns about potential incentives to secure approval before the 30 June 2023 deadline, potentially benefiting Genesis shareholders.

St Barbara's position and board recommendations: St Barbara continues to recommend that shareholders vote in favour of the Genesis Transaction. The company deems Silver Lake's proposal as highly conditional and lacking a reasonable business case. Granting Silver Lake access to due diligence could jeopardize the binding agreement with Genesis. The St Barbara Board believes that the premium offered by Silver Lake does not justify the risks associated with potentially losing the Genesis transaction. The board unanimously recommends voting in favour of the Resolutions at the upcoming Extraordinary General Meeting to proceed with the sale to Genesis.

Shareholder responses: Major shareholders, including L1 Capital Pty Ltd and Baker Steel Capital Managers LLP, have expressed dissatisfaction with the St Barbara Board's conduct. L1 Capital plans to vote against the Genesis Proposal unless a superior offer emerges, while Baker Steel Capital Managers LLP has called for a deferral of the shareholder meeting to allow more time to consider competing proposals.

Collaborative approach for better outcomes: Regarding the situation at St Barbara, there is a lack of clarity regarding the dynamics between shareholders and the board of directors. Shareholders are voicing their dissatisfaction and concerns, urging the company to consider alternative proposals. However, the board of directors is pushing for shareholders to vote in favour of the Genesis deal, potentially implying that the company will face default otherwise.

St Barbara shareholders will be voting on the Genesis deal mid-June. It remains to be seen how they will use their vote to voice their preference. It would be interesting to see if Silver Lake returns with yet another bid.

Foreign investments: new thresholds for UK investors in Australia

 

The recent implementation of the Australia-United Kingdom Free Trade Agreement (A-UKFTA) on 31 May 2023 brings forth numerous advantageous prospects for UK investors. Notably, UK investors will now benefit from higher monetary screening thresholds for specific investments under the foreign investment framework.

It is important to note that the updated thresholds will apply to any actions taken on or after the implementation date. For the specific details and the multitude of benefits that the A-UKFTA offers, read our analysis here.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.