Corporate 5 Minute Fix 07: continuous disclosure, shareholder communications, schemes of arrangement, cyber risks

09 Nov 2023
Time to read: 5 minutes

ANZ found guilty of breaching disclosure laws in 2015 institutional share placement

The Federal Court ruled that the Australia and New Zealand Banking Group Limited (ANZ) had breached continuous disclosure laws in relation to its $2.5 billion institutional share placement in 2015 by failing to disclose material placement subscriptions allocated to underwriters. This ruling reinforces the role of continuous disclosure rules in upholding market integrity and confirms ASIC's expectation for material information to be disclosed to the market in capital raisings.

The Court's judgment concluded that ANZ breached continuous disclosure laws by failing to notify the Australian Securities Exchange (ASX) that a significant portion of the ANZ shares offered in the Institutional Placement, between approximately $754 million and $791 million, was to be acquired by its underwriters rather than investors.

Justice Moshinsky, in his verdict, stated that this information was material. He agreed with ASIC's argument that, if this information had been disclosed, investors would have expected the underwriters to quickly divest themselves of the allocated or acquired Placement shares, putting downward pressure on ANZ's share price.

ASIC's Deputy Chair, Karen Chester highlighted that "Proper disclosure is fundamental to fair and efficient markets and price formation. Investors need to be fully informed about information that is likely to have a material impact on the price or value of a security. In the context of capital raising transactions, ASIC expects that issuers will consider the information in their possession and make appropriate disclosures to the market."

The next step in this case is for ASIC to make submissions regarding appropriate penalties. The Court will then determine the final judgment on penalties at a date yet to be decided.

The penalty for a single breach of continuous disclosure under section 674(2) of the Corporations Act 2001 (Cth), by a corporate body increased in 2019 to the greater of 50,000 penalty units (currently $15.65 million), three times the benefit obtained, and detriment avoided, or 10% of annual turnover (capped at 2.5 million penalty units, currently $782.5 million). The value of a penalty unit is set by the Crimes Act 1914 and currently stands at $313 for offences committed on or after July 1, 2023.

This Federal Court decision serves as a reminder to market participants of the importance of complying with continuous disclosure laws and the importance of following proper procedures when engaging in capital raising activities to ensure transparency and a proactive approach in keeping the market adequately informed. Failure to do so may result in severe legal and financial consequences.

A close look at shareholder communications in InvoCare-TPG Scheme by Supreme Court of NSW

As discussed in a previous Corporate 5 Minute Fix, in a recent development, a Federal Court of Australia judgment serves as a reminder for scheme participants to keep the Court informed about substantive shareholder communications concerning schemes of arrangement. Scheme related shareholder communications were considered by Justice Black in the NSW Supreme Court during the initial hearing for the InvoCare-TPG scheme (see Re InvoCare Limited [2023] NSWSC 1180).

His Honour considered the question of court review and "approval" of certain scheme communications with shareholders, with reference to recent Federal Court of Australia judgments Re Vita Group Limited [2023] FCA 400 and Re DDH1 Limited [2023] FCA 982. Justice Black observed that, a practice has emerged by which scheme participants have provided proposed shareholder email and call-script communications for the Court's review and "approval" at the first court hearing. Whilst this approach provides the Court with an opportunity to raise any potential concerns, Justice Black clarified that such approval is not strictly "required". His Honour stated that "any failure to bring such communications to the Court’s attention will not necessarily lead the Court to refuse approval for a scheme at the second Court hearing", however noting that "the Court will there consider whether the content of such communications has undermined the integrity of the scheme process in determining whether to approve the scheme".

Ultimately, the Court will assess whether the content of shareholders communications has compromised the integrity of the scheme process when considering whether to approve the scheme. Justice Black prefers to characterise the disclosure of a scheme participant's intended communications with shareholders at first court hearing as an "expectation" rather than a "requirement". However, scheme participants should take note of Justice Black's observation that, despite this characterisation, it is unclear why a participant would opt to delay the review of such communications until the second court hearing. Doing so may jeopardise the scheme's success should the Court find those communications to have undermined the integrity of shareholders' vote. Relevantly, since the publication of Justice Black's judgment, the Federal Court has issued an updated Schemes of Arrangement Practice Note to provide guidance in relation to certain scheme practices. The Practice Note outlines the Court's expectations concerning shareholder communications, including that:

  • the Court’s approval be sought before a supplementary scheme booklet is sent out to shareholders;
  • the nature of intended shareholder communications be disclosed at the first court hearing; and
  • scheme participants are encouraged to continue the existing practice of drawing the Court’s attention to material shareholder communications following the first court hearing, to reduce the risk of issues arising at the second court hearing.

This newest Practice Note demonstrates how the Court's approach to issues of scheme practice has been guided by recent developing case law, such as the recent judgments of Re Vita Group Limited, Re DDH1 Limited and Re InvoCare Limited.

Schemes of Arrangement Practice Note (GPN-SOA)

On 30 April 2021, the Government announced its intent to enhance the role of the Takeovers Panel in control transactions, including potential provisions for advance rulings and broadening the Panel's scope to include members' schemes of arrangement. The primary objective behind these proposals under a consultation paper released in April 2022, was to reduce the time and costs involved in mergers and acquisitions, to which generally submissions received were in favour.

In a recent decision In the Matter of Vita Group Limited [2023] FCA 400, Justice Jackman criticised the extensive volume of evidence and other material required to be prepared and delivered to Court ahead of the first and second court hearings in a scheme. This results from practice and procedure that has emerged over the years rather than actual legislative requirements. To address this, His Honour took the unusual step of conducting a case management hearing shortly after the application was filed, outlining the manner in which the first and second court hearings might be approached.

However, in light of the differences in practice among participants involved in schemes of arrangement, the Federal Court has issued the "Schemes of Arrangement Practice Note (GPN-SOA)" implementing the recommendation of the Practice Note – Harmonisation in schemes of arrangement as developed by the Committee for the Harmonisation of Rules of the Council of Chief Justices of Australia and New Zealand, aimed to address recent disparities in the practice of schemes and to ensure a consistent approach among Australian Courts for the benefit of all parties involved in schemes of arrangement. The NSW and WA Supreme Court also followed suit and implemented the Harmonisation Rules.

The Practice Note follows closely the proposals stated by Justice Jackman which covers the following key points:

  1. The Court supports simplifying in the approval process for schemes of arrangement, encouraging the simplification of affidavit evidence presented during scheme hearings, with no mandated form for scheme affidavits. For instance:
    1. ASIC's usual intent letter is sufficient as evidence, there is no longer a requirement to prepare an affidavit containing all communication between ASIC and the Company;
    2. in the originating process, the initial formal affidavit need only include the recent ASIC search, dispensing with compliance with the Corporations Rules to provide a formal affidavit, as later affidavits filed before the first Court hearing will contain the necessary facts to support the originating process.
  2. A proposed chairperson and alternate chairperson are no longer required to create their own affidavits to confirm their willingness to act and any conflict of interest, that evidence can be provided in the main affidavit.
  3. The Independent expert report (IER) does not fall under the category of expert opinion evidence, therefore there is no longer a requirement for the IER to be accompanied by an affidavit.
  4. Whilst all communication with ASIC is no longer required to be provided to the Court, given the ex- parte nature of the scheme process, material issues raised by ASIC should be presented to the Court either by submissions and, if required, affidavit evidence.
  5. The Court may waive the requirement for a newspaper notice for the second Court hearing if notice is effectively provided by an announcement on the Australian Securities Exchange or the scheme proponent's website (if unlisted). A newspaper advertisement is only necessary if the scheme proponent has valid reasons to believe that neither of these methods would sufficiently inform securityholders about the scheme.
  6. The note specifies matters to be addressed in evidence, such as:
    1. at the first Court hearing, the scheme proponent should provide evidence of due diligence and verification processes, preferably through direct testimony from a company officer or legal representative familiar with the process;
    2. the break fee's percentage relative to the implied equity value and the general nature and duration of exclusivity provisions at the first Court hearing. Submissions can be brief unless they are novel issues;
    3. orders sought from the first Court hearing must specify how the explanatory statement will be sent to securityholders. At the second Court hearing, the scheme proponent should present evidence about the scheme documents' dispatch in line with the Court's orders. This evidence can include information and belief, focusing on compliance issues. Details of technology used are unnecessary, unless issues arise that require the Court's attention; and
    4. at the second Court hearing, evidence to be provided is the approval of the scheme by the requisite majority including the percentage of members turnout together with details of the number and percentage of members who participated, either in person or by proxy as a percentage of the whole shareholder base.
  7. Court's approval is not required for communication between the scheme proponent and its members (other than with respect to a supplementary scheme documents and communication plan with members). However, the Court encourages parties to inform the Court on material communication with members after the first Court hearing to minimise potential issues at the second Court hearing.
  8. In practice evidence from foreign bidders is produced to evidence of the enforceability of a deed poll in a foreign jurisdiction, however, such evidence may only be required if there is a real uncertainty or issue with that regard.
  9. To maintain market transparency, the risk associated with a bidder using a special purpose vehicle with minimal assets to acquire shares of a substantial value in a scheme must be disclosed by the scheme proponent (target company). At the first Court hearing, evidence of the bidder's funding or financial support availability should be provided.
  10. When making an order under subsection 411(1) of the Corporations Act 2001 (Cth), the Court requires a notice to be displayed with specific content in the explanatory statement.
  11. The note highlights the scheme proponent's obligation to make full and fair disclosure to the Court regarding matters relevant to the ex-parte orders sought in a scheme of arrangement.

Overall, the Practice Note including the subsequent adoption of the Harmonisation Rules by the NSW and WA Supreme Court, provide practical guidance and expectations for practitioners involved in schemes of arrangement, ensuring a consistent and simplified approach while complying with the statutory responsibilities and binding authority of the Court. The adoption of the Harmonisation Rules by the NSW and WA Supreme Court and Federal Court as per the Practice Note is beneficial for M&A practitioners and scheme proponents as it reduces evidentiary requirements, making the scheme approval process more efficient and cost-effective. However, it places the responsibility on scheme proponents and their legal advisers to bring to the court's attention material issues when necessary.

Mitigating third-party supplier cyber risks – ASIC cautions boards

Representatives from major Australian businesses and key regulatory bodies gathered at the AFR Cyber Summit on 18 September 2023 to discuss Australia's cyber security landscape and the practical measures organisations must take to protect their business from cyber threats.

In his speech to the summit, Joe Longo, the Chair of the Australian Securities and Investment Commission (ASIC), emphasised boards' responsibility in prioritising "good cyber management" and addressing third-party vulnerabilities. ASIC's Chair warned that a failure to do so may expose directors to potential enforcement action by ASIC for breach of director duties.

The key takeaways from Joe Longo's speech to the summit are:

"Every system is vulnerable"

ASIC expects businesses to adopt a proactive approach towards building security systems that can anticipate and withstand risks and potential security breaches. Mr Longo noted that mere compliance with security measures is insufficient; the key is recognising that "cyber preparedness" requires businesses to be prepared to respond to potential cyber-attacks and navigate the aftermath that may follow effectively. Preparing involves necessary steps such as thorough and comprehensive planning, and a clearly thought-out risk management strategy, to strengthen businesses against these vulnerabilities.

Directors are ultimately responsible

ASIC observed a disconnect between the several elements of cyber security, which boards should consider addressing:

  • Oversight of cyber risk by boards;
  • Reporting of cyber risk to boards by management;
  • Identification and remediation of cyber risk by management;
  • Comprehensive cyber risk assessments; and
  • Implementation of cyber risk controls.

Mr Longo emphasised that directors of boards that do not have an adequate framework in place to address cyber security risks are exposing themselves to potential enforcement action by ASIC, based on directors not acting with reasonable care and diligence. ASIC expects directors to take action tailored to the scale and complexity of their businesses and factor in the significance and sensitivity of the assets held by the business.

Third-party providers mean risk

Mr Longo cited a recent cyber pulse survey conducted by ASIC that found that "third party suppliers, vendors and managed service providers were the weakest links in cyber preparedness". ASIC warned that businesses must not rely on measures taken by third-party suppliers', rather businesses must build up cyber resilience.

Mr Longo recommends for businesses to reinforce their cyber security and minimise third-party risks are:

  • an active approach to managing supply chain and vendor risks is necessary - simply establishing a set it and forget it approach is no longer sufficient;
  • preparedness for an attack is key - businesses should know how they will respond before the need arises, including in relation to third-party suppliers and vendors. Regular testing of response plans is important to ensure their efficiency and comprehensiveness;
  • the identification of critical information and systems is vital to ensure the prioritised protection of this information. After all, a business cannot safeguard information it is unaware it needs to protect.

Mr Longo's speech serves as a timely reminder that the onus is on businesses to be cyber-proficient, and feigning ignorance is no longer tenable in this era of escalating cyber threats. To avoid potential enforcement action by ASIC, it is incumbent on boards and directors to remain vigilant and drive proactive cyber-resilience initiatives.

ASIC's consultation on clarifying director's duties to prevent insolvent trading

On 14 September 2023, the Australian Securities and Investments Commission (ASIC) released Consultation Paper 372 "Guidance on insolvent trading safe harbour provisions: Update to RG 217". The Consultation Paper is inviting feedback on ASIC's proposed updates to Regulatory Guide 217 "Duty to prevent insolvent trading: Guide for directors" (RG 217), which provides guidance to directors regarding their duty to prevent insolvent trading under the Corporations Act 2001 (Cth).

Motivation behind the proposals

RG 217 was first published in July 2010, setting out general guidance on the directors' duty to prevent insolvent trading. On 19 September 2017, the safe harbour provisions (sections 588GA and 588GAAB of the Corporations Act) came into effect. These provisions shield directors from civil liability for insolvent trading in certain circumstances.

On 24 March 2022, an independent review and report regarding the safe harbour provisions was tabled in Parliament which identified the lack of awareness and understanding with regards to directors' duty to prevent insolvent trading and the accompanying safe harbour provisions under the Corporations Act. ASIC now endeavours to align the RG 217 with the recommendations from this report, by including updates to RG 217 with general guidance on the operation of the provisions.

Current position under RG 217

The current RG 217, published in August 2020, centres around key principles to help directors understand and comply with their duty under section 588G of the Corporations Act to prevent insolvent trading. It does not provide guidance on the operation of the safe harbour provisions under sections 588GA and 588GAAB.

Instead, the current RG 217 expands on the application of section 588G such as director duty, the consequences of breaching this duty, the defences available facing a civil claim for insolvent trading, the criteria for determining insolvency, and the actions directors must undertake to fulfil their duty. ASIC has provided several factors it will consider when assessing if a director has breached their duty to prevent insolvent trading.

ASIC's consultation objectives

The Consultation Paper is an opportunity for stakeholders including companies and boards, to provide feedback on ASIC's proposed changes and approach to RG 217, which touches on several aspects, including:

  • evaluating the existing guidance for directors about their duty to prevent insolvent trading, and considering amendments for additional guidance into the key principles guiding directors in carrying out their duty to prevent insolvent trading;
  • the inclusion of information regarding the operation of the safe harbour provisions in a related company and, in particular, when a holding company may become liable for debts incurred by a subsidiary in circumstances where the subsidiary has traded while insolvent; and
  • providing information and general guidance about the operation of the safe harbour provisions, including the evidentiary onus placed on the director and some of the factors ASIC will consider when assessing whether a director may rely on the safe harbour protections.

A draft RG 217 incorporating ASIC's proposed changes is attached to the Consultation Paper.

ASIC have noted its careful consideration of the regulatory and financial impact in developing the proposed changes to RG 217, aiming to strike a balance with raising director awareness, reducing the risk of directors breaching their duty, protecting the interests of creditors and not unduly burdening directors with excessive costs in complying with their duties.

What's next?

Submissions to ASIC closed on Wednesday, 26 October 2023, following which, ASIC will consider all submissions and expect to release the updated RG 217 during the first quarter of 2024.

ASIC regains company registry functions back from ATO

On 28 August 2023, the Assistant Treasurer released the findings of the independent review into the Modernising Business Registers (MBR) program and the Government’s response.

As part of the Government's digital business plan, the MBR program aimed to establish the Australian Business Registry Services (ABRS) and streamline how business are registered, viewed and maintained with the Government.

After considering the review's findings, the Government announced it would stop the MBR program and consider options to stabilise and uplift the existing business registers.

What's already changed

In 2021, the director ID requirement was introduced with a new ABRS website and online service to apply for a director ID.

On 15 April 2021, ASIC registry staff moved to the ATO in a Machinery of Government administrative change to assist the Registrar.

Next steps for ASIC

The review recommended the transfer of registry functions from the ATO to a newly established division within (back to) ASIC.

Unchanged aspects

For now, there will be no alterations to how companies register, search, obtain extracts from the registers, or engage with ASIC. These existing processes and interactions will continue as usual.


It remains to be seen whether the transition back to ASIC of the registry function will cause any disruptions or delays for ASIC to process requests and whether these changes will trigger any associated costs to stakeholders.

Get in touch

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.