23 Jul 2015
A fine balance: investor engagement vs. acquisition of control
by Geoff Hoffman, Nicole Landerer
Investors concerned about corporate governance have new ASIC guidelines to follow.
Investors who consult among themselves about corporate governance issues run the risk of breaching the Corporations Act. A new ASIC regulatory guide clarifies what conduct might be unacceptable.
The guide seeks to strike a balance between fostering investor engagement (which, ASIC acknowledges, is fundamental to good corporate governance) and preventing contraventions of the takeover and substantial holding provisions of the Act.
Takeover and substantial holding provisions
Collective action by investors will trigger the takeover and substantial holding provisions where the engagement constitutes a relevant agreement between the investors resulting in an investor acquiring a relevant interest in another person’s shares or triggering an associate relationship. The investors may also become associates if they are acting in concert in relation to the entity's affairs.
The result is that the investors may be required to lodge a substantial holding notice (if their joint holdings are greater than 5%). In addition, they may contravene the prohibition on acquiring more than 20% of the entity.
ASIC believes that conduct “more likely” to create a relevant agreement includes:
- jointly signing a meeting requisition for a resolution relating to the composition of the board or the entity’s affairs (on the basis that this is often accompanied by an understanding about the exercise of voting rights). This is particularly relevant where the resolution:
- proposes to remove directors and replace them with new directors who are aligned with the requisitioning investors; or
- seeks approval for a transaction (eg. a selective buy-back) on unduly favourable or non-commercial terms, or a transaction that has an effect on the "control" of the company;
- putting together joint proposals concerning board appointments or a strategic issue; and
- accepting an inducement to vote in a specific way, agreeing on a plan relating to voting or limiting one’s freedom to vote (eg. by granting another investor an irrevocable proxy).
Where it is ambiguous as to whether the relevant conduct triggers the takeover and substantial provisions, ASIC will consider whether the conduct is control-seeking rather than simply promoting good corporate governance.
Other legal and regulatory issues
In addition to the takeover and substantial holding provisions, the revised guide identifies a number of other legal issues that investors and listed entities should be aware of in relation to collective engagement.
Investors should consider:
- whether through any voting agreement or discussion with other investors, the investor has obtained inside information that could trigger the prohibition on insider trading;
- whether the engagement results in the investor effectively managing the entity such that he/she is acting as a shadow director; and
- when making collective public statements, whether the statements are misleading or deceptive.
Listed entities should consider:
- whether the relevant engagement undermines the directors’ duties to act in the best interests of the company and for a proper purpose;
- whether they might breach their continuous disclosure obligations by selectively disclosing confidential information; and
- when publicly responding to investor communications, whether the statements are misleading or deceptive.
Revocation of class order relief
As part of its review, ASIC has repealed the class order relief that allowed certain agreements about voting between institutional investors. ASIC has not issued a replacement Class Order, but instead will offer individual relief where conduct that triggers the provisions is not concerned with the acquisition of a substantial interest in or control over an entity.
A starting point, but not the end point
At the end of the day, the decision on whether the Act has been breached or there have been unacceptable circumstances is up to a court or the Takeovers Panel. In such cases, much depends upon the particular factual matrix. For that reason, although they are a useful starting point, ASIC's guidelines are no substitute for independent legal advice.