ASIC reports on corporate finance

ASIC has released its eighth report on the regulation of corporate finance issues in Australia (Report 567: ASIC regulation of corporate finance: July to December 2017) to provide greater transparency around ASIC’s role in the regulation of corporations and corporate transactions.

The report provides key insights about ASIC’s regulatory approach to assist companies and their advisers in carrying out their legal and compliance obligations, and demonstrates how ASIC facilitates business transactions while safeguarding investors. It includes an overview of the types of issues which have caused ASIC to intervene over the period from July to December 2017 in the areas of fundraising transactions, mergers and acquisitions, corporate governance issues, related party transactions and financial reporting, as well as ASIC’s responses to novel issues in those areas and relevant policy initiatives.

This note relates to fundraising transactions and mergers and acquisitions only. For the remainder of the areas reported on, please refer to the full report on ASIC’s website.

Fundraising transactions

Seventy-two IPO disclosure documents were issued during the period, a 20% increase compared to the previous period, January to June 2017 (but no change compared to the July to December 2016 period). ASIC also received 329 original disclosure documents (a 2.1% decrease to that received by ASIC over the July to December 2016 period) raising over $5 billion (down from $7 billion over the July to December 2016 period).

ASIC raised disclosure concerns in connection with approximately 24.3% of fundraising offer documents, down from the previous July to December 2016 period where concerns were raised with approximately 33.3% of fundraising offer documents.

The most common disclosure concerns during the July to December 2017 period were:

1. Risk disclosure being inadequate, insufficiently prominent and/or not being adequately tailored (raised 14 times);
2. Business models not being fully and/or adequately disclosed (raised 14 times);
3. Unclear or insufficient detail disclosed regarding the use of funds (raised 10 times);
4. Summary, investment overview and/or key information being insufficient or not clear, concise and effective (raised 8 times);
5. Insufficient disclosure of directors’ history (raised 6 times); and
6. Disclosure not being adequately balanced (raised 6 times).

ASIC also extended exposure periods 39 times (11.9% of offers) and issued 10 interim stop orders in relation to 6 offers (1.8%) and two final stop orders (0.6%) during the period.

With the implementation of three new accounting standards (AASB 9 Financial instruments and AASB 15 Revenue from contracts with customers having commenced on 1 January 2018, and AASB 16 Leases due to commence on 1 January 2019), companies and their advisers should note that ASIC will be closely reviewing disclosure practices for transactions which require disclosure of historical and prospective financial information which overlaps the commencement dates. It is expected that the new accounting standards will have a significant impact on the reporting of revenue, values of financial instruments, loan loss provisions and the impact of lease arrangements.

ASIC also noted that some issuers who had been required to downgrade their forecasts throughout a prospectus forecast period were then stating in their year end announcements that the issuer had exceeded its forecast, without referring to the fact that the company did not actually achieve its prospectus forecasts. ASIC recommends reconciling year end announcements to prospectus forecasts to avoid misleading or confusing the market.

ASIC further observed that:

1. Restrictions on advertising – the monitoring of advertising of fundraising offers that were misleading, deceptive or failed to comply with the requirements of Chapter 6D of the Corporations Act 2001 (Cth) (‘Corporations Act’) resulted in advertisers or promotors removing or correcting advertising on websites, marketing platforms and social media and, in one case, providing corrective statements in a replacement disclosure document;
2. Concise disclosure of mineral asset information – greater care is needed around disclosures which include technical reports containing a high degree of technical detail and jargon. Disclosures are required to be worded and presented in a ‘clear, concise and effective manner’ (section 715A of the Corporations Act) which may require including the technical report as an appendix or engaging with ASIC to discuss a proposed approach;
3. Underwriters’ obligations – underwriters that provide underwriting as part of a financial services business need to either hold an AFS licence that expressly includes the authorisation to underwrite, or act as an authorised representative. Underwriters must also be careful that their acquisition of any fundraising shortfall does not contravene the takeover prohibition in the Corporations Act and must play an active role in the preparation of a disclosure document and ensure that proper due diligence is undertaken;
4. Emerging market issuer listings – there has been an increase in emerging market issuers lodging prospectuses in the last 6 months. ASIC has been focussing on the historical financial information contained in these documents and the work carried out by independent accountants. ASIC expects that independent accountants thoroughly review the audit working papers of a local auditor irrespective of location or the language they have been completed in; and
5. Prospectuses for unlisted property developments – a number of small property developers have sought funding from the public via the issue of preference shares. Where that has occurred, ASIC has required that the prospectus contain or reference documentation supporting the ownership of the property in question, evidence that a development application has been lodged, an expert opinion on the cost of construction and a valuation of the development on an ‘as if complete’ basis, and a gearing calculation. ASIC will also require the production and lodgement of financial accounts.

Mergers and acquisitions

During the period there were 20 independent control transactions via 24 takeover bids, 11 independent control transactions via 11 members’ schemes of arrangement and 6 independent restructure transactions via 12 members’ and/or creditors’ schemes of arrangement.

The total number of independent control transactions (31) was similar to the previous period. The total value of control transactions using a bid or scheme was substantially lower than the previous period, from $12.4 billion down to $4.5 billion.

Compared with the previous period, there was a substantial increase in the number of offers for targets whose size was less than $50 million (from 41.4% to 58.6%) and a decrease in offers for targets whose size was between $50 million and $200 million (37.9% to 20.7%). Only one scheme related to a target valued at over $1 billion, and this was the largest control transaction by a significant margin.

The issues which ASIC has identified in its oversight of control transactions include:

1. Classes and fairness in schemes of arrangement – ASIC recommends that companies and their advisers take a conservative approach to the constitution of classes to avoid uncertainties about whether the scheme is fair;
2. Timing for schemes of arrangement – in relation to scheme transactions that are subject to approvals and other conditions precedent, where there is uncertainty regarding the timing of those conditions being satisfied, ASIC may query any uncertainty regarding, and progress towards, conditions precedent prior to the first court hearing; and
3. Attorney appointment – an attorney appointment or proxy voting term that may operate while there is still uncertainty about whether an offer will become unconditional is contrary to the principles enshrined in item 1 of section 611 of the Corporations Act.

If ASIC is unable to resolve its concerns about a control transaction, it may seek a declaration of unacceptable circumstances and orders from the Takeovers Panel, or take an active role in proceedings brought by third parties in front of the Takeovers Panel.

ASIC has also highlighted the importance of AFS licensees complying with their AFS licence requirements and ASIC policies when providing independent expert reports. Surveillance conducted by ASIC resulted in one AFS licensee voluntarily varying the terms of its licence to remove its authorisation to provide independent expert advice. ASIC reminds AFS licensees who provide independent expert reports of their responsibilities as financial system gatekeepers.

ASIC noted disclosure issues in relation to technical specialists’ reports (such as geology and mining reports) to accompany an independent expert report. ASIC was primarily concerned with the adequacy of disclosure of assumptions, compliance with relevant industry codes and demonstration of a reasonable basis for assumptions and conclusions drawn by specialists. Licensees who engage technical specialists to provide reports are expected to have sufficient familiarity with relevant industry codes to critically assess those reports.

This article was written by Andrew Shearwood, Partner, David Naoum, Special Counsel and Stephanie Patchell, Solicitor.