Compliance: Theory and Practice in the Financial Services Industry

5. Shareholding Restrictions

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Outline

   Corporations Act
     Relevant Interests
     Associates
     Takeover Restrictions
     Substantial Holding Notices
     Tracing Notices
   Foreign Acquisitions and Takeovers Act
     Overview
     Substantial Interests
     Associates
     Notifications
     Prohibition/Divestiture Powers
   Other Legislation
   System Issues

 


Corporations Act
Relevant Interests

CA s608(1) - The Basic Rule
A person has a relevant interest in securities if they:
(a)   are the holder of the securities;
(b)   have power to exercise, or control the exercise of, a right to vote attached to the securities; or
(c)   have power to dispose of, or control the exercise of a power to dispose of, the securities.
It does not matter how remote the relevant interest is or how it arises. If 2 or more people can jointly exercise one of these powers, each of them is taken to have that power.

Click here for a copy of the Corporations Act.

CA s608(2) – Power and Control
Includes power or control that:
(a)   is indirect;
(b)   is, or can be, exercised as a result of, by means of or by the revocation or breach of:
  (i)   a trust;
  (ii)   an agreement;
  (iii)   a practice; or
  (iv)   any combination of them;                                                       
  whether or not they are enforceable; and
(c)   is, or can be made, subject to restraint or restriction.
It does not matter whether the power or control is express or implied, formal or informal, exercisable alone or jointly with someone else, nor does it matter that the power or control cannot be related to a particular security.

 

CA s608(3) - Interests Held Through Bodies Corporate
A person has the relevant interests in any securities that any of the following has:
(a)   a body corporate, or managed investment scheme, in which the person's voting power is above 20%;
(b)   a body corporate, or managed investment scheme, that the person controls.
Para (a) does not apply to a relevant interest that the body corporate or scheme itself has in the securities merely because of the operation of that paragraph in relation to another body corporate or managed investment scheme.

(a) is often referred to as the "20% tracing rule". (b) is often referred to as the "control tracing rule".

The closing words in relation to (a) are confusing. What they are intended to mean is that the 20% tracing rule in (a) can only operate once in a chain of entities. By necessary implication, there are no limits on the number of times the control tracing rule in (b) can operate in a chain of entities.

For the purposes of s608(3)(b), a person controls a body corporate if the person has the capacity to determine the outcome of decisions about the body corporate's financial and operating policies (s608(4)). In determining whether a person has this capacity: (a) the practical influence the person can exert (rather than the rights they can enforce) is the issue to be addressed; and (b) any practice or pattern of behaviour affecting the body corporate's financial or operating policies is to be taken into account, even if it involves a breach of an agreement or a breach of trust (s608(5)).

This definition of "control" was taken from Australian Accounting Standard AASB 1024: Consolidated Accounts (now superseded), which prescribed when one entity was taken to be controlled by another and therefore had to be consolidated into its accounts.

Under CA s608(6), a person does not control the body corporate merely because the person and an entity that is not an associate jointly have the capacity to determine the outcome of decisions about the body corporate's financial and operating policies.

Under CA s608(7), a person is not taken to control a body corporate merely because of a capacity they have if they are under a legal obligation to exercise that capacity for the benefit of: (a) if the person is an individual—someone else; or (b) if the person is a body corporate—someone other than its members.

Note that these provisions don’t necessarily capture trusts – at least those that do not have a corporate trustee and fall outside the definition of "managed investment scheme".

CA s608(8) - Performance of Agreements
If at a particular time all the following conditions are satisfied:
(a)   a person has a relevant interest in issued securities;
(b)   the person (whether before or after acquiring the relevant interest):
  (i)   has entered or enters into an agreement with another person with respect to the securities;
  (ii)   has given or gives another person an enforceable right, or has been or is given an enforceable right by another person, in relation to the securities (whether the right is enforceable presently or in the future and whether or not on the fulfilment of a condition); or
  (iii)   has granted or grants an option to, or has been or is granted an option by, another person with respect to the securities;
(c)   the other person would have a relevant interest in the securities if the agreement were performed, the right enforced or the option exercised;
the other person is taken to already have a relevant interest in the securities.

Note that a precondition to the operation of this section is that the other party themselves must have a relevant interest in securities. This stops people creating relevant interests out of nothing by, say, giving someone an option over shares that they don’t own but intend to buy if the option is exercised.

Those interested in how different types of options can give rise to a relevant interest should look at section D of ASIC Regulatory Guide 5 Relevant interests and substantial holding notices.

CA s608(9) - Interests of Bodies Corporate in Themselves
This section may result in a body corporate having a relevant interest in its own securities.

This section inserted to overcome the doubts expressed in Rendoel Pty Ltd v Campbell Investment Co (1985) 3 ACLC 335 on whether a body corporate could have a relevant interest in its own securities.

Illustration of CA Tracing/Acceleration Rules
Example: suppose A owns 30% of B, which owns 51% of C, which owns 100% of D, which owns 21% of E. Assume that A's 30% shareholding in B does not confer control of B. E owns 4.9% of X and has taken a call option over a 10% shareholding in X held by Y. Who has what relevant interest in X shares?

Answer: The effect of s608(8) is that E was deemed to have a relevant interest in Y's 10% of X immediately upon taking the call option and so E has a relevant interest in 14.9% of X (its 4.9% plus the 10% the subject of the call option).

D is deemed to have the same relevant interest in X as E has (ie 14.9%) by virtue of the operation of the 20% tracing rule in s608(3)(a).

Under s608(3)(b), C is deemed to have the same relevant interest in X as D has (ie 14.9%) because it controls D.

Under s608(3)(b), B is also deemed to have the same relevant interest in X as C has (ie 14.9%) because it controls C.

A, however, does not have a relevant interest in X shares. Under s608(3), it would be deemed to have a relevant interest in each of the shareholdings below it down to D's 21% of E but not in E's 14.9% of X because the second non-controlling 20+% shareholding in the chain between D and E prevents any further tracing past that point.

Exceptions to Relevant Interests
CA s609(1) - Financial Accommodation Exception
A person does not have a relevant interest in securities merely because of a security interest taken or acquired by the person if:
(a)   the security interest is taken or acquired:
  (i)   in the ordinary course of the person's business of the provision of financial accommodation by any means; or
  (ii)   for the benefit of one or more other persons in relation to financial accommodation provided by the other persons in the ordinary course of the other persons' business of the provision of financial accommodation by any means; and
  on ordinary commercial terms; and
(b)   the person whose property is subject to the security interest is not an associate of any other person mentioned in this subsection.
For the purposes of this subsection a security interest includes a negative pledge.

Note that this section has been amended by ASIC Class Order CO 13/520 (for an explanation of the amendments, see paragraphs 67-70 of ASIC Regulatory Guide 5 Relevant interests and substantial holding notices).

“Security interest" is defined in ss9 and 51A to include a PPSA security interest and a charge, lien or pledge.

CA s609(2) - Nominees and Trustees Exception
A person who would otherwise have a relevant interest in securities as a bare trustee does not have a relevant interest in the securities if a beneficiary under the trust has a relevant interest in the securities because of a presently enforceable and unconditional right of the kind referred to in s608(8).

Note the conditions for this exemption to comply – the trust must be a bare trust and the beneficiary must have a presently exercisable and unconditional right of the kind referred to in s608(8) - that is, an enforceable right in relation to the securities that if exercised would give the beneficiary a relevant interest in the securities.

CA s609(3) – Financial Services Licensee Exception
A financial services licensee does not have a relevant interest in securities merely because they receive specific instructions from a person directing the financial services licensee to on behalf of the person:
(a)   dispose of the securities; or
(b)   enter into a sold position in relation to a security by dealing in:
  (i)   a warrant; or
  (ii)   a financial product that, but for the product not being transferable, would be a warrant;
in the ordinary course of the licensee’s financial services business.
For the purposes of paragraph (b), sold position means a position under which a person has an obligation to make delivery of the security.

Note that this section has also been amended by ASIC Class Order CO 13/520 (for an explanation of the amendments, see paragraphs 77-85 of ASIC Regulatory Guide 5 Relevant interests and substantial holding notices).

This exemption does not apply to securities held by a licensee on its own behalf. Section F of ASIC Regulatory Guide 6 Takeovers: Exceptions to the general prohibition outlines the circumstances in which ASIC will consider granting case-by-case relief to allow a broker or syndicate of brokers to acquire a large parcel of securities from a single client (or associated clients) as principal for prompt disposal in the course of providing client facilitation services. ASIC will only grant such relief if it does not appear to ASIC that the broker has a control purpose. Any relief it gives will also be subject to conditions designed to restrict the broker's ability to exert control over the relevant entity and to prevent warehousing.

CA s609(4) – Company Buy-back Exception
A person does not have a relevant interest in a company’s shares if the relevant interest would arise merely because the company has entered into an agreement to buy back the shares.

Under CA s257H, when a company enters into an agreement to buy back shares, all rights attached to the shares are suspended from the time it enters into the agreement and the shares are automatically cancelled when it registers a transfer of the shares in its favour. Hence any relevant interest a company acquires under s608(8) by virtue of having entered into an agreement to buy back shares is at best a fleeting one.

CA s609(5) - Proxies Exception
A person does not have a relevant interest in securities merely because the person has been appointed to vote as a proxy or representative at a meeting of members, or of a class of members, of the company, body or managed investment scheme if:
(a)   the appointment is for one meeting only; and
(b)   neither the person nor any associate gives valuable consideration for the appointment.

See generally ASIC Regulatory Guide 128 Collective Action by Investors, which sets outs ASIC's view on when institutional investors who hold shares in a company can collectively discuss their intentions about voting at a meeting of the company without becoming associates or entering into a relevant agreement which would result in an acquisition of shares under Chapter 6 of the Corporations Act.

CA s609(6) - ETOs and Derivatives Exception
A person does not have a relevant interest in securities merely because they have:
(a)   a market traded option over the securities; or
(b)   a right to acquire the securities given by a derivative.
This subsection stops applying to the relevant interest when the obligation to make or take delivery of the securities arises.

Without this exemption, the acceleration provision in s608(8)) would deem the holder of a market traded option or derivative over a share to have a relevant interest in the underlying share from the moment the ETO or derivative is acquired. But a person who has a market traded option or derivative over a share generally does not get any control over the underlying share until the option is exercised or the derivative is settled and the share is delivered. Hence the reason for the exemption.

CA s9 provides that a reference to a derivative outside Chapter 7 has the same meaning as it does in Chapter 7. Note that an option or other instrument that confers an equitable right or interest in an issued share or debenture is not a derivative for these purposes (these fall within para (c) of the definition of "security" and therefore within s764A(1)(a) and so cannot be a derivative because of s761D(3)(c)). The same is true of an option or other instrument that confers an equitable right or interest in an issued interest in a managed investment scheme (these fall within s764A(1)(b)(ii) if the scheme is registered and s764A(1)(ba)(ii) if the scheme is not registered and so again cannot be a derivative because of s761D(3)(c)). Some warrants may confer such an equitable right or interest and therefore will not be a derivative for these purposes - see the discussion on the definitions of "derivative" in lecture 12A and "warrant" in lecture 12B.

Note that there are some issues with this particular exception vis-a-vis OTC derivatives - see the discussion under the heading '3C(ii) - The inappropriate extension of former futures laws to OTC derivatives and other financial products - Takeovers and relevant interests' in Lewis, "A Decade On - Reforming the Financial Services Law Reforms".

CA s609(7) - Conditional Agreements Exception
A person does not have a relevant interest in securities merely because of an agreement if the agreement:
(a)   is conditional on:
  (i)   a resolution under item 7 in the table in s611 being passed; or
  (ii)   ASIC exempting the acquisition under the agreement from the provisions of this Chapter under s655A;
(b)   does not confer any control over, or power to substantially influence, the exercise of a voting right attached to the securities; and
(c)   does not restrict disposal of the securities for more than 3 months from the date when the agreement is entered into.
The person acquires a relevant interest in the securities when the condition referred to in paragraph (a) is satisfied.

Item 7 in the table in section 611 is one of the important windows through the takeover prohibition. It allows someone to acquire shares if the acquisition has been approved by an ordinary resolution of shareholders, where the parties to the transaction and their associates have not voted in favour of the resolution (ie a vote of disinterested shareholders).

This exception is a technical one and counteracts the effect that the acceleration provisions in s608(8)) would otherwise have - namely, conferring a relevant interest in shares as soon as you enter into an agreement to acquire them, even where that agreement is conditional on you doing something (ie passing an item 7 resolution or obtaining an ASIC exemption) that would otherwise protect the acquisition from breaching the takeover prohibition. The effect of the exemption is to postpone your relevant interest until the item 7 resolution is passed or the ASIC exemption is obtained.

CA s609(8) - Pre-emptive Rights Exception
A member of a company, body or managed investment scheme does not have a relevant interest in securities of the company, body or scheme merely because the company's, body's or scheme's constitution gives members pre‑emptive rights on the transfer of the securities if all members have pre‑emptive rights on the same terms.

This exception was inserted to overcome the decision in North Sydney Brick & Tile Co Ltd v Darvall (1986) 4 ACLC 539. It was held in that case that pre-emptive rights in a company’s constitution meant that each shareholder had the power to control disposal of all shares in the company and therefore each had an entitlement to 100% of the shares in the company. This meant that they could acquire shares from each other without increasing their entitlement and therefore without breaching the takeovers prohibition. Technically, it also meant that each new shareholder who purchased shares, no matter how few, went from a nil entitlement to a 100% entitlement in breach of the takeovers prohibition.

CA s609(9) - Directors Exception
A person does not have a relevant interest in securities merely because:
(a)   the person is a director of a body corporate; and
(b)   the body corporate has a relevant interest in those securities.

This exception was inserted to overcome the decision in Clements Marshall Consolidated Ltd v ENT Ltd (1988) 6 ACLC 389, which held that the directors of a company owning shares had the same relevant interest in the shares that the company had because, between them, they had the power as directors to determine how the company would vote or dispose of the shares. This was roundly criticised at the time and subsequently doubted in Zytan Nominees Pty Ltd v Laverton Gold NL (1989) 7 ACLC 153.

CA s609(11) - Restricted Securities Exception
A listed company does not have a relevant interest in restricted securities merely because under the listing rules of the prescribed financial market the company applies restrictions on the disposal of the securities by the holder.

CA s609(11) was introduced by ASIC Class Order CO 13/520.

There are some other lesser exceptions to the definition of "relevant interest".

CA s609(8A), as introduced by ASIC Class Order CO 13/520, provides that a bidder does not have a relevant interest in bid class securities merely because facility acceptances are given to an acceptance facility operator under an acceptance facility in relation to a takeover bid, provided certain conditions are met.

CA s609(9A) also provides that the operator of a clearing and settlement facility does not have a relevant interest in securities merely because of its provision of facilities for the settlement of transactions.

CA s609(10) provides that a person does not have a relevant interest in securities in the circumstances specified in the regulations. The regulations may provide that interests in securities are not relevant interests subject to specified conditions. Currently no such circumstances are prescribed.

CA s609(12), also introduced by ASIC Class Order CO 13/520, provides that an operator of a prescribed financial market does not have a relevant interest in restricted securities merely because under the listing rules of the market the operator has the power to control the exercise of a power to dispose of the securities.

Return to Outline


Corporations Act
Associates

CA s12(2) – Meaning of Associate References in Takeovers Situations
For the purposes of the application of the associate reference in relation to a designated body, a person (the second person) is an associate of the primary person if, and only if, one or more of the following paragraphs applies:
(a)   the primary person is a body corporate and the second person is:
  (i)   a body corporate the primary person controls;
  (ii)   a body corporate that controls the primary person; or
  (iii)   a body corporate that is controlled by an entity that controls the primary person;
(b)   subject to s12(2A), the second person is a person with whom the primary person has, or proposes to enter into, a relevant agreement for the purpose of controlling or influencing the composition of the designated body's board or the conduct of the designated body's affairs;
(c)   subject to s12(2A), the second person is a person with whom the primary person is acting, or proposing to act, in concert in relation to the designated body's affairs.

Division 2 of Part 1.2 of the Corporations Act defines "associate" in relation to a person, called the "primary person". Section 12 applies for the purposes of interpreting a reference to an associate, in relation to a "designated body", if:

(a) the reference occurs in a provision of Ch 6, 6A, 6B or 6C; or
(b)   the reference occurs in a provision outside those Chapters that relates to:
  (i)   the extent, or restriction, of a power to exercise, or to control the exercise of, the votes attached to voting shares in the designated body;
  (ii)   the primary person's voting power in the designated body;
  (iii)   relevant interests in securities in the designated body;
  (iv)   a substantial holding in the designated body;
  (v)   a takeover bid for securities in the designated body; or

 

(vi)  

the compulsory acquisition, or compulsory buy-out, of securities in the designated body.

"Designated body" includes a company or a managed investment scheme (s12(5)). For the purposes of applying s12 to a managed investment scheme:
(a)   a reference to controlling or influencing the composition of the designated body's board is taken to be a reference to controlling or influencing:
  (i)   if the scheme is a registered scheme - whether a particular company becomes or remains the scheme's responsible entity; or
  (ii)   if the scheme is not a registered scheme - whether a particular person is appointed, or remains appointed, to the office (by whatever name it is known) in relation to the scheme that corresponds most closely to the office of responsible entity of a registered scheme; and
(b)  

a reference to voting shares in the designated body is taken to be a reference to voting interests in the managed investment scheme (CA s12(3)).

For these purposes, "control" is defined in s50AA in essentially the same terms as ss608(4)–(7) mentioned above, except that s50AA(3) does not include some wording that s608(6) has relating to associates (s50AA(3) provides that an "entity does not control a second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity's financial and operating policies", while s608(6) provides that a "person does not control the body corporate merely because the person and an entity that is not an associate jointly have the capacity to determine the outcome of decisions about the body corporate's financial and operating policies").

CA s9 defines "relevant agreement" to mean an agreement, arrangement or understanding: (a) whether formal or informal or partly formal and partly informal; (b) whether written or oral or partly written and partly oral; and (c) whether or not having legal or equitable force and whether or not based on legal or equitable rights.

CA s53 defines the "affairs" of a body corporate for the purposes of certain nominated sections and any "prescribed provision" of the CA to include:
(a)   the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body;
(b)   in the case of a body corporate (not being an authorised trustee corporation) that is a trustee (but without limiting the generality of paragraph (a)) - matters concerned with the ascertainment of the identity of the persons who are beneficiaries under the trust, their rights under the trust and any payments that they have received, or are entitled to receive, under the terms of the trust;
(c)   the internal management and proceedings of the body;
(d)   any act or thing done (including any contract made and any transaction entered into) by or on behalf of the body, or to or in relation to the body or its business or property, at a time when:
  (i)   a receiver, or a receiver and manager, is in possession of, or has control over, property of the body;
  (ii)   the body is under administration;
  (iia)   a deed of company arrangement executed by the body has not yet terminated;
  (iii)   a compromise or arrangement made between the body and any other person or persons is being administered; or
  (iv)   the body is being wound up;
  and, without limiting the generality of the foregoing, any conduct of such a receiver or such a receiver and manager, of an administrator of the body, of an administrator of such a deed of company arrangement, of a person administering such a compromise or arrangement or of a liquidator or provisional liquidator of the body;
(e)   the ownership of shares in, debentures of, and interests in a managed investment scheme made available by, the body;
(f)   the power of persons to exercise, or to control the exercise of, the rights to vote attached to shares in the body or to dispose of, or to exercise control over the disposal of, such shares;
(g)   matters concerned with the ascertainment of the persons who are or have been financially interested in the success or failure, or apparent success or failure, of the body or are or have been able to control or materially to influence the policy of the body;
(h)   the circumstances under which a person acquired or disposed of, or became entitled to acquire or dispose of, shares in, debentures of, or interests in a managed investment scheme made available by, the body;
(j)   where the body has made available interests in a managed investment scheme - any matters concerning the financial or business undertaking, scheme, common enterprise or investment contract to which the interests relate; and

(k)  

matters relating to or arising out of the audit of, or working papers or reports of an auditor concerning, any matters referred to in a preceding paragraph.

CR 1.0.18 specifies ss12(2)(b) and (c) as "prescribed provisions" for the purposes of s53.

Section 12 was introduced in its current form into the Corporations Act by the Financial Services Reform Act of 2001. The Explanatory Memorandum for that Act stated:

 

"20.50   The new definition of ‘associate’ will will [sic] apply to all occurrences of ‘associate’ in Chapters 6 to 6C as well as outside those Chapters where the references relate to certain matters such as ‘voting power’ and ‘relevant interests’ in securities. This will avoid any doubt about which definition of ‘associate’ applies in provisions in Chapters 6 to 6C."

Section 12(2A) was introduced by ASIC Class Order CO 13/520. It provides that for the purposes of ss12(2)(b) and (c), the second person is not an associate of the primary person in relation to a designated body merely because: (a) they have entered or propose to enter into a relevant agreement; and (b) one of them has or will have a right under that relevant agreement (whether the right is enforceable presently or in the future and whether or not on the fulfilment of a condition) to dispose of securities in the designated body or control the exercise of a power to dispose of the securities. The explanatory statement for the modification noted that the reason for the modification was to be consistent with the underlying objective of the associate concept in s12. The concept of "associate" is intended to group together persons with a common purpose in relation to a company. It aims to ensure that a person is not treated as acting independently from a person with whom they are in fact cooperating. The modification in s12(2A) recognises that the existence of a mere disposal right is not, in itself, an indication that the parties have a common purpose or objective in relation to the broader direction or destiny of the company. The modification only relates to disposal rights and does not operate in relation to any other provision of an agreement, or any other relevant agreement between the parties that indicates the parties have a common purpose in relation to a company or otherwise creates an association. Examples of circumstances where the modification would not apply are when there is another term in the agreement or another agreement that: (a) the parties will seek to remove one or more of the directors; (b) one party will vote for the appointment of a director nominated by the other party; (c) the disposal right is conditional on such board changes; (d) is concerned with dividend policy; (e) is concerned with the future sale or acquisition of an asset by the company to or from a party; (f) a party will vote in favour of, or against, a corporate action (e.g. in favour of the issue of options or against liquidation); (g) the parties will consult on voting; or (h) the person who disposes of securities under the relevant agreement will continue to play a role in directing the company, whether through representation on the board or otherwise.

In Elders IXL Ltd v NCSC, the NCSC tried to argue that s15(1)(c) - which provides that an associate reference includes a reference to a person with whom the primary person is, or proposes to become, associated, whether formally or informally, in any other way in respect of the matter to which the associate reference relates and which, in the takeovers context, has now been supplanted by s12(2)(c)) - meant that an association could arise unilaterally. BHP and ACI held defensive shareholdings in each other. Bell and Elders were fighting for control of BHP; Hawkins and Pratt for control of ACI. Hawkins/Pratt dropped their bid for ACI after legal advice that it would fail and then bought 4.4% of BHP. Hawkins made public statements along the lines that the reason for buying the shares was that this would give them a seat at the bargaining table, implying that because they might be able to deliver control of BHP to Bell or Elders, then Bell or Elders might be prepared to cause BHP to sell its ACI shareholding to Hawkins/Pratt. The NCSC suggested that Hawkins and Pratt were associates of John Elliot/Elders in relation to BHP. In addition to Hawkins’ public statements, the NCSC pointed out that Pratt and Elliot were friends, directors of the Carlton Football Club and had other common directorships and shareholding interests. However, there was no evidence of any communication between Elliot and Hawkins or Pratt about the acquisition. The court rejected the notion of a unilateral association and said that there must be a real connection between the parties – ie, to paraphrase in my words, that there must be a "proposal" that both parties are aware of and committed to - for these provisions to apply.

See also Endresz v Whitehouse (1997) 15 ACLC 936, where the court held that there must be some bilateral element to a proposal for it to fall within s15(1)(c) (and, by extension, s12(2)(c)).

 

CA s12(4) – Body Itself may be an Associate
In relation to a matter relating to securities in a designated body, a person may be an associate of the body and the body may be an associate of the person.

 

CA s16(1) – Associate Exclusions
A person is not an associate of another person … merely because of one or more of the following:
(a)   one gives advice to the other, or acts on the other's behalf, in the proper performance of the functions attaching to a professional capacity or a business relationship;
(b)   one, a client, gives specific instructions to the other, whose ordinary business includes dealing in securities, to acquire shares on the client's behalf in the ordinary course of that business;
(c)   one had sent, or proposes to send, to the other an offer under a takeover bid for shares held by the other;
(d)   one has appointed the other, otherwise than for valuable consideration given by the other or by an associate of the other, to vote as a proxy or representative at a meeting of members, or of a class of members, of a body corporate.

Return to Outline


Corporations Act
Takeover Restrictions

CA s606(1) – The Takeovers Prohibition
A person must not acquire a relevant interest in issued voting shares in a company if:
(a)   the company is:
  (i)   a listed company; or
  (ii)   an unlisted company with more than 50 members;
(b)   the person acquiring the interest does so through a transaction in relation to securities entered into by or on behalf of the person; and
(c)   because of the transaction, that person's or someone else's voting power in the company increases:
  (i)   from 20% or below to more than 20%; or
  (ii)   from a starting point that is above 20% and below 90%.

This prohibition is subject to s606(1A), which provides that the person may acquire the relevant interest under one of the exceptions set out in s611 (see below), without contravening s606(1).

CA ss603 and 604 extend these provisions to other bodies that are formed and listed in Australia but are not technically companies under the Corporations Act (eg listed building societies and co-operatives and Westpac Banking Corporation, which was formed under a deed of settlement rather than under companies legislation) and to listed managed investment schemes.

"Transaction" used to be defined in the Corporations Act but no longer is and so takes its ordinary meaning. Doing nothing cannot be a transaction. So if shareholder A has their shares cancelled pursuant to a selective reduction of capital or buyback, the fact that that might cause the voting power of shareholder B to increase above the 20% threshold won’t trigger these provisions because that has occurred independently of any transaction "by or on behalf of" shareholder B.

The prohibitions in s606(1) above and s606(2) below are broadened by s610(3), which provides that if: (a) a transaction in relation to, or an acquisition of an interest in, securities occurs; (b) before the transaction or acquisition, a person did not have a relevant interest in particular voting shares but an associate of the person did have a relevant interest in those shares; and (c) because of the transaction or acquisition, the person acquires a relevant interest in those shares; then, for the purposes of applying s606 to the transaction or acquisition, the person's voting power is taken to have increased because of the transaction or acquisition from what it would have been before the transaction or acquisition if the votes attached to those shares were disregarded to what it was after the transaction or acquisition (taking the votes attached to those shares into account). CA s610(3) was introduced to overcome a potential loophole. Without s610(3), it might be possible for two parties, A (an owner of shares) and B (a party wanting to acquire those shares), to manufacture an association between themselves in a way that did not involve B acquiring a relevant interest in the shares in breach of s606(1) or a legal or beneficial interest in the shares in breach of s606(2). Then, because A and B are associates, B's voting power would be taken to include A's shares, which would then mean that B could subsequently acquire those shares from A without any change in voting power, again without infringing s606(1) or (2). CA s610(3) is intended to stop that. Under s610(3), B can only do this if B already has a relevant interest in the shares in question.

Note also s610(3A), as introduced by ASIC Class Order CO 13/520, which provides that s610(3) does not apply to an acquisition of an interest in securities by a subsidiary from its holding company, unless as a result of the acquisition the voting power of a person that is not a subsidiary of their ultimate holding company in the body corporate that issued the voting shares increases. For an explanation of why this provision was introduced, see paragraphs 114-121 of ASIC Regulatory Guide 5 Relevant interests and substantial holding notices.

CA s606(2) - Acquisitions for Others
A person must not acquire a legal or equitable interest in securities of a body corporate if, because of the acquisition:
(a)   another person acquires a relevant interest in issued voting shares in a company that is:
  (i)   a listed company; or
  (ii)   an unlisted company with more than 50 members;
(b)   someone's voting power in the company increases:
  (i)   from 20% or below to more than 20%; or
  (ii)   from a starting point that is above 20% and below 90%.

This prohibition is subject to s606(2A), which provides that if the acquisition of the relevant interest is covered by one of the exceptions set out in s611 (see below), the person may acquire the legal or equitable interest without contravening s606(2).

CA s606(4) - Offers and Invitations
A person must not:
(a)   make an offer, or cause an offer to be made on their behalf, if the person would contravene s606(1) or (2) if the offer were accepted; or
(b)   issue an invitation, or cause an invitation to be issued on their behalf, if the person would contravene s606(1) or (2) if:
  (i)   an offer were made in response to the invitation; and
  (ii)   the offer were accepted.

 

CA s9 - Voting Share
"Voting share" in a body corporate means an issued share in the body that carries any voting rights beyond a right to vote:
(a)   while a dividend (or part of a dividend) in respect of the share is unpaid;
(b)   on a proposal to reduce the body's share capital;
(c)   on a resolution to approve the terms of a buy-back agreement;
(d)   on a proposal that affects the rights attached to the share;
(e)   on a proposal to wind the body up;
(f)   on a proposal for the disposal of the whole of the body's property, business and undertaking;
(g)   during the body's winding up.

When applying these provisions to a managed investment scheme, the reference to voting shares in a body corporate is taken to be a reference to voting interests in the scheme (s610(5)(a)). CA s9 defines "voting interest", in relation to a managed investment scheme, to mean an issued interest in the scheme that confers a right to vote, not being a right to vote that is exercisable only in one or more of the following circumstances: (a) on a proposal that affects rights attached to the interests; (b) on a proposal to wind up the scheme; (c) on a proposal for the disposal of the whole of the scheme property, business and undertaking; or (d) during the winding up of the scheme.

CA s610(1) - Voting Power
A person's voting power in a designated body is:
 Person’s and associates’ votes 

  x 100                                             

Total votes in designated body
where:
person's and associates' votes is the total number of votes attached to all the voting shares in the designated body (if any) that the person or an associate has a relevant interest in; and
total votes in designated body is the total number of votes attached to all voting shares in the designated body.

Even if a person's relevant interest in voting shares is based on control over disposal of the shares (rather than control over voting rights attached to the shares), their voting power in the designated body is calculated on the basis of the number of votes attached to those shares.

CA s610(2) provides that the number of votes attached to a voting share in a designated body is the maximum number of votes that can be cast in respect of the share on a poll: (a) if the election of directors is determined by the casting of votes attached to voting shares - on the election of a director of the designated body; or (b) if the election of directors is not determined by the casting of votes attached to voting shares - on the adoption of a constitution for the designated body or the amendment of the body corporate's constitution.

When applying these provisions to a managed investment scheme, the reference to the election of directors is read as a reference to the appointment of a responsible entity for the scheme (or its nearest equivalent in the case of an unregistered scheme) (s610(5)(b)).

CA s606(6) - Extended Meaning of Acquisition
A person is taken for the purposes of ss606(1) or (2) to acquire a relevant interest in voting shares in a company if:
(a)   securities in which the person already had a relevant interest become voting shares in the company; or
(b)   there is an increase in the number of votes that may be cast on a poll attached to voting shares that the person already had a relevant interest in.
The acquisition occurs when the securities become voting shares or the number of votes increases.

Some examples of cases to which this s606(6) applies are: (1) a person exercises a right to convert a non-voting preference share into an ordinary share that carries votes; or (2) a person pays up partly-paid shares with limited votes and this leads to an increase in the number of votes attached to the shares.

Illustration of Takeovers Rules (1)
Example: suppose A owns 30% of B, which owns 51% of C, which owns 100% of D, which owns 21% of E, an Australian listed company to which our takeover laws apply. Assume that A and B are both foreign so that our takeovers laws don’t apply to restrict anyone from buying shares in B (at least not directly). Z, which currently has no relevant interest in any of A, B, C, D or E, would like to acquire a significant stake in B.
Question (1): Can Z buy A's 30% shareholding in B?
Spurred on by Z's interest in B, A has decided that it would like to acquire a larger shareholding in B. It decides not to sell its 30% shareholding in B to Z but instead to buy the remaining 70% shareholding in B.
Question (2): Can A buy the remaining 70% shareholding in B without infringing Australian takeover laws?

Answers: (1) No. Remember from the example before that A has a relevant interest in D's 21% of E because of the tracing rules in s608(3). By buying A's 30% shareholding in B, Z will also get a relevant interest in (and therefore voting power over) D's 21% of E under s608(3). That increases Z's voting power in E from 0% to 21% in breach of s606(1).

This example is intended to illustrate the point that s606(1)(b) can be triggered if you acquire securities in an upstream company and the effect is to increase your voting power in a downstream company beyond the 20% takeover limit.

(2) Yes. Even though A's economic interest in E will go from (30% of 51% of 21%) to (100% of 51% of 21%), a more than threefold increase, that does not change A's relevant interest/voting power in E. It remains at 21%.

This example is intended to illustrate the point that s606(1) focuses on control over voting power rather than economic interest.

Illustration of Takeovers Rules (2)
Example: again, suppose A owns 30% of B, which owns 51% of C, which owns 100% of D, which owns 21% of E. B owns 15%, E owns 4.9% and Y (an unrelated company) owns 10% of X, an Australian listed company to which our takeover laws apply. E is considering taking a call option over Y's 10% shareholding in X. Can it do so?

Answer: No. Even though E's relevant interest/voting power in X would only go from 4.9% to 14.9% by reason of taking the call option, the effect of the acquisition would be to increase B's relevant interest/voting power in X from 19.9% (its 15% plus a tracing interest in E's 4.9%) to 29.9% (its 15% plus a tracing interest in E's 14.9%) in breach of s606(1).

This example is intended to illustrate how s606(1)(c) can be triggered not only by the effect an acquisition has on the acquirer's voting power, but also by the effect it has on another person's voting power. Note that if E proceeded to take the call option, it would be E, the acquirer, that would breach s606(1) even though it is B's voting power that increases about the 20% takeovers limit.

CA s611 – Exempt Acquisitions
1.    Complying off-market bids
2.    On-market purchases during a complying on-market bid
3.    On-market purchases of convertible securities during a takeover bid that is unconditional or subject only to certain prescribed conditions
4.    Acceptance of scrip offered as takeover consideration
5.    Omitted
6.    Appointment of a receiver/manager under a security
7.    Acquisitions approved by a resolution of the target where no votes are cast in favour or resolution by the parties to the acquisition or their associates
8.    Issues of securities by a company that has not started to carry on any business and has not borrowed any money
9.    3% creep in 6 months (provided throughout the 6 months before the acquisition that person, or any other person, has had voting power in the company of at least 19%)
10.   Pro rata rights issues
11.   Dividend reinvestment plans
12.   IPO issues to promoters under and in accordance with a disclosure document
13.   Issues to underwriters or sub-underwriters under and in accordance with a disclosure document
14.   Indirect acquisitions of downstream holdings resulting from acquisitions of shares in listed companies
15.   Acquisitions under a wills or through operation of law
16.   Auctions of forfeited shares
17.   Court approved compromises or arrangements
18.   Liquidations
19.   Buy-backs
20.   Acquisitions prescribed by the regulations

Regulation 6.2.01 exempts from the CA takeover prohibitions acquisitions of shares in public authorities and in various incorporated associations, co-operatives and building societies (these generally have their own legislative takeover regime under their governing law). Regulation 6.2.02 exempts acquisitions that result from a person holding certain statutory offices prescribed in CR Schedule 3.

Consequences of Breach
•     Criminal offence - 25 penalty units and/or 6 months' jail for individuals (s1311 and Schedule 3) and 125 penalty units for bodies corporate (s1312)
•     Transactions are not invalid (s607)
•     Remedial orders (ss9, 1325A)

Remedial orders include orders freezing voting rights and orders vesting shares in ASIC for sale.

Under CA s606(5), it is a defence to the prosecution of a person for contravening s606(1), (2) or (4) if the person proves that they contravened the subsection: (a) because of inadvertence or mistake; or (b) because the person was not aware of a relevant fact or occurrence. In determining whether the defence is available, you disregard the person's ignorance of, or a mistake on the person's part concerning, a matter of law.

Unacceptable Circumstances
•     Takeovers Panel may declare circumstances in relation to the affairs of a company to be unacceptable, whether or not Chapter 6 has been contravened (s657A).
•     If it makes such a declaration, Panel can also make final orders, including remedial orders, to protect the rights or interests of affected persons or to ensure that a bid proceeds as if unacceptable circumstances had not occurred (s657D).
•     Panel can also make interim orders without having made a declaration of unacceptable circumstances (s657E).

Section 657A provides that the Panel may only declare circumstances to be unacceptable having considered: (1) their effect on the control or potential control of a company; or (2) their effect on an acquisition or proposed acquisition of a substantial interest in a company; or (3) whether they contravene Chapters 6, 6A, 6B or 6C. It must also have regard to the so-called 'Eggleston principles' outlined in section 602 (ie that acquisitions of substantial interests in a listed company or scheme take place in an efficient, competitive and informed market; that target shareholders and directors know the identity of the potential acquirer and have a reasonable time and sufficient information to consider the acquisition; and that target shareholders have a reasonable and equal opportunity to participate in the benefits of the acquisition).

Orders can be made against both the acquirer and the target for causing unacceptable circumstances.

See, for example, Viento Group Limited [2011] ATP 1, where the Takeovers Panel made a declaration of unacceptable circumstances on an application by Viento Group Limited in relation to its affairs. It found that various parties were associated in relation to Viento and that the association resulted in the voting power of certain shareholders increasing above 20% otherwise than in accordance with section 611. Substantial holding notices and tracing notices were not filed, were late or were deficient, and no substantial holding notices were given reflecting the association and subsequent acquisitions. The Panel ordered vesting of shares above an aggregated holding of 20% and filing of substantial holding notices.

Return to Outline


Corporations Act
Substantial Holding Notices

S671B(1) - Requirement to give Information
A person must give the information referred to in s671B(3) to a listed company, or the responsible entity for a listed registered managed investment scheme, if:
(a)   the person begins to have, or ceases to have, a substantial holding in the company or scheme;
(b)   the person has a substantial holding in the company or scheme and there is a movement of at least 1% in their holding; or
(c)   the person makes a takeover bid for securities of the company or scheme.
The person must also give the information to each relevant market operator.

The information must be given even if the situation changes by the time the information is to be given.

ASIC's policy on substantial holdings can be found in ASIC Regulatory Guide 5 Relevant interests and substantial holding notices. See also ASIC Regulatory Guide 222 Substantial holding disclosure: Securities lending and prime broking.

CA s9 – "Substantial Holding"
A person has a substantial holding in a body corporate, or listed registered managed investment scheme, if:
(a)   the total votes attached to voting shares in the body, or voting interests in the scheme, in which they or their associates:
  (i)   have relevant interests; and
  (ii)   would have a relevant interest but for ss609(6) (market traded options and derivatives), 609(7) (conditional agreements) or 609(11) (restricted securities);
  is 5% or more of the total number of votes attached to voting shares in the body, or interests in the scheme; or
(b)   the person has made a takeover bid for voting shares in the body, or voting interests in the scheme, and the bid period has started and not yet ended.

Note that this definition has been amended by ASIC Class Order CO 13/520 to introduce the reference to s609(11) in para (ii) above.

Thus even though ETOs, derivatives, conditional agreements and restricted security arrangements under the ASX Listing Rules don't give you a relevant interest for the purposes of the takeover rules, they still count towards determining whether you are a substantial holder and, as we shall see below, under s671B(7) you must disclose them in any notice you give as a substantial holder.

CA s671B(2) – Movements of + 1%
There is a movement of at least 1% in a person's holding if the percentage worked out using the following formula increases or decreases by 1 or more percentage points from the percentage they last disclosed under this Part in relation to the company or scheme:
 Person’s and associates’ votes 

  x 100                                             

Total votes in designated body
where:
person's and associates' votes is the total number of votes attached to all the voting shares in the company or interests in the scheme (if any) that the person or an associate has a relevant interest in; and
total votes in company or scheme is the total number of votes attached to all voting shares in the company or interests in the scheme.

 

CA s671B(3) - Information to be Given
(a)   The person's name and address;
(b)   Details of their relevant interest in [the shares/interests];
(c)   Details of any relevant agreement through which they would have a relevant interest in [the shares/interests];
(d)   The name of each associate who has a relevant interest in voting shares in the company or interests in the scheme, together with details of:
  (i)   the nature of their association with the associate;
  (ii)   the relevant interest of the associate; and
  (iii)   any relevant agreement through which the associate has the relevant interest;
(e)   If the information is being given because of a movement in their holding - the size and date of that movement;
(f)   If the information is being given because a person has ceased to be an associate - the name of the person; and
(g)   Any other particulars that are prescribed.

Currently nothing additional is prescribed in the Regulations.

Note that while s671B(3) technically only requires the disclosure of relevant interests in a listed company or scheme, as a practical matter, if a person is engaging, or proposing to engage, in a control transaction involving the company or scheme and they use equity derivatives to acquire a significant economic interest in the company or scheme without necessarily acquiring a relevant interest, that too may have to be disclosed in order to avoid "unacceptable circumstances" occurring in relation to that control transaction: see Takeovers Panel Guidance Note 20 - Equity Derivatives.

CA s671B(7) - Other Interests That Have to be Disclosed
For the purposes of this section, a person has a relevant interest in securities if the person would have a relevant interest in the securities but for:
(a)   s609(6) (market traded options and derivatives);
(b)   s609(7) (conditional agreements); or
(c)   s609(11) (restricted securities).

Thus even though ETOs, derivatives, conditional agreements and restricted security arrangements under the ASX Listing Rules don't give you a relevant interest for the purposes of the takeover rules, you must still disclose them in any notice you give as a substantial holder.

Note that this section has been amended by ASIC Class Order CO 13/520 to introduce para (c) above.

CA s617B(4) - Form
The information must be given in the prescribed form and must be accompanied by:
(a)   a copy of any document setting out the terms of any relevant agreement that:
  (i)   contributed to the situation giving rise to the person needing to provide the information; and
  (ii)   is in writing and readily available to the person; and
(b)   a statement by the person giving full and accurate details of any contract, scheme or arrangement that:
  (i)   contributed to the situation giving rise to the person needing to provide the information; and
  (ii)   is not both in writing and readily available to the person.
If the person is required to give a copy of a contract, scheme or arrangement, the copy must be endorsed with a statement that the copy is a true copy.
See New Ashwick Pty Ltd v Wesfarmers Ltd (2000) 18 ACLC 742 and In the matter of Austar United Communications Limited (2003) ATP 16.

The prescribed forms are contained in the Corporations Regulations – Form 603 for an initial notice, Form 604 for a notice of change and Form 605 for a notice of cessation.

CA s617B(5) provides that a substantial holder notice does not need to be accompanied by the documents referred to in s617B(4) if the transaction that gives rise to the person needing to provide the information takes place on a prescribed financial market. This reflects the fact that the process for acquiring or disposing of securities on-market is standardised and typically involves very little documentation between the buyer and seller. In such cases, you simply state in your substantial holder notice that you acquired or disposed of the relevant securities on-market.

In New Ashwick Pty Ltd v Wesfarmers Ltd, W and I entered into a heads of agreement regarding a potential merger which included W taking an immediate allotment of 15% in I. Upon the allotment, W duly gave a substantial shareholding notice to I and the ASX in relation to the allotment and included a copy of the letter from the chairman of W confirming its agreement to take up the allotment but not of the Heads of Agreement itself. The plaintiff sought and received a declaration that W had not complied with the law because it should have attached a copy of the Heads of Agreement. The fact that the Heads dealt with other matters was not considered relevant. It "contributed to" W having a substantial shareholding and therefore had to be disclosed in its entirety.

In In the matter of Austar United Communications Limited, C entered into an agreement with U to acquire shares in an upstream holding company of Austar. Three days later, after filing a substantial shareholder notice giving notice of that agreement, C entered into a shareholders agreement with U setting out how they would jointly control Austar. A shareholder in Austar brought proceedings before the Takeover Panel arguing that C's substantial shareholder notice was defective for failing to include details of the shareholders agreement. C countered that it had not entered into the shareholders agreement at the time of filing the substantial shareholders notice and therefore could not have attached it to the notice. The Takeovers Panel said that where a transaction is effected by various connected agreements and the obligation to give a substantial shareholding notice is triggered by entry into the first agreement, s671B(4)(b) will usually require disclosure of the other written agreements or, if they have not yet been finalised, a written description of the other agreements still under negotiation. The person giving the substantial shareholding notice must be in a position to explain why, having entered the triggering agreement, the parties have not reached sufficient consensus on the terms of the other agreements to bring s671B(4)(b) into play. Thus, it is likely that the decision in New Ashwick will in many cases require the disclosure of the related agreements (or a summary of those parts of the agreement that have been agreed and a description of the other provisions that are intended to be included in the agreement) even if the agreement creating the relevant interest is executed before the other agreements have been finalised.

CA s617B(6) - Deadline for Giving Information
The person must give the information:
(a)   within 2 business days after they become aware of the information; or
(b)   by 9.30 am on the next trading day of the relevant securities exchange after they become aware of the information if:
  (i)   a takeover bid is made for voting shares in the company or voting interests in the scheme; and
  (ii)   the person becomes aware of the information during the bid period.

 

Consequences of Non-compliance
•     Criminal offence - 25 penalty units and/or 6 months' jail for individuals (s1311 and schedule 3) and 125 penalty units for bodies corporate (s1312)
•     Civil liability to a person for any loss or damage they suffer because of the contravention (s671C)
•     Remedial orders (ss9, 1325A) - see Nicholas v Wade (1982) 1 ACLC 459 and ASIC v Terra Industries Inc (1999) 17 ACLC 905

In Nicholas v Wade, the chairman of Mid-East Minerals decided that the company ought to accumulate shares in Metals Exploration with a view to making a takeover bid. To avoid disclosing the position, "carousel" put and call arrangements were entered into. The idea was that as the shareholding got close to the disclosure threshold (then 10%), they would be sold to A, who had put and calls to B, who in turn had put and calls back to Mid-East. It was thought that this would avoid Mid-East having a relevant interest and therefore having to disclose the position. The court held that Mid-East still had a relevant interest under the puts and calls, that this should have been disclosed under a substantial holding notice and that the chairman had been properly convicted of aiding and abetting a breach of the substantial holding notice requirements.

In ASIC v Terra Industries Inc, a broker bought 4 parcels of shares in Coms 21, representing 12.9% of its issued capital, in late December 1998 on behalf of an unnamed client of Terra Industries. One of the 4 parcels was paid for via a fraud committed on another broker and was subsequently sold to cover that broker's costs. The other 3 parcels were not paid for and so, in accordance with ASX market rules, the broker had to pay for them out of its own funds and acquired the right to sell (and therefore a relevant interest in) the shares. Under contractual arrangements between the broker and the individual employee (Gray) who had effected the purchase for the client, Gray was obliged to reimburse the broker for the default by the client. Gray borrowed the funds and paid the broker the amount in question on 8 Jan 1999, resulting in Gray being subrogated to the right of the broker to sell the shares to cover the amount paid. A tracing notice was given by Coms 21 to the broker on 15 Jan 1999 and Gray filed a response on its behalf stating that it had purchased the shares on behalf of Terra Industries and that it did not have a relevant interest in the shares under the precursor to s609(3) (the exception for financial services licensees holding securities on behalf of someone else in the ordinary course of their securities business). The response did not disclose the default in payment or Gray’s interest in the shares. On 29 Jan 1999 someone purported to lodge a substantial shareholding notice on behalf of Terra Industries' unnamed client without naming the client or disclosing the default in payment. Gray subsequently filed a substantial shareholding notice on 25 Feb 1999. At no time did Terra Industries file a substantial shareholding notice. ASIC applied for, and was granted, a vesting order for the failure by Terra Industries and Gray to comply with the substantial shareholding notice requirements in a timely manner. The court noted that there was strong implication that could be drawn from the facts of a conspiracy to mislead the market (Gray had a close association with the chairman of Coms 21), perhaps in an attempt to create circumstances that might attract a takeover offer for Coms 21.

Note that a person who deliberately or negligently gives a false or misleading substantial holding notice also commits an offence against CA s1308(2).

See also ASIC Media Release 08-119, advising of the successful prosecution and fining of a former CEO and managing director of a company who held a substantial interest in the company's shares that varied between 43.05% and 46.40%, amongst other things, for failing to give the company and ASX notices of changes in his substantial holding.

Return to Outline


Corporations Act
Tracing Notices

CA s672A(1) - Disclosure Notices
ASIC, a listed company or the responsible entity for a listed managed investment scheme, may direct:
(a)   a member of the company or scheme; or
(b)   a person named in a previous disclosure under s672B as having a relevant interest in, or having given instructions about, voting shares in the company or interests in the scheme;
to make the disclosure required by s672B.

ASIC Regulatory Guide 86 - Tracing beneficial ownership sets out ASIC’s view of its role in relation to such notices (while this relates to the pre-CLERP 4 Corporations Law, it is still applied in principle under the post-CLERP 4 Corporations Act).

S672A(2) provides that ASIC must exercise its powers under this section if requested to do so by a member of the company or scheme unless it considers that it would be unreasonable to do so in all the circumstances.

S672C provides that where ASIC receives information pursuant to a notice given by it, it may pass it on to the company or responsible entity in question. If the notice was given by ASIC pursuant to a request of a member, ASIC must pass the information on to the person who made the request unless ASIC considers it would be unreasonable in all the circumstances to do so.

Under CA s672DA, a listed company, or the responsible entity for a listed managed investment scheme, must keep a register of information that it receives under disclosure notices, whether the information is received pursuant to a direction the company, or responsible entity, itself gives under s672A or is received from ASIC under s672C. The register must be open for inspection by members free of charge and by other persons upon payment of a fee no more than prescribed in the regulations (CA s672DA(7)).

There is no prescribed form for a direction under s672B. It can be given by fax – see ASIC v Bank Leumi Le-Israel (1996) 14 ACLC 1576.

Confirming what perhaps should have been self-evident, in Re Murchison Holdings Ltd [2009] VSC 528, the Supreme Court of Victoria held that a primary tracing notice under CA s672A(1)(a), and a secondary tracing notice under CA s672A(1)(b), must relate to a current shareholding and cannot be given in relation to a former shareholding. It also held that a notice cannot be given under s672A in relation to options.

CA s672B(1) - Disclosure Obligations
A person given a direction under s672A must disclose to the person giving the direction:
(a)   full details of their own relevant interest in the shares or interests in the scheme and of the circumstances that give rise to that interest;
(b)   the name and address of each other person who has a relevant interest in any of the shares or interests together with full details of:
  (i)   the nature and extent of the interest; and
  (ii)   the circumstances that give rise to the other person's interest; and
(c)   the name and address of each person who has given the person instructions about:
  (i)   the acquisition or disposal of the shares or interests;
  (ii)   the exercise of any voting or other rights attached to the shares or interests; or
  (iii)   any other matter relating to the shares or interests;
  together with full details of those instructions (including the date or dates on which they were given).

CA s672B(1A) provides that a matter referred to in s672B(1)(b) or (c) need only be disclosed to the extent to which it is known to the person required to make the disclosure.

Note that a defendant bears an evidential burden in relation to the "lack of knowledge defence" - see s13.3(3) of the Criminal Code. In other words, they have the burden of adducing or pointing to evidence that suggests a reasonable possibility that they did not know of the information.

CA s672B(2) – Timing
The disclosure must be made within 2 business days after:
(a)   the person is given the direction;
(b)   if the person applies for an exemption under s673 from the obligation to make the disclosure and ASIC refuses to grant the exemption - ASIC notifies the person of its decision on the application; or
(c)   if the direction is given by a company or responsible entity - the company or responsible entity pays any fee payable under the regulations made for the purposes of s672D (currently $5.00).

CA s672D and Schedule 4 of the Corps Regulations prescribe a fee of $5.00 for complying with a direction under section 672A. It is very important if you are ever serving a direction that you remember to include a cheque for the $5.00 fee. Time does not start to run until payment is received.

If the recipient of a notice does not respond to the notice within 2 business days of receipt then they have to refund the fee and can be sued for recovery (s672D(2))!!

Note that CA s672B(3) provides that a person does not have to comply with a direction under s672A given by a company or a responsible entity if the person proves that the giving of the direction is vexatious. This exception does not apply to directions given by ASIC. It is very difficult to prove that a direction is vexatious and thereby rely on this exception. It was tried unsuccessfully in Brunswick NL v Blossomtree Pty Ltd under the old law where a member could request a company to issue a notice. The company refused to do so because it alleged the shareholder had ulterior motives. The shareholder sued successfully to force the company to issue the notice. The shareholder was found by the court to have 3 motives: (1) to inform the market; (2) to investigate potential breaches of takeovers law; and (3) to resolve a commercial dispute and, even if (3) was possibly vexatious, (1) and (2) were sufficient to justify the grant of an injunction.

Consequences of Non-compliance
•     Criminal offence - 25 penalty units and/or 6 months' jail for individuals (s1311 and schedule 3) and 125 penalty units for bodies corporate (s1312)
•     Civil liability to a person for any loss or damage they suffer because of the contravention (s672F)
•     Remedial orders (ss9, 1325A) - see ASIC v Bank Leumi Le-Israel (1996) 14 ACLC 1576 and ASIC v Merkin Investments Pty Ltd (2001) 19 ACLC 1481

A failure to comply within 2 business days can trigger very potent sanctions – described by Fullagar J in Re North Broken Hill Holdings Ltd (1986) 4 ACLC 131 as a "small and hair-pressure trigger for a very powerful and potentially destructive gun".

In ASIC v Bank Leumi Le-Israel, a case which arose out of the Offset Alpine Printing saga, 2 Swiss banks argued that they did not have to comply with a tracing notice because they were precluded from doing so under Swiss secrecy laws. The court rejected this defence and ordered that the shares be disposed of, in this case not by vesting them in ASIC but by selling them to the highest of 2 takeover bids then being made for the subject company.

In ASIC v Merkin Investments Pty Ltd, a similar argument was advanced and then dropped in relation to Vanuatu law. In that case, the court held that the recipient of the notice did not know the relevant information and therefore was not guilty of failure to comply with the tracing notice provisions (other than by taking longer than 2 business days to tell ASIC that it did not know the relevant information). Nevertheless, the court still made a vesting order because of the failure of the holder to comply with substantial shareholding notice requirements.

Note that a person who deliberately or negligently gives a false or misleading response to a notice also commits an offence against CA s1308(2).

Issues for Discussion
Suppose you are holding shares as custodian or nominee for a client:
•     What duty do you have to the client to inform them that you have received a tracing notice?
•     What should you do if you receive a tracing notice without the required $5.00 fee or if the notice is otherwise defective?
See Robertson v Canadian Imperial Bank of Commerce [1995] 1 All ER 824

In Robertson v CIBC, CIBC received a subpoena to produce bank records in an action by a third party against the plaintiff’s brother for repayment of a £15,000 loan. This was received 2 days before the trial was due to begin. It was alleged that the loan was made by way of a cheque given to the brother and payable to the plaintiff. The bank manager tried to contact the plaintiff but was unsuccessful and so attended at court and produced the documents required under the subpoena. These showed not only the deposit of the cheque but also that the plaintiff was overdrawn on his account to the tune of £5,405. A person who heard of this telephoned the plaintiff mentioning his overdraft. The plaintiff took umbrage and brought an action against the bank asserting that it had breached its implied duty of confidentiality (we look at banker-client duties of confidentiality in lecture 9) and was negligent in failing to obtain his consent for the disclosure, not informing the court that his consent had not been obtained, in revealing more information than was required to show the existence of the £15,000 debt and in failing to object to the unnecessarily wide disclosure. The Privy Council held that the bank was compelled by law to disclose the document and therefore it was not in breach of its duty of confidentiality. There was no absolute duty to inform the customer of receipt of the subpoena. Here the bank had used all reasonable endeavours to try to contact the plaintiff and in the circumstances that was all that could be expected of it. More generally, the Privy Council was reluctant to hold that there was a duty imposed on a bank in all cases to try to notify its customer of receipt of a subpoena. While this was appropriate as a matter of simple courtesy and proper business practice and ordinarily a customer could reasonably expect this, the Privy Council pointed out that there might be cases where a bank was entitled, in its own protection or compelled by public duty, not to make such disclosure. On the question of failure to object to the width of the subpoena, the judgment is somewhat unclear. The court at first instance had held that it was a breach of the bank’s duty of care for it not to claim privilege in relation to the customer’s records. The Privy Council held that there was no such privilege at law for the bank to claim and therefore that part of the claim failed. It did not specifically address the issue of whether the bank should have objected to the subpoena on grounds of relevance and unnecessary width. On the question of failure to disclose to the court that the customer had not consented, the Privy Council said that they would not exclude the possibility of such a duty arising as an implied contractual term but that in this case the plaintiff could not show that he had suffered any loss by the failure to so inform the court (by implication, the Privy Council thought that the document would have been admitted into evidence in any event).

A custodian or nominee really should not be exposing itself to these sorts of arguments about implied duties and should deal with these issues expressly in its client documentation (eg by including an express provision acknowledging that it is entitled to respond to legal process whether or not it has made contact with the customer and that, in the absence of specific instructions and an acceptable indemnity from the client, it is not bound to oppose or challenge disclosure under legal process).

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Foreign Acquisitions and Takeovers Act
Overview

FATA - Overview
•     Regulates direct and upstream acquisitions by foreign persons of securities in Australian corporations and units in Australian unit trusts above certain thresholds (referred to as the threshold test).
•     Triggers - 20% substantial interest and 40% aggregate substantial interests.
•    

Interests of associates are included.

•     Direct acquisitions of substantial interests by foreign persons are both notifiable actions and significant actions and subject to a compulsory "notify and wait" requirement under s81(1).
•     Upstream acquisitions of substantial interests and acquisitions of aggregate substantial interests by foreign persons are significant actions and voluntarily notifiable to the Treasurer under s82(1).
•     The Treasurer may prohibit a significant action if it involves a change of control which s/he considers to be contrary to the national interest or, if the action has already occurred, may order divestiture.
•     Notification of a significant action triggers an obligation on the Treasurer to consider the action within the next 30 days, although s/he can extend that via an interim order by up to a further 90 days if necessary. If the Treasurer does not prohibit the action in that period (and the notifier has waited until the end of that period to effect the action), the Treasurer is precluded thereafter from prohibiting or undoing the action. Therefore a major incentive to lodge a notice and wait the required period before completing the action, even where notification is voluntary.

Click here for a copy of the Foreign Acquisitions and Takeovers Act 1975.

In addition to regulating acquisitions by foreigners of interests in Australian corporations and unit trusts, FATA also regulates acquisitions by foreigners of interests in Australian businesses and Australian land as well as other arrangements by foreigners to control boards of Australian corporations or to control Australian businesses. These provisions are beyond the scope of this course.

The threshold test is complex and depends on the type of transaction (eg whether it is in a sensitive sector or involves an indirect acquisition of Australian land or an agribusiness), the type of acquirer (government sector or private sector) and whether the acquirer is from a country with which Australia has a Free Trade Agreement (USA, China, Japan, South Korea, NZ and Chile). Some of the thresholds are indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year. A summary of the thresholds is available online at http://firb.gov.au/exemption-thresholds/monetary-thresholds/. For most foreign private sector investors acquiring interests in the securities of Australian corporations, the relevant threshold as at 31 December 2016 was $1,094m (originally $800m indexed from 2005) for FTA investors and $252m (originally $200m, indexed from 2007) for non-FTA investors.

FIRB - Examination of Proposals
•     Foreign Investment Review Board – a division of Treasury.
•     Assists the Treasurer in review of notifications pursuant to published Policy Guidelines setting out the government's approach to "national interest" considerations.
•     Sensitive sectors are subject to lower thresholds and closer scrutiny: media, telecommunications, transport, military goods/technology, encryption/security technology, extraction of uranium/plutonium and operation of a nuclear facility.

The Policy Guidelines are set out in the Treasury publication "Australia's Foreign Investment Policy" (December 2015). Sensitive sectors are prescribed in r22 of the Foreign Acquisitions and Takeovers Regulations 2015.

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Foreign Acquisitions and Takeovers Act
Substantial Interests

FATA ss4 and 17(1) - Substantial Interests
•     A person holds a substantial interest in an entity if they, alone or together with one or more associates:
  •     are in a position to control at least 20% of the voting power or potential voting power in the entity;
  •     hold interests in at least 20% of the issued securities in the entity; or
  •     would hold interests in at least 20% of the issued securities in the entity if securities in the entity were issued or transferred as the result of the exercise of rights of a kind mentioned in s15(1)(b) or (c).
•     A person holds a substantial interest in a trust (including a unit trust) if they, together with any one or more associates, hold a beneficial interest in at least 20% of the income or property of the trust.

FATA s15(1)(b) and (c) are summarised in the slide on acceleration of interests below.

FATA s17(3) provides that in determining the percentage of voting power or potential voting power that a person is in a position to control in an entity, disregard any votes that he or she controls as a proxy or representative.

Note Equiticorp Industries Ltd v ACI International Ltd (1987) VR 485, where the Victorian Supreme Court held that you can't look solely at the holdings of a foreigner's associates in an Australian company to see if the foreigner holds a substantial interest in the company. A foreigner must hold some securities or control some voting power in the company before you can add in the interests of their associates.

FATA ss4 and 17(2) - Aggregate Substantial Interests
•    

Two or more persons hold an aggregate substantial interest in an entity if they, together with any one or more associates of any of them:

  •     are in a position to control at least 40% of the voting power or potential voting power in the entity;
  •    

hold interests in at least 40% of the issued securities in the entity; or

  •     would hold interests in at least 40% of the issued securities in the entity if securities in the entity were issued or transferred as the result of the exercise of rights of a kind mentioned in s15(1)(b) or (c).
•     Two or more persons hold an aggregate substantial interest in a trust (including a unit trust) if they, together with any one or more associates of any of them, hold in the aggregate beneficial interests in at least 40% of the income or property of the trust.

Again, FATA s17(3) provides that in determining the percentage of voting power or potential voting power that a person is in a position to control in an entity, disregard any votes that he or she controls as a proxy or representative.

FATA s15(1), referred to in the third indented bullet point above, is an acceleration of interest provision. It is set out below.

FATA ss22 and 23 – Voting Power and Potential Voting Power
•     Voting power = the maximum number of votes that might be cast at a general meeting of the entity (s22(1)).
•     Potential voting power = the voting power in the entity, on the assumption that the votes that might be cast at a general meeting of the entity included each vote that:
  •     because of the exercise of a right might come into existence in the future (whether or not the right is exercisable presently or in the future or on the fulfilment of a condition); and
  •     if it came into existence, might be cast at a general meeting of the entity (s22(2)).
•     Control of voting power = control that is direct or indirect, including as a result or by means of agreements or practices, whether or not the agreements or practices have legal or equitable force or are based on legal or equitable rights (s23).

FATA s22(3) provides that in determining how much of the potential voting power in an entity a person is in a position to control at a particular time, if: (a) a right exists that, if exercised, would result in the person being in a position to control more of the potential voting power in the entity than the person would be in a position to control if the right were not exercised; and (b) it cannot be determined at that time (whether from the right itself or from the circumstances existing at that time) whether the right would be exercised, assume that the right were exercised at that time.

FATA s22(4) provides that if a person is in a position to veto any resolution of the board, central management or general meeting of an entity, then for the purposes of FATA (except s47(2)(b) (meaning of notifiable action) and s54(4) (meaning of control)) the person is taken to be in a position to control 20% of the potential voting power in the entity.

FATA ss4, 9 and 11 – Interests
•     Interest in securities = any legal or equitable interest in the securities (s9(1)).
•     Interest in a trust = any beneficial interest in the income or property of the trust and includes the holding of a unit in a unit trust (s11).

FATA s4 defines "security" as a share in a corporation or a unit in a unit trust and an "entity" as a corporation or a unit trust.  FATA s4 also defines "interest" in relation to an asset and Australian land.

FATA s9(2) provides that a person holds or acquires an interest in a security in an entity if: (a) the person is not the registered holder of the security; and (b) the person is entitled to exercise or control the exercise of a right attached to the security (other than because he or she was appointed as a proxy or representative).

FATA s9(3) provides that in determining whether a person holds or acquires an interest in a security, it is immaterial that the interest cannot be related to a particular security.

FATA ss18(1) and (2) provide that if (a) a person has a right that, if exercised, would result in the person holding an interest in an issued security in the entity; and (b) it cannot be determined at that time (from the right itself or from the circumstances existing at that time) whether the right would be exercised, in determining the percentage of the interests in the issued securities in the entity that the person holds, or would hold, at a particular time, it should be assumed for the purposes of the Act that the right were exercised at that time.

FATA s18(3) provides if, under the terms of a trust, a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken for the purposes of the Act to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.

FATA s15(1) – Acceleration of Interests
A person is taken to acquire an interest in a security if the person:
(a)   enters an agreement to acquire the interest;
(b)   has a right to acquire such an interest under an option;
(c)   has a right, other than by reason of having an interest under a trust, to have such an interest transferred to himself or herself or to his or her associate.

FATA s15(1) is an acceleration provision not unlike CA s608(8).

FATA s15(2) provides that a right mentioned in paragraph (b) or (c) above includes a right under an instrument or agreement.

FATA s15(3) provides that ss15(1) and (2) apply whether or not: (a) the right or option is presently exercisable or exercisable in the future; or (b) the agreement, right or option requires the fulfilment of a condition.

FATA ss15(4) and (5) – Exception for Conditional Agreements

For the purposes of Part 4 (notice of notifiable action) and related provisions, if a person proposes to take an action to acquire or sell an interest in a security and the provisions of the agreement to acquire or sell the interest do not become binding on the person until one or more conditions are met, the person takes the action to acquire or sell the interest, and enters the agreement, only when the provisions become binding.

The importance of this provision is explained in the slide on FATA ss81 and 82 ("Notify and Wait" Requirement) below.

FATA s19 - Tracing of Substantial Interests
Where:
(a)   a person holds a substantial interest, or 2 or more persons hold an aggregate substantial interest, in a corporation or trust (the higher entity), including because of one or more applications of this section; and
(b)   the higher entity:
  (i)   is in a position to control all or any of the voting power or potential voting power, or holds interests in all or any of the shares, in a corporation (the lower entity); or
  (ii)   holds an interest in a trust (the lower entity);

the person or those persons together shall be taken to be in a position to control so much of the voting power or potential voting power of the lower entity as the higher entity is in a position to control or to hold the interests in the lower entity that the higher entity holds.

FATA s19 is a tracing provision not unlike CA s608(3)(a). However, unlike CA s608(3)(a), which only traces through one non-controlling 20%+ shareholding, FATA s19 traces through multiple 20%+ substantial interests and 40%+ aggregate substantial interests without limit.

FATA s19(3) provides that this section does not apply for the purpose of determining under s40(2)(a) (meaning of significant action - entities), s41(2)(a) (meaning of significant action - businesses) or s47(2)(a) (meaning of notifiable action - general), whether a foreign person acquires a direct interest in an Australian entity or Australian business that is an agribusiness, or determining under s47(2)(b) (meaning of notifiable action - general) whether a foreign person acquires a substantial interest in an Australian entity.

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Foreign Acquisitions and Takeovers Act
Associates

FATA s6(1) - Associates
Each of the following persons is an associate of a person:
(a)   any relative of the person;
(b)   any person with whom the person is acting, or proposes to act, in concert in relation to an action to which the Act may apply;
(c)   any person with whom the person carries on a business in partnership;
(d)   any entity of which the person is a senior officer;
(e)   if the person is an entity, any holding entity or any senior officer of the entity;
(f)   any entity whose senior officers are accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the person or, if the person is an entity, the senior officers of the person;
(g)   an entity if the person is accustomed or under an obligation (whether formal or informal) to act in accordance with the directions, instructions or wishes of the entity or the senior officers of the entity;
(h)   any corporation in which the person holds a substantial interest;
(i)  

if the person is a corporation, a person who holds a substantial interest in the corporation;

(j)   the trustee of a trust in which the person holds a substantial interest;
(k)   if the person is the trustee of a trust, a person who holds a substantial interest in the trust;
(l)   if the person is a foreign government, a separate government entity or a foreign government investor in relation to a foreign country (or a part of a foreign country):
  (i)   any other person that is a foreign government in relation to that country (or any part of that country);
  (ii)   any other person that is a separate government entity in relation to that country (or any part of that country); or
  (iii)   any other foreign government investor in relation to that country (or any part of that country).

FATA s6(3) provides that a person is not an associate of another person merely because: (a) one gives advice to the other, or acts on the other's behalf, in the proper performance of the functions attaching to a professional capacity or a business relationship; (b) one, a client, gives specific instructions to the other, whose ordinary business includes dealing in financial products (within the meaning of the Corporations Act), to acquire financial products on the client's behalf in the ordinary course of that business; (c) one had sent, or proposes to send, to the other an offer under a takeover bid (within the meaning of that Act) for securities held by the other; (d) one has appointed the other, otherwise than for valuable consideration (within the ordinary meaning of the term) given by the other or by an associate of the other, to vote as a proxy or representative; (e) one provides independent services as a trustee of a trust to the other who is a beneficiary of the trust and the trustee is licensed to provide those services under a law of the Commonwealth, a State, a Territory, a foreign country or a part of a foreign country; (f) one holds a substantial interest in a managed investment scheme (within the meaning of the Corporations Act) and the other is the responsible entity of the scheme; or (g) both are partners of a partnership of actuaries or accountants, medical practitioners, patent attorneys, sharebrokers or stockbrokers, trade mark attorneys, architects, pharmaceutical chemists or veterinary surgeons, legal practitioners or a partnership that has as its primary purpose collaborative scientific research, and includes at least one university and one private sector participant (whether or not it also includes government agencies or publicly funded research bodies).

For these purposes, an "officer" of an entity includes: (a) for a corporation, a director of the corporation; (b) for a unit trust, the trustee (where the trustee of which is an individual), a director of the trustee (where the trustee of which is a corporation) and any other individual involved in the central management and control of the trust; (c) a person who is, or a person in a group of persons who are, in a position to determine the investments or policy of the entity or a trustee of the entity; (d) a person who makes, or participates in making, decisions that affect the whole, or a substantial part of, the business of the entity; (e) a person who has the capacity to affect significantly the financial standing of the entity; (f) a receiver and manager of any part of the business of the entity appointed under a power contained in any instrument; (g) an administrator of the entity; (h) an administrator under a deed of company arrangement executed by the entity; and (i) a liquidator of the entity appointed in a voluntary winding up (s4).

A "senior officer" of an entity means an officer of the entity under any of paragraphs (a) to (e) of the definition of officer above, except an independent director of the entity (s4).

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Foreign Acquisitions and Takeovers Act
Notifications

FATA ss81 and 82 - "Notify and Wait" Requirement
•     A foreign person who proposes to take a notifiable action must give a notice to the Treasurer before taking the action (s81(1)).
•     A foreign person who proposes to take a significant action that is not a notifiable action may choose to give a notice to the Treasurer about the proposed action (s82(1)).

•    

Having furnished such a notice to the Treasurer, the foreign person must not take the action before the earliest of:
  •     the day that is 10 days after the end of the decision period mentioned in s77;
  •     if an interim order is made, the end of the period specified in the order;
  •     the day a no objection notification is given to the person (s82(2)).

A person who fails to give a notice under s81(1) before taking a notifiable action commits an offence under s84 and contravenes a civil penalty provision under s91. A person who takes a significant action before the end of the period in s82(2) commits an offence under s85 and contravenes a civil penalty provision under s92. The criminal offence in each case is punishable by imprisonment for 3 years and/or a fine of 750 penalty units. The civil penalty is punishable in each case by a penalty of 250 penalty units.

As mentioned previously, FATA ss15(4) and (5) provide that, for the purposes of Part 4 (notice of notifiable action) and related provisions, if a person proposes to take an action to acquire or sell an interest in a security and the provisions of the agreement to acquire or sell the interest do not become binding on the person until one or more conditions are met, the person takes the action to acquire or sell the interest, and enters the agreement, only when the provisions become binding.

This enables a foreign person to enter into an agreement to acquire a substantial interest in an Australian entity which is conditional upon compliance with the FATA notification and wait provisions (usually referred to as a "FIRB condition") without breaching the Act. Otherwise, the acceleration provisions in s15(1) would have the effect that the foreigner would breach the Act simply by entering into an agreement to acquire a substantial interest ahead of notifying the Treasurer under s81(1).

FATA s81(2) provides that if a person takes an action by entering an agreement, the notice must deal with each notifiable action covered by the agreement.

FATA s47 - Definition of "Notifiable Action"
Includes a foreign person ... acquiring a substantial interest in:
•     an Australian corporation that carries on an Australian business, whether alone or together with one or more other persons;

•    

an Australian unit trust; or
•     an Australian entity that is the holding entity of an entity mentioned above,
and that meets the threshold test.

"Australian entity" means an Australian corporation or an Australian unit trust (s4).

"Australian corporation" means a corporation formed in Australia (s4).

"Australian unit trust" means a unit trust: (a) the trustee of which holds relevant Australian assets (that is Australian land or securities in an Australian entity); (b) the trustee of which carries on an Australian business (see below); (c) the central management and control of which is in Australia; (d) in which one or more persons who are ordinarily resident in Australia hold more than 50% of the beneficial interests in the income or property of the unit trust; or (e) that is listed for quotation in the official list of a stock exchange in Australia (s4).

"Australian business" means a business that is carried on wholly or partly in Australia in anticipation of profit or gain and includes holding an interest in a mining or production tenement (s8).

The threshold test for these types of acquisitions is based on the higher of the total asset value or the total issued securities value of the relevant entity in which the interest is being acquired (s51). Total asset value is generally measured using the asset values in the entity's most recent financial statements (FATR rr20 and 23), after converting any non-AUD amounts into AUD (FATR r25). Total issued securities value is generally measured by reference to the acquisition or issue price being paid for the interests being acquired (FATR r21), again after converting any non-AUD amounts into AUD (FATR r25).

As mentioned previously, the threshold test is complex and depends on the type of transaction (eg whether it is in a sensitive sector or involves an indirect acquisition of Australian land or an agribusiness), the type of acquirer (government sector or private sector) and whether the acquirer is from a country with which Australia has a Free Trade Agreement (USA, China, Japan, Korea, NZ and Chile). Some of the thresholds are indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year. For most foreign private sector investors acquiring interests in the securities of Australian corporations, the relevant threshold as at 31 December 2016 was $1,094m (originally $800m indexed from 2005) for FTA investors and $252m (originally $200m, indexed from 2007) for non-FTA investors.

Note that the definition of "notifiable action" (and therefore the compulsory "notify and wait" requirement in s81(1) below) only applies to agreements under which a person to whom that section applies acquires a "substantial interest" (20%+) in an Australian entity. They do not apply to agreements under which a group of unassociated foreigners acquire an "aggregate substantial interest" (40%+) in an Australian entity. These latter agreements instead are voluntarily notifiable under s82(1).

FATA s4 – Definition of "Foreign Person"
Foreign person means:
(a)   an individual not ordinarily resident in Australia;
(b)   a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;
(c)   a corporation in which 2 or more persons each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
(d)   the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;
(e)   the trustee of a trust in which 2 or more persons each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
(f)   a foreign government; or
(g)   any other person, or any other person that meets the conditions, prescribed by the regulations.

"Foreign corporation" means a foreign corporation to which paragraph 51(xx) of the Constitution applies (s4).

"Foreign government" means an entity (within the ordinary meaning of the term) that is: (a) a body politic of a foreign country; (b) a body politic of part of a foreign country; or (c) a part of a body politic mentioned in paragraph (a) or (b) (s4).

Note that an Australian corporation can be a "foreign person" if foreigners have a substantial or aggregate substantial interest in it.

FATA s20(1) – Definition of "Acquire a Substantial Interest"
A person acquires a substantial interest in an entity if the person:
(a)   starts to hold a substantial interest in the entity;
(b)   would start to hold a substantial interest in the entity on the assumption that the person:
  (i)  held interests in securities that are interests that he or she has offered to acquire; or
  (ii)  held rights to votes that might be cast at a general meeting of the entity that are rights that he or she has offered to acquire; or
(c)   already holds a substantial interest in the entity and they:
  (i)  become in a position to control more of the voting power or potential voting power in the entity;
  (ii)  start to hold additional interests in the issued securities in the entity; or
  (iii)  would start to hold additional interests in the issued securities in the entity if securities in the entity were issued or transferred as the result of the exercise of rights of a kind mentioned in s15(1)(b) or (c).

For these purposes, a reference to a person offering to acquire interests in securities or rights includes a reference to a person making or publishing a statement (however expressed) that expressly or impliedly invites a holder of interests in securities or rights to offer to dispose of interests in securities or rights (s20(2)).

FATA s40 - Definition of "Significant Action"
Includes an acquisition of an interest in, or issue of, securities in an entity that is:
•     if the securities are shares, a corporation that is a relevant entity that carries on an Australian business, whether alone or together with one or more other persons, or the holding entity of such a corporation;

•    

an Australian corporation that carries on an Australian business, whether alone or together with one or more other persons, or the holding entity (other than a foreign corporation) of such a corporation; or
•     an Australian unit trust or a holding entity of an Australian unit trust,
that meets the threshold test and where there would be or has been a change in control of the entity as a result of the action.

FATA s4 defines "relevant entity" as: (a) an Australian entity; (b) a foreign corporation that holds relevant Australian assets or that is a holding corporation of one or more Australian corporations; or (c) a holding entity of such a foreign corporation or of an Australian unit trust.

"Australian entity", "Australian corporation", "Australian unit trust" and "Australian business" are defined in the notes to the slide on s47 (definition of "notifiable action") above.

For an explanation of the "threshold test", see the notes to the slide on FATA s47 (Definition of "Notifiable Action") above.

FATA ss54(1)-(3) provide that there is a "change in control" of an entity if, and only if, the Treasurer is satisfied that the action would have, or has had, the result that: (a) one or more foreign persons would begin, or have begun, to control the entity (whether alone or together with any associates of any of those persons); or (b) if one or more foreign persons already control or controlled the entity or business, either: (i) another foreign person would become, or has become, a person who controls the entity; or (ii) a person would cease, or has ceased, to be a person who controls the entity or business.

FATA s54(4) provides that a person "controls" an entity if: (a) the person (whether alone or together with one or more associates) is in a position to determine the policy of the entity or business in relation to any matter; or (b) without limiting (a), the person holds a substantial interest in the entity or is one of 2 or more persons who hold an aggregate substantial interest in the entity. However, a person mentioned in paragraph (4)(b) does not control the entity if the Treasurer is satisfied that, having regard to all the circumstances, the person together with any one or more associates of that person is not in a position to determine the policy of the entity (s54(5)). In other words, a person with a substantial interest in an entity is, or persons with an aggregate substantial interest in an entity are, taken to control the entity unless the Treasurer is satisfied otherwise.

FATA s54(7) provides that if the Treasurer is satisfied that one or more foreign persons together with any one or more associates control an entity under s54(4), then, in relation to an action taken relating to the entity, a reference to a foreign person is taken, for the purposes of Part 3 (powers of Treasurer), to include a reference to those associates, even if those associates are not foreign persons.

See Canwest Global Communications Corporation v Treasurer for an example of a successful challenge to a divestiture order by the Treasurer under FATA.

Consequences of Breach
•     Criminal offence - 750 penalty units and/or 3 years jail (ss84 and 85)
•     Civil penalty - 250 penalty units (ss91 and 92)
•     Prohibition/disposal order (ss67 and 69)
•     Remedial orders (s132)
•     Acquisition is not however invalid (s134)
•     Note anti-avoidance provisions (ss78 and 79)

Where a person gives notice of a proposed significant action to the Treasurer and takes the action without waiting the required period, the person only commits an offence or contravenes a civil penalty provision if there is a change in control as a result of the action (ss85(e) and 92(b)).

Note also s102 (where a corporation is convicted of a criminal offence or liable to a civil penalty for contravening the Act, an officer of the corporation who authorized or permitted the contravention is also punishable for the same offence or civil penalty) and 103 (an officer of a corporation is liable to a civil penalty if: (a) the corporation contravenes a civil penalty provision of this Act; (b) the officer knew that, or was reckless or negligent as to whether, the contravention would occur; (c) the officer was in a position to influence the conduct of the corporation in relation to the contravention; and (d) the officer failed to take all reasonable steps to prevent the contravention).

Exemptions from Compulsory Notification
•    

Rights issues (r41(2)(a))

•     Dividend or distribution reinvestment plans and bonus share plans of listed entities (r41(2)(b))
•     Interests held solely by way of security for the purposes of a moneylending agreement or acquired by way of enforcement of a security held solely for the purposes of a moneylending agreement (r27)
•     Legal interests held by a foreign custodian for (non-foreign) Australian beneficiaries, where the foreign custodian exercises voting rights only in accordance with the directions of the beneficiaries or another custodian (r30)
•     Underwriters can apply for an exemption certificate (r42)
•     Acquisitions of interests in financial sector companies - these are separately regulated under the Financial Sector (Shareholdings) Act 1998 (Cth) (r32)

FATR r5 defines "moneylending agreement" as an agreement entered into in good faith, on ordinary commercial terms and in the ordinary course of carrying on a business of lending money or otherwise providing financial accommodation, except an agreement dealing with any matter unrelated to the carrying on of that business.

Under FATR r42, a foreign person, including a foreign government investor, may apply for an exemption certificate if they propose to acquire interests in securities through their business of underwriting. The Treasurer may give such a certificate, if satisfied that the acquisition of the kinds of interests by the foreign person is not contrary to the national interest. Actions covered by the certificate do not need to be notified to the Treasurer provided the conditions (if any) specified in the certificate are met. FIRB Guidance Note 26 Exemption Certificates for Underwriters has further details.

Illustration of FATA Tracing/Acceleration Rules
Example: again, suppose A (a foreign incorporated company) owns 30% of B, which owns 51% of C, which owns 100% of D, which owns 21% of E, an Australian company. B owns 15%, E owns 4.9% and Y (an unrelated company) owns 10% of X, a listed Australian company. E is considering taking a call option over a 10% shareholding in X held by Y. According to its most recent published balance sheet, X has assets in excess of the FATA threshold. Can E do so?

 

Answer: not without including a FIRB condition in the option and then complying with the "notify and wait" provisions in FATA. Because all the shareholdings between A and E are above the 20% substantial interest threshold, s19 operates so that A is deemed to have an interest in everything in which B, C, D and E have interests. This includes D's 21% of E and so E is deemed to be a foreign person for the purpose of FATA (E is a corporation in which a foreign corporation holds a substantial interest within paragraph (b) of the definition of "foreign person" in s5). A, B, C, D and E are also all associates of each other under ss6(1)(h) and (i) because of the 20%+ shareholdings up and down the chain. So the interest of E and its associates in X is 19.9% (E's 4.9% and B's 15%). If E takes the call option without including a FIRB condition, the effect of s15(1) will be that E is deemed to have an interest in Y's 10% of X immediately it takes the call option. That in turn will increase the interest of E and its associates from 19.9% to 29.9%, giving it and its associates a substantial interest in X. To avoid breaching FATA, E will need to include a FIRB condition in the option under ss15(4) and (5) and then give a notice to the Treasurer under s81(1) and wait the prescribed period under s82(2) before the acquisition of the call option becomes effective.

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Foreign Acquisitions and Takeovers Act
Prohibition/Divestiture Powers

Treasurer's Powers in Respect of Significant Actions
In the case of a significant action involving an acquisition of an interest in, or issue of, securities:
•     if the action has not yet been taken and the Treasurer is satisfied that taking the action would be contrary to the national interest, an order prohibiting the action (wholly or partly) and directing a foreign person not to increase their interest in the relevant entity (s67);

•    

an interim order giving the Treasurer an extra 90 days to consider whether to make a prohibition order (s68);
•     if the action has already been taken and the Treasurer is satisfied that the result is contrary to the national interest, an order directing the person who acquired the interest to dispose of the interest within a specified period to one or more persons who are not associates of the person (s69);
•     a no objection notification, subject to conditions (s74); or

•    

an unconditional no objection notification (s75).

An order under ss67-69 must be in writing and registered on the Federal Register of Legislation with 10 days after it is made (s72).

FATA s77 imposes a time limit on the Treasurer exercising the powers above in cases where the Treasurer receives a notice from a person stating that a significant action (including a significant action that is a notifiable action) is proposed to be taken and the person does not take the action before the end of the "decision period" or, if the Treasurer makes an interim order before the end of the "decision period" under s68 extending the period for consideration, before the end of the extended period under that order.

"Decision period" is defined in s77(5) to mean effectively 30 days after the day the Treasurer receives the requisite notice from a person stating that a significant action is proposed, although this can be extended by written request from the person giving the notice.

If the Treasurer wants to make an order prohibiting the action or give a no objection notification, unless he or she makes an interim order under s68 extending the period for consideration, he or she must do so within the "decision period" (s77(2)).

If the Treasurer makes an interim order under s68 extending the period for consideration and wants to make an order prohibiting the action or give a no objection notification, the Treasurer must do so within the extended period under the interim order (s77(3)).

As mentioned previously, these provisions provide a major incentive for foreign persons to lodge a notice in relation to a significant action and wait the required period before completing the action, even where notification is voluntary.

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Other Legislation

Sector Specific Limitations
•     Licensed ADIs, insurance companies and their holding companies - Financial Sector (Shareholdings) Act 1998 (Cth)
•     Financial market or clearing and settlement system operators - Part 7.4 of the Corporations Act 2001 (Cth)
•     Airport operator companies - Part 3 of the Airports Act 1996 (Cth)
•     Broadcasters - Part 5 of the Broadcasting Services Act 1992 (Cth)
•     Casinos - see eg Casino (Burswood Island) Agreement Act 1985 (WA)

The Financial Sector (Shareholdings) Act 1998 (Cth) regulates the ownership of licensed ADIs, insurance companies and their holding companies. The maximum "stake" that a person may have in such a company is 15%, unless the Treasurer approves a higher percentage limit on national interest grounds. A person's "stake" is the aggregate of the person's "direct control interests" and the "direct control interests" of the person's associates. The term "associate" is defined in a similar manner to the FATA prior to its amendment in 2015. There are serious problems with that definition because of endless extension of that term to associates of associates (see section 4(1)(l) in schedule 1 to the Financial Sector (Shareholdings) Act).

CA Part 7.4 allows the operators of financial markets and clearing and settlement facilities which are of national significance to be prescribed. Once prescribed, a person is prohibited from having "voting power" (as defined in the CA) in excess of 15% in the operator without the Minister's approval.

Company Specific Limitations
•     Qantas - Part 3 of the Qantas Sale Act 1992 (Cth)
•     Telstra - Part 2A of the Telstra Corporation Act 1991 (Cth)
•     GAL - prior to its corporatisation in 2002, Part 4 of the Gas Industry Restructuring Act 1986 (NSW)
•     Santos - prior to 29 November 2008, Santos Limited (Regulation of Shareholdings) Act 1989 (SA)
•     Constituent documents

For an example of the restrictions on ownership that can sometimes be found in constituent documents, see Shears v The Phosphate Co-operative Company of Australia Limited (1989) 7 ACLC 812, where a co-operative company limited the number of shares a person could hold to 500. It is increasingly rare for listed companies to have such restrictions on ownership as ASX Listing Rules 6.10 and 6.12 only allow removal of voting and dividend rights or divestiture where that is required by legislation or otherwise approved by the ASX. Approval is generally only given if the requirement is a mandatory one imposed under legislation or needed to maintain a licence.

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System Issues

•     Different rules for determining ownership interests, different tests for associates, different exemptions and different trigger points ® a systems nightmare
•     Need to be able to capture, classify, aggregate, dissect and analyse group positions
•     Need early warning system and ability to restrict trading as you approach relevant thresholds
•     Given time constraints, need robust procedures for giving substantial holder notices and responding to tracing notices

 

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