ASIC highlights key corporate finance issues amid renewed focus on enforcement

Australia’s merger and acquisition (M&A) activity reached record-breaking highs in 2018. With this trend set to continue, the way that companies engage in M&A opportunities will come under amplified scrutiny by ASIC.

In this edition of Corporate Insights, we examine the key areas of focus highlighted in ASIC’s latest report on the regulation of corporate finance issues and recommend steps you should take to ensure ongoing compliance.

In brief

ASIC has recently published its tenth consecutive report on the regulation of corporate finance issues, providing important insights into ASIC’s approach when intervening into the regulation of fundraising transactions, expert valuations, M&A and corporate governance.

The key areas of focus highlighted in ASIC’s report include:

Fundraising

• Inadequate disclosure of corporate business models – This was the most common reason that ASIC raised concerns with company prospectuses. There was found to be a lack of financial information in relation to key accounting judgements and estimates that have been made in the financial statements.
• Methodologies for disclosing prospective financial information – Although it is common market practice to provide for a forecast period within the company prospectus for companies with an operation history, ASIC has reported concerns with a lack of disclosure.
• On-market buy backs – ASIC has reported knowledge of companies that are undertaking on‑market buy backs within the 10/12 limit (different rules apply to share buy-backs involving 10% or less of the total shares to be purchased within a 12-month period, and share buy-backs involving over 10%).

M&A

• Schemes of arrangement – Issues regarding offer terms, ‘truth in takeovers’ statements, shareholder classes and bid structures are among ASIC’s largest concern. Particularly, with complex consideration in schemes giving rise to concerns over inequality of shareholders, extra scrutiny has arisen where the transaction may lack traditional mechanisms for managing class inequalities. These issues arose in the recent Mitula Group Limited scheme of arrangement,  where shareholders were offered cash considerations for their first 20,000 shares and then scrip in a foreign entity for the balance of their holdings. ASIC raised concerns of potential unfairness between shareholders as the target holders were offered different considerations, resulting in the amendment of the consideration structure.
• Voting intention and other public statements –  There has been significant intervention by ASIC in ensuring that potential investors and scheme acquirers properly recognise the limitations of agreements, arrangements and understandings.

Corporate governance: Climate change risk disclosure

• Mitigation – As discussed in the last edition of Corporate Insights: Climate change: An emerging risk for company directors, it is necessary that companies and directors remain vigilant in respect of policy shifts towards mitigation of climate change related risks.
• Proactive approach – ASIC urges companies to proactively consider climate change related risks and the potential effects on all aspects of their business. The 2018 annual general meeting (AGM) season highlighted that climate change risks are a significant issue for investors, emerging as the most frequently raised environmental, social and governance issue.
• Specific climate change risk disclosure – With the potential threat of liability for directors emerging, specific rather than general disclosure of climate change risks to investors is recommended, especially in relation to financial statements and the financial performance of the business.
• Strong corporate governance – In order to identify, assess, and manage potential risks to the business and investors, companies should maintain a strong and effective corporate governance framework.

How will this impact you?

With ASIC recently receiving a funding boost in the tune of $400 million over four years, as the annual general meeting season fast approaches companies should prepare to see ASIC strengthen and intensify its approach to enforcement against corporate misconduct.

To ensure compliance with regulatory requirements, we recommend that companies:

1. Provide adequate disclosure in company prospectuses in relation to fundraising, and within financial statements for climate change risk;
2. Ensure that on-market buy-backs are truly on-market and are carried out in the ordinary course of trading;
3. Clearly consider and address any potential shareholder class issues that are likely to arise within complex schemes; and
4. Establish and maintain a strong system of corporate governance.