Respondent
...
Level 16, 530 Collins Street
MELBOURNE VIC 3000
Ph: +61 3 9655 3500
Internet: www.takeovers.gov.au
Email: takeovers@takeovers.gov.au
10 December 2024
Beneficial Ownership and Transparency Unit
Market Conduct and Digital Division
Treasury
Langton Cres
Parkes ACT 2600 By email: beneficialownership@treasury.gov.au
Private and confidential
Dear all
Exposure Draft – Treasury Laws Amendment Bill 2024: Enhanced disclosure of
ownership of listed entities (“Exposure Draft”)
The Takeovers Panel is a peer review body that is the main forum for resolving disputes in takeovers.1 The Panel has for decades acted to promote transparency in the beneficial ownership of listed entities, demonstrated by the Panel’s Guidance
Note 20: Equity Derivatives and concerns the Panel has raised in relation to compliance with the tracing notice provisions.2 Accordingly, the President of the
Panel appointed a subcommittee to consider the Exposure Draft.3
Disclosure of equity derivatives
The subcommittee supports incorporating equity derivatives into the substantial holding regime and notes that requiring the same standard of disclosure for the disclosure of equity derivatives in proposed s671BA(4) would deal with the main issue in Pacific Smiles Group Limited [2024] ATP 12. The subcommittee’s comments below focus on some improvements that could be made to the draft legislation that
1
For more information about the Panel and its role, see the material in the ‘About’ tab on our website www.takeovers.gov.au
2
See for example: Viento Group Limited 02 [2011] ATP 12, [45]-[46] and Firestone Energy Limited [2013]
ATP 4, [62]-[75]
3
The sub-committee members are Alex Cartel (Chair), Kelvin Barry, Sylvia Falzon, Marissa Freund,
Jon Gidney, Christian Johnston, Kristen Jung, Marina Kelman, Jeremy Leibler, Rebecca Maslen-
Stannage, Diana Nicholson, Reeny Paraskeva, James Stewart, Philippa Stone and Erin Tinker
1/4
would simplify its operation and reduce compliance costs, without materially detracting from the core aim of improving transparency.4
Incorporating equity derivatives into the definition of relevant interests
If the government wants to incorporate equity derivatives (whether physical or cash settled) into the substantial holding provisions, the subcommittee considers that it would be preferable to do so by having a separate definition, rather than incorporating equity derivatives into the definition of ‘relevant interest’ whether for the purposes of Chapter 6, 6C or s205G – which is likely to have unintended consequences. The definition of ‘relevant interest’ has been in place for decades and the market has incorporated this term into commercial agreements.
The subcommittee is also concerned about the impact of incorporating equity derivatives into the definition of ‘relevant interest’ as it is applied to the tracing notice provisions, having regard to the fact that equity derivatives (in particular, non- physically settleable equity derivatives) may be functionally and intentionally different (from a control perspective) to physical holdings (or physically settleable equity derivatives).
Another reason not to incorporate equity derivatives into the definition of relevant interests is that any issues relating to the use of equity derivatives to circumvent the takeovers prohibition in s606 is best left to the Takeovers Panel to consider on a case- by-case basis. The subcommittee considers that by incorporating equity derivatives into the definition of ‘relevant interest’ and repealing s609(6), it is likely that the draft legislation (if enacted as is) would pick up contraventions of s606 that are clearly not unacceptable.5 The ability for ASIC to determine how cash settled equity derivatives can be calculated and recalculated (see proposed s608(3) to (6)) could also lead to contraventions of s606 that are beyond the relevant holder’s control.
The subcommittee is concerned about the complexity of the drafting in the proposed redraft of Part 6C.1 (including the definitions in the table in proposed s671B) and has considered ways in which disclosure of changes in the composition of equity derivatives could be simplified. The subcommittee considers that the main concern should be to ensure that changes of the make up between equity derivatives and physical shares (in circumstances where the person’s aggregate holding across equity derivatives and relevant interests (as unamended) changes by 1% or more, or there is
4
Noting that the sub-committee considers that some of the negative consequences it discusses in this submission are likely to be unintentional and unforeseen by the drafters.
5
For example, through someone holding equity derivatives (and a long position of over 20%) with no control purpose. The main example of using equity derivatives to acquire a long position in over 20% in a way that would be unacceptable is by making those acquisitions in a way that ensures you can guarantee acquisitions under item 9, s611 (known colloquially as ‘banking creep’).
2/4
a 1% or greater change as between the categories) are appropriately disclosed.6 If equity derivatives were given a new definition and taken out of the definition of
‘relevant interest’, the drafting of these disclosure requirements could be significantly simplified.
Another option if the government reconsiders
If after reviewing the submissions from other market participants, the government reconsiders this reform, another option would be to mitigate any risk that the Panel’s current position in Guidance Note 20 is subject to judicial review by making regulations under s602A(3) which “may provide that an interest of a particular kind is an interest that may constitute a substantial interest”. The subcommittee is happy to assist
Treasury if it is decided to make such regulations.
Freezing orders
While the subcommittee acknowledges that the Takeovers Panel proposed the freezing orders power in 2015, that was in the context of the existing definition of
‘relevant interest’ and tracing notice regime and in the absence of the proposed changes to the substantial holding notice regime. In the circumstances, the subcommittee considers that the freezing orders proposal may not be necessary to effect the core changes of the proposal (ie the substantial holding notice regime which the subcommittee supports) and that the proposal may otherwise need further consideration to deal with the following issues:
• It would be preferable to limit ASIC’s power to make freezing orders to cases
when it finds non-compliance with the tracing notice provisions (which was the
focus of the Panel’s proposal in 2015 in the context of the existing definition of
‘relevant interest’ and tracing notice regime) and not the substantial holding
provisions more generally.
• There may be complications in ASIC using the freezing orders power in relation
to equity derivatives, as it could potentially apply to the holder of hedge
securities. It may be preferable to remove equity derivatives from the scope of
the freezing orders power.
The subcommittee was also concerned that the proposed freezing orders power does not have a time limit and wondered whether it would be preferable for appeals to freezing orders to go to the Takeovers Panel.
6
The main issue in Pacific Smiles Group Limited [2024] ATP 12 was not that there was no disclosure of the change in the equity derivative from cash settled to physically settled but rather, as noted above, that documents relating to the likely acquisition of shares were not disclosed at the time the equity derivative was written.
3/4
The subcommittee understands you plan to meet with the Panel executive on
Wednesday, 11 December 2024. We are happy for them to give you more context in relation to the above comments. The subcommittee is also happy to meet with you.
Yours sincerely
Alex Cartel
President
Takeovers Panel
4/4
