Corporate Finance Update - Issue 11

ob体育 has taken its first action for 鈥榞reenwashing鈥� against listed energy company Tlou Energy Limited (Tlou). Tlou has paid a total of $53,280 to comply with four infringement notices issued by ob体育 over concerns about alleged false or misleading sustainability-related statements made to the Australian Securities Exchange (ASX) in October 2021.

The infringement notices were issued in relation to statements and images contained in two ASX announcements made by Tlou which claimed that:

electricity produced by Tlou would be carbon neutral
Tlou had environmental approval and the capability to generate certain quantities of electricity from solar power
Tlou鈥檚 gas-to-power project would be 鈥榣ow emissions鈥�, and
Tlou was equally concerned with producing 鈥榗lean energy鈥� through the use of renewable sources as it was with developing its gas-to-power project.

ob体育 was concerned that Tlou either did not have a reasonable basis to make the representations, or that the representations were factually incorrect. For more information, please see Media Release (22-294MR) ob体育 acts against greenwashing by energy company (27 October 2022).

We have previously reminded listed companies and their advisers that sustainability-related statements or plans must have a reasonable basis (see Issue 7, Issue 6 and Issue 4 of the ob体育 Corporate Finance Update). ob体育 is prioritising greenwashing misconduct for enforcement action and will use its regulatory toolbox where instances of greenwashing are identified.

Treasury consultation on mandatory climate reporting

On 12 December 2022, Treasury released a consultation paper on . The consultation paper seeks initial views on key considerations for the design and implementation of standardised, internationally-aligned requirements for disclosure of climate-related financial risks and opportunities in Australia. ob体育 encourages listed companies to participate in the consultation process to ensure the proposed standards are appropriate and workable for our market and economy and will provide 鈥榙ecision-useful鈥� information for investors.

Feedback is open for 10 weeks and can be provided to [email protected] until 17 February 2023.

The Government will consider views submitted in response to the consultation paper and set out a specific design proposal for further consultation, which will provide more detail of the new reporting requirements and their implementation and sequencing.

For more information on the consultation paper see .

Treasury consultation on empowering the AASB to deliver sustainability standards

The Government has committed to ensuring large businesses provide Australians and investors with greater transparency and accountability about their climate鈥憆elated plans, financial risks, and opportunities.

Treasury is currently consulting on proposals to amend parts of the ob体育 Act to to meet the Government鈥檚 commitment. ob体育 encourages interested stakeholders to participate in the consultation process.

Feedback can be provided to [email protected] until 16聽December 2022.

Fundraising

Design and distribution obligations

Implementation of design and distribution obligations (DDO) is one of our core strategic projects, as outlined in the ob体育 Corporate Plan. Recent surveillances have resulted in 21聽stop orders.

We emphasise that issuers should not lodge a prospectus and expect that DDO concerns can always be resolved within the exposure period. Issuers should think very carefully about DDO before they draft the prospectus and before it is lodged with ob体育.

Recent stop orders have focused on the quality of target market determinations (TMDs). We summarise some recently issued stop orders below in relation to offers of securities under Chapter 6D of the Corporations Act.

Neldner Road Vintners Limited (Neldner)

Neldner is an unlisted public company seeking to raise $10 million to acquire and expand its vineyard operations. ob体育 issued an interim order because:

Neldner relied on self-certification by investors that they were in the target market, and
the TMD was not publicly available.

The interim order was lifted after Neldner made changes to the TMD. For further information, please see Media Release (22-308MR) Interim stop order on offers from Neldner Road Vintners Limited (9 November 2022).

Finnia Income Ltd (Finnia)

Finnia is an unlisted public company seeking to raise $20 million through the issue of redeemable preference shares for the purpose of lending to real estate development projects.聽ob体育 issued an interim order because:

Finnia had not prepared a TMD for the offer, and
the TMD it subsequently produced primarily focused on the features of the offer and consumers鈥� understanding of the offer rather than appropriately defining a target market.

For further information, please see Media Release (22-309MR) ob体育 places interim stop order on offers from Finnia Income Limited (9 November 2022).

ob体育 using natural language processing for prospectus reviews

ob体育 considers a range of risks and other factors to determine which types of disclosure documents we will review.

We have recently developed and implemented an in-house natural language processing (NLP) solution to help us identify prospectuses that we will review in detail and to analyse trends in prospectus disclosure. Our NLP solution extracts key information from prospectuses with a high degree of accuracy and performs pre-defined searches within the document.

This information 鈥� along with other metrics, regulatory portal data and internal information 鈥� helps us target our prospectus reviews.

As part of ob体育鈥檚 recently announced data strategy, we are committed to improving and extending our use of NLP and machine learning in the future.

ob体育 acts against 鈥榞reenwashing鈥� in capital raisings

ob体育 has been continuing to focus on potential 鈥榞reenwashing鈥� in capital raisings. Our concerns were more common among issuers involved in the mining and energy industries.

Our actions resulted in:

an oil and gas issuer removing net zero emissions targets where it did not provide additional information about how the targets would be achieved and the potential feasibility of them
a hydrogen exploration issuer removing 鈥榗lean energy鈥� claims because its exploration activities were not at the stage where it could suggest that its assets were viable to be a source of 鈥榗lean鈥� hydrogen
a vanadium exploration issuer recasting its 鈥榗lean green鈥� labelling because it had not completed studies that assessed the feasibility of adopting renewable energy sources or other carbon abatement strategies and was hence a future focus only.

In general terms, we consider issuers should provide:

clear and supportable reasons to justify why they consider their products or services are 鈥榗lean鈥� or 鈥榞reen鈥�. These reasons should be disclosed in proximate locations so that investors can identify and understand the basis for any claims, and
reasonable grounds for any statement that is forward-looking in nature, including net zero targets, and disclose those grounds. Investors should be provided with information about what your target is, how and when you expect to meet your target, how you will measure your progress or milestones and any underlying assumptions.

When making any green or sustainability-related claims, issuers should consider the principles set out in Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products.聽

Lodging disclosure documents during the Christmas close-down period

We remind issuers that prospectuses lodged over the Christmas close-down period will automatically have the exposure period extended.

In 2018, we issued聽. This instrument continues to operate to automatically extend the exposure period to 14 days for disclosure documents lodged between:

5 pm on the last business day before 18 December, and
9 am on the first business day after 1 January.

Issuers should consider this carefully when lodging fundraising documents during this period.

Deferred settlement relief extended

Section 11 of provides relief for deferred settlement trading of Australian Securities Exchange (ASX) quoted products (deferred settlement relief) following certain corporate actions such as initial public offers and rights issues.

ob体育 has previously granted individual relief to allow deferred settlement trading for institutional investors who could not rely on the deferred settlement relief because institutional settlement generally occurs after the commencement of the deferred settlement trading period. From 7 December 2022, the deferred settlement relief has been extended to permit deferred settlement trading where there is an agreement to pay the application monies (rather than having to pay the application monies before the deferred settlement trading period commences).

Additionally, the deferred settlement relief now permits deferred settlement trading in connection with corporate actions such as compromises or arrangements under Part 5.1 of the Corporations Act where there is an entitlement to be transferred securities. This is consistent with individual relief we have previously granted for deferred settlement trading where applicants were not able to rely on the deferred settlement relief as the securities were transferred rather than issued.

ob体育 has commenced proceedings against McPherson鈥檚 Limited

ob体育 has commenced proceedings in the Federal Court against McPherson鈥檚 Limited. We are claiming that just before a capital raise in November 2020, McPherson鈥檚 became aware that its sales to a major customer would be significantly lower than what it had publicly forecast. Despite this, McPherson鈥檚 did not revise its forecast, and issued a cleansing notice to the ASX which represented that it had no information that needed to be disclosed and that it had complied with all its disclosure obligations. ob体育 is alleging that McPherson鈥檚 breached its continuous disclosure obligations and misled investors by:

failing to remove or update its original earnings guidance
issuing a defective cleansing notice, and
reaffirming the forecasts at its annual general meeting.

ob体育 is also alleging that McPherson鈥檚 former CEO Laurence McAllister breached his duties by failing to prevent McPherson鈥檚 breaches.聽

This action serves as a reminder that companies need to be acutely aware of their disclosure obligations at the time of a capital raising.

Please see Media Release (22-346MR) ob体育 sues McPherson鈥檚 and its former CEO alleging continuous disclosure and directors鈥� duties breaches, misleading statements (9 December 2022) for further information.

Mergers and acquisitions

Relief from section 606 to facilitate an internal restructure

Section 606(4) prohibits a person from making an offer that would cause the person to contravene section 606(1) or (2). ob体育鈥檚 general position is that, unless there are exceptional circumstances, a company should not seek section 606 relief where a restructure could otherwise be facilitated through an item 7 approval.

We received an application for relief concerning a proposed sale of the majority of shares in Company A. However, Company A held a 33.61% interest in a listed company (Company B) which the buyer did not wish to acquire. To facilitate the sale, Company A established a new company (Company C) to transfer its holdings in Company B. However, Company C would contravene section 606(1) and (2) by acquiring the interest of more than 20% in Company B and Company A would contravene section 606(4) by making the offer.

We granted relief because we considered the transaction between Company A and Company C was not a control transaction and did not offend the principles in section 602. We required that the officers, constitution and underlying beneficial holders of Company C at the acquisition would remain the same as Company A. Our relief also meant Company B did not have to seek an item 7 approval from its shareholders for a transaction unrelated to them.

Relief granted to facilitate extension of offer period

We granted relief for a takeover bid where the bidder sought to re-open and extend the offer period after the offer period had closed. Although the application was made after the end of the bid period, we considered it was still open to ob体育 to consider the relief.

Relief was required to process certain acceptances that the bidder considered to be validly accepted prior to the offer close according to the bidder鈥檚 statement, but not submitted to ASX鈥檚 clearing and settlement facility (CHESS) until after the bid period had ended. Under the Corporations Act, Corporations Regulations and ASX Settlement Operating Rules, where a target holder鈥檚 securities are CHESS registered, their acceptance of a takeover bid is not deemed an acceptance until it has been processed by CHESS.

We granted technical relief conditionally, to give effect to the wishes of shareholders whom the bidder considered had validly accepted the offer in accordance with the bidder鈥檚 statement before the end of the original bid period. Relevantly, ob体育 did not make a determination as to whether the acceptances were validly made. Without this relief, the takeover bid might have failed as there was doubt as to whether the minimum acceptance condition would have been met. The effect of the relief was that the bid period was briefly extended to allow the relevant acceptances to be processed in CHESS.

Prospective bidders are reminded of the requirements on acceptances of takeover offers. For more information, please refer to Regulatory Guide 9 Takeover bids (RG 9) at RG聽9.595鈥揜G聽9.601.

Disclosing the buy price in Rule 5.13.1 announcements

Rule 5.13.1 of the prohibits a participant from offering, on behalf of the bidder, to buy the target securities on-market at a price that varies from the consideration offered under the relevant takeover bid, unless and until an announcement has been made to the market.聽

Generally, market practice is to either:聽

state in a Rule 5.13.1 announcement that the participant (on behalf of the bidder) will buy on-market at a price which is at or below the consideration offered under the relevant takeover bid, or
if the buy price is higher than the consideration offered, the bidder will usually vary their takeover bid first and then, if applicable, make a Rule 5.13.1 announcement as described in paragraph (a) above.聽

These practices are compliant with Rule 5.13.1.聽聽聽

However, where a takeover bid is not varied before a Rule 5.13.1 announcement is made, and the participant (on behalf of the bidder) is offering to buy at a price which is above the consideration offered, we expect a Rule 5.13.1 announcement to be a statement of the actual price at which the participant is offering to buy. This ensures that the market remains fully informed during a takeover bid.

An announcement of a varied takeover bid will typically result in a short trading suspension of the target securities by the market operator. A Rule 5.13.1 announcement disclosing the higher buy price will also likely result in a short trading suspension. This allows time for the information to be disseminated and for the market to respond accordingly.聽

We intend to consult in future on a proposal to amend Rule 5.13.1 to ensure our expectations for these announcements are clear to all participants.聽

Engaging and communicating with members in schemes

We continue to support companies鈥� efforts to promote member engagement with scheme of arrangement transactions. However, we highlight the importance of scheme proponents adopting a disciplined approach to their communications with shareholders. We recently observed a scheme of arrangement where communications with shareholders, both formal and informal, provided an unbalanced representation of the advantages of the scheme. This included:

an ASX announcement released after the first court hearing discussing only the advantages of the scheme
an outbound call script to be used by a shareholder engagement firm having an unbalanced representation of the benefits of the scheme, and
various ad hoc communications with shareholders that might not have adhered to the court-approved messaging contained in the scheme booklet.

In addition, the scheme proponent sought orders at an interlocutory hearing to approve a 鈥榦ne-on-one鈥� call script for possible use by the company鈥檚 CEO to conduct systematic outbound calls. The court did not approve the call script because it considered a campaign of outbound calls to shareholders by a CEO, even if it contained a balanced account of the advantages and disadvantages of the scheme, could readily become implied advocacy for the scheme due to the unusual conduct.

We also recently observed a scheme where the court noted that there appeared to be no reason to distinguish between scripts prepared for inbound or outbound calls. The court considered approval should be sought for substantive (as opposed to administrative) communications.

As we have previously highlighted (for example, in Issue 9 of the ob体育 Corporate Finance Update), if proponents seek to engage with members before a scheme meeting, they should take care and ensure that they:

advise the court of proposed call scripts or other relevant shareholder communications that involve substantive engagement with shareholders
do not interfere with the court-approved 鈥榤essage鈥�
keep records of communications with shareholders during the scheme process and make those records available to ob体育 before the second court hearing as well as to the court.

We will seek to review and provide comments on any shareholder communications that are to be put to the court. We may also wish to review other proposed communications with shareholders about the scheme, which may include communications made before the first hearing.

Control transactions with common directors

We recently raised concerns about a potential conflict of interest in a proposed members鈥� scheme of arrangement where three of four directors of the scheme proponent were also directors of the proposed acquirer and had participated in board decisions about the transaction. The common directors also proposed to make recommendations in the scheme booklet.

Common directors between parties pursuing a control transaction is not uncommon. We expect directors who hold positions on the board of both a scheme proponent and acquirer to take steps to address or mitigate any real, potential or perceived conflict of interest. In most instances, the scheme proponent will appoint an independent board committee and the relevant director(s) will recuse themselves from participating in the scheme proponent鈥檚 negotiations, deliberations or decisions relating to the transaction. This helps to ensure that common directors are not in a position of potential conflict between duties owed to the scheme proponent and the proposed acquirer respectively.

We raised concerns and highlighted them in our 鈥榠ndication of intent鈥� letter provided to the court. Subsequently, the scheme booklet was amended to remove the common directors鈥� recommendations. Further prominent and detailed disclosure was provided regarding the risks that may arise from the potential conflicts.

Corporate governance

Audit relief

(ob体育 Instrument 2016/784) relieves certain large proprietary companies, and small proprietary companies that are controlled by a foreign company, from the obligation of having the company鈥檚 financial report audited, providing an auditor鈥檚 report to members, and providing a statement by the auditor in relation to any concise financial report.

A large proprietary company, or a small proprietary company that is controlled by a foreign company, that is not eligible for audit relief under ob体育 Instrument 2016/784 may apply for individual audit relief covering the matters set out in Regulatory Guide 115 Audit relief for proprietary companies (RG 115).

We are not obliged to grant individual audit relief even if the statutory pre-conditions and our policy settings in RG 115 for individual audit relief have been met. We will take into account all of the relevant circumstances of the application when considering whether to exercise our discretion to grant individual audit relief. ob体育 may refuse to grant individual audit relief if the company has failed to comply with its financial reporting obligations under the Corporations Act in previous financial years. We generally require a company that has failed to comply with the financial reporting obligations under the Corporations Act in previous financial years to demonstrate two years of 鈥榦n-time鈥� financial reporting compliance before we consider granting individual audit relief. We consider that this approach is consistent with our policy that companies seeking audit relief must be well managed and in sound financial condition.

Using the Regulatory Portal

ob体育 Regulatory Portal lodgement issues: Outages, incorrect lodgements, and timing

Portal outages: Where planned outages occur, they will be communicated through the聽ob体育 . Where there is a requirement to submit lodgements on a particular day, we encourage lodging parties to check the scheduled service interruptions page on the ob体育 website.

Lodgements will otherwise need to wait until the portal can be accessed. This includes all applications which must be made through the portal and will not be accepted by other means.

Document lodgement errors:聽Where an incorrect or incomplete document has been lodged, the correct document will need to be provided through a new lodgement. This may require a replacement or supplementary disclosure document to be lodged. All new lodgements will incur additional fees.

Lodgement timeframes:聽If a lodgement through the portal is submitted at or just after midnight, even if the lodgement process was commenced before midnight, it will result in a date stamp of the following day and the lodgement will be taken as being received on the following day. We encourage you to allow sufficient time to make lodgements through the portal to ensure the relevant applications or documents are dated the same day as lodgement.聽

Time and date of lodgement are recorded as Eastern Standard Time or Eastern Standard Daylight Savings time (whichever applies in the ACT) regardless of your physical location when using the portal.

For further information, please see the聽

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