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The Department of Home Affairs has issued its draft guidance “Modern Slavery Act 2018: Draft Guidance for Reporting Entities” (Draft Guidance) for the new Modern Slavery Act 2018 (Cth) (the Act).
It's a time of much uncertainty for the equity capital markets community as a result of the cases being brought by the ACCC and ASIC in relation to the ANZ capital raising in 2015. How joint lead managers can work together to manage a capital raising transaction without breaching cartel provisions and what disclosure is required in relation to the outcome of a raising has been and will continue to be a much discussed topic for lead managers and issuers alike.
ASIC’s report 605 gives almost no guidance on when disclosure is required in relation to a shortfall however it does give guidance on two important issues: allocation processes and bookbuild messaging.
For the second year in a row, ASIC provided an early Christmas gift to Australian equity capital market participants with the release of a publication of significance.
ASIC Report 605 Allocations in Equity Capital Transactions (Report), released on 20 December 2018, provides a detailed overview of the way that various types of Australian ECM transactions are carried out and sets out ASIC’s findings from its review of market practice for the allocation of securities in equity capital market transactions. This includes a number of “best practice” recommendations for lead managers as well as some for ASX-listed issuers (and those aspiring to be ASX-listed).
The Report comes at a time when there is global focus on the management of conflicts of interest in allocation processes in ECM transactions – ASIC’s report largely adopts a number of the recommendations contained in the International Organisation of Securities Commissions’ (IOSCO’s) final report into equity capital raising processes from September 2018.
Given that regulatory context, and considering observations that ASIC has made in previous reports concerning management of confidential information and conflicts of interest in capital raising processes, ASIC’s findings set out in the Report do not come as much of a surprise. We expect that a large number of lead managers are already conducting themselves largely in accordance with the “best practice” recommendations made by ASIC in the Report. That said, some of the recommendations concerning the role of compliance in allocation processes, the records to be maintained (in particular, setting out and recording the reasons for each allocation decision) and participation by employees in securities transactions are likely to be new (and perhaps unanticipated) developments.
Additionally, there are a number of significant points coming out of the Report relevant to boards of issuers. It is those comments that are in some respects the most significant in the Report.
ASIC reminds boards that approving the issue of securities (including the allocations made) is their responsibility and ASIC’s Report suggests that in discharging their duties they should be having regard to:
ASIC also notes in passing that based on its analysis of post-offer pricing performance, issuers may not be focussing on the terms of raising (ie the offer price) as “actively as they should”. We query that statement obviously and in our experience, issuers are typically very focused on the issue price and minimising the discount but there are a number of factors to balance, pricing (maximising proceeds and/or minimising the dilution impact for non-participating holders) being one of them, but others will often be of equal (and sometimes greater) importance, such as funding certainty (ie ability to obtain an underwriting commitment), the desire for a successful raising (ie ensuring that there is sufficient demand for the offering), the desire for a successful aftermarket and also the company’s interests in the long term health of its share register.
For lead managers, it is worth bearing in mind that although the findings in the Report are expressed as recommendations, it provides a strong indication of the approach ASIC will take in interpreting the content of legal obligations that all lead managers have (which include the obligations to provide financial services “efficiently, honestly and fairly”, to have in place adequate arrangements for the management of conflicts and not to engage in misleading or deceptive conduct in relation to securities). That being said, some of the “better practices” are expressed to be examples of things that might be considered. We suggest that lead managers consider the appropriateness of these suggestions in the context of their individual circumstances and processes.
Overall, ASIC has refrained from taking a prescriptive approach to allocations (compare this to ASIC’s guidance on sell-side research). However, like with the guidance on sell-side research, we expect that the significance of the recommendations will become more apparent as the industry attempts to implement the recommendations.
All lead managers should consider their systems and practices against ASIC’s “best practice” recommendations, which include:
There are a few additional areas in the Report which will also be of interest to lead managers:
ASIC has flagged that it will next look at practices in debt capital market raisings – suffice to say, to the extent the recommendations of this Report apply, debt capital market participants should also follow those.
 See, for example, ASIC Report 486 Sell Side Research and Corporate Advisory: Confidential Information and Conflicts and ASIC Regulatory Guide 264 Sell-side Research.