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In this Edition, we consider ASIC’s recent Market Integrity Update, AICD’s joint guidance for navigating the virtual environment, the Takeovers Panel’s consideration of the dividend reinvestment plan exception to section 606 of the Corporations Act and duties to disclose climate-related financial risks.

GOVERNANCE & REGULATION

ASIC issues April 2021 Market Integrity Update. ASIC has published its Market Integrity Update for April 2021, containing regulatory developments and issues affecting market intermediaries. The key items in this update include various protections for retail clients in relation to binary options and contracts for difference and an instance of ASIC’s restriction from eligibility to rely on reduced-disclosure rules. ASIC has banned the issue and distribution of binary options to retail clients from 3 May 2021, given these options have resulted in (or are likely to result in) significant detriment to retail clients due to their product characteristics, such as the “all or nothing” payoff structure. Additionally, ASIC confirms that its production intervention order imposing conditions on the issue and distribution of contracts for difference to retail clients took effect on 29 March 2021. ASIC also announced that it has restricted an entity from eligibility to use transaction-specific disclosure (ie reduced disclosure) until 11 March 2022 given its failure to lodge a financial report, director’s report and auditor’s report for its financial year ending 31 December 2019 within the time required. ASIC confirmed that it considers the ability to rely on reduced-disclosure rules a privilege which is dependent on compliance with other aspects of the law, including financial reporting obligations. See ASIC’s Market Integrity Update.

AICD releases guide for navigating virtual AGMs, e-document execution and digital shareholder communications. The AICD, in collaboration with the Governance Institute of Australia, Australasian Investor Relations Association and the Law Council of Australia, have released joint guidance to help companies navigate the ongoing uncertainty around holding AGMs. The guide contains various tips for holding AGMs in the current environment, ranging from logistical considerations for hosting virtual AGMs to suggestions which will promote positive shareholder sentiment. For instance, the guidance recommends that, although not mandatory, it is good practice for as many of the directors as possible to attend the AGM. In particular, it is preferable for directors to attend the meeting (either physically or virtually, depending on the company’s approach) where they are standing for re-election at the AGM.

LEGAL

Takeovers Panel considers dividend reinvestment plan exception to section 606 of the Corporations Act. On 19 April 2021, the Panel published its reasons for decisions in relation to Thorn Group Limited 01 & 02 [2020] ATP 29 – the first matter where the Panel has been required to consider the exception in item 11 of s 611 of the Corporations Act, which exempts acquisitions of shares under a dividend reinvestment plan (DRP) from the 20% threshold in section 606 of the Corporations Act. The decision concerned the announcement of a special dividend by Thorn Group Limited (Thorn) to which Thorn’s DRP would apply. As a result of the application of the DRP, the voting power of Thorn’s largest shareholder would increase from 30.57% to 39.42%. The Panel emphasised that, despite receiving submissions to the contrary, there was no requirement for the Panel to find a plot, conduct or intention to determine unacceptable circumstances. Rather, the Panel must consider whether the issue of shares under the DRP was unacceptable having regard to its effect on control or potential control – that is, the exception in item 11 of section 611 of the Corporations Act is to be considered no differently to other similar exceptions. The Panel determined that the application of the DRP would have an unacceptable effect on the control of Thorn, and therefore gave rise to unacceptable circumstances. The Panel noted that while most DRPs will not require scrutiny for the purpose of relying on the item 11 exception, the unusual combination of factors in this matter led to the circumstances being unacceptable. In particular, the Panel considered Thorn’s capital management strategy, whether there is a need for funds, the size of the special dividend, the existence of substantial shareholders on the company’s register and Thorn’s communications with shareholders. Boards should consider each of these factors carefully when deciding whether to implement a dividend reinvestment plan, or similar corporate actions, that could have an impact on control. See Takeover Panel’s reasons for decision.

OVER THE HORIZON

Disclosure of climate-related financial risks – the new norm? Growing pressure from both institutional and retail investors and increased scrutiny from regulators (for example, the recently established Task Force on Climate-Related Financial Disclosures) have required companies to think carefully about their climate-related risks.  The G+T Article “Directors’ duties to disclose climate-related financial risks” considers the consequences of a failure to disclose climate-related financial risks in this new environment. In particular, the article reports that there is an emerging body of opinion that a failure to properly consider and disclose foreseeable climate-related risks may constitute a breach of a director’s duty of care, skill and diligence. The vulnerability of Australia’s natural environment, as demonstrated recently by bushfires and floods experienced across the country, therefore requires that directors place climate-related risks at the forefront of their risk management frameworks and upcoming disclosures in the company’s annual report.