This is a service specifically targeted at the needs of busy non-executive directors. We aim to give you a “heads up” on the things that matter for NEDs in the week ahead – all in two minutes or less. A short week this week due to the public holiday in Western Australia.
In this Edition, we consider activist short selling in Australia, the shift away from LIBOR, legal principles relating to schemes of arrangement and the potential impact of remuneration structures on findings of unconscionable conduct.
We also introduce our new “Risk Radar” section, highlighting emerging issues which may be relevant for consideration within companies’ risk management framework. We start by assessing the increasing immediacy of climate-related risks and the potential impact of the District Court of The Hague’s decision in the Shell case.
GOVERNANCE & REGULATION
ASIC issues information sheet on activist short selling in Australia. ASIC has published Information Sheet 225 Activist short selling campaigns in Australia which considers the practice of activist short selling in Australia and outlines ASIC's expectations to promote market integrity during these campaigns. Activist short selling involves a person taking a short position in a financial product and then publicly disseminating information (directly or through an agent) that might negatively impact the price of the product (‘short reports’). ASIC recognises the potential benefit of activist short selling, noting they can have a positive impact on price formation and market integrity. The Information Sheet outlines suggested best practices for activist short sellers and authors of short reports, which include (1) releasing short reports outside of Australian hours; (2) disclosing conflicts of interests; (3) avoiding overly emotive and imprecise language; and (4) fact checking with the target entity. Of note to Directors, the Information Sheet also provides guidance for market participants and target entities, stating that market participants should monitor for short selling activity and report suspicious activity, and target entities should maximise business transparency and comprehensively respond to claims contained in short reports. If activist short selling campaigns fail to meet these best practice guidelines, ASIC may engage with ASX and other market operators (including on the timing of trading halts), examine trading activity during the campaign, engage directly with the activist short seller if their identity is known, engage with the target entity to assess the veracity of claims in short reports and where necessary, take action for any breaches of the law. See ASIC’s media release.
Regulators expect the use of LIBOR to cease before the end of 2021. Regulators in Australia, including ASIC, APRA and the RBA, are emphasising the importance of ensuring a timely transition away from the London Interbank Offered Rate (LIBOR). This transitional period is reiterated in light of the Financial Stability Board’s announcement that all new use of LIBOR benchmarks should cease as soon as practicable, and in any event, before the end of 2021. See ASIC’s media release and APRA’s media release.
Supreme Court clarifies legal principles regarding approval of a scheme of arrangement in the second court hearing. In Re Piedmont Lithium Ltd; Ex Parte Piedmont Lithium Ltd [No 3]  WASC 173, the Court clarified the factors influencing the Court’s discretion to approve a scheme of arrangement under section 411(4)(b) of the Corporations Act. These Court confirmed that these factors include whether members have voted in good faith and not for an improper purpose; whether the proposal is fair and reasonable so that an intelligent and honest person who was a member of the relevant class, properly informed and acting alone, might approve it; whether the plaintiff has brought to the attention of the court all matters that could be considered relevant to the exercise of the Court’s discretion; whether there has been full and frank disclosure of all information material to the members' decision; whether minority shareholders would be oppressed by the scheme; whether the court is satisfied that the scheme has not been proposed to avoid ch 6 of the Act; whether ASIC has an objection to the scheme; and whether the scheme offends public policy. The Court also noted that it is not bound to approve a scheme merely because the Court previously made orders for the convening of a meeting or because the statutory majorities have been achieved – it remains a matter in which the Court may exercise its discretion in light of the above factors. However, the Court will usually approach the task on the basis that shareholders are better judges of what is in their commercial interests than the Court.
Culture of non-compliance results in $20 million penalty and disqualification of sole director. The Federal Court has ordered that a private company pay a $20 million penalty for engaging in systemic unconscionable conduct, paying conflicted remuneration to its team leaders and account managers and failing to act in the best interests of its clients. The Court found the entity had engaged in a system of unconscionable conduct for a number of reasons. Notably, one of these reasons was the entity’s employee remuneration scheme and key performance indicators where team leaders and account managers were rewarded and paid commissions based on net deposits made by their clients. The Court’s finding serves as a reminder for Directors that a company’s remuneration structure and incentive schemes will be a key driver of strategic outcomes, whether positive or (as in this case) negative. See ASIC’s media release.
A low emission future for oil and gas companies? It’s clear that fossil fuel companies are coming under pressure from investors to reduce CO2 emissions. However, a recent decision of the District Court of the Hague, Milieudefensie and others v Royal Dutch Shell (ECLI:NL:RBDHA:2021:5339), suggests judicial pressure may also be rising. The Court declared that by 2030, Shell must cut its direct and indirect CO2 emissions by 45% compared to 2019 levels, marking the first time that a company has been legally required to take positive action to comply with the Paris Agreement. Although the decision (which may be appealed) will not transform global judicial precedent overnight, we expect it will be closely parsed by environmental groups seeking encouragement to bring similar claims in other jurisdictions, including Australia.
The increasing immediacy of climate change risk. Previous editions of Boardroom Brief have noted the evolution of climate change from an ‘ESG matter’ to an intrinsic business risk. Entities can no longer refer to initiatives or milestones to address climate change risk which are to be assessed in 20 to 30 years’ time – climate change risk is now a matter which investors and external stakeholders expect Boards to address (at least to some extent) now. In February, an article by the ASIC Commissioner emphasised that disclosing and managing climate change is a key Director responsibility. Following their release under freedom of information laws, it was disclosed that ASIC had warned five fossil fuel companies that they risked breach of law due to non-disclosure of climate-related risks affecting those entities. ASIC’s surveillance serves as a reminder to Directors to disclose climate risks, to act on those risks once known and to avoid declaring climate goals without legitimate means of achieving them, or declaring climate goals which are so far removed as to have little meaning for investors today. Directors should familiarise themselves with their climate-related disclosure obligations by consulting the Centre for Policy Development’s Supplementary Memorandum of Opinion and the Task Force on Climate-Related Financial Disclosures Recommendations.
OVER THE HORIZON
Crypto assets. The surge in popularity of cryptocurrencies and other digital assets is fuelling calls for increased regulation of the sector. In a recent opinion piece in the AFR, columnist Kenneth Rogoff argues that “the view that cryptocurrencies are just an innocent store of value are stupefyingly naïve”, pointing to the use of Bitcoin and other untraceable digital assets in ransomware attacks, tax evasion and crime. While the blockchain technology underpinning cryptocurrencies has undoubted potential to significantly disrupt many industries, most notably financial services, we expect global regulators to ramp up their efforts to achieve a global regulatory framework for digital assets in the latter part of 2021.