Welcome to the eleventh edition of Expert Adviser, published quarterly by G+T’s Perth corporate advisory team and developed specifically for advisers active in the local market.
Quarter In Review
With Australia’s economic rebound in full swing and the S&P/ASX 200 Index at near all-time highs, there is continued optimism and liquidity in the market. This is particularly the case in the resources sector, where the potential early stages of a “super-cycle”, supported by continued commodity price strength, strong demand for raw materials on the back of global stimulus measures, and further activity in the clean energy sector, is driving a rebound in M&A activity, as recently demonstrated by Regis Resources’ proposed acquisition of IGO’s interest in the Tropicana gold mine, and the proposed merger of Galaxy Resources and Orocobre. We anticipate that this trend will continue in the next quarter, with further consolidation and deal making activity in the clean energy and critical minerals sector.
The momentum of the multi-year highs in the ECM market has also carried through to 2021, although activity in Q3FY21 appears to be marginally down on the previous quarter. The market’s support for miners with a defined strategy or operational track record was clear, with Cyprium raising nearly 350% of its then market cap to acquire copper operations from Metals X, and Western Areas raising $100 million equity to improve its balance sheet flexibility to start the Odysseus project. With capital in relative abundance as a result of global QE programs, and a low interest rate environment (underpinned by record low core inflation in Australia) set to persist in the medium to long term, we see the pipeline of companies seeking to access to the ECM market, including for M&A, remaining strong for the remainder of calendar 2021.
Strategic funding package involving Venturex Resources
We are advising former Northern Star Managing Director Mr Bill Beament in connection with a strategic funding package for Venturex Resources Ltd, comprising a AUD$14 million placement and a AUD$4.4 million entitlement offer.
Odin Metals Ltd
We advised Odin Metals on its two tranche $2.25 million placement to sophisticated and professional investors.
Australis Oil & Gas Limited placement and SPP
We advised Australis Oil & Gas Limited on its successful equity raising comprising a AUD$8.175 million placement to institutional and sophisticated investors and a AUD$2 million share purchase plan, to recommence leasing of its mineral rights in the Tuscaloosa Marine Shale.
Black Rock Mining Ltd placement
We advised Tanzanian graphite developer Black Rock Mining Ltd on its conditional US$7.5 million placement to POSCO Ltd. Black Rock Mining Ltd intends to use the funds from the POSCO transaction to develop the Mahenge Graphite Project.
Targets to exercise caution in dealing with employee incentives under a control transaction
Target companies often make payments to employees for cancelling their entitlements under employee share and option schemes in connection with a control transaction. However, the Federal Court in Clough Limited v Commissioner of Taxation  FCA 108 recently determined that these payments were not, in that case, immediately tax deductible to the payer. The taxpayer in question (Clough) claimed these payments were fully deductible in the year they were paid, whereas the Commissioner permitted deductions over 5 years under the Income Tax Assessment Act 1997 (Cth). The Court found these cancellation payments were not incurred “in gaining or producing assessable income” (meaning Clough could not satisfy the test for immediate deductibility). Relevant factors to the Court’s ruling in this case included that:
- there was no evidence that the cancellation payments were made for past performance of employees;
- evidence suggested that the target considered it an obligation to make these cancellation payments to employees (even though it was at the target board’s discretion under the plans);
- the target intended to establish new employee plans following the change of control, suggesting the payments were not genuine payments made to retain or incentivised staff; and
- it was difficult to establish how the cash payments would incentivise employees to continue employment with the target.
In light of this, targets should consider other tax outcomes depending on how incentives are dealt with under a control transaction:
- if vesting is accelerated and shares are issued to employees, with those shares then acquired under the control transaction, payments by the bidder would be capital in nature and not deductible. This would therefore form part of the cost base for the bidder.
- If entitlements are allowed to lapse, there are no adverse tax consequence for employees and no payments made by target or bidder (so no associated tax implications).
- If entitlements are replaced with similar interests in the bidder on implementation of the control transaction, target employees may not have a taxing event and no payment would be made by target or bidder (and therefore no associated tax consequences).
ASIC’s ‘no-action’ position on expiry of COVID-19 relief measures permitting virtual meetings
In 2020, as part of its COVID-19 relief measures, the Federal Government permitted entities to hold general meetings virtually and to send notices of meeting to shareholders electronically (regardless of whether they had “opted in” to receiving electronic communications from the entity). It was originally intended that these relief measures would be permanently enshrined in legislation before their expiry, however the draft legislation has been referred to the Senate Economics Legislation Committee for further review, and the relief measures lapsed on 22 March 2021. As a result, virtual meetings and electronic communication of notices of meetings are no longer permitted under the Corporations Act. However, ASIC has recently adopted a ‘no action’ position regarding holding virtual meetings and electronic dispatch of notices of meetings, which enables companies to convene and hold meetings in the same way as the relief measures. This no action position applies to meetings held between 21 March 2021 and either 31 October 2021 or the date that any relevant measures are passed by Parliament, whichever is earlier.
Proposed changes to continuous disclosure regime
On 17 February 2021, the Federal Government introduced a Bill which proposes that certain temporary changes to Australia’s continuous disclosure laws introduced as a result of COVID-19 become permanent. One of the key changes under the Bill is the introduction of a mental element so that entities and officers will only be liable for civil penalty proceedings in respect of the continuous disclosure obligations under the Corporations Act where they have acted with “knowledge, recklessness or negligence”. This proposed change has been welcomed by business groups given the changes raise the bar required to make out a breach of continuous disclosure obligations. One of the aims of this Bill is to seek to mitigate against opportunistic class action litigation in respect of failures to disclose material information in a timely manner. Such a change would bring Australia’s continuous disclosure laws into line with the United States and United Kingdom and is intended to balance the benefit of continuous disclosure obligations with the cost imposed on entities and the officers by securities class actions.
Even if the Bill is passed through parliament, ASX listed entities need to bear in mind that ASX has not amended Listing Rule 3.1 or 3.1A to reflect the changes (and it is doubtful it would do so), so those entities must continue to release information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities as soon as it becomes aware of that information (unless an exemption applies).
As with the other COVID-19 relief measures mentioned above, the Bill has been referred to the Senate Economics Legislation Committee and further debate is expected in the second half of 2021.
Quarterly Publication Review
Takeover + Schemes Review for 2021
We are once again pleased to present our survey of public company takeover and schemes activity (TASR) for 2021.
Consistent with our observations in the WA market, the theme of this year’s TASR is whether the “roaring twenties” might be with us once again. The analogues to the post-WWI (and Spanish Flu!) era are hard to ignore.
G+T in the community
Up All Night
On Saturday, 6 March 2021, the Perth G+T team stayed Up All Night for Ronald McDonald House Charities WA, walking a massive 42.2km overnight. There was an impressive effort from Jennifer Hart and John Larbalestier who completed the walk in just 7 hours and 59 minutes, with the rest of the team coming in around the 9.5 hour mark. It was a great opportunity to put the team in the shoes of the parents and families of sick children staying at the Ronald McDonald House. We would like to send a big thank you to everyone who donated. We raised a total of $16,354, beating our original goal of $6,000. This translates to 86 nights’ accommodation for a family at the Ronald McDonald House, 677 dinners and 308 lessons in the learning centre.