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New ASIC class order to facilitate offers of CHESS depository interests
On 13 October 2014, ASIC released Regulatory Guide 253 (RG 253) to provide guidance about the application of the Australian prospectus and financial services licensing requirements in connection with offers of CHESS depository interests (CDIs) over securities of a foreign company. Class Order [CO 14/827] Offers of CHESS Depository Interests ([CO 14/827]), announced by ASIC concurrently with RG 253, modifies the Corporations Act 2001 (Cth) (Corporations Act) to ensure that the law now reflects market practice for disclosure of CDI offerings and also confirms that ASIC’s existing disclosure relief, such as relief under Class Order [CO 08/35] (low-doc rights offers) and Class Order [CO 04/671] (disclosure relief from on-sale of securities), applies in respect of CDIs.
Who will this affect?
- Foreign companies proposing to seek a listing of CDIs on ASX (or certain other approved markets) over their shares or options;
- Foreign companies who already have a CDI-listing and who are proposing further issues of CDIs (for eg, under a rights offer or placement) or who intend to use CDIs as consideration in a takeover or scheme.
What is the reason for ASIC's new class order?
Unless a foreign company is incorporated in New Zealand, Bermuda or Papua New Guinea, it is unable to have its shares or options admitted to quotation on ASX since this requires their local laws to recognise electronic registration of ownership and transfers.
CDIs are used to overcome this problem. A foreign company listing on ASX issues securities to CHESS Depository Nominees Pty Limited (CDN), who is the sole depository nominee in the Australian market. Investors hold CDIs over underlying securities that are held by CDN and under the operating rules of the exchange, CDN has various obligations to pass through dividends, vote in accordance with instructions from the CDI holder and so on.
Due to this relationship between the foreign issuer and CDN, there has been uncertainty in the market as to how offers of CDIs are regulated under the Corporations Act, particularly how CDIs are characterised, which disclosure regime applies to offers of CDIs and who offers and issues CDIs (CDN or the foreign issuer?). ASIC’s new class order ensures that the market practice of treating the foreign company as the issuer of the CDI will have a firm legal basis.
Important points for CDI issuers and other market participants to note
- (Characterisation of CDIs) Offers (for issue or sale) of CDIs are regulated under Ch 6D of the Corporations Act in the same way that offers of underlying foreign securities would be regulated. The foreign company that offers and issues the underlying foreign securities is taken to be the offeror and issuer of the CDIs and the foreign company (and not CDN) is responsible for providing disclosure to shareholders under a prospectus. This is a "look through" approach.
- (Other disclosure relief applies to CDIs) If an offer of underlying securities would be exempt from disclosure under Ch 6D, then any offer of CDIs should also be exempt. This means that foreign companies can avoid the compliance cost of applying for ad hoc relief from ASIC in common situations, such as:
- where the company has CDIs over all or some of its underlying securities, the low-doc rights issue regime will be available (and ASIC has clarified how the conditions to that regime are to be interpreted for a registered foreign company);
- where a foreign company has relief from ASX to enable it to quote only its CDIs (and not all of its underlying securities), ASIC has confirmed that the entity will still be eligible to issue a transaction-specific prospectus under section 713 of the Corporations Act; and
- where the foreign company wants to utilise CDIs as scrip consideration under a takeover or scheme, ASIC has confirmed that the issue of those CDIs will not require a prospectus and the relief from the on-sale provisions under [CO 04/671] will be applicable to ensure those CDIs can be quoted on ASX without a prospectus.
- (Disclosure requirements) As a condition to this relief, a foreign company must explain the differences between holding CDIs and holding the underlying foreign securities in any prospectus. RG 253 assists foreign companies to comply with such disclosure requirements, as well as provide effective disclosure for offers of CDIs and in other communications with CDI holders. Generally speaking, the level of disclosure recommended is consistent with what we see used in the market. CDI-issuers should be conscious of including disclosure in their notices of meeting to help their CDI holders to vote. Providing dividend disclosure in $A terms on a per-CDI basis is also recommended.
- (Licensing relief) [CO 14/827] exempts a foreign company (other than a foreign investment company covered by s 766C(5) of the Corporations Act) from the requirement to hold an Australian financial services licence for ‘arranging’ for CDN or a CDI holder (or proposed CDI holder) to deal in CDIs over its foreign securities. This is technical relief that is provided to avoid any doubt about whether a foreign company can rely on the "self-dealing" exemption from the licensing provisions when it issues CDIs.