The Takeovers Panel released a Public Consultation Response Statement on 28 May 2020 which sets out its revised Guidance Note 20: Equity Derivatives (GN20) and provides long-awaited and welcomed clarifications on where the use or non-disclosure of equity derivative positions may give rise to unacceptable circumstances.
- Long positions of 5% or more of the voting rights in a listed or other public entity will need to be disclosed regardless of whether or not a control transaction has commenced. Failure to disclose such long positions may give rise to unacceptable circumstances.
- Long positions that would contravene the ‘20% rule’ if it were comprised entirely of a physical holding may give rise to unacceptable circumstances.
- The existing guidance continues to apply for now. The Panel will give market participants three months’ notice of when the revised guidance will come into effect (but the Panel hasn’t indicated when it will do so).
GN20 was first issued on 11 April 2008 to provide guidance to market participants on their disclosure obligations in relation to equity derivatives, as well as the principles which the Panel may consider in a finding of unacceptable circumstances. The Panel’s existing guidance with respect to equity derivatives under the current GN20 can be summarised as follows:
- the Panel expects disclosure to be made where the long position of a person and their associates is 5% or more and if so, changes by at least 1% or falls below 5%, of the voting rights in a listed or other public entity, provided a control transaction had commenced; and
- a failure to disclose a long position could give rise to unacceptable circumstances.
Updates to GN20
Following public consultation, the Panel has finalised a number of material amendments in the revised GN20 regarding the commencement of control transactions, considerations for determining unacceptable circumstances and guidance in relation to long positions over 20%.
- Disclosure of long positions regardless of control transaction: As previously provided, the Panel expects disclosure to be made where the long position of a person and their associates is 5% and if so, changes by at least 1% or falls below 5%. However, the Panel has now provided that a failure to disclose may give rise to unacceptable circumstances regardless of whether or not a control transaction has commenced or whether the acquisition constitutes a “substantial interest”. Under the previous guidance, that disclosure was only required “where a control transaction had commenced” or where it concerned the acquisition of a “substantial interest” and there was often uncertainty about when that occurred.
- Considerations for determining unacceptable circumstances: The Panel has clarified that in determining whether a failure to disclose gives rise to unacceptable circumstances, it will consider (i) the effect of non-disclosure on control of an entity and the acquisition of a substantial interest, and (ii) whether the failure to disclose is deemed to be contrary to an efficient, competitive and informed market. The Panel has highlighted a number of examples where it would likely find unacceptable circumstances, including:
- if a person with an undisclosed long position over 5% has attempted to exercise control or influence over the entity, or proposes a control transaction after the time at which disclosure should have been made; and
- if someone other than the holder of the undisclosed equity derivative proposes a control transaction and is unaware of that equity derivative.
- Long positions over 20%: The Panel has also confirmed that the acquisition of a long position that would contravene section 606 of the Corporations Act, if it were comprised entirely of a physical holding, may give rise to unacceptable circumstances. In coming to a determination of unacceptable circumstances, the Panel will consider (i) whether there has been some exercise of control or influence over the entity, (ii) if and when the long position was disclosed, and (iii) whether the acquirer could have relied on an exception in section 611 of the Corporations Act if the acquirer had made the acquisition as a physical holding (eg. the 3% “creep” exception).
The Panel has stated that it intends to provide three months’ notice to market participants before the revised GN20 comes into effect. Accordingly, the current version of GN20 will continue to apply until such notice is provided to market participants.
Considerations for market participants
Despite the fact that these changes will capture a wider range of circumstances giving rise to disclosure, we consider that the updates to GN20 are positive developments as they will facilitate greater transparency for market participants.
Market participants who take long positions over 5% in listed or other public entities should now consider disclosure regardless of whether a control transaction has commenced, given that non-disclosure, particularly once a control transaction has commenced (whether by the holder of the long position or another third party), could result in a finding of unacceptable circumstances under the Panel’s revised guidance.
In addition, market participants should also properly consider how to mitigate a risk of a finding of unacceptable circumstances where a long position is acquired that would, if comprised entirely of a physical holding, contravene section 606 of the Corporations Act.
Although, strictly speaking, the revised GN20 does not become effective until the Panel has given three months’ notice, market participants would be well advised to have immediate regard to the revised GN20 in taking and disclosing long positions in listed and other public entities.
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