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.

In this edition, we consider recent comments by the Australian Council of Superannuation Investors on gender diversity across the top ASX Boards, ASIC’s amendments to the market integrity rules, the Takeovers Panel’s decision to decline to conduct proceedings in relation to BGH’s second application relating to Virtus Health Limited, and the Full Federal Court’s ruling which overturns the dismissal of the Worley class action.  

In Over the Horizon, we consider what equity capital raisings might look like in the current climate of uncertainty.

GOVERNANCE & REGULATION

Calls for greater gender diversity continue.  In recognition of International Women’s Day last week, the Australian Council of Superannuation Investors (ACSI) has called for greater gender diversity across the ASX200.  According to ACSI, women represent just 9.5% of chair roles and 6.5% of CEO positions among the ASX200.  While female representation is increasing, there is still a way to go to achieve the recommended target for a gender balanced board composition of a 40:40:20 mix.  See the ACSI media release. In this realm, we expect to see superannuation funds (as key institutional investors in ASX200 companies) push for change which aligns with their own ESG targets.  As board gender targets come closer to being achieved, we also expect to see greater emphasis being placed on female representation in C-Suite roles.  

ASIC amends market integrity rules.  ASIC has introduced new market integrity rules with the aim of promoting technological and operational resilience of securities and futures market operators and participants, with the changes to the rules presenting minimum expectations to mitigate technological and operational risks.  The rules apply from 10 March 2023 and relate to outsourcing, information security and business continuity planning for market operators and participants, and trading controls for market operators only.  The rules strengthen existing obligations and bring the rules into better alignment with international standards. Among the changes are for example, in the Future Markets Rules, ASIC has replaced the prohibited employment rule with a ‘good fame and character test’ and imposed suspicious activity reporting obligations which apply from 10 June 2022.  ASIC has also clarified throughout the rule books which decisions are subject to merits review and its power to grant waivers from the rules.  See ASIC’s media release.

LEGAL

Takeovers Panel declines latest application relating to Virtus Health Limited.  In previous editions of Boardroom Brief, we have considered applications made by BGH Capital Fund I (BGH) in relation to competing takeover bids for Virtus Health Limited (Virtus) made by BGH and CapVest Partners LLP (CapVest). In the most recent application, BGH submitted Virtus had not taken steps to facilitate a genuine auction process between BGH and CapVest following revised proposals from both bidders, and an ultimate decision not to engage with BGH given the revised CapVest proposal was considered superior by the Virtus Board. The Panel concluded that while Virtus was able to engage with BGH in respect of its revised proposal, it was not required to do so – the Board had considered the two revised proposals and determined that its decision not to engage with BGH was in the best interests of Virtus and its shareholders.  The Panel noted that it considered it “unlikely that it would second guess” the decision of the Virtus Board, and therefore concluded there was no reasonable prospect it would make a declaration of unacceptable circumstances and declined to conduct proceedings.  See the Takeovers Panel’s media release. The decision fixes an important boundary line on the Panel’s deliberations.  It is consistent with the cautious approach taken by Courts when examining conduct by directors involving weighing of complex decisions and the making of commercial judgments.  

Worley shareholders successfully appeal dismissal of their class action.  In October 2020, the Federal Court dismissed a shareholder class action commenced in relation to Worley Limited (Worley).  The class action sought compensation for shareholders who acquired Worley shares between 14 August 2013 and 19 November 2013 on the basis that Worley failed to inform the market of its true earnings position, alleging Worley did not have reasonable grounds for forecasts in its quarterly reports released during this period.  The class action was ultimately dismissed by the Federal Court in October 2020, but that decision has now been successfully appealed.  In overturning the decision, the Full Federal Court determined Worley did not have reasonable grounds for its earnings guidance – clarifying that the relevant test is whether the Board ought to have known that Worley did not have a reasonable basis to forecast increased earnings, not whether the Board acted reasonably or unreasonably given the information made available to it.  The Court noted the latter approach would “effectively reward a publicly listed company for having such poor information systems and management procedures that the company does not come into possession of important, market-sensitive information and does not form an opinion based on known facts”.  The Full Federal Court’s decision serves as an important reminder on Directors to consider the adequacy of information-sharing systems and processes currently in place, and whether these effectively mitigate any information gaps between management and the Board.  See the judgment.  

OVER THE HORIZON 

Raising capital in the current climate. The past two years have witnessed some of the most active equity capital markets on record, both in terms of IPOs and secondary raisings, and with respect to volume and value.  The current year, however, has brought a unique and concurrent set of challenges, with inflation concerns (even before the Russia / Ukraine conflict) impacting central bank policies, heightened geopolitical concerns complicating supply chains, and expectations of rising interest rates crimping sky-high valuations across the technology sector.  These factors have created significant headwinds for several recently listed companies and small-cap players, which, anecdotally, has resulted in several others deciding to hit pause on their floats, secondary raisings and acquisitions.  We expect current market volatility (and generally heightened investor nervousness) to impact the underwriting of upcoming floats and secondary raisings and potentially complicate the timeline to complete of major M&A transactions. This is evidenced by the delay in IGO’s proposed acquisition of Western Areas, prompted by dramatic volatility in the nickel price, which in turn led to suspension of trading in the metal on the LME last week.