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 ASIC’s report on so-called ‘pump and dump’ schemes in micro-cap securities, the ACNC’s consultation on its proposed Regulations and Twitter’s legal proceedings seeking to enforce the $44 billion business sale agreement with Elon Musk.
In Over the Horizon, we consider concerns with RBA overreach on interest rate hikes.
GOVERNANCE & REGULATION
ASIC releases report on ‘pump and dump’ of micro-cap securities. In a recent report, ASIC considered the so-called ‘pump and dump’ schemes in the market for micro-cap securities which have been on the radar of the regulator for some time given heightened trading activity by retail shareholders during the pandemic. The two activities focused on by ASIC were ‘momentum ignition’ and social media campaigns. Momentum ignition is the practice of aggressive purchasing by one or several accounts to have a significant impact on price and to encourage other traders to engage in buying activity. In relation to instances of momentum ignition, ASIC observed (a) increased trading when markets were unusually volatile through large retail brokers offering online access, (b) 30% of a targeted security’s turnover being from individual traders, and (c) all identified accounts submitted orders manually to the market through automated processing systems. Social media campaigns involved promoters, across a range of platforms, encouraging their followers to engage in coordinated purchases and sales of low liquidity securities susceptible to market impact. Approximately 81% of all participating day-trading accounts lost money or broke even in these events. ASIC expects market participants, including brokers, to play a gatekeeping role in detecting and preventing pump and dump activity and identified good practice expectations in the report. See report.
ACNC consults on new Australian Charities and Not-for-profits Commission Regulations. The existing Australian Charities and Not-for-profits Commission Regulations 2013 (ACNC Regulations) are scheduled to automatically sunset on 1 April 2023. This has presented an opportunity for the ACNC Regulations to be updated to improve clarity and remove transitional provisions that are no longer required, such as the annual financial report requirements set out in Subdivision 60D. The language, format and numbering of the ACNC Regulations has been retained in the new draft to maintain consistency with the ACNC’s administrative guidance for the sector. A draft of the proposed regulations has been released. The Treasury welcomes consultation on the proposed regulations until 15 August 2022. See media release.
Twitter’s proceedings against Elon Musk to enforce $44 billion business sale agreement. Earlier this month, Twitter commenced legal proceedings against Elon Musk in an attempt to enforce the $44 billion agreement entered into for the purchase of Twitter. According to documents filed by Twitter, Musk terminated the sale agreement on the basis that he had not been provided with sufficient information from Twitter about spam accounts and bots on its service. Twitter argues these claims are unfounded, no evidence has been provided to demonstrate the information provided is not correct, and that Musk should be held to the legally binding agreement. Twitter claims that Musk has “repeatedly disparaged Twitter and the deal, creating business risk and downward pressure on its share price” and that Musk should bear the losses sustained by Twitter. A Delaware judge has last week ruled that the timely resolution of the matter is desirable and as such, the matter is set to go to trial in October 2022. If it proceeds, the trial is expected to be one of the most high-profile ever seen and its outcome would have a significant impact on the principles of contract, dealing in good faith and business sales in the future. However, typically this kind of litigation is used as leverage to extract either amended terms from the bidder (if willing to proceed) or an enhanced “break fee” if not. A similar action in Australia (assuming issues over the exclusive jurisdiction of the Takeovers Panel could be resolved) would be unlikely to succeed.
OVER THE HORIZON
Prime Minister Anthony Albanese cautions the RBA against overreach with interest rate hikes. Since May this year, we have seen the Reserve Bank of Australia (RBA) increase interest rates from 0.10% at the beginning of May to 1.35% in July. Interest rates are expected to keep rising, with markets predicting a peak rate of 3.5% within the next year. These increases need to be seen in the context of increasing cost pressures and anticipated peak inflation of around 7% in the December quarter (meaning the real interest rate is still negative). Prime Minister Anthony Albanese recently raised his concerns about the potential further increases. While recognising the independence of the RBA, Albanese has suggested that the RBA “need to be careful that they don’t overreach”. While higher cash rates may assist to curtail inflation, they will not resolve other mounting pressures which are feeding into the inflation rate such as ongoing labour shortages, the oil crisis and general supply chain pressures. Dr Lowe, Governor of the RBA, has recently admitted that with the benefit of hindsight, he can see why some may conclude that the interest rate was too low during the onset of the pandemic and has fed into the inflationary pressures Australia is now experiencing. It will be interesting to see how this admission informs the independent review into the RBA announced by Treasurer Jim Chalmers last week.