Compliance: Theory and Practice in the Financial Services Industry

5. Shareholding Restrictions

IMPORTANT NOTE: These slides have been provided primarily for the use and benefit of students taking the "Compliance: Theory and Practice in the Financial Services Industry" course at Sydney University Law School. They are a summary only of the subject matter covered and are not intended to be, nor should they be relied upon as, a substitute for legal or other professional advice. In particular, it should be noted that the slides are not always verbatim quotes from the underlying source material and that material may have been abridged or paraphrased for presentational purposes. There also may have been legislative, regulatory or other developments since these slides were last updated that are not incorporated.

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Outline

	Corporations Act
		Relevant Interests
		Associates
		Takeover Restrictions
		Substantial Shareholding Notices
		Tracing Notices
	Foreign Acquisitions and Takeovers Act
		Overview
		Substantial Interests
		Associates
		Compulsory Notification
		Prohibition/Divestiture Powers
	Other Legislation
	System Issues

Corporations Act
Relevant Interests

Click here for a copy of the Corporations Act.

(a) is often referred to as the "20% tracing rule". (b) is often referred to as the "control tracing rule".

The closing words in relation to (a) are confusing. What they are intended to mean is that the 20% tracing rule in (a) can only operate once in a chain of entities. By necessary implication, there are no limits on the number of times the control tracing rule in (b) can operate in a chain of entities.

For the purposes of s608(3)(b), a person controls a body corporate if the person has the capacity to determine the outcome of decisions about the body corporate's financial and operating policies (s608(4)). In determining whether a person has this capacity: (a) the practical influence the person can exert (rather than the rights they can enforce) is the issue to be addressed; and (b) any practice or pattern of behaviour affecting the body corporate's financial or operating policies is to be taken into account, even if it involves a breach of an agreement or a breach of trust (s608(5)).

This definition of "control" was taken from Australian Accounting Standard AASB 1024: Consolidated Accounts (now superseded), which prescribed when one entity was taken to be controlled by another and therefore had to be consolidated into its accounts.

Under CA s608(6), a person does not control the body corporate merely because the person and an entity that is not an associate jointly have the capacity to determine the outcome of decisions about the body corporate's financial and operating policies.

Under CA s608(7), a person is not taken to control a body corporate merely because of a capacity they have if they are under a legal obligation to exercise that capacity for the benefit of: (a) if the person is an individual—someone else; or (b) if the person is a body corporate—someone other than its members.

Note that these provisions don’t necessarily capture trusts – at least those that do not have a corporate trustee and fall outside the definition of "managed investment scheme".

Note that a precondition to the operation of this section is that the other party themselves must have a relevant interest in securities. This stops people creating relevant interests out of nothing by, say, giving someone an option over shares that they don’t own but intend to buy if the option is exercised.

Those interested in how different types of options can give rise to a relevant interest should look at ASIC Regulatory Guide 48 - Takeovers Aspects of Options over Shares. This relates to the pre-CLERP 4 Corporations Law but the conclusions expressed in that Regulatory Guide are probably still valid under the post-CLERP 4 Corporations Act.

Answer: The effect of s608(8) is that E is deemed to have a relevant interest in Y’s 10% of X immediately it takes the call option and so E has a relevant interest in 14.9% of X (its 4.9% plus the 10% the subject of the call option). D is deemed to have the same relevant interest as E has (ie 14.9%) by virtue of the operation of the 20% tracing rule in s608(3)(a). B and C are also deemed to have the same relevant interest as E has by virtue of the combined operation of s608(3)(a) and (b). A, however, does not have a relevant interest in X shares. Under s608(3), it would be deemed to have a relevant interest in each of the shareholdings below it down to D’s 21% of E but not in E’s 14.9% of X because the second non-controlling 20+% shareholding in the chain between D and E prevents any further tracing past that point.

Note that this section has been amended by ASIC Class Order CO 01/1542 (for an explanation of the amendments, see paragraphs 12-22 of ASIC Regulatory Guide 171).

Note the conditions for this exemption to comply – the trust must be a bare trust and the beneficiary must have a presently exercisable and unconditional right of the kind referred to in s608(8). This is fairly vague, because s608(8) simply refers to a right in relation to the shares that upon exercise will give a relevant interest. By implication, this must mean a right to vote or dispose of securities.

Note that this section has been amended by ASIC Class Order CO 01/1542 (for an explanation of the amendments, see paragraphs 23-27 of ASIC Regulatory Guide 171).

Note also that this exemption does not apply to securities held by a licensee on its own behalf. ASIC Regulatory Guide 31 outlines the circumstances in which ASIC will consider granting relief to licensees in relation to securities acquired pursuant to their market making activities.

Under CA s257H, when a company enters into an agreement to buy back shares, all rights attached to the shares are suspended from the time it enters into the agreement and the shares are automatically cancelled when it registers a transfer of the shares in its favour. Hence any relevant interest a company acquires under s608(8) by virtue of having entered into an agreement to buy back shares is at best a fleeting one.

See generally ASIC Regulatory Guide 128, which sets outs ASIC's view on when institutional investors which hold shares in a company can collectively discuss their intentions about voting at a meeting of the company without becoming associates or entering into a relevant agreement which would result in an acquisition of shares under Chapter 6 of the Corporations Act. It also outlines the form of relief that ASIC will grant (Class Order 98/649) so that two or more institutions which hold shares in a company can enter into an agreement about voting at a meeting of the company.

Without this exemption, the acceleration provision in s608(8)) would deem the holder of a market traded option or derivative over a share to have a relevant interest in the underlying share from the moment the ETO or derivative is acquired. But a person who has a market traded option or derivative over a share generally does not get any control over the underlying share until the option is exercised or the derivative is settled and the share is delivered. Hence the reason for the exemption.

CA s9 provides that a reference to a derivative outside Chapter 7 has the same meaning as it does in Chapter 7. Note that an option or other instrument that confers an equitable right or interest in an issued share or debenture is not a derivative for these purposes (these fall within para (c) of the definition of "security" and therefore within s764A(1)(a) and so cannot be a derivative because of s761D(3)(c)). The same is true of an option or other instrument that confers an equitable right or interest in an issued interest in a managed investment scheme (these fall within s764A(1)(b)(ii) if the scheme is registered and s764A(1)(ba)(ii) if the scheme is not registered and so again cannot be a derivative because of s761D(3)(c)). Some warrants may confer such an equitable right or interest and therefore will not be a derivative for these purposes - see the discussion on the definitions of "derivative" in lecture 12A and "warrant" in lecture 12B.

Item 7 in the table in section 611 is one of the important windows through the takeover prohibition. It allows someone to acquire shares if the acquisition has been approved by an ordinary resolution of shareholders, where the parties to the transaction and their associates have not voted in favour of the resolution (ie a vote of disinterested shareholders).

This exception is a technical one and counteracts the effect that the acceleration provisions in s608(8)) would otherwise have - namely, conferring a relevant interest in shares as soon as you enter into an agreement to acquire them, even where that agreement is conditional on you doing something (ie passing an item 7 resolution or obtaining an ASIC exemption) that would otherwise protect the acquisition from breaching the takeover prohibition. The effect of the exemption is to postpone your relevant interest until the item 7 resolution is passed or the ASIC exemption is obtained.

This exception was inserted to overcome decision in North Sydney Brick & Tile Co Ltd v Darvall (1986) 4 ACLC 539. It was held in that case that pre-emptive rights in a company’s constitution meant that each shareholder had the power to control disposal of all shares in the company and therefore each had an entitlement to 100% of the shares in the company. This meant that they could acquire shares from each other without increasing their entitlement and therefore without breaching the takeovers prohibition. Technically, it also meant that each new shareholder who purchased shares, no matter how few, went from a nil entitlement to a 100% entitlement in breach of the takeovers prohibition.

This exception was inserted to overcome the decision in Clements Marshall Consolidated Ltd v ENT Ltd (1988) 6 ACLC 389, which held that the directors of a company owning shares had the same relevant interest in the shares that the company had because, between them, they had the power as directors to determine how the company would vote or dispose of the shares. This was roundly criticised at the time and subsequently doubted in Zytan Nominees Pty Ltd v Laverton Gold NL (1989) 7 ACLC 153.

CA s609(9A) also provides that the operator of a clearing and settlement facility does not have a relevant interest in securities merely because of its provision of facilities for the settlement of transactions.

CA s609(10) provides that a person does not have a relevant interest in securities in the circumstances specified in the regulations. The regulations may provide that interests in securities are not relevant interests subject to specified conditions. Currently no such circumstances are prescribed.

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Corporations Act
Associates

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Corporations Act
Takeover Restrictions

CA ss603 and 604 extend these provisions to other bodies that are formed and listed in Australia but are not technically companies under the Corporations Act (eg listed building societies and co-operatives and Westpac Banking Corporation, which was formed under a deed of settlement rather than under companies legislation) and to listed managed investment schemes.

"Transaction" used to be defined in the Corporations Act but no longer is and so takes its ordinary meaning. Doing nothing cannot be a transaction. So if shareholder A has their shares cancelled pursuant to a selective reduction of capital or buyback, the fact that that might cause the voting power of shareholder B to increase above the 20% threshold won’t trigger these provisions because that has occurred independently of any transaction "by or on behalf of" shareholder B.

When applying these provisions to a managed investment scheme, the reference to voting shares in a body corporate is taken to be a reference to voting interests in the scheme (s610(5)(a)).

Even if a person's relevant interest in voting shares is based on control over disposal of the shares (rather than control over voting rights attached to the shares), their voting power in the designated body is calculated on the basis of the number of votes attached to those shares.

CA s610(2) provides that the number of votes attached to a voting share in a designated body is the maximum number of votes that can be cast in respect of the share on a poll: (a) if the election of directors is determined by the casting of votes attached to voting shares - on the election of a director of the designated body; or (b) if the election of directors is not determined by the casting of votes attached to voting shares - on the adoption of a constitution for the designated body or the amendment of the body corporate's constitution.

When applying these provisions to a managed investment scheme, the reference to the election of directors is read as a reference to the appointment of a responsible entity for the scheme (or its nearest equivalent in the case of an unregistered scheme) (s610(5)(b)).

Note also s610(3A), as introduced by ASIC Class Order CO 01/1542, which provides that s610(3) does not apply to an acquisition of an interest in securities by a subsidiary from its holding company, unless as a result of the acquisition the voting power of a person that is not a subsidiary of their ultimate holding company in the body corporate that issued the voting shares increases. For an explanation of why this provision was introduced, see paragraphs 28-40 of ASIC Regulatory Guide 171.

Some examples of cases to which this s606(6) applies are: (1) a person exercises a right to convert a non-voting preference share into an ordinary share that carries votes; or (2) a person pays up partly-paid shares with limited votes and this leads to an increase in the number of votes attached to the shares.

Answers: (1) No. By buying A's 30% shareholding in B, Z will also get a relevant interest in D's 21% of E under s608(3). That increases Z's voting power in E from 0% to 21% in breach of s606(1). This example is intended to illustrate the point that s606(1)(b) can be triggered by an acquisition of securities in any body corporate, if the effect is to increase your voting power in a company of the type referred to in s606(1)(a) beyond the limits proscribed in s606(1)(c).

(2) Yes. Even though A's economic interest in E will go from (30% of 51% of 21%) to (100% of 51% of 21%), a more than threefold increase, that does not change A's relevant interest/voting power in E. It remains at 21%.

Answer: No. Even though E's relevant interest/voting power in X would only go from 4.9% to 14.9% by reason of taking the call option, the effect of the acquisition would be to increase B's relevant interest/voting power in X from 19.9% (its 15% plus a tracing interest in E's 4.9%) to 29.9% (its 15% plus a tracing interest in E's 14.9%) in breach of s606(1). This example is intended to illustrate how s606(1)(c) can be triggered not only by the effect an acquisition has on the acquirer's voting power, but also by the effect it has on another person's voting power. Note that if E proceeded to take the call option, it would be E, the acquirer, that would breach s606(1) even though it is B's voting power that increases about the 20% takeovers limit.

Regulation 6.2.01 exempts from the CA takeover prohibitions acquisitions of shares in public authorities and in various incorporated associations, co-operatives and building societies (these generally have their own legislative takeover regime under their governing law). Regulation 6.2.02 exempts acquisitions that result from a person holding certain statutory offices prescribed in CR Schedule 3.

Remedial orders include orders freezing voting rights and orders vesting shares in ASIC for sale.

Under CA s606(5), it is a defence to the prosecution of a person for contravening s606(1), (2) or (4) if the person proves that they contravened the subsection: (a) because of inadvertence or mistake; or (b) because the person was not aware of a relevant fact or occurrence. In determining whether the defence is available, you disregard the person's ignorance of, or a mistake on the person's part concerning, a matter of law.

Section 657A provides that the Panel may only declare circumstances to be unacceptable having considered: (1) their effect on the control or potential control of a company; or (2) their effect on an acquisition or proposed acquisition of a substantial interest in a company; or (3) whether they contravene Chapters 6, 6A, 6B or 6C. It must also have regard to the so-called 'Eggleston principles' outlined in section 602 (ie that acquisitions of substantial interests in a listed company or scheme take place in an efficient, competitive and informed market; that target shareholders and directors know the identity of the potential acquirer and have a reasonable time and sufficient information to consider the acquisition; and that target shareholders have a reasonable and equal opportunity to participate in the benefits of the acquisition).

Orders can be made against both the acquirer and the target for causing unacceptable circumstances.

See, for example, Viento Group Limited [2011] ATP 1, where the Takeovers Panel made a declaration of unacceptable circumstances on an application by Viento Group Limited in relation to its affairs. It found that various parties were associated in relation to Viento and that the association resulted in the voting power of certain shareholders increasing above 20% otherwise than in accordance with section 611. Substantial holding notices and tracing notices were not filed, were late or were deficient, and no substantial holding notices were given reflecting the association and subsequent acquisitions. The Panel ordered vesting of shares above an aggregated holding of 20% and filing of substantial holding notices.

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Corporations Act
Substantial Shareholding Notices

The information must be given even if the situation changes by the time the information is to be given.

ASIC's policy on substantial holdings can be found in ASIC Regulatory Guide 159 - Takeovers, compulsory acquisitions and substantial holdings. See also ASIC Regulatory Guide 222 - Substantial holding disclosure: Securities lending and prime broking.

Currently nothing additional is prescribed in the Regulations.

Note that while s671B(3) technically only requires the disclosure of relevant interests in a listed company or scheme, as a practical matter, if a person is engaging, or proposing to engage, in a control transaction involving the company or scheme and they use equity derivatives to acquire a significant economic interest in the company or scheme without necessarily acquiring a relevant interest, that too may have to be disclosed in order to avoid "unacceptable circumstances" occurring in relation to that control transaction: see Takeovers Panel Guidance Note 20 - Equity Derivatives.

The prescribed forms are contained in the Corporations Regulations – Form 603 for an initial notice, Form 604 for a notice of change and Form 605 for a notice of cessation.

In New Ashwick Pty Ltd v Wesfarmers Ltd, W and I entered into a heads of agreement regarding a potential merger which included W taking an immediate allotment of 15% in I. Upon the allotment, W duly gave a substantial shareholding notice to I and the ASX in relation to the allotment and included a copy of the letter from the chairman of W confirming its agreement to take up the allotment but not of the Heads of Agreement itself. The plaintiff sought and received a declaration that W had not complied with the law because it should have attached a copy of the Heads of Agreement. The fact that the Heads dealt with other matters was not considered relevant. It "contributed to" W having a substantial shareholding and therefore had to be disclosed in its entirety.

In In the matter of Austar United Communications Limited, C entered into an agreement with U to acquire shares in an upstream holding company of Austar. Three days later, after filing a substantial shareholder notice giving notice of that agreement, C entered into a shareholders agreement with U setting out how they would jointly control Austar. A shareholder in Austar brought proceedings before the Takeover Panel arguing that C's substantial shareholder notice was defective for failing to include details of the shareholders agreement. C countered that it had not entered into the shareholders agreement at the time of filing the substantial shareholders notice and therefore could not have attached it to the notice. The Takeovers Panel said that where a transaction is effected by various connected agreements and the obligation to give a substantial shareholding notice is triggered by entry into the first agreement, s671B(4)(b) will usually require disclosure of the other written agreements or, if they have not yet been finalised, a written description of the other agreements still under negotiation. The person giving the substantial shareholding notice must be in a position to explain why, having entered the triggering agreement, the parties have not reached sufficient consensus on the terms of the other agreements to bring s671B(4)(b) into play. Thus, it is likely that the decision in New Ashwick will in many cases require the disclosure of the related agreements (or a summary of those parts of the agreement that have been agreed and a description of the other provisions that are intended to be included in the agreement) even if the agreement creating the relevant interest is executed before the other agreements have been finalised.

Thus even though ETOs, derivatives and conditional agreements don’t give you a relevant interest for the purposes of the takeover rules, you must still disclose them in any notice you have to give as a substantial holder.

In Nicholas v Wade, the chairman of Mid-East Minerals decided that the company ought to accumulate shares in Metals Exploration with a view to making a takeover bid. To avoid disclosing the position, "carousel" put and call arrangements were entered into. The idea was that as the shareholding got close to the disclosure threshold (then 10%), they would be sold to A, who had put and calls to B, who in turn had put and calls back to Mid-East. It was thought that this would avoid Mid-East having a relevant interest and therefore having to disclose the position. The court held that Mid-East still had a relevant interest under the puts and calls, that this should have been disclosed under a substantial holding notice and that the chairman had been properly convicted of aiding and abetting a breach of the substantial holding notice requirements.

In ASIC v Terra Industries Inc, a broker bought 4 parcels of shares in Coms 21, representing 12.9% of its issued capital, in late December 1998 on behalf of an unnamed client of Terra Industries. One of the 4 parcels was paid for via a fraud committed on another broker and was subsequently sold to cover that broker's costs. The other 3 parcels were not paid for and so, in accordance with ASX market rules, the broker had to pay for them out of its own funds and acquired the right to sell (and therefore a relevant interest in) the shares. Under contractual arrangements between the broker and the individual employee (Gray) who had effected the purchase for the client, Gray was obliged to reimburse the broker for the default by the client. Gray borrowed the funds and paid the broker the amount in question on 8 Jan 1999, resulting in Gray being subrogated to the right of the broker to sell the shares to cover the amount paid. A tracing notice was given by Coms 21 to the broker on 15 Jan 1999 and Gray filed a response on its behalf stating that it had purchased the shares on behalf of Terra Industries and that it did not have a relevant interest in the shares under the precursor to s609(3) (the exception for financial services licensees holding securities on behalf of someone else in the ordinary course of their securities business). The response did not disclose the default in payment or Gray’s interest in the shares. On 29 Jan 1999 someone purported to lodge a substantial shareholding notice on behalf of Terra Industries' unnamed client without naming the client or disclosing the default in payment. Gray subsequently filed a substantial shareholding notice on 25 Feb 1999. At no time did Terra Industries file a substantial shareholding notice. ASIC applied for, and was granted, a vesting order for the failure by Terra Industries and Gray to comply with the substantial shareholding notice requirements in a timely manner. The court noted that there was strong implication that could be drawn from the facts of a conspiracy to mislead the market (Gray had a close association with the chairman of Coms 21), perhaps in an attempt to create circumstances that might attract a takeover offer for Coms 21.

Note that a person who deliberately or negligently gives a false or misleading substantial holding notice also commits an offence against CA s1308(2).

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Corporations Act
Tracing Notices

ASIC Regulatory Guide 86 - Tracing beneficial ownership sets out ASIC’s view of its role in relation to such notices (while this relates to the pre-CLERP 4 Corporations Law, it is still applied in principle under the post-CLERP 4 Corporations Act).

S672A(2) provides that ASIC must exercise its powers under this section if requested to do so by a member of the company or scheme unless it considers that it would be unreasonable to do so in all the circumstances.

S672C provides that where ASIC receives information pursuant to a notice given by it, it may pass it on to the company or responsible entity in question. If the notice was given by ASIC pursuant to a request of a member, ASIC must pass the information on to the person who made the request unless ASIC considers it would be unreasonable in all the circumstances to do so.

Under CA s672DA, a listed company, or the responsible entity for a listed managed investment scheme, must keep a register of information that it receives under disclosure notices, whether the information is received pursuant to a direction the company, or responsible entity, itself gives under s672A or is received from ASIC under s672C.

There is no prescribed form for a direction under s672B. It can be given by fax – see ASIC v Bank Leumi Le-Israel (1996) 14 ACLC 1576.

Confirming what perhaps should have been self-evident, in Re Murchison Holdings Ltd [2009] VSC 528, the Supreme Court of Victoria held that a primary tracing notice under CA section 672A(1)(a), and a secondary tracing notice under CA section 672A(1)(b), must relate to a current shareholding and cannot be given in relation to a former shareholding. It also held that a notice cannot be given under section 672A in relation to options.

Note: A defendant bears an evidential burden in relation to the "lack of knowledge defence" - see s13.3(3) of the Criminal Code. In other words, they have the burden of adducing or pointing to evidence that suggests a reasonable possibility that they did not know of the information.

CA s672D and Schedule 4 of the Corps Regulations prescribe a fee of $5.00 for complying with a direction under section 672A. It is very important if you are ever serving a direction that you remember to include a cheque for the $5.00 fee. Time does not start to run until payment is received.

If the recipient of a notice does not respond to the notice within 2 business days of receipt then they have to refund the fee and can be sued for recovery (s672D(2))!!

It is very difficult to make out this defence. It was tried unsuccessfully in Brunswick NL v Blossomtree Pty Ltd under the old law where a member could request a company to issue a notice. The company refused to do so because it alleged the shareholder had ulterior motives. The shareholder sued successfully to force the company to issue the notice. The shareholder was found by the court to have 3 motives: (1) to inform the market; (2) to investigate potential breaches of takeovers law; and (3) to resolve a commercial dispute and, even if (3) was possibly vexatious, (1) and (2) were sufficient to justify the grant of an injunction.

A failure to comply within 2 business days can trigger very potent sanctions – described by Fullagar J in Re North Broken Hill Holdings Ltd (1986) 4 ACLC 131 as a "small and hair-pressure trigger for a very powerful and potentially destructive gun".

In ASIC v Bank Leumi Le-Israel, a case which arose out of the Offset Alpine Printing saga, 2 Swiss banks argued that they did not have to comply with a tracing notice because they were precluded from doing so under Swiss secrecy laws. The court rejected this defence and ordered that the shares be disposed of, in this case not by vesting them in ASIC but by selling them to the highest of 2 takeover bids then being made for the subject company.

In ASIC v Merkin Investments Pty Ltd, a similar argument was advanced and then dropped in relation to Vanuatu law. In that case, the court held that the recipient of the notice did not know the relevant information and therefore was not guilty of failure to comply with the tracing notice provisions (other than by taking longer than 2 business days to tell ASIC that it did not know the relevant information). Nevertheless, the court still made a vesting order because of the failure of the holder to comply with substantial shareholding notice requirements.

Note that a person who deliberately or negligently gives a false or misleading response to a notice also commits an offence against CA s1308(2).

In Robertson v CIBC, CIBC received a subpoena to produce bank records in an action by a third party against the plaintiff’s brother for repayment of a £15,000 loan. This was received 2 days before the trial was due to begin. It was alleged that the loan was made by way of a cheque given to the brother and payable to the plaintiff. The bank manager tried to contact the plaintiff but was unsuccessful and so attended at court and produced the documents required under the subpoena. These showed not only the deposit of the cheque but also that the plaintiff was overdrawn in his account to the tune of £5,405. A person who heard of this telephoned the plaintiff mentioning his overdraft. The plaintiff took umbrage and brought an action against the bank asserting that it had breached its implied duty of confidentiality (we look at banker-client duties of confidentiality in lecture 9) and was negligent in failing to obtain his consent for the disclosure, not informing the court that his consent had not been obtained, in revealing more information than was required to show the existence of the £15,000 debt and in failing to object to the unnecessarily wide disclosure. The Privy Council held that the bank was compelled by law to disclose the document and therefore it was not in breach of its duty of confidentiality. There was no absolute duty to inform the customer of receipt of the subpoena. Here the bank had used all reasonable endeavours to try to contact the plaintiff and in the circumstances that was all that could be expected of it. More generally, the Privy Council was reluctant to hold that there was a duty imposed on a bank in all cases to try to notify its customer of receipt of a subpoena. While this was appropriate as a matter of simple courtesy and proper business practice and ordinarily a customer could reasonably expect this, the Privy Council pointed out that there might be cases where a bank was entitled, in its own protection or compelled by public duty, not to make such disclosure. On the question of failure to object to the width of the subpoena, the judgment is somewhat unclear. The court at first instance had held that it was a breach of the bank’s duty of care for it not to claim privilege in relation to the customer’s records. The Privy Council held that there was no such privilege at law for the bank to claim and therefore that part of the claim failed. It did not specifically address the issue of whether the bank should have objected to the subpoena on grounds of relevance and unnecessary width. On the question of failure to disclose to the court that the customer had not consented, the Privy Council said that they would not exclude the possibility of such a duty arising as an implied contractual term but that in this case the plaintiff could not show that he had suffered any loss by the failure to so inform the court (by implication, the Privy Council thought that the document would have been admitted into evidence in any event).

A custodian or nominee really should not be exposing itself to these sorts of arguments about implied duties and should deal with these issues expressly in its client documentation (eg by including an express provision acknowledging that it is entitled to respond to legal process whether or not it has made contact with the customer and that, in the absence of specific instructions and an acceptable indemnity from the client, it is not bound to oppose or challenge disclosure under legal process).

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Foreign Acquisitions and Takeovers Act
Overview

Click here for a copy of the Foreign Acquisitions and Takeovers Act.

In addition to regulating acquisitions of interests in shares, FATA also regulates acquisitions by foreigners of Australian businesses and Australian urban land as well as other arrangements by foreigners to control boards of Australian corporations or to control Australian businesses. These provisions, however, are beyond the scope of this course.

Even though notifications under s25(1) are not mandatory, the government's public position is that anything within the purview of its foreign investment policy should be notified under that section. In that sense, notifications under s25(1) are not really "voluntary".

* As a consequence of reforms agreed in the Australia-US Free Trade Agreement, higher notification thresholds apply to US investors that non-US investors (see FATA ss17A-17H and FATR rr2AA, 2AB and 6-13). For most acquisitions, the threshold for US investors is $1,005m (originally $800m indexed from 2005) rather than $231m (originally $200m indexed from 2007). For acquisitions in certain prescribed sensitive sectors or by entities controlled by a US government, the threshold remains at $231m (indexed as mentioned below).

The $231m and $1,005m thresholds are indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year.

The Policy Guidelines are set out in the Treasury publication "Australia's Foreign Investment Policy" (January 2011).

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Foreign Acquisitions and Takeovers Act
Substantial Interests

FATA s11(2A) is summarised under the slide headed "FATA ss11(2), 12B(2) – Acceleration of Interests" below.

FATA ss9(1B) and (1C) provide that for the purposes of (c) and (d) above, in determining the percentage of the interests in the issued shares of a corporation that a person holds or would hold at a particular time, if: (a) the person has a right that, if exercised, might result in the person holding an interest in an issued share in the corporation; and (b) it cannot be determined at that time (whether from the right itself or from the circumstances existing at that time) whether the exercise of the right would have that result; one must assume that the right were exercised at that time.

Note Equiticorp Industries Ltd v ACI International Ltd (1987) VR 485, where the Victorian Supreme Court held that you can’t just look at shareholdings of associates to see if they control 15%+. A foreigner must have some control over voting power before you add in the interests of associates.

FATA s11(2A) is summarised under the slide headed "FATA ss11(2), 12B(2) – Acceleration of Interests" below.

Again, FATA ss9(1B) and (1C) provide that for the purposes of (c) and (d) above, in determining the percentage of the interests in the issued shares of a corporation that a person holds or would hold at a particular time, if: (a) the person has a right that, if exercised, might result in the person holding an interest in an issued share in the corporation; and (b) it cannot be determined at that time (whether from the right itself or from the circumstances existing at that time) whether the exercise of the right would have that result; one must assume that the right were exercised at that time.

FATA s14(3) provides that in determining how much of the potential voting power in a corporation a person is in a position to control at a particular time, if: (a) a right exists that, if exercised, might result in the person being in a position to control more of the potential voting power in the corporation than the person would be in a position to control if the right were not exercised; and (b) it cannot be determined at that time (whether from the right itself or from the circumstances existing at that time) whether the exercise of the right would have that result; assume that the right were exercised at that time.

Note that there are certain exclusions from the notion of "interest" in ss11(5) and 12B(4). These include interests held solely by way of security for the purposes of a moneylending agreement, and in the case of shares, interests held by office holders prescribed in the regulations and other interests prescribed in the regulations. Currently, there are no prescribed officeholders. The only interests prescribed in the regulations for these purposes are shareholdings held by foreign custodians (rr2A-2B of the Foreign Acquisitions and Takeovers Regulations).

FATA ss11(2) and s12B(2) are acceleration provisions not unlike CA s608(8).

FATA s11(2A) provides that, to avoid doubt, a right covered by s11(2)(b) or (c) includes a right under an instrument, agreement or arrangement, whether the right is exercisable presently or in the future and whether on the fulfilment of a condition or not (eg a convertible note).

FATA s12C is a tracing provision not unlike CA s608(3)(a). However, unlike CA s608(3)(a), which only traces through one non-controlling 20%+ shareholding, FATA s12C traces through multiple 15%+ substantial interests and 40%+ aggregate substantial interests without limit.

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Foreign Acquisitions and Takeovers Act
Associates

For these purposes, an "officer" of a corporation includes not only a director or secretary of the corporation, but also any employee of the corporation (s5).

Para (l) is one of the most ridiculous provisions ever drafted. The breadth of the definition of "associate" and the fact that it is bi-directional and carries on to infinity through chains of persons and their relatives, employers and their employees, corporations and their directors and substantial shareholders, and trusts and their substantial beneficiaries, almost certainly means that every person and body corporate on the planet are associates of each other for the purposes of FATA. Indeed, based on the "six degrees of separation" theory, it probably takes no more than 5 applications of para (l) to create an association between any two people in the world!

To illustrate with a simple example, take a major Australian bank with, say, 30,000 employees. The bank's associates include all 30,000 employees (para (e)); the hundreds of thousands of spouses, children, grandchildren, brothers, sisters, parents and grandparents of those employees (para (a) with para (l)); all of the employers of those hundreds of thousands of relatives (para (e) with para (l)); and all of the other employees of those employers (para (e) with para (l) again). In just 3 applications of para (l) with just one of the categories of associate in each application, the bank would have literally millions of associates.

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Foreign Acquisitions and Takeovers Act
Compulsory Notification

Note that the compulsory "notify and wait" requirements in section 26 only apply to agreements under which a person to whom that section applies acquires a "substantial interest" (15%+) in an Australian corporation. They do not apply to agreements under which a group of foreigners acquire an "aggregate substantial interest" (40%+) in an Australian corporation. These latter agreements instead are "voluntarily" notifiable under section 25.

FATA s5 defines "agreement" to mean any agreement, whether formal or informal and whether express or implied, other than a moneylending agreement. It also defines "moneylending agreement" to mean an agreement entered into in good faith in the ordinary course of carrying on a business of lending money, not being an agreement dealing with any matter unrelated to the carrying on of that business. Note that not all financial accommodation involves lending money – discounting bills of exchange has been held to involve a purchase not a loan and therefore the moneylender exception doesn’t always apply when it should.

FATA s5 defines "acquisition" to include an agreement to acquire, but to exclude an acquisition by will or by devolution by operation of law or by way of enforcement of a security held solely for the purposes of a moneylending agreement.

FATA s26(7) makes it clear that the concept of "offer" in (b) is not given its technical contract law meaning. It provides that a reference to a person offering to acquire interests in shares or rights includes a reference to a person making or publishing a statement, however expressed, that expressly or impliedly invites a holder of interests in shares or rights to offer to dispose of interests in shares or rights.

Trading and financial corporation are further defined in s5 as meaning corporations of the type referred to in s51(xx) of the Constitution. That section gives the Commonwealth the power to make laws with respect to trading or financial corporations formed within the Commonwealth. This definition is used to form the constitutional foundation for the Act. Para (c) picks up the Commonwealth’s power to legislate with respect to the Territories. So basically, "Australian corporation" means a corporation formed in Australia, with the caveat that if formed in a State it must be a trading or financial corporation and if formed within a Territory it must be formed under its company law.

The Foreign Acquisitions and Takeovers (Notices) Regulations prescribe form 2 for compulsory notices under s26. The Regulations also specify how a notice should be signed and what documents should accompany it.

Note also s31 - where an offence is committed by a corporation, an officer of the corporation who authorizes or permits the commission is also guilty of an offence punishable by the same penalty. Remember "officer" means not only a director or secretary but any employee.

An "exempt dealing" – exempt from both ss18 and 26 – was originally defined in FATA to mean an acquisition of shares in a company with less than $5m in assets or, if more than half its assets comprise rural land, $3m or such other amounts as prescribed. The Regulations now prescribe for each of these thresholds an amount of $231m (originally $200m indexed from 2007). S13B tells you how to work out these asset thresholds. The provisions are quite complex but basically you look at the last balance sheet and work back from there.

As a consequence of reforms agreed in the Australia-US Free Trade Agreement, a higher notification threshold of $1,005m (originally $800m indexed from 2005) now applies for US investors, except for investments in prescribed sensitive sectors or by an entity controlled by a US government, which remain subject to a $231m threshold (indexed as mentioned below): see FATA ss17A-17H and FATR rr2AA, 2AB and 6-13. The FATA also does not apply to investments by US investors in those financial sector entities which are subject to the operation of the Financial Sector (Shareholdings) Act 1998. For these purposes, a ‘US investor’ is defined as a national or permanent resident of the US; a US enterprise; or a branch of an entity located in the US and carrying on business activities there.

The $231m and $1,005m thresholds are indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year.

Urban land acquisitions are exempt from compulsory notification under s26 because they have their own compulsory notification regime in s26A.

This section enables you to enter into an agreement which is conditional upon compliance with the FATA notification and wait provisions (usually referred to as a "FIRB condition"). Without it, the acceleration provisions in s11(2) would mean that even a conditional agreement of this sort would breach s26(2). You have to be careful, however, when drafting the condition so that the relevant provisions of the agreement do not become binding before the 40 day period under s26(2) has expired or a non-objection letter has been received – ie it must take effect as a condition precedent and not a condition subsequent.

Note that FIRB conditions, even though they only need to provide a 40 day wait to avoid committing an offence under s26(2), typically allow for up to 120 days wait to take advantage of s25 (see below).

Answer: not without including a FIRB condition precedent in the option and then notifying the Treasurer and waiting the prescribed period under s26. Because all the shareholdings between A and E are above the 15% substantial interest threshold, s12C operates so that both A and B are deemed to have a substantial interest in E. E therefore is a corporation to which s26 applies (it is a corporation in which a foreign corporation, A and/or B, holds a substantial interest). A, B, C, D and E are all associates of each other under ss6(j), (k) and (l) because of the 15%+ shareholdings down the corporate chain. When you add B’s 10% to E’s 4.9%, that puts the combined interests of E and its associates in X at 14.9%, just under the 15% notification threshold in FATA. The effect of s11(2) is that E would be deemed to have an interest in Y’s 10% of X immediately it took the call option. That extra 10% interest would put E above the 15% notification threshold, triggering the requirement to give a notice under s26 and to wait the prescribed period before the acquisition of the call option becomes effective.

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Foreign Acquisitions and Takeovers Act
Prohibition/Divestiture Powers

FATA s18(2) also applies to proposals by corporations to issue shares that have the result referred to in (b) and (c).

"Proposing to acquire shares" is expanded further in the interpretation provisions in FATA s5(3)(a). It includes making an offer to acquire shares, making or publishing a statement that expressly or impliedly invites a holder of shares or assets to offer to dispose of them and taking part in, or proposing to take part in, negotiations with a view to the acquisition of shares.

Where Treasurer is empowered to make an order under s18(2), he is also able under s18(3) to fix the level of voting power/shareholding that the foreigner and their associates are permitted to hold.

Canwest Global Communications Corporation v Treasurer involved a challenge to a divestiture order by the Treasurer. Canwest held just under 15% of the shares in Channel Ten with the balance held by Australian institutions. All shareholders held pre-emptive rights. Some of the shareholders wanted to sell and Canwest exercised those rights and nominated 2 Australian companies to purchase the shares. The 2 companies were funded via convertible debentures subscribed for by Canwest subsidiaries which effectively meant that Canwest had the entire economic interest in their shareholdings. The Treasurer said that the 2 companies were associates of Canwest and made a divestiture order under s18(4)(a)(i) directing the 2 Australian companies to dispose of the shares. The court overturned the Treasurer’s decision, saying that he had not afforded natural justice to the 2 Australian companies and that he had not turned his mind to relevant considerations under s9(2). In the case of the second of the 2 acquisitions, he had also purported to make a decision under s18(4)(a)(i) where that plainly did not apply and he should have turned his mind to the relevant question under s18(4)(a)(ii) (ie whether different foreign persons now controlled the company). The matter became moot because a similar appeal against the ABA, which had made a corresponding finding of control under the Broadcasting Services Act, was rejected.

"Prescribed corporation" is defined in FATA s13. In broad terms, it means an Australian corporation (as per our discussion of s26) or a foreign corporation that has at least half its assets in Australia or Australian assets worth more than $20m or such other amount as is prescribed. The FAT Regulations currently prescribe an amount for these purposes of $231m (indexed as mentioned below). The value of a corporation’s assets are measured under s13 by reference to its accounts at its last balance date.

As a consequence of this definition, s18 applies to a much broader class of transactions than s26. S26 only applies to direct acquisitions of substantial interests in Australian corporations. S18 empowers the making of orders in relation to upstream acquisitions of interests in foreign corporations that control an Australian corporation or have other Australian assets and also acquisitions leading to aggregate substantial interests. These are not compulsorily notifiable under s26 but, as noted above, s25(1) permits them to be voluntarily notified and, as a matter of government policy, the government expects them to be notified.

The $231m threshold is indexed on 1 January each year to the GDP price deflator in the Australian National Accounts for the previous year.

For the definition of "exempt corporation", see the note under the slide "Exemptions from Compulsory Notification" above.

Note that an Australian company can be a foreign person if it is controlled by foreigners.

Canwest Global Communications Corporation v Treasurer, supra, held that the Treasurer had to turn his mind to s9(2) and determine whether control in fact exists. I am not sure this is correct. FATA s9(2) deems control to exist unless the Treasurer is satisfied otherwise and that seems to me to put the onus on the holder of the substantial interest or aggregate substantial interest to show, to the Treasurer's satisfaction, that control in fact does not exist.

Notice in this context can mean a compulsory notice given under s26 or a notice given voluntarily under s25(1) itself.

As noted above, the Foreign Acquisitions and Takeovers (Notices) Regulations contain the prescribed forms – form 1 for a voluntary notice under s25 and form 2 for a compulsory notice under s26 - and specify how a notice should be signed and what documents should accompany it. If you are acquiring shares in an Australian company, it will most likely be a s26 notification and therefore must be made on form 2. If you are acquiring shares in a foreign corporation that has a downstream interest in an Australian company, it will be a s25 notification and should be made on form 1.

The effect of s25(2) is that if you give a notice and the Treasurer does not act upon it within 30 days and then tell you about it within another 10 days, he is forever precluded from taking action in the future.

"Act", in this context, means either give you a conditional letter of non-objection under s25(1A) or make a prohibition order under s18 or interim order under s22. This last section enables the Treasurer to extend the period for consideration of a proposal by up to 90 days. If he makes an interim order, then s25(3) (see below) comes into operation. Note that it is unusual for the Treasurer to make an interim order unless there is a real concern about the acquisition. If he needs more time, he usually asks you to withdraw and re-lodge your application so that the 30 days start running again.

Note condition (b) – you can’t carry out the proposal before the 30 days has expired. Technically this is so even if you get a non-objection letter within the 30 days (although getting a non-objection letter out of the Treasurer in much under 30 days is, in my experience, a fairly rare occurrence).

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Other Legislation

The Financial Sector (Shareholdings) Act 1998 (Cwth) regulates the ownership of licensed ADIs, insurance companies and their holding companies. The maximum "stake" that a person may have in such a company is 15%, unless the Treasurer approves a higher percentage limit on national interest grounds. A person's "stake" is the aggregate of the person's "direct control interests" and the "direct control interests" of the person's associates. The term "associate" is defined in a similar manner to the FATA.

CA Part 7.4 allows the operators of financial markets and clearing and settlement facilities which are of national significance to be prescribed. Once prescribed, a person is prohibited from having "voting power" (as defined in the CA) in excess of 15% in the operator without the Minister's approval.

For an example of the restrictions on ownership that can sometimes be found in constituent documents, see Shears v The Phosphate Co-operative Company of Australia Limited (1989) 7 ACLC 812, where a co-operative company limited the number of shares a person could hold to 500. It is increasingly rare for listed companies to have such restrictions on ownership as ASX Listing Rules 6.10 and 6.12 only allow removal of voting and dividend rights or divestiture where that is required by legislation or otherwise approved by the ASX. Approval is generally only given if the requirement is a mandatory one imposed under legislation or needed to maintain a licence.

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System Issues

Eg, in relation to the first bullet point, the moneylenders exemption in FATA is much narrower than CA. The specific legislation for Telstra, Qantas and airport operator companies exclude from the foreign ownership restrictions foreign trustees or responsible entities of managed funds where those funds are substantially Australian – there is no equivalent safe harbour in FATA or the Broadcasting Services Act.

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