Put on notice: Proposed changes to disclosure obligations of equity derivatives

Introduction

On 14 November 2024, the Treasury released an exposure draft of the Treasury Laws Amendment Bill 2024: Enhanced Disclosure of Ownership of Listed Entities (Draft Bill) and opened consultation in relation to the Draft Bill.

The Draft Bill and the consultation relates to proposed amendments to the Corporations Act 2001 (Cth) (Corporations Act) which, if passed, would extend the substantial holding notice and tracing regimes in the Corporations Act to equity derivatives (e.g., cash settled call options), strengthen ASIC powers and potential penalties in the event of breach and make various procedural changes in relation to both aspects.

The consultation period is open until 13 December 2024.

As stated in the draft explanatory memorandum accompanying the Draft Bill (EM), the Government intends for the Draft Bill to be the first step towards increasing transparency in relation to the beneficial ownership of public and private companies which was foreshadowed by consultation in 2022 in relation to the proposed Public Beneficial Ownership Register.

Relevant interest in equity derivatives

The main change introduced by the Draft Bill is an expansion of the meaning of a ‘relevant interest’ in securities for the purpose of Chapter 6 of the Corporations Act to cover interests arising under equity derivatives, irrespective of how the derivative is to be settled  (i.e. physically or cash-settled), and regardless of whether the counterparty has a relevant interest at any particular time in any of the underlying securities required to meet their obligations at settlement or upon exercise.

The Draft Bill also removes the existing exclusion from the relevant interest provisions for market-traded options and rights to acquire securities given by derivatives (subsection 609(6)). This will not affect existing substantial holding disclosure obligations (because the current definition of ‘substantial holding’ in section 9 negates this exclusion for the purposes of those obligations). However, for other Corporations Act purposes (such as whether a party has breached the 20% takeovers threshold), parties to an equity derivative will have to take into account the impact of the derivative on their relevant interest and resulting voting power in determining whether they have breached that threshold. This is contrary to the position under the Corporations Act currently (subject to Takeovers Panel discretion to declare unacceptable circumstances).

Disclosure requirements

In determining a person’s substantial holding disclosure obligations, the calculation of total relevant interests will be based on a person’s non-derivative based relevant interests as well as their ‘derivative-based holding percentage’, the latter of which is in turn made up of:

• their ‘relatable’ derivative interests – the relevant interests in securities though derivative holdings that arise under the existing subsection 708(8) of the Corporations Act, which covers the extent the derivative counterparty has a relevant interest in the underlying securities;
• their ‘deemed physically settleable’ interests – the relevant interests in securities they may acquire through derivative holdings where the derivative will, or may be, physically settled, which covers the extent the derivative counterparty does not have a relevant interest in the underlying securities; and
• their ‘deemed non-physically settleable’ interests – the relevant interests in securities that are referable to their derivative holdings where the derivative will not be physically settled, in which case the calculation of the number of referable underlying securities is to be determined or calculated in accordance with legislative instrument issued by ASIC.

These provisions are drafted to ensure there is no double counting.

Accordingly, a substantial holder must:

• provide a substantial holding notice which provides details (including percentages) in relation to their relatable derivative-based holding percentage, each category of the above derivative-based interests, as well as the aggregate total derivative-based holding percentage even where the derivative-based percentage is zero;
• count their total interest (derivative and non-derivative) in calculating whether there is movement in substantial interest which requires disclosure; and
• disclose when their derivative-based holding percentage in the listed entity moves by 1 or more percentage points, even if their overall holdings in the listed entity have moved by less than 1 percentage point – such changes can also arise due to a recalculation as required by ASIC’s legislative instrument and, if it is an increase in the relevant interests, will be considered an acquisition that occurs through a transaction in relation to securities (potentially triggering a breach of the takeovers threshold in s606 of the Corporations Act if the holder’s interest increases above, or further above, 20%).

Other changes proposed in the Draft Bill

Among other procedural and technical amendments, if the Draft Bill is passed in its current form, the approach under the Corporations Act will be such that:

• deadline and awareness required to trigger deadline: the deadline for lodging a substantial holding notice will be unchanged however, the disclosure obligation will be extended to a person who ought reasonably to have been aware of a situation giving rise to a requirement to disclose;
• disclosure of substantial interests in newly listed entities: a person will need to disclose their substantial holdings in a listed entity when the entity becomes a Chapter 6C body – i.e. when the entity first lists;
• form of substantial holding notice: ASIC may approve the manner and form in which a substantial holding notice must be given and specify additional particulars by legislative instrument;
• recipients of tracing notices from ASIC: ASIC will be able to issue tracing notices to persons (and associates of such persons) suspected on reasonable grounds of having relevant interests in, or having given instructions, about securities, in addition to members of listed entities and persons named in previous disclosures made in response to tracing notices;
• recipients of tracing notices from Chapter 6C entities: a Chapter 6C body (e.g., a listed company) will have a similar power to ASIC to issue tracing notices, however such key persons may not issue tracing notices to suspected associates of members or associates of persons named in previous tracing notices, and where issuing a tracing notice based on a reasonable suspicion, that reasonable suspicion must be based wholly or partly on information already disclosed under Chapter 6C (i.e. in a previous substantial holding notice or response to a tracing notice);
• issue of a tracing notice by ASIC on request: where ASIC receives a request to issue a tracing notice from a member of a company, ASIC may refuse to issue such a tracing notice if it considers that complying with the request would be unreasonable (based on various factors including its level of resources);
• information required in response to tracing notice: this will be the same information as required by a substantial holding notice (unless ASIC dispenses with this requirement);
• application of Chapter 6C to foreign entities: unless ASIC deems a foreign entity to be exempt (on the basis of equivalent disclosure requirements in its home jurisdiction), Chapter 6C of the Corporations Act will apply equally to entities incorporated or formed outside of Australia that are listed on an Australian market (whereas they currently do not apply to foreign entities at all);
• tracing notice register: the obligation of listed entities to maintain a register in a form approved by ASIC of information provided in response to a tracing notice and an entity’s tracing notice register must be made open to inspection by journalists or academics, free of charge, in addition to its members;
• ASIC freezing order: ASIC may make a freezing order in relation to securities if a person fails to comply with requirements related to substantial holding and tracing notices (instead of only where a freezing order is required in order to assist an ASIC investigation, and a person fails to comply with Part 3 of the Corporations Act); and
• applicable penalties: maximum penalties for offences under Chapter 6C will be doubled.

Takeaways

• The Draft Bill does more than only enhance the disclosure regime surrounding derivatives – if the bill is enacted, the removal of subsection 609(6) will result in additional triggers by which the 20% takeovers threshold may be breached. This could even be so where the derivative in question is only to be cash-settled (i.e. non-physically settleable), such that the holder could possibly breach s606 of the Corporations Act pursuant to an instrument which would never give that holder a right to, or an interest in, shares to which the breach is supposedly referable.  Furthermore, the relevant interests referable to a cash-settled derivative may need to be recalculated, as required by ASIC legislative instrument, and if such recalculation takes them above, or further above, the 20% threshold, that could constitute a breach of s606 (the Draft Bill makes this abundantly clear).
• The Draft Bill would appear to supersede much of the work that Takeovers Panel Guidance Note 20 does. The Panel will now need to assess compliance with the amended Act (in addition to Guidance Note 20) in assessing whether there are unacceptable circumstances in relation to disclosure of derivative positions.  One would think that compliance with these enhanced derivative disclosure requirements under the Corporations Act should mean nothing further is required to avoid a declaration of unacceptable circumstances – although this has not stopped the Panel before.
• The Draft Bill seeks to preserve the existing position that a relevant interest cannot arise through a derivative where the underlying security to be delivered will be newly issued (as opposed to a transfer of an existing security) – the most common example of this would be an option or right over an unissued share. The EM specifically notes this would mean typical performance rights where delivery of the underlying share is by way of issue would not give rise to a relevant interest.  However, many such options or rights granted by ASX-listed companies give the company an option to deliver by way of transfer of existing shares.  Under the drafting of the Draft Bill, such an option or right may well give the holder a relevant interest in the underlying shares, despite what is intended.  Some further tweaking to the provisions may be required to avoid unintended consequences in this regard.

No doubt Treasury will receive a number of responses to its consultation questions. It seems likely that the Draft Bill will change following the consultation period and, subject to political / electoral considerations, be enacted some time in 2025.