ASIC restricts certain retail offers of ‘stub equity’ in takeovers to maintain investor protection

ASIC has modified the Corporations Act to prevent stub equity offers of scrip in a proprietary company being made to large numbers of retail target holders in takeover bids and schemes of arrangement.

The modification follows ASIC consultation on proposals to address concerns with offers of stub equity to retail investors in control transactions (19-127MR). ASIC’s response to submissions received as part of this consultation process is contained in Report 669 Response to submissions on CP 312 Stub equity in control transactions (REP 669).

ASIC Commissioner Cathie Armour said the changes would protect retail investors.

‘Proprietary companies have different governance and disclosure requirements than public companies and offers to the general public are usually not permitted,’ Commissioner Armour said.

‘These changes uphold the legislative intent of the restrictions on proprietary companies and ensure that retail investors benefit from the higher levels of regulation available in public companies’.

ASIC decided not to proceed with one of the proposals in its consultation paper, which sought to restrict offers of stub equity in public companies that use mandatory custodial structures. However, ASIC has included anti-avoidance measures within the instrument to ensure that these types of public companies do not convert to proprietary companies after the takeover is completed.

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Background

‘Stub equity’ is sometimes offered as consideration under a takeover or scheme of arrangement. It typically consists of securities or interests in an unlisted bid or holding vehicle that provides offerees the option to retain continued economic exposure to the performance of the underlying business of an entity as an alternative to another form of consideration (such as cash) that does not provide the same exposure.

ASIC’s proposals during consultation sought to restrict certain structures that would result in retail investors not being covered by the normal protections available under Australian law when participating in a public offer of securities. This can occur when shares in a proprietary, rather than public, company are offered as consideration under a takeover bid or scheme of arrangement. It can also arise when scrip consideration is required to be held by a custodian.

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