The exposure draft Treasury Laws Amendment Bill 2024: Enhanced Disclosure of Ownership of Listed Entities (Cth) (Exposure Draft), which was released for public consultation on 14 November 2024, is the latest (and arguably the most significant) development in the ongoing debate in relation to corporate transparency. The Exposure Draft proposes legislative amendments which Treasury claims will improve Australia’s beneficial ownership disclosure regime for listed entities by increasing transparency and supporting stronger enforcement. Its release follows a global trend towards enhanced transparency in support of regulatory outcomes in international tax compliance, sanctions, money laundering and terrorism financing, with jurisdictions including the United States, the United Kingdom, Canada and France enacting legislative reforms in this area in the last few years.
While it is difficult to argue against enhanced transparency in principle, the new legislation cuts across well-established principles of takeovers regulation in Australia - particularly the concept of control over securities on which that regulation is based, as encapsulated in the foundational definition of a ‘relevant interest’. It remains to be seen whether the legislative amendments following public consultation will strike the right balance between improved transparency and compliance burden.
In this article we examine the background to the Exposure Draft, the changes it proposes, the likely effect these changes might have in practice, and where these legislative reforms might lead to next.
A quick look
Set out below is a snapshot of some the key changes proposed by the Exposure Draft and their likely implications.
# | Proposed change | Implications | |
1 | Derivative-based interests in listed entities will give rise to a ‘relevant interest’ regardless of settlement method or whether the counterparty has any control over the underlying securities. |
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2 | Substantial holding notices will need to include break downs for different categories of derivative-based relevant interests. |
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3 | Any movement of 1% or more in aggregate derivative-based holdings, or any of the three categories of derivative-based holdings will trigger a disclosure obligation. |
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4 | Substantial holdings will need to be disclosed when an entity becomes listed. |
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5 | Australian-listed foreign entities will become subject to the substantial holding and tracing notice regimes. |
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6 | Tracing notices will be able to be issued to a substantially wider class of persons and ASIC can make broader requests. |
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7 | ASIC will be able to make freezing orders over securities in connection with disclosure failures. |
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Background to the exposure draft
Changes to Australia’s beneficial ownership disclosure regime have been in the pipeline for some time now.
Back in 2015, the Financial Action Task Force (an international organisation that sets financial crime-fighting standards for adoption by member states) assessed Australia’s anti-money laundering and counter-terrorism financing system. It found that, despite Australia’s mature regime for combating money laundering and terrorism financing, Australia’s legislative regime at that time was not sufficient to ensure that accurate and up-to-date information on beneficial ownership is available in a timely manner and was ripe for misuse by criminals.
One of the current Federal Government’s election commitments in 2022 was to ensure multinational enterprises operating in Australia pay their fair share of tax. As part of this commitment, the government indicated it would implement a public registry of beneficial ownership to improve transparency on corporate structures and show who ultimately owns (or controls) a company or legal vehicle. Ultimately, the register is intended to support stronger regulatory and law enforcement responses to tax and financial crime, assist foreign investment applications, and facilitate the enforcement of sanctions. This approach would broadly align Australia’s beneficial ownership disclosure regime with that of various other OECD member countries.
In November 2022, the Federal Government conducted a public consultation process seeking comments on the design features for the first phase of a publicly available beneficial ownership register. The first phase of the reforms involved a proposal to require specified unlisted entities regulated under the Corporations Act 2001 (Cth) (Corporations Act) to maintain publicly accessible beneficial ownership registers. The Federal Government simultaneously sought feedback on proposed amendments to the substantial holding notice and tracing notice regimes in the Corporations Act.
It further indicated it would consult on proposed approaches to the disclosure of beneficial ownership of property held through other legal vehicles (such as trusts) and the centralisation of information on individually maintained beneficial ownership registers in a single public registry.
The Federal Government received several submissions during the public consultation process, which appears to have prompted a change in approach and has ultimately culminated in the release of the Exposure Draft for public consultation.
Changes proposed by the exposure draft
Set out below are a few of the key changes proposed by the Exposure Draft.
1. A new approach to derivative interests
Under the current disclosure regime, the economic interest held by the taker of an equity derivative that is physically settled (or includes an option for physical settlement) in any securities underlying that equity derivative only gives rise to a ‘relevant interest’ for the purposes of the Corporations Act to the extent the counterparty to the derivative (i.e. the writer) has a relevant interest in those underlying securities. That is, the taker will only have a relevant interest in securities comprising the writer’s hedged position.
Takeovers Panel guidance also requires disclosure of any long economic position in 5% or more of an entity’s voting rights. It further expects those disclosures to allow the market to fully understand the nature of the taker's long position. However, the practical challenges in complying with this guidance became apparent in recent Takeovers Panel proceedings in relation to the affairs of Pacific Smiles Group Limited, where the Panel found disclosures made in relation to an economic interest in Pacific Smiles shares under the terms of a cash settled total return swap were deficient because they did not annex or provide full details of certain agreements with associates of the taker that related to the potential acquisition of Pacific Smiles shares.
Accordingly, the Panel found the disclosures did not permit the market to fully understand the nature of the taker’s long position, despite the fact that the extent of the taker’s economic interest in Pacific Smiles shares had been disclosed, and the Panel’s guidance does not require the disclosure of underlying derivative agreements.
The Exposure Draft seeks to address these issues by expanding the meaning of a ‘relevant interest’ in securities to cover interests arising under equity derivatives irrespective of how the derivative is to be settled and whether the counterparty to the derivative has a relevant interest in any of the underlying securities.
This is a substantial departure from what until now had been a well-settled, if broad, regulatory construct. It brings derivative positions into the disclosure framework under the Corporations Act (instead of non-disclosure needing to meet the higher threshold of ‘unacceptable circumstances’ before enlivening the Takeovers Panel’s jurisdiction) but in order to do so, it requires the introduction of several new, and potentially complex, concepts that will impose substantial regulatory burdens, in particular on the writers of derivatives.
2. Substantial holding notices for derivative-based interests
The Exposure Draft proposes that substantial holding notices which disclose derivative-based relevant interests in the securities of a listed entity will need to separately set out the taker’s:
(a) Relatable derivative-based holding percentage, which includes relevant interests in derivatives under existing law. The word ‘relatable’ refers to the fact that the relevant interest is relatable to the holding in which the counterparty has a relevant interest (i.e. the hedged position).
(b) Deemed physically settleable derivative-based holding percentage, which includes the securities that the taker would have at the time of settlement of an equity derivative that is physically settled (or includes an option for physical settlement), excluding those already caught under existing law. This is the theoretical number of shares underlying an equity derivative which represents the portion of the taker’s economic interest which is not reflected in any holding in which the counterparty has a relevant interest (i.e. the unhedged position).
(c) Deemed non-physically settleable derivative-based holding percentage, which includes a deemed number of securities underlying an equity derivative that is not capable of being physically settled. The Exposure Draft proposes that ASIC will make a determination specifying the number of securities, or a method of calculating the number of securities, in which the taker will be deemed to have a relevant interest. It is in this area in particular that the compliance environment for financial institutions will become more burdensome, arguably without a corresponding benefit (at least, from a takeovers regulation perspective).
(d) Derivative-based holding percentage, being the aggregate percentage across the above three categories.
This breakdown is required regardless of whether the substantial holding is entirely derivative-based or made up of a combination of derivative-based and non-derivative based relevant interests.
In addition, the Exposure Draft proposes that holders of derivative-based relevant interests in the securities of a listed entity will be required to disclose:
any movement in their derivative-based holding of 1% or more (regardless of whether their overall holding in the entity has moved by 1% or more)
any shifts in any of the three derivative categories listed above of 1% or more.
This means any change in the nature of a derivative-based interest in the securities of a listed entity which gives rise to a substantial holding will need to be disclosed. This includes, for example, the amendment of a cash settled equity derivative to allow for physical settlement.
3. Extension to Australian-listed foreign entities
Currently, the substantial holding and tracing notice regimes in Chapter 6C of the Corporations Act do not apply to entities which are not formed under the Corporations Act. Typically, it is a condition of admission of such entities to the ASX that they enter into a deed of undertaking which includes a covenant to report substantial holding information to ASX to the extent the entity becomes aware of it. However, this still potentially leaves a gap in the disclosure of substantial holdings in such companies, subject to a similar regime applying in their home jurisdiction.
The Exposure Draft proposes to simplify and enhance this regime by extending Chapter 6C of the Corporations Act to foreign entities listed on a financial market operated in Australia.
It also includes a carve-out whereby ASIC can declare the substantial holding notice obligations will not apply to a holder of interests in an Australian-listed foreign entity that is subject to equivalent obligations in a foreign jurisdiction.
However, the holder will still be required to pass on information provided under equivalent overseas obligations to the operator of each Australian market on which the entity is listed. This requirement aligns with the continuous disclosure provisions under Chapter 3 of the ASX Listing Rules and the typical terms of the deeds of undertaking noted above.
4. Substantial holdings in newly-listed entities
The Exposure Draft clarifies a person must disclose a substantial holding in an entity at the time that it becomes listed on a financial market. While typically this information would be disclosed in the prospectus or information memorandum prepared as part of the listing process to the extent it is material to a decision whether to invest in the relevant securities, there is no unambiguous obligation to do so.
5. More powerful tracing notices
The Exposure Draft proposes to substantially expand the class of persons to whom tracing notices can be issued. In addition to the existing classes of recipients, ASIC and listed entities will be able to issue tracing notices to persons that they suspect, on reasonable grounds, of:
having a relevant interest in voting shares or interests in a listed entity
giving instructions about any matter relating to voting shares or interests in a listed entity
being an associate of a person eligible to receive a tracing notice under existing law (which includes members of a listed entity).
Listed entities will be required to base their reasonable suspicion on information already disclosed under the substantial holding or tracing notice regimes, while this restriction will not apply to ASIC - presumably so that it may have regard to confidential information to which it has access as a result of its proprietary data and investigative powers.
The Exposure Draft further proposes to align the information required to be disclosed in response to an ASIC-issued tracing notice with that required to be disclosed in a substantial holding notice. While there is already significant alignment between these requirements, the changes proposed by the Exposure Draft in relation to substantial holding notices for derivative-based relevant interests will significantly extend the scope of ASIC-issued tracing notices. This is expected to assist the regulator’s ability to assess compliance with disclosure obligations and empower it to uncover undisclosed information, particularly relating to overseas holders.
6. Freezing orders for disclosure failures
The Exposure Draft also proposes to empower ASIC to make freezing orders in relation to securities in listed entities where, in the regulator’s opinion, a person has failed to comply with substantial holding notice or tracing notice obligations.
This power is intended to allow ASIC to preserve the status quo while it conducts enquiries into underlying ownership, and to incentivise market participants to comply with the disclosure regimes. In the absence of such powers, ASIC is effectively required to go down the expensive and time-consuming path of applying to the Takeovers Panel for orders based on a finding of ‘unacceptable circumstances’.
What will this mean in practice?
The amendments proposed by the Exposure Draft are likely to have an effect which reaches far beyond its corporate taxation and financial crime prevention policy background. The policy impact of the Exposure Draft appears to have strayed into the domain of takeovers regulation, and the cost benefit analysis in that domain, in our view is unclear.
On the one hand, there is some merit in increasing certainty in relation to equity derivatives that are physically settled (or include an option for physical settlement) by giving the Takeovers Panel’s policy position legislative force. However, it is difficult to see how the expanding the definition of a ‘relevant interest’ in securities to cover interests in securities underlying equity derivatives which are not capable of physical settlement, or to cover the unhedged portion of a taker’s economic interest in securities, would enhance regulatory outcomes under taxation or anti-money laundering or counter terrorism financing legislation.
In the context of M&A transactions, the expanded meaning of a ‘relevant interest’ proposed by the Exposure Draft could effectively remove any incentive to use equity derivative arrangements to acquire a strategic interest in an entity’s securities in advance of a potential control transaction (i.e. ‘pre-bid stake’). This is particularly relevant given the prevalence of schemes of arrangement under which any hedged securities underlying an equity derivative would likely give rise to a separate ‘class’ of shareholders for voting purposes.
Investment banks and other writers of equity derivatives will also likely face extensive disclosure obligations where another arm of the same organisation holds securities in the entity to which the equity derivative relates (usually in a different capacity, with information barriers between teams).
We also consider the extensive substantial holding notice requirements for derivative-based interests are likely to make these notices less useful to market participants who do not understand complex derivative arrangements, despite the Exposure Draft proposing to remove the requirement for substantial holding notices to be given ‘in the prescribed form’.
Enforcement of the revamped substantial holding notice regime will also bring its own challenges, particularly given that compliance with existing disclosure obligations is generally not well (or at least consistently) enforced. Expanding the scope of ASIC’s tracing notice powers and empowering the regulator to make freezing orders for disclosure failures will go some way to combating these challenges, but a question remains as to how the regulator will keep up with the sheer volume of disclosures.
The ASX Listing Rules require foreign entities listed on ASX to immediately release documents they receive about a substantial holding of securities under any overseas laws or provision in the entity’s constitution equivalent to Australia’s substantial holding disclosure or tracing notice regime. In our view, there is some merit in giving these obligations legislative force to ensure they apply equally to all financial markets operated in Australia.
In a broader sense, the amendments proposed by the Exposure Draft should (in theory, at least) lead to:
Enhanced transparency and increased investor confidence – increased transparency in relation to beneficial ownership will almost invariably assist market participants in conducting due diligence (whether in relation to potential investments, their own securities register, or otherwise) and could, over time, facilitate a more stable, attractive and robust market.
Deterrence of financial crimes – increased transparency would deter individuals from using complex ownership structures to facilitate illegal activities such as money laundering, tax evasion and terrorism financing.
Corporate accountability – beneficial owners could be held accountable (at least reputationally) for the actions of entities they beneficially control. This could, in turn, deter corporate misconduct and incentivise improved corporate governance.
Improved risk management – investors (including potential bidders), armed with the ability to trace beneficial ownership, may be able to better assess and manage reputational and other risks associated with potential investments and business relationships.
Privacy concerns aside, these amendments could equally generate:
Increased administrative burdens – the Exposure Draft would, in essence, require the implementation and maintenance of an enhanced disclosure system which would almost certainly be administratively burdensome for the persons required to make disclosures to the standard the Exposure Draft proposes.
Compliance costs – the costs associated with the implementation and maintenance of such systems could be significant and could be passed on to investors.
A perception of overregulation, deterring investment – investors (including potential bidders) could be deterred from investing in entities in circumstances where they would be required to provide extensive disclosure regarding beneficial ownership, which could impact a listed entity’s ability to raise capital. The extent of private equity investment in the Australian market in particular may decrease.
Where to next?
There is still a long way to go before any proposed changes to Australia’s beneficial ownership disclosure regime would become effective. Submissions on the Exposure Draft are due by 13 December 2024, after which it would need to be passed by both houses of parliament (likely with amendments) and receive Royal Assent. The Exposure Draft would then become effective six months later.
Time will tell whether the Exposure Draft, if passed, will achieve its central aim of increasing transparency and supporting a stronger beneficial ownership disclosure framework and regulatory enforcement outcomes or whether it will perhaps inspire more novel loopholes.