Corporate 5 Minute Fix 08: proposed merger reforms, ASIC remakes class orders, CHESS solution, cyber security

Time to have your say on the Treasury's proposed merger reform

The Treasury released a consultation paper, on 20 November 2023, aiming to reform the existing merger control regime in Australia.

Responding to ACCC's concerns regarding the effectiveness of the current merger control system, which prohibits mergers that might substantially lessen competition as assessed through voluntary merger review/authorisation and Federal Court proceedings, is "skewed towards clearance" and fails to be as effective as it needs to be at curbing anti-competitive mergers.

The consultation paper proposes three alternative options to replace the current merger clearance regime:

• Option 1 – A voluntary formal clearance regime, where businesses could choose to notify a merger and the ACCC could grant legal immunity from court action under section 50 of the Competition and Consumer Act 2010 (Cth) (CCA) if satisfied that the merger would not be likely to substantially lessen competition. The ACCC's decision would be subject to review by the Competition Tribunal, but if the ACCC declined clearance and the parties sought to proceed with the merger, the ACCC would need to commence legal action in the Federal Court to prevent it going ahead – the ACCC would not be sole decision-maker.
• Option 2 – A mandatory suspensory notification regime whereby mergers above a certain threshold would require notification to the ACCC. Transactions would be suspended whilst the ACCC conducts its assessment. Similar to Option 1, to prevent an anti-competitive merger the ACCC would need to prove to the court that the merger would be "likely to substantially lessen competition" – the ACCC would not be sole decision-maker.
• Option 3 – A mandatory formal clearance regime where the ACCC is the main decision-maker, not the courts (ACCC's proposal). This would require compulsory notification as well as a discretionary power for the ACCC to "call in" transactions below the relevant threshold where there are competition concerns. Like in Option 1, clearance would provide legal immunity from court action under section 50 of the CCA. The legal test to be applied under this model is similar to Option 1 in that the ACCC "must be satisfied the merger is not likely to substantially lessen competition (or net public benefit)". There would be limited merits review to the Competition Tribunal. Under this model, the role of the Federal Court would be much reduced.

The consultation paper also proposes reforms to the test applied by decision makers when reviewing proposed mergers under section 50 of the CCA. This includes modernising the list of factors that decision makers must consider when assessing the impact of mergers on competition and expanding the test to include merges that "entrench, materially increase or materially extend a position of substantial market power".

A more detailed overview of the proposed reforms can be found here.

The ACCC's proposed reforms (ie. Option 3) may have a variety of implications for Australia's merger regime if enacted. It is expected that more mergers would require ACCC clearance before being able to close. The addition of this regulatory hurdle will need to be factored into deal timelines and transaction documents. The reforms also reverse the onus of proof, requiring the merging parties to prove to the ACCC that the merger is not likely to substantially lessen competition. The reverse onus of proof, coupled with the ACCC's suggestion that merging parties provide "up front information", places additional burdens on merging parties seeking ACCC clearance.

Chair of the Australian Competition and Consumer Commission (ACCC), Gina Cass-Gottlieb, has vouched for the expediency of the ACCC's proposed administrative model (Option 3) when compared to reforms relying on judicial enforcement, stating that "if the ACCC retained final decision-making power it would continue to pre-approve more than 90 per cent of merger applications within a month of receiving them and would also be subject to a set time frame for final decisions, which the courts are not". She also notes that the Australian Competition Tribunal would provide a faster process for appeals than going through the courts and have the benefit of review by more specialised experts.

ASIC remakes class orders on takeovers, compulsory acquisitions and relevant interests

Following recent public consultation, ASIC has taken action to remake various class orders relating to takeovers, compulsory acquisitions and relevant interests under Chapters 6, 6A and 6C of the Corporations Act 2001 (Cth).

The purpose of the class orders is to amend and supplement the Corporations Act by providing technical relief and operational improvement to its provisions in order to stay up to date with market developments over time.

The following ASIC instruments, which were due to cease operating on 1 October 2023, were recently reissued:

• ASIC Corporations (Changing the Responsible Entity) Instrument 2023/681;
• ASIC Corporations (Takeover Bids) Instrument 2023/683;
• ASIC Corporations (Compulsory Acquisitions and Buyouts) Instrument 2023/684;
• ASIC Corporations (Bidder Giving Substantial Holding Notice) Instrument 2023/685;
• ASIC Corporations (On-Sale Disclosure Relief for Scrip Bids and Schemes of Arrangement) Instrument 2023/686;
• ASIC Corporations (Warrants: Relevant Interests and Associations) Instrument 2023/687; and
• ASIC Corporations (Replacement Bidder’s and Target’s Statements) Instrument 2023/688.

Except for ASIC Class Order [CO 13/520]: Relevant interests, voting power and exceptions to the general prohibition which was incorporated into the Corporations Act 2001 (Cth) (CA 2001);

While the other instruments have been reissued by ASIC on substantially the same terms as their predecessors, a handful of technical amendments have been made such as:

• bidder relief in respect of securities issued on conversion or exercise of a derivative under section 617(2) the CA 2001;
• relief allowing lodgement of replacement bidder's and target's statements before dispatch of the original statements;
• clarification that a bidder can, in its offer terms, promise a shorter time for payment of bid consideration than the periods specified in section 620(2) of the CA 2001; and
• clarification that securities acquired on-market by a bidder in reliance on item 2 of section 611 of the CA 2001 during the bid period, but before the first offer, can be included in the securities acquired for the 75% threshold test.

Given the dynamic nature of the market and the needs of market participants, the relief provided by these instruments is essential to the ongoing operation of the provisions of the CA 2001 relating to takeovers, compulsory acquisitions and relevant interests. Navigating the range of sunsetting instruments and new ASIC instruments may be overwhelming. However, to stay abreast with the latest changes, the regulatory index on ASIC's website can be a useful tool to guide you through the maze of ASIC Instruments.

ASIC and RBA acknowledge ASX's CHESS solution

ASX has announced a product-based solution to replace CHESS.

The solution is an interoperable modular technology platform to be delivered by TATA Consultancy Services.

The change will be implemented in two stages. Stage one is estimated to cost up to $125 million and its release is expected in 2026. Details of stage 2 are anticipated in late 2024.

ASIC and the RBA, as regulators of clearing and settlement facilities have acknowledged ASX's decision and commended the involvement of ASX's Cash Equities Clearing and Settlement Advisory Group in representing the interests of the market up to this point and going forward. ASIC has reported that the transition will be complex and technical and implementation risks must be managed.

Background

For 30 years the Clearing House Electronic Subregister System (CHESS) has been used by the Australian Securities Exchange (ASX) and market participants to manage the settlement of share transactions and record shareholdings. In recent years, ASX has been exploring options to replace the CHESS infrastructure.

A clearing and settlement (CS) facility clears and settles transactions in financial products. ASX is an operator of CS facilities.

The Australian Securities Investment Commission (ASIC) and the Reserve Bank of Australia (RBA) share the responsibility of supervising operators of CS facilities and their participants. ASIC is responsible for assessing whether a CS facility's services are provided in a fair and effective way, as well as its responsibilities as a market regulator. ASX has statutory obligations to comply with the RBA's standards for ensuring that CS facility licensees conduct their affairs to promote stability in the Australian financial system, and the RBA assesses its compliance annually.

Design announcement

On Monday 20 November ASX announced a product-based solution to replace CHESS.

Key points of the announcement include:

• The solution is an interoperable modular technology platform, which will be delivered by global technology provider TATA Consultancy Services (TCS).
• ASX intends to implement the change through two stages to reduce delivery risk: first the clearing service, and then the settlement and sub-register services.
• The first stage of the release is estimated to cost between $105 and $125 million, with a release forecast for 2026. Details as to the scope, timing and cost of the second release are anticipated in late 2024.

Accenture will support the project delivery by providing additional capability and capacity in technology project delivery and industry expertise.

ASIC and RBA response

ASIC has acknowledged the importance of ASX's decision to deliver the replacement but noted that there is still a long way to go, stating that: "…it will be critical for ASX to now focus on engaging with the market on the detailed design of the CHESS Replacement Program with a realistic and achievable timeline for implementation".

Similarly, the RBA acknowledged the new direction for the CHESS replacement program and commented that "[i]t will also be critical for ASX to address the findings from various external audits and reviews so that past issues with the program are not repeated."

ASX's Cash Equities Clearing and Settlement Advisory Group is comprised of recognised industry leaders, formed to advise ASX's CS facilities on SC and settlement issues. Both ASIC and the RBA recognised the Advisory Group's role in bringing the interests of the market to the decision, and ongoingly throughout the program's implementation.

What's next?

CHESS will need to meet ongoing resilience, reliability, integrity and security requirements for the time being. ASIC has reported that the replacement program will be complex and technical. ASX must ensure robust and transparent governance arrangements are put in place to manage the risks associated with its implementation.

ASX is likely to publish its special report covering program and project management frameworks, and assess these against internationally recognised standards, amongst other things, in the coming weeks.

Australia's three largest accounting standards bodies to be merged

On 21 November 2023, the Federal Government announced its plan to make the largest reform to Australia's financial reporting standards in decades by merging the Australian Accounting Standards Board (AASB), the Auditing and Assurance Standards Board and the Financial Reporting Council into a single entity.

According to Labor Senator Deborah O'Neill the new streamlined body, is a response to the regulatory gaps identified during the PWC tax scandal, is intended to increase the efficiency of accounting and auditing standard setting. The body will also support the ongoing implementation of climate-related financial disclosure standards in line with the Sustainable Finance Strategy, a function the AASB will continue to work on prior to the formulation of the new body.

A topic of interest when the Government finalises the details of this new entity is the rules regarding who will be permitted to serve on the body following the recent amendments to the Treasury laws. Such amendments saw partners or senior executives who currently work in a tax firm with more than 100 employees or whose former partners have ongoing financial links to such firms ineligible to sit on the Tax Practitioners Board.

The Government is set to release draft legislation for consultation, with the aim to have this body operational by July 1 2026.

ASIC Report 776: Spotlight on cyber: Findings and insights from the cyber pulse survey 2023

The Australian Securities and Investments Commission (ASIC) released a report which provides insights on ASIC's research and survey of cyber resilience of firms in Australia's financial markets. The Cyber Pulse Survey in 2023 was developed to understand the cybersecurity maturity of regulated entities amid increased threats. The anonymous and voluntary survey was designed to aid organisations in evaluating their cyber resilience and to allow benchmarking against industry peers. It assessed capabilities in managing cyber risks, safeguarding critical information assets, and responding to security incidents.

Ninety-five percent of participants received personalised reports comparing their cyber maturity with industry peers. The report measured six functions, assigning weighted average scores based on responses, and then compared these scores against industry averages.

Previously, ASIC conducted similar surveys focused solely on Australia's financial markets sector. However, the 2023 survey broadened participation to include public companies, large proprietary firms, and ASIC-licensed entities across various industries and sizes.

ASIC plans to utilise survey insights to identify sector-specific gaps, guide initiatives, and collaborate with industries to bolster cyber resilience. They emphasise the importance of moving beyond security measures and stress the need to test incident response and recovery plans for true resilience regularly.