Guidance Note 20 Equity Derivatives - Public Consultation Response Statement [28/05/2020] The Takeovers Panel

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28 May 2020

Guidance Note 20 Equity Derivatives - Public Consultation Response Statement

Introduction

On 10 April 2019, the Takeovers Panel released a Consultation Paper seeking public comments on proposed amendments to Guidance Note 20: Equity Derivatives. 
Comments on the Consultation Paper were due by 31 May 2019.  The Panel received submissions from 10 respondents (Annexure A).  The Panel thanks the respondents for their comments.  Consistent with the Panel’s published policy on responding to submissions, this statement sets out the Panel’s response to the public consultation. 

Attached are copies of the final revised Guidance Note 20, in clean (Annexure B1) and in mark-up (Annexure C) to show the changes from the draft circulated with the Consultation Paper (Consultation Draft).  For the reasons discussed at the end of this statement, the current first edition of Guidance Note 20 will continue to apply for now.  We intend to give market participants three months’ notice of when the revised Guidance Note 20 will come into effect.

Material comments received and Panel's conclusions

Do you agree that the Panel should expect disclosure of all long positions over 5%? If not, what do you consider should be the Panel’s policy position on disclosure of equity derivatives?

Comments

The majority of respondents agreed with the requirement to disclose all long positions over 5%.  One respondent submitted that the Guidance Note should clearly state that it applies irrespective of whether a control transaction has commenced, if that is the Panel’s policy position.

One respondent submitted that the Panel should expect disclosure of derivatives “in the context of takeovers”. 

Two respondents expressed concerns around the practicalities of disclosing all long positions over 5%.  One respondent submitted that it was against the public reporting of equity derivative positions where there is no control transaction as the “reporting of those positions could discourage market activity and positions that have no connection to takeovers” and that the Panel’s guidance requires “in the absence of a control transaction, general reporting requirements that go beyond those that have been set by the Corporations Act”.  Another respondent made similar submissions in effect.  One respondent queried the Panel’s ability to enforce its guidance under the current legislative regime and remedy a failure to disclose.

One respondent submitted that there is significant uncertainty as to whether the premise that “the economic incentives for a writer to hedge is likely to give some form of effective control over the disposal of an equivalent number of the underlying securities” is still valid in the current market and, accordingly, whether the fundamental premise of the Panel’s policy as expressed in the Guidance Note remains valid.  That respondent also submitted that the Guidance Note would ideally express that the Panel expects disclosure to be made on and from entry into a long position (regardless of whether there is a control transaction occurring), which would require the Panel to take a definitive view on its jurisdiction.

One respondent also submitted that the definitions of “long” and “equity derivative positions” were too narrow, on the basis that the definitions create uncertainty as to whether other equity-like instruments fall within the disclosure regime. 

Two respondents submitted that the requirement to disclose long positions over 5% should not apply to market makers, either as the writer or taker, for reasons including that the holding of a market maker is generally passive.

Panel Response

In light of the submissions, the Panel considers that the market is generally supportive of greater transparency.  Accordingly, the Panel has clarified that it expects disclosure of all long positions over 5% irrespective of whether a control transaction has commenced (see paragraph 9).

In response to the submissions regarding market makers, the Panel has (a) stated in example 3 that the Panel would not normally expect a market maker to disclose a long position to hedge another equity derivative it has written and (b) removed the word “usually” from footnote 3 of the Consultation Draft2 to clarify the position in relation to writers of derivatives.

In the Panel’s experience, the writer of an equity derivative usually has an economic incentive to hedge its position (see paragraph 6).  Accordingly, the Panel considers the ’premise’ of the Guidance Note remains valid.

The Panel considers that it has jurisdiction to consider (among other things) matters relating to the control or potential control of an entity and the acquisition or proposed acquisition of a substantial interest, and whether the market is efficient, competitive and informed.  The Panel also considers that it is appropriate for it to state its general expectations relating to disclosure while acknowledging it will consider each case before it in light of its jurisdiction.  Accordingly, to assist market participants, the Panel has included three examples in paragraph 10 to provide additional non-exhaustive guidance as to when it may find unacceptable circumstances relating to non-disclosure and to clarify that the Panel will consider the effect of the non-disclosure on matters within its jurisdiction. 

To address the submission relating to the scope of the definitions of “long” and “equity derivative positions”, the Guidance Note now states the principles may be considered in relation to dealings with other financial instruments that provide economic exposure to an entity’s securities.

Do you agree with footnote 2? What further guidance (if any) do you think the Panel should provide in cases when a person obtains a long position of over 20%?

Comments

Footnote 2 of the Consultation Draft stated that “The acquisition of a long position that would contravene s606 if it were comprised entirely of a physical holding may also give rise to unacceptable circumstances (even if the acquisition does not result in a person acquiring a relevant interest in contravention of s606).”

The submissions were generally supportive of the substance of footnote 2, and submissions were also received that the footnote should be given greater prominence and be included in the body of the Guidance Note given the significance of the guidance.

Three respondents submitted that they agreed with footnote 2 and that no further guidance was necessary. 

Four respondents submitted that it would be helpful if the Panel could provide more guidance, and two of those respondents submitted that the Panel should make it clear whether the exceptions in s6113 would be relevant (in essence, whether the Panel will distinguish between long positions and physical holdings in considering the exceptions in s611). 

One respondent submitted that, if the position is that long positions over 20% should be unacceptable, this would be a “significant change in the policy underlying Chapter 6, which is clearly focused on matters relating to the control of a company or the acquisition of a substantial physical interest in securities” (noting the exclusion in s609(6)).  One respondent disagreed with footnote 2 and submitted that the “inclusion of footnote 2 would be extending the law and policy quite considerably from where it currently stands, which we submit is more properly the province of legislation” and that there is no policy or legislative basis for such an extension.

Panel Response

The Panel considers that it is appropriate to provide guidance on circumstances where an acquisition of a long position that would contravene s606 if it were comprised entirely of a physical holding would be unacceptable, see new paragraph 19.  This further guidance clarifies that the Panel will take into account the ‘creep’ exemption in s609(6), noting the decision in John Fairfax Holdings [1997] ATP, and that it will consider whether the acquirer of the long position could have relied on an exemption in s611 if the acquirer had made the acquisition as a physical holding. 

Should there be more guidance provided in relation to what information is required to be disclosed (see paragraphs 11-17)? If yes, what guidance would assist? Should the taker of an equity derivative be expected to disclose the identity of the writer(s) of that derivative? Please explain.

Comments

The Panel received a number of submissions as to whether more guidance should be provided in relation to what information is required to be disclosed.

One respondent submitted that the reference to ISDA documentation in paragraph 13(b) of the Consultation Draft should be replaced with a more generic reference, and another respondent submitted that the Panel should clarify whether a “swap confirm” is required to be disclosed. 

One respondent submitted that the term “physical position” in paragraph 12(i) of the Consultation Draft was unclear and “more clarity could be added to ensure there is no disclosure loophole based on technical arguments…” and another respondent submitted that the words should be replaced with “long physical or other equity derivative positions”.

One respondent submitted, in relation to paragraph 12(j) of the Consultation Draft, that disclosure of gross short positions is not common in other financial markets.  That respondent also submitted that next trading day disclosure (see paragraph 15 of the Consultation Draft) may be too short a timeframe.

One respondent submitted that the Panel’s guidance may increase the level of unnecessary disclosure and submitted that it would only be reasonably practicable to disclose short and long positions on a group basis.

In relation to whether the taker of a derivative should be expected to disclose the identity of the writer, four respondents submitted that there should be no such requirement.  Submissions were received to the effect that there should be a clear exclusion on placing any obligation on the writer of a derivative to disclose.

One respondent submitted that there should be a disclosure requirement for writers on the basis that there is a risk that in many cases the market will not know (but the taker will know) whether substantial holding disclosures made by the writer likely relate to the equity derivative position or not. 

Panel Response

The Panel considers the submissions to be broadly supportive of the guidance in paragraphs 11-17 of the Consultation Draft, with respondents providing relatively limited submissions.

In relation to whether more guidance should be provided as to the information required to be disclosed, the Panel has clarified that standard documentation (which the Panel is unlikely to consider needs to be disclosed) is not limited to ISDA documentation. 4  The Panel has also substituted “long positions” for “physical positions” in paragraph 13(i)5 in recognition that derivative positions may be offset against other derivative positions. 

In relation to whether the taker of a derivative should be expected to disclose the identity of the writer, the Panel considers that such guidance is not appropriate in light of the submissions it received.  As set out in footnote 4,6 the taker may not know the hedge status, or be able to ascertain it, or the hedge status might change frequently, or the hedge may not be the underlying security (for example it may be another equity derivative). 

Are there any other changes you would make to the draft Guidance Note? Please explain.

Comments

In addition to the suggested changes to address matters expressed above, other suggested amendments included that:

  • the Guidance Note should use one of the terms “equity derivative” and “derivative” rather than both
  • the Guidance Note should clarify whether the 5% threshold is for just one derivative or includes aggregate holdings
  • the Panel should expressly enunciate, in the body of the Guidance Note, the factors noted in Tribune Resources Limited [2018] ATP 18 and Auris Minerals Limited [2018] ATP 7 rather than include a reference in a footnote and
  • references to “ASX” should be changed to more precisely reflect the wording of s671B.

Two respondents also submitted that a transitional period would be desirable to allow time for the Panel’s expectations to be considered and necessary disclosures to be made.

Panel Response

The Panel considers that it is not necessary to amend the use of the terms “equity derivative” and “derivative” in the Guidance Note.  Similarly, the Panel considers it is not necessary to include an additional clarification regarding the 5% threshold as a combined reading of paragraph 13(h) and the definition of “long position” makes it clear that the guidance refers to the aggregated positions of a taker and its associates. 

The Panel considers it appropriate to retain a reference in a footnote to the factors noted in Tribune Resources Limited [2018] ATP 18 rather than include those factors in the body of the Guidance Note as the paragraphs containing those factors should be read and understood in their full context.

In addition, a new footnote 6 has been included to provide guidance as to the appropriate form of disclosure of a long derivative position.  This guidance clarifies that disclosure should be made in a form that is suitable for immediate release to the market without the need for substantial alteration or summation by the relevant listed entity in order to facilitate the public release of such disclosure.  The Panel does not consider it necessary to amend the references to ASX as it expects all market participants will understand that the Panel’s guidance applies to companies listed on other exchanges if relevant. 

Initially the Panel did not consider that a formal transitional period was necessary given the Panel reaches outcomes according to considerations of practicality, policy, economic impact, commercial and market factors and the public interest.7  However as a result of the market disruption caused by the COVID-19 Pandemic, the Panel has decided that the current first edition of Guidance Note 20 will continue to apply for now and we will give market participants three months’ notice of when the revised Guidance Note 20 will come into effect.


1 - Unless otherwise stated, all references to the Guidance Note are to the final version in Annexure A

2 - This appears as footnote 2 in the final Guidance Note

3 - Unless otherwise stated, all statutory references are to the Corporations Act 2001 (Cth)

4 - See paragraph 14(b)

5 - This was paragraph 12(i) in the Consultation Draft

6 - This was footnote 6 in the Consultation Draft

7 - See Attorney-General of the Commonwealth of Australia v Alinta Limited & Ors [2008] HCA 2 at [45]


Annexure A: Submissions

Download the submissions [PDF 4.35MB]


Annexure B: Clean version of GN 20

Guidance Note 20 - Equity Derivatives

Background

  1. This Guidance Note has been prepared to assist market participants understand the Panel’s approach to disclosure of equity derivatives. Equity derivatives are valuable trading and risk management products. There is a significant market for them and the Panel does not want to interfere with that market where equity derivatives are not used in ways that undermine the policy of Chapter 6.
  2. If an equity derivative gives the taker a relevant interest in any underlying securities, the disclosure regime in Chapter 6C applies.1 This note applies to equity derivatives that may not require disclosure under Chapter 6C.
  3. The examples are illustrative only and nothing in the note binds the Panel in a particular case. The Panel may consider the principles in this guidance note for dealing with other financial instruments that provide economic exposure to an entity’s securities.
  4. In this note the following definitions apply:
  5. cap and/or collar arrangement
           Arrangements that operate to limit the taker's upside and/or downside exposure
    entity
           A listed company, listed body or listed registered managed investment scheme
    long position
           Either a long equity derivative position or a relevant interest in securities or a combination of both
    taker
           Person who 'acquires' an equity derivative, usually the client
    writer
           Person who 'provides' the equity derivative, usually an investment bank

Equity derivatives and hedging

  1. Equity derivatives, in the hands of the taker, may be long (ie, the taker is to benefit from an increase in the price of the underlying security) or short (ie, the taker is to benefit from a decrease in the price of the underlying security). In either case, the terms may provide that they are cash-settled or “exchanged for physical” (ie, the underlying security is transferred).
  2. Equity derivatives may be hedged. The writer usually has an economic incentive to hedge its position, regardless of whether the derivative is cash-settled or exchanged for physical. The hedge is often established by acquiring the underlying securities. The writer is not ordinarily contractually obliged to hedge (or else a relevant interest may arise). Nevertheless, even if the derivative is hedged, the long position may not confer voting power on the taker. On the unwinding of the position, the writer has an economic incentive to unwind any hedge.
  3. By creating the economic incentive to hedge and then by controlling the unwinding, the taker of a long equity derivative position (even one that is cash-settled) may affect the market in the underlying securities, for example by bringing about a reduction in the “free float” of the entity. Such an effect on the supply (and perhaps therefore the price) of the securities may, in turn, affect:
    1. control or potential control of the entity
    2. the acquisition or proposed acquisition of a substantial interest in the entity or
    3. the efficient, competitive and informed market for control of the entity’s voting securities.
  4. Non-disclosure of equity derivative transactions in the above circumstances may give rise to unacceptable circumstances.

Disclosure of equity derivatives

  1. The Panel expects disclosure to be made where the long position of a person and their associates:
    1. is 5% or more and
    2. if so, changes by at least 1% or falls below 5%

    of the voting rights in an entity.2 Failure to disclose in accordance with paragraphs 12 to 18 below may give rise to unacceptable circumstances, irrespective of whether a control transaction has commenced.

  2. In considering whether failure to disclose in the circumstances described above gives rise to unacceptable circumstances, the Panel will consider the effect of non-disclosure on the control or potential control of an entity and the acquisition or proposed acquisition of a substantial interest, and whether non-disclosure is contrary to an efficient, competitive and informed market.3
  3. Example 1: A Panel is more likely to find unacceptable circumstances if the taker with a long position over 5% (which has not been disclosed) has attempted to exercise control or influence over the entity or proposes a control transaction after the time that disclosure should have been made in accordance with paragraph 16.

    Example 2: The Panel is more likely to find that non-disclosure of an equity derivative gives rise to unacceptable circumstances if someone other than the taker proposes a control transaction and is unaware of the equity derivative.

    Example 3: The Panel would not normally expect a market maker to disclose a long position to hedge another equity derivative it has written (ie, a back-to-back equity derivative on essentially identical terms).

  4. There may also be circumstances in which the Panel would consider non-disclosure of equity derivatives to be unacceptable where the taker does not have a long position of 5% or more. For example, where purchase of physical securities to which the equity derivatives relate would have required disclosure by a bidder under s636(1)(h), the Panel may consider that the policy underpinning this requirement would warrant equivalent disclosure of the equity derivatives.
  5. Disclosure of equity derivatives should allow the market to understand fully the nature of the taker’s long position. This may require disclosure of any cap and/or collar arrangements and (if the information is known or readily available) the extent to which the counterparty has hedged.4
  6. The Panel considers that the following information should be disclosed (as applicable):
    1. identity of the taker (but not the writer)
    2. relevant security
    3. price (including reference price, strike price, option price etc as appropriate)
    4. entry date
    5. number of securities to which the derivative relates
    6. type of derivative (e.g. contract for difference, cash settled put or call option)
    7. any material changes to information previously disclosed to the market
    8. long equity derivative positions held by the taker and its associates, its relevant interests and its associates’ relevant interests (and the identity of all associates referred to)
    9. short equity derivative positions that offset long positions5 and
    10. Example 1: A taker “rents” voting power by acquiring physical securities and simultaneously taking offsetting short equity derivative positions.

      Example 2: A substantial holding of, say, 10% that is disclosed but subsequently a short equity derivative contract is entered for, say, 5%.

    11. short positions of more than 1% that have been acquired after a long position is disclosed, whether by notice or substantial holder notice (ie, the taker should update its disclosure with reference to the short position).
  7. The Panel is unlikely to consider that:
    1. the information needs to be in the form of a formal substantial holder notice (ASIC Form 603 and 604), unless required by Chapter 6C or
    2. standard (for example ISDA) documentation needs to be provided.
  8. Disclosure may be made:
    1. as a note annexed to a substantial holder notice, if one is given or
    2. by written notice to the entity.6
  9. In considering whether timely and adequate disclosure has been made, the Panel will have regard to the requirements for substantial holder notices - that is, within 2 business days of becoming aware or, in a bid period, by 9.30 am on the next trading day.7
  10. The Panel expects that the entity will disclose any written notice it receives to ASX.
  11. Entry into an equity derivative may be a multi-stage process, especially if the writer is providing exposure to the taker only after it has established adequate hedging. If so, disclosure may be required as it is progressively increased, regardless of when the formalities are completed.

Long positions over 20%

  1. The acquisition of a long position that would contravene s606 if it were comprised entirely of a physical holding may also give rise to unacceptable circumstances.8 Factors the Panel may take into account in determining whether such an acquisition is unacceptable include:
    1. if the taker has attempted to exercise control or influence over the entity
    2. if and when the long position was disclosed and
    3. whether the acquirer of the long position could have relied on an exception in s611 if the acquirer had made the acquisition as a physical holding. 9

Remedies

  1. If the Panel finds unacceptable circumstances it can make any order (including remedial orders) it thinks appropriate to (among other things):
    1. if it is satisfied that the rights or interests of any person, or group of persons, have been or are being affected, or will be or are likely to be affected, by the circumstances - protect those rights or interests, or any other rights or interests, of that person or group of persons or
    2. ensure that a takeover bid or proposed takeover bid in relation to securities proceeds (as far as possible) in a way that it would have proceeded if the circumstances had not occurred.10
  2. In considering what orders to make, the Panel may consider:
    1. any effect on the control or potential control of an entity (including the effect on any control transaction or proposed control transaction)
    2. the nature of the equity derivative and
    3. the period for which the equity derivative is held and the timing of any disclosure made.
  3. The Panel may order:
    1. disclosure of the derivatives
    2. disposal of any securities and
    3. cancellation of agreements.
  4. If a person has benefitted or gained an advantage from non-disclosure or inadequate disclosure of a long position of 5% or more, the Panel may seek to make orders to reverse that benefit or advantage.
  5. If non-disclosure or inadequate disclosure of a long position of 5% or more has an effect on control, potential control or the acquisition (or proposed acquisition) of a substantial interest, the Panel may seek to make orders to reverse that effect.

Publication History

First Issue: 11 April 2008

Second Issue:

Related Material

Equity Derivatives - Discussion Paper and Draft Guidance Note (10 September 2007)


1 - All statutory references are to the Corporations Act 2001 (Cth) (as modified by ASIC) unless otherwise indicated. Disclosure of equity derivatives may also be required under Chapter 6C if the writer and taker are associates. ASIC has provided guidance regarding the requirements of Chapter 6C in Regulatory Guide 5, Relevant interests and substantial holding notices, including in relation to options ([5.152]-[5.185]) and warrants ([5.186]-[5.242]), and Regulatory Guide 222: Substantial holding disclosure: Securities lending and prime broking.

2 - The Panel expects that this will apply to holders of equity derivative positions, not the counterparties or writers (who, in the case of long positions, may already be required to disclose relevant interests in shares that they hold as a hedge).

3 - See s657A(2) and s602(a). See also the factors discussed relating to the Panel’s consideration of whether contraventions of the substantial holding provisions are unacceptable in Tribune Resources Limited [2018] ATP 18 at [67]-[68].

4 - The taker may not know the hedge status, or be able to ascertain it, or the hedge status might change frequently, or the hedge may not be the underlying security (for example it may be another equity derivative).

5 - However it will not normally be appropriate to net long and short positions, unless the derivatives being netted are exchange traded equity derivatives that are exactly offsetting in nature, period and price.

6 - Such notice should be made in a form that is suitable for immediate release to the market without the need for substantial alteration or summation by the listed entity. It should also include a statement that disclosure is made under this Guidance Note and request that it be provided to the ASX.

7 - Section 671B(6).

8 - The Panel will take into account the exemption in s609(6) in such circumstances. See for example the Panel’s approach for rights issues in Guidance Note 17, Rights Issues, at [3] to [5]

9 - However, it may be unacceptable if the terms of an equity derivative, or any other material, suggests that an acquirer intends to lock in the price at which the acquirer makes future acquisitions in reliance on the exception in item 9 of s611, see John Fairfax Holdings [1997] ATP.

10 - Section 657D.


Annexure C: Mark up of GN 20

Guidance Note 20 - Equity Derivatives

Background

  1. This Guidance Note has been prepared to assist market participants understand the Panel’s approach to disclosure of equity derivatives. Equity derivatives are valuable trading and risk management products. There is a significant market for them and the Panel does not want to interfere with that market where equity derivatives are not used in ways that undermine the policy of Chapter 6.
  2. If an equity derivative gives the taker a relevant interest in any underlying securities, the disclosure regime in Chapter 6C applies.1 This note applies to equity derivatives that may not require disclosure under Chapter 6C.
  3. The examples are illustrative only and nothing in the note binds the Panel in a particular case. The Panel may consider the principles in this guidance note for dealing with other financial instruments that provide economic exposure to an entity’s securities.
  4. In this note the following definitions apply:
  5. cap and/or collar arrangement
           Arrangements that operate to limit the taker's upside and/or downside exposure
    entity
           A listed company, listed body or listed registered managed investment scheme
    long position
           Either a long equity derivative position or a relevant interest in securities or a combination of both
    taker
           Person who 'acquires' an equity derivative, usually the client
    writer
           Person who 'provides' the equity derivative, usually an investment bank

Equity derivatives and hedging

  1. Equity derivatives, in the hands of the taker, may be long (ie, the taker is to benefit from an increase in the price of the underlying security) or short (ie, the taker is to benefit from a decrease in the price of the underlying security). In either case, the terms may provide that they are cash-settled or “exchanged for physical” (ie, the underlying security is transferred).
  2. Equity derivatives may be hedged. The writer usually has an economic incentive to hedge its position, regardless of whether the derivative is cash-settled or exchanged for physical. The hedge is often established by acquiring the underlying securities. The writer is not ordinarily contractually obliged to hedge (or else a relevant interest may arise). Nevertheless, even if the derivative is hedged, the long position may not confer voting power on the taker. On the unwinding of the position, the writer has an economic incentive to unwind any hedge.
  3. By creating the economic incentive to hedge and then by controlling the unwinding, the taker of a long equity derivative position (even one that is cash-settled) may affect the market in the underlying securities, for example by bringing about a reduction in the “free float” of the entity. Such an effect on the supply (and perhaps therefore the price) of the securities may, in turn, affect:
    1. control or potential control of the entity
    2. the acquisition or proposed acquisition of a substantial interest in the entity or
    3. the efficient, competitive and informed market for control of the entity’s voting securities.
  4. Non-disclosure of equity derivative transactions in the above circumstances may give rise to unacceptable circumstances.2

Disclosure of equity derivatives

  1. The Panel expects disclosure to be made where the long position of a person and their associates:
    1. is 5% or more and
    2. if so, changes by at least 1% or falls below 5%

    of the voting rights in an entity.3 Failure to disclose in accordance with paragraphs 1112 to 1718 below may give rise to unacceptable circumstances4, irrespective of whether a control transaction has commenced.

  2. In considering whether failure to disclose in the circumstances described above gives rise to unacceptable circumstances, the Panel will consider the effect of non-disclosure on the control or potential control of an entity and the acquisition or proposed acquisition of a substantial interest, and whether non-disclosure is contrary to an efficient, competitive and informed market.5
  3. Example 1: A Panel is more likely to find unacceptable circumstances if the taker with a long position over 5% (which has not been disclosed) has attempted to exercise control or influence over the entity or proposes a control transaction after the time that disclosure should have been made in accordance with paragraph 16.

    Example 2: The Panel is more likely to find that non-disclosure of an equity derivative gives rise to unacceptable circumstances if someone other than the taker proposes a control transaction and is unaware of the equity derivative.

    Example 3: The Panel would not normally expect a market maker to disclose a long position to hedge another equity derivative it has written (ie, a back-to-back equity derivative on essentially identical terms).

  4. 10There may also be circumstances in which the Panel would consider non-disclosure of equity derivatives to be unacceptable where the taker does not have a long position of 5% or more. For example, where purchase of physical securities to which the equity derivatives relate would have required disclosure by a bidder under s636(1)(h), the Panel may consider that the policy underpinning this requirement would warrant equivalent disclosure of the equity derivatives.
  5. 11Disclosure of equity derivatives should allow the market to understand fully the nature of the taker’s long position. This may require disclosure of any cap and/or collar arrangements and (if the information is known or readily available) the extent to which the counterparty has hedged.6
  6. 12The Panel considers that the following information should be disclosed (as applicable):
    1. identity of the taker (but not the writer)
    2. relevant security
    3. price (including reference price, strike price, option price etc as appropriate)
    4. entry date
    5. number of securities to which the derivative relates
    6. type of derivative (e.g. contract for difference, cash settled put or call option)
    7. any material changes to information previously disclosed to the market
    8. long equity derivative positions held by the taker and its associates, its relevant interests and its associates’ relevant interests (and the identity of all associates referred to)
    9. short equity derivative positions that offset physicallong positions7 and
    10. Example 1: A taker “rents” voting power by acquiring physical securities and simultaneously taking offsetting short equity derivative positions.

      Example 2: A substantial holding of, say, 10% that is disclosed but subsequently a short equity derivative contract is entered for, say, 5%.

    11. short positions of more than 1% that have been acquired after a long position is disclosed, whether by notice or substantial holder notice (ie, the taker should update its disclosure with reference to the short position).
  7. 13The Panel is unlikely to consider that:
    1. the information needs to be in the form of a formal substantial holder notice (ASIC Form 603 and 604), unless required by Chapter 6C or
    2. standard (for example ISDA) documentation needs to be provided.
  8. 14Disclosure may be made:
    1. as a note annexed to a substantial holder notice, if one is given or
    2. by written notice to the entity.8
  9. 15In considering whether timely and adequate disclosure has been made, the Panel will have regard to the requirements for substantial holder notices - that is, within 2 business days of becoming aware or, in a bid period, by 9.30 am on the next trading day.9
  10. 16The Panel expects that the entity will disclose any written notice it receives to ASX.
  11. 17Entry into an equity derivative may be a multi-stage process, especially if the writer is providing exposure to the taker only after it has established adequate hedging. If so, disclosure may be required as it is progressively increased, regardless of when the formalities are completed.

Long positions over 20%

  1. The acquisition of a long position that would contravene s606 if it were comprised entirely of a physical holding may also give rise to unacceptable circumstances.10 Factors the Panel may take into account in determining whether such an acquisition is unacceptable include:
    1. if the taker has attempted to exercise control or influence over the entity
    2. if and when the long position was disclosed and
    3. whether the acquirer of the long position could have relied on an exception in s611 if the acquirer had made the acquisition as a physical holding. 11

Remedies

  1. 18If the Panel finds unacceptable circumstances it can make any order (including remedial orders) it thinks appropriate to (among other things):
    1. if it is satisfied that the rights or interests of any person, or group of persons, have been or are being affected, or will be or are likely to be affected, by the circumstances - protect those rights or interests, or any other rights or interests, of that person or group of persons or
    2. ensure that a takeover bid or proposed takeover bid in relation to securities proceeds (as far as possible) in a way that it would have proceeded if the circumstances had not occurred.12
  2. 19In considering what orders to make, the Panel may consider:
    1. any effect on the control or potential control of an entity (including the effect on any control transaction or proposed control transaction)
    2. the nature of the equity derivative and
    3. the period for which the equity derivative is held and the timing of any disclosure made.
  3. 20The Panel may order:
    1. disclosure of the derivatives
    2. disposal of any securities and
    3. cancellation of agreements.
  4. 21If a person has benefitted or gained an advantage from non-disclosure or inadequate disclosure of a long position of 5% or more, the Panel makemay seek to make orders to reverse that benefit or advantage.
  5. 22If non-disclosure or inadequate disclosure of a long position of 5% or more has an effect on control, potential control or the acquisition (or proposed acquisition) of a substantial interest, the Panel makemay seek to make orders to reverse that effect.

Publication History

First Issue: 11 April 2008

Second Issue:

Related Material

Equity Derivatives - Discussion Paper and Draft Guidance Note (10 September 2007)


1 - All statutory references are to the Corporations Act 2001 (Cth) (as modified by ASIC) unless otherwise indicated. Disclosure of equity derivatives may also be required under Chapter 6C if the writer and taker are associates. ASIC has provided guidance regarding the requirements of Chapter 6C in Regulatory Guide 5, Relevant interests and substantial holding notices, including in relation to options ([5.152]-[5.185]) and warrants ([5.186]-[5.242]), and Regulatory Guide 222: Substantial holding disclosure: Securities lending and prime broking.

2 - The acquisition of a long position that would contravene s606 if it were comprised entirely of a physical holding may also give rise to unacceptable circumstances (even if the acquisition does not result in a person acquiring a relevant interest in contravention of s606).

3 - The Panel expects that this will usuallyapply to holders of equity derivative positions, not the counterparties or writers (who, in the case of long positions, may already be required to disclose relevant interests in shares that they hold as a hedge).

4 - In determining whether non-disclosure of equity derivatives gives rise to unacceptable circumstances, the Panel may have regard to the factors noted (in relation to contraventions of the substantial holding provisions) in Tribune Resources Limited [2018] ATP 18 at [67]-[68] and Auris Minerals Limited [2018] ATP 7 at [23].

5 - See s657A(2) and s602(a). See also the factors discussed relating to the Panel’s consideration of whether contraventions of the substantial holding provisions are unacceptable in Tribune Resources Limited [2018] ATP 18 at [67]-[68].

6 - The taker may not know the hedge status, or be able to ascertain it, or the hedge status might change frequently, or the hedge may not be the underlying security (for example it may be another equity derivative).

7 - However it will not normally be appropriate to net long and short positions, unless the derivatives being netted are exchange traded equity derivatives that are exactly offsetting in nature, period and price.

8 - Such notice should be made in a form that is suitable for immediate release to the market without the need for substantial alteration or summation by the listed entity. It should also include a statement that disclosure is made under this Guidance Note and request that it be provided to the ASX.

9 - Section 671B(6).

10 - The Panel will take into account the exemption in s609(6) in such circumstances. See for example the Panel’s approach for rights issues in Guidance Note 17, Rights Issues, at [3] to [5]

11 - However, it may be unacceptable if the terms of an equity derivative, or any other material, suggests that an acquirer intends to lock in the price at which the acquirer makes future acquisitions in reliance on the exception in item 9 of s611, see John Fairfax Holdings [1997] ATP.

12 - Section 657D.