House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Productivity, Competition, Charities and Treasury, the Hon Dr Andrew Leigh MP)

Chapter 1: Enhanced disclosure of ownership of listed entities

Outline of chapter

1.1 Schedule 1 to the Bill amends Chapters 6 and 6C of the Corporations Act to enhance the substantial holding and tracing notice regimes, which, among other things, govern the disclosure of beneficial ownership for listed entities.

1.2 Schedule 1 to the Bill includes amendments intended to:

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bring interests arising from equity derivatives into the Chapter 6C disclosure regime – streamlining disclosure requirements and ensuring the same level of regulatory oversight, and penalties for misconduct, apply with respect to all interests required to be disclosed to the market;

•

require foreign-registered entities listed on Australia's financial markets and their shareholders to disclose interests in securities to the same standard as Australian-registered listed entities and their shareholders;

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clarify when the existing and new disclosure requirements crystallise and introduce greater flexibility to simplify some of the disclosures required;

•

improve access to, and usability of, existing registers of information about relevant interests in listed entities collected via tracing notices; and

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confer on ASIC appropriate powers to incentivise compliance with the streamlined disclosure regime and protect market participants, including increased penalties for existing offences in Chapter 6C.

1.3 The amendments are consistent with the Government's 2022 election commitment to introduce reforms in relation to beneficial ownership.

1.4 All legislative references in this Chapter are to the Corporations Act unless otherwise specified.

Context of amendments

1.5 The Government announced a multinational tax integrity package to address tax avoidance and improve corporate transparency as part of its 2022 election platform. As part of this package, the Government announced that it would implement a public register of beneficial ownership to show who ultimately owns or controls companies and legal vehicles in Australia.

1.6 Increasing the availability of companies' beneficial ownership information is intended to discourage the use of complex structures to obscure tax liabilities and facilitate financial crimes. Greater levels of transparency will also increase the tools available to regulators and law enforcement in performing their functions and powers (including, for example, the assessment of foreign investment applications and the enforcement of sanctions).

1.7 It will also support transparency by providing greater access to information to interested members of the public, such as journalists and academics, who play a key role in initiating and encouraging public debate.

1.8 Access to beneficial ownership information supports the efficient operation of financial markets by increasing the information available to persons making investment decisions and their ability to conduct due diligence on prospective acquisitions, ultimately supporting more efficient resource allocation.

1.9 As a first step, the Government is seeking to enhance the beneficial ownership disclosure obligations that already apply to listed entities under Chapter 6C of the Corporations Act. In particular, these amendments enhance the substantial holding and tracing notice regimes, including by bringing aspects of Australia's market transparency requirements into line with comparable jurisdictions.

Transparency Requirements for Beneficial Ownership of Listed Entities

Transparency Requirements for Beneficial Ownership of Listed Entities

1.10 Existing Part 6C.1 of the Corporations Act obliges a person with a substantial holding in a listed company ^[2] to provide to the company and the relevant market operator various details concerning both their own and their associates' relevant interests. This obligation applies where:

•

the person begins to have, or ceases to have, a substantial holding in the company; or

•

the person has a substantial holding in the company and there is a movement of at least 1 percentage point in their holding; or

•

the person makes a takeover bid for securities of the company.

1.11 Existing Part 6C.2 of the Corporations Act empowers listed companies and ASIC to direct a member of the company to disclose full details of their own relevant interest in the company's shares and the names and addresses of others who have a relevant interest in, or have given instructions about, any of the shares. These directions are commonly referred to as 'tracing notices'.

1.12 Existing sections 655A and 673 empower ASIC to exempt persons from and modify Chapter 6 (including the provisions governing 'relevant interests') and Chapter 6C. Several modifying instruments are currently in force.

1.13 The disclosure of interests arising from equity derivatives is presently governed by a combination of the Takeovers Panel's Guidance Note 20, and existing requirements under Chapter 6C of the Corporations Act. Schedule 1 to the Bill's extension of disclosure requirements, while consistent with the approach outlined in Takeovers Panel Guidance Note 20, operates more broadly to cover market disclosures beyond the remit of the Takeovers Panel's guidance. Bringing all equity derivatives within the disclosure regime in Chapter 6C means that:

•

disclosures of substantial holdings involving equity derivatives can be standardised and streamlined in a single integrated substantial holding notice, assisting improved data quality over time;

•

ASIC will be able to seek penalties for failures to disclose interests arising under equity derivatives, consistent with the current position for other interests that should be disclosed under the substantial holding disclosure requirements (this will supplement the current non-punitive administrative remedies available via the Takeovers Panel where non-compliance is found to give rise to unacceptable circumstances); and

•

other enhancements to beneficial ownership transparency included in Schedule 1 to the Bill, such as enhancements to ASIC's regulatory enforcement powers, will apply to interests arising under equity derivatives.

1.14 Regulators and others seeking to uncover undisclosed interests in listed companies can confront significant obstacles – including when interests need to be traced through overseas entities. Expanding ASIC's existing tracing notice and freezing order powers to support its regulatory oversight of Chapter 6C will enable, amongst other things, ASIC to undertake more effective investigations and fact finding ahead of taking any further steps (if necessary) to seek final resolution of relevant contraventions – such as applying to the Court or the Takeovers Panel for remedial orders requiring divestiture or the payment of compensation.

Summary of new law

1.15 The changes to Chapters 6 and 6C of the Corporations Act improve the beneficial ownership disclosure regime for listed entities by increasing transparency and supporting stronger enforcement.

1.16 Schedule 1 to the Bill requires holders to disclose the following derivative-based interests to the market, in the same way as they would disclose any other interests that form part of a substantial holding:

•

interests arising from physically settleable derivatives, regardless of whether the counterparty has a relevant interest in the underlying securities;

•

interests arising from non-physically settleable derivatives; and

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in certain circumstances – offsetting short positions.

1.17 Schedule 1 to the Bill also clarifies that a person must disclose a substantial holding in an entity at the time that it initially lists on a financial market.

1.18 The amendments provide ASIC with enhanced powers relating to the format of substantial holding notices and tracing notices. This promotes consistency, standardisation, and continuous improvement to the information available to the public.

1.19 The amendments both widen and refine the application of disclosure requirements, including by:

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aligning the information required under an ASIC-issued tracing notice with the information required under substantial holding notices;

•

imposing disclosure requirements on entities incorporated or formed outside Australia and listed on a financial market operated in Australia; and

•

expanding the class of persons who can be the subject of a tracing notice to include persons reasonably suspected of having certain kinds of involvement with listed entities, or of being associates of such persons or of other persons already subject to disclosure requirements.

1.20 The amendments require affected entities to allow journalists and academics to inspect their tracing notice registers free of charge.

1.21 They also expand ASIC's powers to make freezing orders to cover failures to comply with substantial holding and tracing notice requirements.

1.22 The amendments bolster the offence provisions in Chapter 6C, and double the maximum penalties for all the existing offences.

Comparison of key features of new law and current law

Table 1.1 Comparison of new law and current law

Detailed explanation of new law

Requiring disclosure of more kinds of interests arising from equity derivatives

1.23 A key aspect of these reforms is to close various loopholes in the existing disclosure regime to ensure greater transparency for investors and the market, particularly in relation to equity derivatives.

1.24 Under the existing disclosure obligations in the Corporations Act, persons with relevant interests in voting shares of an entity amounting to 5% or more of the total votes that may be cast must disclose that they have a 'substantial holding'. Substantial holders must then report any subsequent movements in their interests of 1 percentage point or more.

1.25 The economic interest in securities underlying a physically settled equity derivative is already recognised as part of a person's relevant interest in an entity, but only to the extent that the counterparty to the derivative has a relevant interest in those underlying securities.

1.26 Schedule 1 to the Bill expands the existing disclosure obligations to cover interests arising under equity derivatives irrespective of how the derivative is to be 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.

1.27 This extension is a key reform which improves market efficiency, competition and transparency. It facilitates the streamlining of disclosures and ensures market participants have better and more timely access to information on the accumulation of substantial interests in listed entities and the dealings and influence of persons who may impact the future direction of such entities.

1.28 Equity derivatives often create an economic incentive for the party to the derivative with the obligation to provide consideration consisting of, or referable to, underlying securities to acquire and/or maintain a holding of underlying securities as a hedge against their exposure. Even if the equity derivative is not physically settleable, the creation and control of this inherent incentive gives the other party a level of influence over underlying securities that warrants disclosure to the market (and that is comparable to the influence over securities arising from many other arrangements and agreements that are already required to be disclosed under Chapter 6C). ^[3]

1.29 Parties with a 'long economic exposure' under an equity derivative are in a unique position of proximity to any underlying securities held as a hedge, given they can generally influence when the equity derivative is 'unwound' (and in turn when the incentive to maintain a holding of the underlying securities ceases). This means that, even in the absence of any formal arrangement or rights in relation to a particular holding of underlying securities, the party in the 'bought position' will often have both a positional and informational advantage in relation to any potential dealings in those securities; for example, in negotiating a right to acquire them at settlement or as part of unwinding the derivative.

1.30 The Takeovers Panel's Guidance Note 20 recognises that the influence arising under equity derivatives is particularly relevant to the market given its potential to impact the availability and pricing of the underlying securities. ^[4]

Background on equity derivatives

Key concepts

1.31 'Equity derivatives' are financial arrangements where the value of the arrangement, or the consideration that must or may be provided at a future date, is at least partly derived from one or more underlying equity securities. Equity derivatives may include instruments such as swaps, forwards, futures and options.

1.32 Typically, equity derivatives are either:

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physically settled (meaning that one party has a right to receive the actual underlying securities); or

•

cash settled (meaning that one party is entitled to receive a cash payment linked to the value of the underlying securities).

1.33 A more complete distinction can be drawn between equity derivatives that are physically settled and those that are not. This captures all equity derivatives – including those that are non-physically settled other than by means of cash (for example, by cryptocurrency).

1.34 Equity derivatives are often created to meet the needs of the clients of investment banks. In this context, the investment bank is generally the 'writer' of the equity derivative and 'sells' or 'grants' the derivative by entering into the derivative contract in exchange for a fee or premium. The 'taker' of the equity derivative 'buys' or 'holds' the derivative and is typically the party for whose benefit, or at whose request, the principal right under the derivative (to receive the underlying securities, or an equivalent cash payment) was created.

1.35 Either the writer or the taker of an equity derivative can be in the 'bought position' or the 'sold position' under the terms of the derivative. The position reflects the outcome for the party at performance or settlement (or upon exercise, in the case of an option). For example, under a relatively simple long forward contract, the writer agrees to give the taker a fixed number of securities at a fixed future date. In this case:

•

the writer is in the sold position (and typically benefits if the price of the underlying securities decreases after the derivative arrangement is entered into); and

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the taker is in the bought position (and typically benefits if the price of the underlying securities increases after the derivative arrangement is entered into).

1.36 As equity derivatives are arrangements between private parties, their terms can vary widely. Some have standardised terms and can be traded on financial markets. Others can be very complex, meaning that some of the terms referenced above may not necessarily apply.

1.37 To aid comprehension in this Explanatory Memorandum, a reference to a term in the first column of the below table should be taken to have the meaning outlined in the second column, unless otherwise indicated. ^[5]

Table 1.2

Existing requirements applicable to equity derivatives

1.38 The concept of a 'relevant interest' in Chapter 6 of the Corporations Act is fundamental to delimiting the scope of a number of requirements and rights relating to the disclosure of interests in an entity and the acquisition of control over an entity, including:

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the substantial holding disclosure and tracing notice requirements in Chapter 6C;

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the director disclosure requirements in section 205G and subsections 300(11) and (12);

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the takeover requirements in Chapter 6; and

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the compulsory acquisition and buyout rights in Chapter 6A.

1.39 The existing relevant interest rules in sections 608 to 609B of the Corporations Act capture the economic interests arising from equity derivatives in some, but not all, circumstances, meaning that equity derivatives are only partially covered by key disclosure requirements under the Corporations Act designed to ensure the integrity of financial markets.

1.40 Under the existing provisions, the party to a physically settleable equity derivative arrangement that is in the bought position has a relevant interest in the securities in which the counterparty to the derivative has a relevant interest, in certain circumstances. This includes where the equity derivative remains subject to future settlement, the satisfaction of conditions or the exercise of a right under an option: see subsection 608(8).

1.41 Subsection 608(8) applies where the party in the bought position would, upon settlement or exercise, have a relevant interest in securities in which the counterparty has a relevant interest: see paragraph 608(8)(c). In this way, the relevant interest arising under the derivative is linked to a relevant interest of another person, which in turn is generally able to be related to an identifiable parcel(s) of underlying securities held by one or more persons on the relevant register of securities.

1.42 Schedule 1 to the Bill defines a percentage holding of relevant interests in derivatives under the existing law as the discloser's 'relatable derivative-based holding percentage'. This refers to the fact that the relevant interest is relatable to a particular holding, being the holding in which the counterparty has a relevant interest.

[Schedule 1, items 18 and 21, section 9 and subsection 671BL(1) of the Corporations Act]

Effect of the amendments

Deemed economic interests

1.43 Schedule 1 to the Bill largely retains the current operation of the relevant interest provisions in Chapter 6 of the Corporations Act insofar as they already cover equity derivatives.

1.44 However, Schedule 1 to the Bill captures interests arising under equity derivatives beyond the scope of the existing provisions by deeming a person in the bought position to have a 'deemed economic interest' in a number of securities equivalent to:

•

the number that they would have at the time of settlement of a physically settled equity derivative (or a derivative with an option to settle physically), excluding the number that they already have under subsection 608(8); and

[Schedule 1, item 16, section 671AA of the Corporations Act]

•

in the case of an equity derivative that is not physically settleable (such as a cash settled derivative) the number specified, or the number calculated in accordance with a method specified, in a legislative instrument made by ASIC.

[Schedule 1, item 16, sections 671AF and 671AK of the Corporations Act]

1.45 Schedule 1 to the Bill also requires any interests arising from equity derivatives to be disclosed by directors under the director-specific obligations in section 205G and subsections 300(11) and (12).

[Schedule 1, items 47 to 51, subsections 205G(1)-(2) and 300(11)-(12) of the Corporations Act]

1.46 This ensures consistency between directors' substantial holding disclosures and the disclosures they make as a director.

1.47 The concept of a deemed economic interest applies alongside the relevant interest concept but only for the purposes of Chapter 6C and the director disclosure provisions. To the extent relevant, it incorporates a number of familiar extensions and exceptions in existing sections 608 to 609B.

1.48 Unlike relevant interests arising under the existing provisions, deemed economic interests are not necessarily relatable to any particular underlying security holding.

1.49 Minor amendments are made to various provisions to include the concept of deemed economic interest where relevant.

[Schedule 1, items 10, 11, 13 and 14, definitions of 'agreement', 'deemed economic interest, 'offsetting short position' and 'remedial order' in section 9 and subparagraph 12(1)(b)(iii) of the Corporations Act]

1.50 Table 1.3 summarises how the deemed economic interest provisions apply to the party to an equity derivative in the bought position.

Table 1.3 Summary of derivative-based interests

Deemed physically settleable derivative-based interests in securities

1.51 Schedule 1 to the Bill gives a person in the bought position a deemed economic interest in a number of securities equivalent to the number that they would have at the time of settlement of a physically settled equity derivative, excluding the number that they already have under subsection 608(8).

1.52 In other words, Schedule 1 to the Bill gives the person a deemed economic interest in a theoretical holding of shares underlying their derivative representing the portion of their economic interest which is not reflected in any holding in which the counterparty has a relevant interest (and that the counterparty may be holding as a hedge).

1.53 Schedule 1 to the Bill defines a percentage holding of these interests as the discloser's 'deemed physically settleable derivative-based holding percentage'.

[Schedule 1, items 18 and 21, section 9 and subsection 671BL(1) of the Corporations Act]

Rationale for expansion to deemed physically settleable derivatives

1.54 The objective of this extension is to ensure recognition and disclosure of the full extent of the economic interests held by the person in the bought position at the time the derivative is entered into and irrespective of the person in the sold position's holding.

1.55 Under the existing Corporations Act provisions, the person in the bought position may not need to disclose the existence of the equity derivative unless and until the counterparty has a relevant interest in a certain number of underlying securities and the person becomes aware of that holding (for example, by the counterparty filing a substantial holding notice). The extension ensures full and more timely disclosure of the person in the bought position's interests in a holding, reflecting a more complete picture of the person's economic exposure to the underlying securities arising from the equity derivative.

1.56 As information about changes to the counterparty's holding becomes available, the relative proportion of the economic exposure reflected by relevant interests arising under subsection 608(8) and the new provision dealing with deemed physically settleable derivatives will change.

1.57 This approach ensures that the market has the same information as the person in the bought position about how much of the incentive created by the equity derivative for the counterparty to acquire, or otherwise obtain, exposure to underlying securities remains unaddressed. It allows the market to ascertain (to the extent the holder is aware):

•

what proportion the counterparty has bought; and

•

what proportion the counterparty has not yet bought, but might buy in the future.

Determining relevant interests and deemed economic interests arising under physically settleable derivatives

1.58 As noted above, equity derivatives with either physical settlement or the option to physically settle can give rise to the person in the bought position having a relevant interest in the underlying securities, a deemed economic interest in the underlying securities or a combination of both. While the total number of securities in which the person is taken to have relevant interests and deemed economic interests under the derivative should always reflect the full value of the derivative, the breakdown between the two categories of interest depends on the application of subsection 608(8).

1.59 Subsection 608(8) applies where one person has a relevant interest in securities and another would have a relevant interest in the securities if a particular agreement were performed, right enforced or option exercised. As ASIC notes (in the context of option agreements) in Regulatory Guide 5: Relevant interests and substantial holding notices (at RG 5.163-5.166), this can give rise to a need to consider how identifiable the particular securities in which the first person has a relevant interest must be with a particular agreement, right or option. ^[6]

1.60 Schedule 1 to the Bill clarifies the operation of subsection 608(8) so that, where a person has an agreement (or right or option) with a counterparty that on performance, enforcement or exercise will result in the person acquiring a relevant interest in securities of a particular class:

•

for the purposes of paragraph 608(8)(b) the agreement is taken to be with respect to any securities the counterparty has a relevant interest in that are in the same class; and

•

for the purposes of paragraph 608(8)(c) the counterparty is taken to use the securities they have a relevant interest in to satisfy their obligations on performance, enforcement or exercise.

[Schedule 1, item 15, section 608A of the Corporations Act]

1.61 This amendment clarifies that there is no need for a person seeking to determine whether they, or another person, has a relevant interest in securities under the Act to ascertain matters such as whether a counterparty to an agreement, right or option has set aside particular securities to satisfy their obligations or whether they are held for other purposes. This will assist disclosing parties to comply with their obligation to provide objective information regarding their relevant interests based on information likely to be available to them. This approach is based on ASIC's existing interpretation of the operation of subsection 608(8) set out at RG 5.166.

1.62 The intention is that where a counterparty's relevant interests in securities of the same class to which the equity derivative relates equals or exceeds the interest the person in the bought position would receive at settlement, that person can clearly determine that they will have a relevant interest in the number of securities that the equity derivative contemplates will be delivered without further need for inquiry. Similarly, if the counterparty's relevant interests are less than the number that would be required to satisfy their obligations at settlement, the party in the bought position can assume they are taken to have relevant interests only in that lesser number.

1.63 To ensure consistency, the clarificatory amendment applies to all instances where subsection 608(8) applies – including in determining whether a person and their associates' relevant interests mean further acquisitions above the 20% takeover threshold will be subject to restrictions under Chapter 6. While exceptions such as subsection 609(6) may apply in some cases, ASIC will also have the power to provide individual exemptions and modifications under sections 655A and 673 in appropriate circumstances.

Other aspects of interests arising under deemed physically settleable derivatives

1.64 Importantly, Schedule 1 to the Bill confers a deemed economic interest where a derivative, on its terms, can be settled either physically or non-physically. This ensures that where a derivative has both physical and non-physical settlement options, the disclosable interest that is deemed to arise under the combination of subsection 608(8) and the new provisions is based on the maximum number of underlying securities that would be received at settlement if physical settlement occurred, rather than a number based on the possible non-physical consideration.

1.65 Schedule 1 to the Bill also ensures that there is no 'double counting' in this context. A person is not taken to have a deemed economic interest in a number of securities (on the basis that those securities will be delivered at settlement) to the extent that the person already has a relevant interest in securities in which the counterparty has a relevant interest because of the derivative.

[Schedule 1, item 16, paragraph 671AA(2)(a) of the Corporations Act]

1.66 The expansion to deemed physically settleable derivative-based interests in securities does not cover an arrangement resulting in the creation of new underlying securities in an entity. An example is a performance right where a company agrees with one of its directors to issue them a certain number of new shares in the company at a later date, upon achievement of a performance target. Schedule 1 to the Bill seeks to address this scenario by excluding securities that would be newly issued as part of the counterparty's consideration. In this example, the director would only obtain a relevant interest upon actually receiving the shares.

[Schedule 1, item 16, paragraph 671AA(2)(b) of the Corporations Act]

1.67 This is consistent with the existing provisions of Chapters 6 and 6C, which regulate takeovers and calculate substantial holdings and voting power by reference to 'issued' securities. It recognises that the creation of new underlying securities in an entity changes the denominator in the substantial holding calculation (that is, the total voting shares) in a way that may be impossible for other shareholders to know. That is, other shareholders cannot accurately report their holding percentage if a private contract between the entity and an unknown person changes the total number of shares in the entity. For more information, see ASIC's Regulatory Guide 5: Relevant interests and substantial holding notices, RG 5.152-5.156.

Deemed non-physically settleable derivative-based interests in securities

1.68 Schedule 1 to the Bill also confers a deemed economic interest where equity derivatives reference underlying securities but are not physically settleable.

1.69 This provision operates by conferring a deemed economic interest on the person who, under the derivative:

•

obtains, in economic substance, the financial benefits of holding, for a period, securities in a class of securities (being the securities that the derivative references); or

•

might otherwise benefit if the value of the securities the derivative references increases (typically, the person would benefit by being in the equivalent of the bought position in relation to the derivative).

[Schedule 1, item 16, subsection 671AF(1) of the Corporations Act]

1.70 This provision will typically result in the person in the bought position in relation to a cash settled equity derivative (who will generally receive a cash pay-off referable to the value of underlying securities, but has no express right or option to receive the underlying securities themselves at settlement) acquiring a deemed economic interest in a theoretical holding of underlying securities in the relevant class. It will also generally apply where a person is a party to a cash settled derivative that indirectly references underlying securities (for example, a cash settled derivative that references a physically settled derivative referencing underlying securities).

1.71 The number of underlying securities a person is taken to have a deemed economic interest in is that specified by, or calculated in accordance with, a determination made by ASIC.

[Schedule 1, item 16, subsection 671AF(5) and section 671AK of the Corporations Act]

1.72 Schedule 1 to the Bill defines a percentage holding of these interests as the discloser's 'deemed non-physically settleable derivative-based holding percentage'. As with deemed physically settleable derivative-based interests, the holding or calculation prescribed is not intended to represent interests referable to a specific parcel of shares. Rather, it is intended to effectively deem the bought position holder to have economic interests in the number of securities in the class of underlying shares to which that derivative is referable.

[Schedule 1, items 18 and 21, section 9 and subsection 671BL(1) of the Corporations Act]

Rationale for the expansion to deemed non-physically settleable derivatives

1.73 Cash settled equity derivatives are sometimes used by investors to gain exposure to the economic performance of a particular security without the need to acquire the underlying physical security.

1.74 These derivatives were generally not captured by the existing relevant interest provisions as, at least on their terms, they do not generally require either party to hold, vote or dispose of any underlying securities. ^[7]

1.75 The party to a cash settled equity derivative in the sold position will often acquire the underlying security as a hedge against their exposure to increases in the price of the underlying securities after entering into the derivative arrangement.

1.76 While holding a cash settled derivative may not confer any express rights over underlying securities, the inherent incentive that the arrangement creates for a counterparty to hedge their exposure gives the person in the bought position a proximity and influence in relation to those securities that is relevant to the market.

1.77 For example, the holder of the derivative may take advantage of commercial incentives that underpin the derivative. If the holder chooses to unwind the derivative (by exiting the arrangement or choosing not to exercise an option), the counterparty will, in normal market practice, unwind their own position by selling their hedge position.

1.78 In this way, the investor can influence the timing of the derivative's unwind, and thereby have advanced notice of when a significant parcel of shares is about to come onto the market. This gives the holder an informational advantage to position themselves to acquire the disposed shares (or to negotiate to change the derivative to a physical settlement option).

1.79 The expansion effected by Schedule 1 to the Bill brings cash settled equity derivative positions into the disclosure regime in recognition that these positions allow participants to exert influence over underlying securities and, in turn, over relevant entities. Appropriate disclosure of this influence is necessary to ensure the transparency of Australia's financial markets.

1.80 Stronger provisions for the disclosure of cash settled equity derivative positions may also improve transparency for the purposes of other regulatory regimes that impose ownership thresholds of listed entities, such as media ownership limits under the Broadcasting Services Act 1992 and foreign investment applications under the Foreign Acquisitions and Takeovers Act 1975.

1.81 Substantial holding disclosure regimes in a number of comparable jurisdictions, such as Hong Kong, New Zealand, Switzerland, the United Kingdom and various members of the European Union, currently account for and require disclosure of interests under cash settled equity derivatives that do not include an express right or option to acquire underlying securities.

Scope of operation of the new provision

1.82 The provision that implements the expansion to deemed non-physically settleable derivatives operates as a catch-all to cover interests arising from long positions under derivatives that are not otherwise captured as relevant interests or deemed physically settleable derivative-based interests.

1.83 If a derivative allows for cash settlement but also contains an option to physically settle, Schedule 1 to the Bill confers a deemed physically settleable derivative-based interest rather than a deemed non-physically settleable derivative-based interest.

1.84 In turn, if the person in the sold position has relevant interests in a number of underlying securities sufficient to fully satisfy their obligation at settlement, the relevant interests in those securities arising under the derivative by virtue of subsection 608(8) would mean that no deemed economic interest arises under the new provision dealing with deemed physically settleable derivatives.

1.85 Accordingly, no deemed non-physically settleable derivative-based interest is conferred where a party or parties to a derivative:

•

receive under the derivative the financial benefits of holding a number of underlying securities for a period but the party already has a relevant interest and/or a deemed economic interest in underlying securities fully reflecting that financial benefit (for example, because the derivative is physically settleable); or

•

might benefit under the derivative if the value of underlying securities increases but the benefit arises fully from exposure to underlying securities that the party already has a relevant interest and/or a deemed economic interest in (again, for example, because the derivative is physically settleable).

[Schedule 1, item 16, subsections 671AF(2) and (3) of the Corporations Act]

1.86 In determining whether a deemed non-physically settleable derivative-based interest arises because a person might benefit if the value of issued securities in the class increases, any element of the derivative that negates that benefit because the person also benefits from a corresponding decrease (for example, a separate short position incorporated in the derivative) is to be ignored. This is intended to ensure that, for the purposes of determining whether a deemed non-physically settleable derivative-based interest arises, long and short exposures cannot be netted.

1.87 This does not, however, affect the calculation of the number of deemed economic interests once a deemed non-physically settleable derivative-based interest arises – that number is determined in accordance with an ASIC instrument. While it is not intended that offsetting be incorporated in the calculation as a matter of course (noting the trigger for the requirement to give a substantial holding notice primarily depends on the extent of a person's bought position and, once triggered, there are separate disclosure requirements for offsetting short positions), ASIC may allow for some form of offsetting in determining the number of deemed economic interests that arise in appropriate circumstances.

[Schedule 1, item 16, subsection 671AF(4) and (6) of the Corporations Act]

Calculating deemed economic interests that arise under non-physically settleable derivatives

1.88 Unlike the deemed economic interests arising under physically settleable derivatives – which depend on the relevant interests that will be acquired upon settlement, enforcement or exercise of relevant rights – the number of underlying securities in which a person is taken to have a deemed economic interest is to be determined in accordance with requirements specified in a legislative instrument made by ASIC.

1.89 Detailed and flexible rules governing the calculation of the deemed economic interests arising under non-physically settleable derivatives are required as there are generally both linear (such as in a forward contract) and non-linear (such as with options) relationships between the consideration or value of the derivative and the value of the underlying securities. In turn, this reflects the fact that different types of derivatives can give rise to different levels of long exposure and, correspondingly, different incentives to hedge the underlying securities.

1.90 The instrument-making power also enables ASIC to effectively exempt certain derivatives from the regime by assigning them a value of 'zero'. For example, ASIC may consider it appropriate to assign a value of zero to certain cash-settled derivatives held by a long position holder and referencing an index or other basket of securities, because the derivatives do not make up a sufficiently large component of, or otherwise give rise to a sufficient level of influence over, any individual class of security to warrant recognition of a deemed economic interest.

[Schedule 1, item 16, subsection 671AK(1) of the Corporations Act]

1.91 ASIC's power to prescribe requirements for the calculation is sufficiently broad to allow ASIC to set criteria and then let the disclosing party adopt their preferred, commonly accepted calculation methodology within those criteria. This means ASIC is able to adopt the approach of prescribing parameters in a similar way to Article 5 of the Commission Delegated Regulation (European Union) 2015/761 of 17 December 2014. It is anticipated that any legislative instrument made for this purpose will be tailored around a similar approach.

1.92 The use of legislative instruments in this instance is appropriate given the variety of derivatives to which the provisions potentially apply to. As noted, the power for ASIC to prescribe the requirements to be met by any calculation method adopted by a disclosing party is intended to allow them to choose between more than one method. At the same time, it ensures that ASIC can monitor industry practice over time in the course of its ongoing oversight of markets and adjust the requirements in the event practices emerge that seek to avoid the need to make disclosures or result in misleading disclosures (for example, by excluding the use of particular methodologies that undermine the objectives of the disclosure regime). Additionally, a legislative instrument made by ASIC will be subject to sunsetting and disallowance to allow for appropriate parliamentary scrutiny.

1.93 ASIC may prescribe a method that involves the person in the bought position needing to recalculate the number of their deemed economic interests from time to time during the life of the derivative. This allows ASIC to tailor how often disclosures need to be updated, having regard to the value of such disclosures to the market.

1.94 This is not intended to require the disclosing party to retrospectively correct a prior disclosure. A recalculation would trigger a disclosable movement if it meets the 1 percentage point threshold, but this is intended to be a fresh disclosure rather than a retrospective correction.

[Schedule 1, item 16, subsection 671AK(2) of the Corporations Act]

Extensions to the 'basic rules'

1.95 Schedule 1 to the Bill contains provisions that extend the circumstances in which a person may be taken to have a deemed economic interest in securities as a result of equity derivatives beyond the 'basic rules' explained above.

1.96 These extensions are based on familiar provisions forming part of the relevant interest concept in section 608 and ensure, amongst other things, that persons who may not be a party to the derivative directly, but otherwise have a relevant connection to the arrangement or a party to the arrangement, are also taken to have a deemed economic interest.

1.97 In cases where substantial holding disclosures are made about the collective relevant interests of a group of persons, aligning the extensions with those that apply as part of the relevant interest concept is also intended to enable, as far as practicable, the same collective approach to be adopted in disclosing any deemed economic interests. For example, because related bodies within a corporate group pick up both the relevant interests and deemed economic interests of other group members under the same rule, disclosures of both types of interest for each entity can be provided by referencing the group's collective interest in a single joint notice.

1.98 There are three types of situations where the extension provisions apply.

1.99 First, Schedule 1 to the Bill ensures that the disclosure requirements apply in cases where a person has the power to dispose of a derivative, or where they control the exercise of the power to so dispose.

1.100 This is based on existing paragraph 608(1)(c) of the Act. Power or control is defined in the same way as it is in existing subsection 608(2), which is deliberately wide in scope to ensure the disclosure requirements are not circumvented: see ASIC's Regulatory Guide 5: Relevant interests and substantial holding notices at RG 5.27.

[Schedule 1, item 16, sections 671AB and 671AG of the Corporations Act]

1.101 Second, if a person's voting power in a body corporate or managed investment scheme is more than 20%, or they control the body corporate or managed investment scheme, they also acquire the same deemed economic interest that the body corporate or managed investment scheme has. This is based on existing subsections 608(3)-(7).

[Schedule 1, item 16, sections 671AC and 671AH of the Corporations Act]

1.102 Third, if a person has a deemed economic interest because of a derivative and enters into an agreement that would later give another person a deemed economic interest, that other person's deemed economic interest is brought forward to the present point. Among other things, this would cover a 'derivative over a derivative' situation. This extension is based on existing subsection 608(8).

[Schedule 1, item 16, sections 671AD and 671AI of the Corporations Act]

Ascertaining the deemed economic interests that arise under the extension provisions

1.103 The extension provisions that apply in relation to physically settleable derivatives generally result in a person acquiring deemed economic interests in the same number of underlying securities that arise under the 'basic rule' (unless under an agreement, right or option covered by the third extension, the person would acquire a deemed economic interest in a lesser number of securities at settlement or upon exercise or enforcement).

1.104 However, to avoid possible double-counting, Schedule 1 to the Bill ensures that the extension provisions do not confer a physically settleable derivative-based interest on the subject of the extension if that person already has a relevant interest in the securities that would be provided under the derivative at settlement.

[Schedule 1, item 16, section 671AE of the Corporations Act]

1.105 The extension provisions that apply in relation to non-physically settleable derivatives operate differently. As a default, they confer deemed economic interests in the same number of underlying securities that arise under the 'basic rule', subject to double-counting provisions that exclude the impact of relevant interests and deemed physically settleable derivative-based interests that the subject of the extension already has.

[Schedule 1, item 16, section 671AJ of the Corporations Act]

1.106 However, in recognition that deemed economic interests under non-physically settleable derivatives are originally calculated in accordance with an ASIC instrument, Schedule 1 to the Bill enables ASIC to override the default approach and determine that a different number or method of working out the number must be adopted under the extension provision.

[Schedule 1, item 16, section 671AK of the Corporations Act]

1.107 This ensures ASIC can, for example, deal with any additional double counting issues that arise from the interaction between the calculation instrument and extension provisions or provide effective exemptions from the extension provisions (by way of a rule that the number arising under the extension provision is zero) where appropriate.

Exceptions to the basic rule and extensions

1.108 Schedule 1 to the Bill also sets out circumstances where deemed economic interests do not arise. These operate as exceptions to the basic rule and extensions. The exceptions reflect several of the existing exceptions in existing section 609 of the Act (which apply in the context of the relevant interest concept).

1.109 Importantly, these exceptions are not the only circumstances when a deemed economic interest may be taken not to arise. The exceptions can be supplemented by ASIC through:

•

its ability to prescribe that in certain circumstances the number of deemed economic interests arising under a non-physically settleable derivative, or the extension provisions relating to a non-physically settleable derivative, is zero; or

•

its existing exemption and modification powers in sections 655A and 673.

Market makers and client facing services

1.110 Investment banks and others who engage in the business of client-facing services and other activities such as market making, trade very frequently in both physically and cash settled derivatives.

1.111 As entry into the equity derivative transactions by investment banks in this context is often driven by client or market demand, rather than an interest in obtaining particular exposure to underlying securities, they will in many cases seek to maintain an economically neutral position overall.

1.112 However, their centralised role in facilitating equity derivative transactions may require them to disclose in aggregate a large number of different derivatives resulting in deemed economic interests and corresponding offsetting short positions as well as related agreements (that individually may not otherwise need to be disclosed), were they required to comply in full with the expanded disclosure obligations in Schedule 1 to the Bill.

1.113 Schedule 1 to the Bill provides that ASIC may, by legislative instrument, prescribe circumstances, relating to transactions entered into by certain financial services entities where a deemed economic interest in underlying securities does not arise.

[Schedule 1, item 16, subsections 671AO(1) and (2) of the Corporations Act]

1.114 Where circumstances of a particular kind are prescribed, the exception applies to all entities that meet the prescribed criteria.

1.115 To make the instrument:

•

the circumstances must relate to transactions entered into by an Australian authorised deposit-taking institution, Australian financial services licensee, clearing and settlement facility licensee or an equivalent foreign entity, in order to do any of the following in the ordinary course of its business:

-

facilitate a client obtaining economic exposure to changes in the value of an entity's securities at the client's request;

-

make a market in securities or derivatives;

-

hedge a position or otherwise manage the risk created by a client serving transaction or market making; and

•

ASIC must believe that granting the exception from having to account for a deemed economic interest is appropriate, having regard to the following matters:

-

the nature of disclosures which would otherwise be required to be made, including their frequency, the extent to which the disclosures would benefit investors and market participants and whether the disclosures would reduce the usefulness of other required disclosures;

-

the likelihood the Australian authorised deposit-taking institution, Australian financial services licensee, clearing and settlement facility licensee, equivalent foreign entity or their associates will, through the interests obtained in the situation exert, or attempt to exert, influence over the affairs of the relevant Chapter 6C entity;

-

the nature and size of the economic exposure the Australian authorised deposit-taking institution, Australian financial services licensee, clearing and settlement facility licensee or equivalent foreign entity has to changes in the value of the securities in the situation;

-

whether the Australian authorised deposit-taking institution, Australian financial services licensee, clearing and settlement facility licensee or equivalent foreign entity maintains appropriate systems to identify and distinguish between transactions entered into to serve client demands and/or market making activities, and other transactions; and

-

any other matters ASIC considers relevant.

[Schedule 1, item 16, subsections 671AO(3) and (4) of the Corporations Act]

1.116 The factor concerning the likelihood of the entity exerting or attempting to exert influence is intended to take into account whether the business context or terms of the transaction means that is unlikely to happen.

1.117 Schedule 1 to the Bill also provides that in making the determination ASIC may require alternative information to be disclosed by persons who have the benefit of the exception. This gives ASIC the ability to ensure the exception operates sufficiently broadly to achieve its objectives while only applying it where the underlying rationale of the exception is met and addressing any potential impact of the exception on the clarity and transparency of market disclosures.

1.118 For example, ASIC could, if considered appropriate, require as part of the determination that where certain persons do not have a deemed economic interest under the exception, they must:

•

disclose that they are a person to whom the exception applies when making any substantial holding disclosure (i.e. in relation to interests that are not covered by the exception); and/or

•

advise a financial market operator and the market whenever the deemed economic interests that do not arise because of the exception result in the person having net economic exposure to underlying securities in any Chapter 6C entity that exceeds a particular limit for a particular period (on the basis that the policy rationale underlying the exception assumes this will be rare).

[Schedule 1, item 16, subsection 671AO(5) of the Corporations Act]

1.119 Failing to provide ASIC with any alternative information required under this power is an offence. The maximum penalty for this offence is 60 penalty units.

[Schedule 1, items 16 and 17, subsection 671AO(6) of, and Schedule 3 to, the Corporations Act]

1.120 It is appropriate for the substantive detail of this exception for market makers and client facing services to be in delegated legislation, rather than in the primary law. ASIC, as the financial market and financial services regulator, has the relevant expertise and market knowledge to accurately assess the situations when it is appropriate for the exception to apply to regulated activities of the kind outlined having regard to the potentially complex nature of the operations of investment banks and matters such as industry practices and existing systems that distinguish between client-serving and proprietary trading. ASIC's day-to-day oversight of both the market and the Chapter 6 disclosure obligations mean it is also best placed to adjust the settings in the determination in response to any poor practices or avoidance that emerges.

1.121 The criteria that ASIC is required to consider prior to specifying the circumstances in which the exception applies are set out in the primary legislation to ensure that the specific new power is appropriately limited. Any legislative instrument will also be subject to disallowance and sunsetting to ensure appropriate parliamentary scrutiny.

Other exceptions

1.122 Schedule 1 to the Bill includes four exceptions that largely replicate exceptions that apply as part of the relevant interest concept under existing subsections 609(1), (2), (9) and (10) of the Act.

1.123 The first three exceptions relate to:

•

interests arising merely because a person has extended secured financial accommodation to an entity, provided it is on ordinary commercial terms;

•

bare trustees, where another person has the deemed economic interest; and

•

directors of a body corporate that has a deemed economic interest in securities.

[Schedule 1, item 16, sections 671AL, 671AM and 671AN of the Corporations Act]

1.124 The fourth exception is that the regulations may prescribe circumstances where a person does not have a deemed economic interest. It is appropriate to allow for this matter to be prescribed in delegated legislation to accommodate for unforeseen circumstances where exclusions may be required to address emerging market circumstances or industry developments. This could occur because of some novel or unexpected activity emerging where disclosing a deemed economic interest would impose an unreasonable burden, or would result in disclosures that misrepresent or do not meaningfully explain a person's influence in relation to securities and the entity. Any regulation will be subject to disallowance and could only provide relief from disclosure obligations, not add to them.

[Schedule 1, item 16, section 671AQ of the Corporations Act]

1.125 Additionally, there is an exception for deemed economic interests that arise exclusively intra-group. Where the only persons who would have a deemed economic interest under a derivative are all related bodies corporate, the deemed economic interest is disregarded. Existing section 50 of the Corporations Act defines when bodies are related.

[Schedule 1, item 16, section 671AP of the Corporations Act]

1.126 The extension provisions applicable to both relevant interests and deemed economic interests mean that generally all entities in a corporate group are taken to have the same interests. As a result, recognising deemed economic interests that arise purely intra-group has the potential to confuse, and would provide little additional value to the market. The exception ceases to operate as soon as a person outside the group acquires a deemed economic interest as a result of the derivative (for example if someone outside the group enters into an arrangement giving them power to control disposal of the derivative or purchase the derivative, and another exception does not apply).

Other provisions relating to deemed economic interests

1.127 For the avoidance of doubt, Schedule 1 to the Bill clarifies that the operation of the deemed economic interest provisions may result in a body having a deemed economic interest in its own securities. This reflects existing subsection 608(9) which applies in the context of relevant interests.

[Schedule 1, item 16, section 671AR of the Corporations Act]

1.128 A derivative holder who gains a deemed economic interest on commencement of Schedule 1 to the Bill because they hold derivatives of a type captured by the new provisions is taken to begin to have the interest on commencement for the purposes of substantial holding notice and tracing notice obligations.

[Schedule 1, item 75, subsection 1711C of the Corporations Act]

Offsetting short positions

1.129 The primary focus of the new provisions extending the disclosure requirements under Chapter 6C to incorporate interests arising under equity derivatives is on the long-side exposure resulting from the derivative (as reflected in the new deemed economic interest concept). This is because, as noted above, it is the influence the person on the long side of the derivative has as a result of creating an incentive to hedge underlying securities or controlling the unwind of that incentive that the extended regime is seeking to capture. However, there is a risk that the extent of the actual economic exposure disclosed is overstated (or even illusory) where a person in the long position has entered into separate arrangements giving rise to countervailing exposure.

1.130 An investor can offset any type of interest arising under a derivative, whether it is relatable, deemed, physically settleable or non-physically settleable. Because offsetting short positions reduce an investor's economic exposure to the value of the underlying shares, disclosing a derivative-based interest without also disclosing any offsetting short positions may mislead other market participants about the investor's position.

1.131 In order to address this risk, Schedule 1 to the Bill contains a requirement that a person who is required to disclose that they have an interest (a relevant interest or deemed economic interest) arising from a derivative must also disclose any arrangements that offset the economic exposure arising from the derivative. This approach is consistent with paragraph 13(i) of the Takeovers Panel's Guidance Note 20.

1.132 In order to define the scope of relevant disclosure obligations, Schedule 1 to the Bill defines when a person has an offsetting short position. The key to this definition is that the person is a party to an equity derivative and might benefit in the case of a decrease in value of the securities underlying the derivative. This generally equates to being in the short position in relation to the derivative.

[Schedule 1, items 11 and 16, sections 9 and 671AS of the Corporations Act]

1.133 ASIC may, by legislative instrument, determine the number of securities, or the methods available to calculate the number of securities, in which the person has an offsetting short position. Such methods of calculation may enable the person to choose between different methods, or require the recalculation of issued securities at certain intervals or in certain circumstances. ASIC may also use this power to effectively exempt certain positions by assigning them a value of 'zero'.

[Schedule 1, item 16, section 671AW of the Corporations Act]

1.134 It is appropriate this is done by legislative instrument as it is highly technical and may regularly be subject to change. Any legislative instrument will be subject to disallowance and sunsetting to ensure appropriate parliamentary scrutiny.

1.135 Unlike the provisions governing deemed economic interests, the provision establishing when an offsetting short position arises does not distinguish between physically settleable and non-physically settable derivatives. The number of underlying securities representing the offsetting short position is determined in all cases in accordance with an ASIC instrument, regardless of derivative type.

1.136 This reflects that the primary purpose of offsetting short disclosure is to convey the extent to which a short position qualifies the long exposure under deemed economic interests and accordingly it does not necessarily require the same approach to breaking down the interests arising under each (although the breakdown may in any event be clear from other disclosures).

1.137 Accordingly, if a person is a substantial holder and holds a derivative-based interest in a body, the person must disclose any offsetting short positions in voting shares or interests in the body, including the person's 'offsetting short position percentage' in the body. The latter is defined as the percentage of total votes attached to voting securities in the body in which the person and their associates have an offsetting short position. The person must also disclose any changes of at least 1 percentage point in those offsetting short positions (including a change from having no offsetting short position to an offsetting short position of at least 1 percentage point).

[Schedule 1, item 21, subparagraph 671BB(1)(b)(iv), paragraph 671BK(1)(c) and section 671BM of the Corporations Act]

1.138 Where an offsetting short position movement triggers a substantial holding notice disclosure, the disclosure must be accompanied by a copy of any relevant written agreement, and a statement about any unwritten agreement, giving rise to the offsetting short position.

[Schedule 1, item 21, subsection 671BF(1) of the Corporations Act]

1.139 Equivalents of the extension provisions that apply to deemed economic interests also apply to offsetting short positions. That is, the offsetting short position disclosure requirements apply in cases of controlling disposal, positions held through bodies corporate and managed investment schemes, and where a person has an offsetting short position because of a derivative and enters into an agreement that would later give another person an offsetting short position.

[Schedule 1, item 16, sections 671AT, 671AU and 671AV of the Corporations Act]

1.140 ASIC is able to specify rules to calculate the number of securities underlying an offsetting short position both under the basic rule and the extensions. However, there are no statutory exceptions contained in Schedule 1 to the Bill. As all offsetting short positions regardless of derivative type are to be determined in accordance with an ASIC instrument, it is anticipated that ASIC will incorporate appropriate exceptions in its determination.

1.141 Regulations may also prescribe circumstances in which offsetting short positions in certain securities do not arise. Allowing exclusions to be prescribed in the regulations is appropriate in this instance as there may be unforeseen circumstances where exclusions may be required to address emerging market circumstances or industry developments. Any regulation will be subject to disallowance.

[Schedule 1, item 16, section 671AX of the Corporations Act]

Other changes affecting Chapter 6C

1.142 Schedule 1 to the Bill introduces new definitions of a 'Chapter 6C body' and a 'key person' for a Chapter 6C body. Chapter 6C bodies, and their respective key persons, are as follows:

•

a listed company (key person is the company);

•

a listed registered scheme and its responsible entity;

•

a listed notified foreign passport fund and its operator;

•

other listed bodies incorporated or formed in Australia (key person is the body);

•

other listed bodies not incorporated or formed in Australia (key person is the body).

[Schedule 1, items 1 and 3, sections 9 and 671A of the Corporations Act]

1.143 Schedule 1 to the Bill retains the exceptions from the relevant interest provisions for the following matters, along with the proviso that negates the exceptions for the purposes of the substantial holding disclosure obligations under Chapter 6C:

•

conditional agreements;

•

market traded options and derivatives;

•

securities escrowed under the listing rules; and

•

securities subject to an escrow agreement in connection with initial public offer etc.

[Schedule 1, item 21, section 671E of the Corporations Act]

1.144 Schedule 1 to the Bill defines 'voting security' for disclosure purposes to include the following:

•

a voting share in a listed company;

•

a voting interest in a listed registered scheme;

•

a voting interest in a listed notified foreign passport fund;

•

a voting share in a listed body (other than the above) incorporated or formed in Australia; and

•

a voting share in a listed body (other than the above) not incorporated or formed in Australia.

[Schedule 1, items 1 and 3, section 9 and column 3 of the table in section 671A of the Corporations Act].

1.145 This definition is also intended to capture securities in foreign bodies covered by Clearing House Electronic Sub-register System (CHESS) depositary interests. As the holder of a CHESS depositary interest is able to control disposal of the underlying securities, the intention is that the holder of these interests is considered to have a relevant interest in the underlying voting security in the company under paragraph 608(1)(c) of the Corporations Act.

Substantial holding notice changes

Disclosure of derivative interests in substantial holding notices

1.146 To ensure that the expanded disclosure regime captures interests arising under equity derivatives, Schedule 1 to the Bill expands the meaning of 'substantial holding' for the purposes of Chapter 6C.

1.147 In consequence, if a person would have a substantial holding in a Chapter 6C body if any of their or their associates' deemed economic interests in securities in the body were instead relevant interests, they are taken to have a substantial holding in the body. This requires a beneficial interest holder to consider the aggregate of their relevant interests and deemed economic interests in determining whether they have a substantial holding.

[Schedule 1, item 21, section 671D of the Corporations Act]

1.148 Schedule 1 to the Bill requires a party to a derivative in the bought position to consider their interests in a Chapter 6C body in each of the following categories (in addition to any non-derivative-based relevant interests) to determine whether they have a substantial holding in the body:

•

relatable derivative-based interests;

•

deemed physically settleable derivative-based interests;

•

deemed non-physically settleable derivative-based interests.

1.149 If the party's and their associates' total interests across all three categories, combined with any non-derivative-based relevant interests, reach the 5% threshold for a substantial holding, the party must disclose the holding by setting out the following breakdown in their substantial holding notice (in addition to the required details about non-derivative holdings):

•

their relatable derivative-based holding percentage;

•

their deemed physically settleable derivative-based holding percentage;

•

their deemed non-physically settleable derivative-based holding percentage;

•

the aggregate percentage across these three categories of derivatives, known as their 'derivative-based holding percentage';

•

details of any offsetting short positions, including their offsetting short position percentage;

•

their aggregate percentage across derivative-based and non-derivative-based holdings, known as their 'holding percentage'.

[Schedule 1, items 18 and 21, section 9, subsection 671B(1) and paragraph 671BB(1)(b) of the Corporations Act]

1.150 Requiring separate disclosure of these categories in a substantial holding notice ensures that the market is able to:

•

clearly distinguish between interests that are referable to particular holdings of securities and those deemed to exist in relation to theoretical holdings (noting that the level of influence and potential impact on the market arising from different interests may be perceived differently by the market); and

•

easily understand when an update is given as a result of a change in a party's total interests or when it involves a change in the nature of interests under a derivative (for example, because a counterparty acquires underlying securities as a hedge).

At every point when disclosure is required, the holder must report each class of derivative-based holding percentage, even if the figure for one or more of them is 0%.

[Schedule 1, item 21, subparagraph 671BB(1)(b)(iii) and section 671BL of the Corporations Act]

1.151 For the most part, the new derivative-based holding disclosure requirements apply only to situations that arise after the commencement of Schedule 1 to the Bill. However, Schedule 1 to the Bill deems disclosures that were not required prior to commencement to have in fact been made, so that if a discloser's holdings change and they need to make a new disclosure, they have a baseline from which to calculate movements.

[Schedule 1, item 21, subsections 671BK(3) to (8) of the Corporations Act]

Disclosures triggered by movements in derivative-based holdings

Disclosures triggered by movements between different types of derivative-based holding

1.152 A party to a derivative in the bought position must count their interests in each of their relatable derivative-based interests, their deemed physically settleable derivative-based interests and their deemed non-physically settleable derivative-based interests in calculating whether there is a movement in their total holding in the listed entity that they need to disclose.

[Schedule 1, items 18 and 21, definition of 'disclosable movement' in section 9 and paragraphs 671B(1)(c) and 671BK(1)(a) of the Corporations Act]

1.153 Additionally, a person must 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. This requirement is intended to promote transparency and limit information asymmetry between parties to a derivative and other market participants.

[Schedule 1, item 21, paragraphs 671B(1)(c) and 671BK(1)(a) of the Corporations Act]

1.154 For example, consider the situation of a shareholder who is the outright owner of voting shares amounting to 8% of the voting rights in a listed company. Suppose, as part of a single transaction, the holder sells shares carrying voting rights equalling 1% of all voting shares, while simultaneously entering into a cash settled derivative with the person to whom they sold the shares, providing economic exposure equivalent to holding that same quantity of shares. Their overall holding percentage in the company is unchanged, but they still need to disclose the 1 percentage point increase in their derivative-based holding percentage and the reduction in their outright holding percentage.

1.155 Further, a party must disclose any shifts in the internal composition of their derivative-based holding percentage of 1 percentage point or greater. That is, they must disclose when their holding percentage in any of the three derivative categories moves by 1 or more percentage points.

1.156 This new requirement ensures that material changes in the nature of interests arising under equity derivatives are disclosed at the time the changes occur. For example, if a cash settled equity derivative is amended to allow for physical settlement, this change would require disclosure at the time of the amendment, including by providing the market with a copy of the relevant amending documentation. ^[8]

[Schedule 1, item 21, paragraphs 671B(1)(c) and 671BK(1)(b) of the Corporations Act]

1.157 Schedule 1 to the Bill includes an anti-avoidance provision that ensures that holders of relevant or deemed economic interests cannot avoid their obligations to disclose subsequent movements by failing to comply on a prior occasion.

[Schedule 1, item 21, subsection 671BK(2) of the Corporations Act]

Example 1.1

A company has 100 million ordinary shares on issue, being the only class of issued shares, all of which carry equal voting rights. An investor buys 6 million shares. They disclose a substantial holding under section 671B and report their 'holding percentage' as 6%.

The investor then enters into a derivative with an investment bank under which the investment bank agrees to provide the investor with 9 million shares in the company in three months' time. The investment bank's most recent substantial holding disclosure indicates that it holds 5 million shares in the company. The investment bank immediately buys 2 million shares as a partial hedge.

Under existing subsection 608(8), the investor would have only disclosed a 7 percentage point movement in their holding.

Under the expanded disclosure regime, the investor must disclose a 9 percentage point increase in their holding percentage and that they have:

•

a 15% holding percentage;

•

a 9% derivative-based holding percentage;

•

a 7% relatable derivative-based holding percentage;

•

a 2% deemed physically settleable derivative-based holding percentage; and

•

a 0% deemed non-physically settleable derivative-based holding percentage.

Suppose the investment bank buys an additional 2 million shares as a hedge, one month later. The investor must disclose:

•

a 2 percentage point increase in their relatable derivative-based holding percentage;

•

a 2 percentage point decrease in their deemed physically settleable derivative-based holding percentage;

•

that they still have a 15% holding percentage;

•

that they still have a 9% derivative-based holding percentage;

•

that they have a 9% relatable derivative-based holding percentage;

•

that they have a 0% deemed physically settleable derivative-based holding percentage; and

•

that they still have a 0% deemed non-physically settleable derivative-based holding percentage.

The investor and the investment bank subsequently vary the derivative at the two-month mark to reduce the number of shares subject to physical settlement, with the bank instead agreeing to provide the investor with 4 million shares in the company and the cash value equivalent to 5 million shares at the end of the period (i.e. one month later). Assuming ASIC has allowed a linear calculation to be applied to the cash settled derivative component of the arrangement in these circumstances, the investor must disclose:

•

a 5 percentage point decrease in their relatable derivative-based holding percentage;

•

a 5 percentage point increase in their deemed non-physically settleable derivative-based holding percentage;

•

that they still have a 15% holding percentage;

•

that they still have a 9% derivative-based holding percentage;

•

that they have a 4% relatable derivative-based holding percentage;

•

that they have a 5% deemed non-physically settleable derivative-based holding percentage; and

•

that they still have a 0% deemed physically settleable derivative-based holding percentage.

1.158 This requirement to disclose intra-derivative movements is important because it allows the market to understand the full extent and nature of the investor's relevant interests and the incentives they create.

Disclosures triggered by movements in offsetting short positions

1.159 As noted above, disclosure of offsetting short positions is required to qualify disclosures relating to the long-side exposures arising under equity derivatives (i.e. a person's derivative-based holding percentage). In consequence:

•

there is no threshold trigger requiring disclosure to be made based on the overall size of an offsetting short position (i.e. offsetting short positions are not incorporated in the definition of a substantial holding for Chapter 6C purposes); and

•

a substantial holder is only required to include details of the offsetting short positions where a person's derivative based holding percentage is greater than zero (i.e. disclosure is not required where a person has no derivative-based interests under subsection 608(8) nor any deemed economic interests – such as where they have a direct holding of securities only).

1.160 Instead, acquisitions of, or changes to, offsetting short positions will only trigger a requirement to update a substantial holding notice if there is a change to a previously disclosed offsetting short position of 1 percentage point or more and (where that change is an increase) the person's derivative-based holding percentage immediately after the change is greater than nil.

1.161 This means, for example, that no disclosure requirement is triggered if a person merely takes out a short position over securities and does not have any derivative-based interests under subsection 608(8) or any deemed economic interests.

1.162 If a person who holds an offsetting short position ceases to have any derivative-based holdings and discloses that their derivative-based holding percentage is nil, they will be taken to have disclosed at that point that their offsetting short position is nil, even if they have retained the short position. Therefore, any subsequent changes to their offsetting short position will not trigger a further requirement to disclose unless and until they acquire a derivative-based holding in the future.

[Schedule 1, item 21, paragraph 671B(1)(c), subparagraph 671BB(1)(b)(iv), paragraph 671BK(1)(c), subsection 671BK(2) and section 671BM of the Corporations Act]

Takeover bid trigger

1.163 Schedule 1 to the Bill clarifies that, in the case of a takeover bid, the substantial holding disclosure requirement in existing paragraph 671B(1)(c) is triggered when the bid period starts. The bid period starts when a bidder gives a bidder's statement for an off-market bid to the target, or when a market bid is announced to the relevant financial market: see the definition of 'bid period' in section 9.

[Schedule 1, item 21, paragraph 671B(1)(d) and subparagraph 671BA(1)(b)(i) of the Corporations Act]

1.164 This clarification gives legislative confirmation to ASIC's existing regulatory approach. See ASIC's Regulatory Guide 5: Relevant interests and substantial holding notices, RG 5.288-5.289.

Listing trigger

1.165 Under existing paragraph 671B(1)(a) of the Corporations Act, a person's obligation to disclose a substantial holding in an entity is triggered, when the person begins or ceases to have a substantial holding in the entity. If a person already has a substantial holding in an entity immediately before it lists, there is some uncertainty about whether they begin to have the substantial holding at the time the entity first lists (and, therefore, whether they have an obligation to disclose their substantial holding at that time).

1.166 Schedule 1 to the Bill clarifies that a person with a substantial holding needs to disclose their holdings at the point in time when the entity in question becomes a 'Chapter 6C body', that is, at the time when the entity is listed on a declared financial market.

[Schedule 1, item 21, paragraph 671B(1)(b) of the Corporations Act]

Changes to required substantial holding notice content

1.167 The existing obligations to disclose information have been expanded to cover the new concept of deemed economic interest. In addition to the holding percentages discussed above, disclosers must include the following information:

•

their name and address;

•

details of any agreement through which they would have a relevant interest or deemed economic interest in voting securities in the Chapter 6C body;

•

the name of any associate who has a relevant interest or deemed economic interest in voting securities in the Chapter 6C body, together with details of the nature of the person's association, the interest they hold, and any agreement giving them the interest;

•

if the information must be given because of a disclosable movement, the size and date of the disclosable movement and details of each transaction that resulted in the disclosable movement;

•

if the information must be given because a person ceased to be an associate, the former associate's name.

[Schedule 1, item 21, paragraphs 671BB(1)(a), (c), (d), (e) and (f) of the Corporations Act]

1.168 The Bill preserves and clarifies the existing requirement that a discloser provide to the key person for the Chapter 6C body and each relevant market operator copies of certain relevant supporting documentation from the discloser or a statement by the discloser giving details of certain contracts, schemes or arrangements.

[Schedule 1, item 21, section 671BF of the Corporations Act]

1.169 Where a person is required to provide details of two or more transactions that occurred on a declared financial market on the same day, the person can give details on an aggregate basis. However, if a person opts to use this aggregate method, the information provided must include, for each day:

•

the highest and lowest price paid per security under any of the transactions; and

•

the total value of the consideration paid that day.

[Schedule 1, item 21, subsection 671BB(2) of the Corporations Act]

1.170 This is intended to enable more concise disclosures to be made while preserving the ability of the market to determine the minimum price at which any future takeover bid could be made by the substantial holder or an associate under existing subsection 621(3).

1.171 The discloser is also not required to give the name and address of a registered holder of securities if the only reason for such a disclosure is that the person accepted an offer relating to those securities made under a takeover bid, and the person remains on the member register at the time of the disclosure.

[Schedule 1, item 21, section 671BD of the Corporations Act]

1.172 If the name and address of a person who accepted a takeover bid is not provided, then the target of the takeover bid may request that the bidder provide the following information:

•

the name and address of each person who has accepted the offer under the bid and remains a registered holder of the securities to which the offer relates;

•

the number of securities held by each such person in respect of which the bidder has a relevant interest because of the person's acceptance of the offer under the bid.

1.173 The bidder must provide this information on or before the first business day after receiving the request. These provisions reflect modifications contained in ASIC Corporations (Bidder Giving Substantial Holding Notice) Instrument 2023/685.

[Schedule 1, item 21, section 671BH of the Corporations Act]

Accompanying documents and details of relevant agreements

1.174 Where the notice may need to be accompanied by copies of documents, disclosers may redact the copy of a document to the extent necessary to conceal an individual's signature, a phone number, an email or a physical address.

[Schedule 1, item 21, subsection 671BG(7) of the Corporations Act]

1.175 ASIC's Regulatory Guide 5: Relevant interests and substantial holding notices explains (at RG 5.302) that substantial holders cannot avoid their obligation to disclose full or substantive details of all contributing agreements and arrangements by, for example:

•

entering into a preliminary agreement or understanding incorporating limited terms (which triggers the substantial holding requirement); and then

•

omitting substantive details of the overall transaction that have been negotiated on the basis that a formal or collateral written agreement or arrangement containing these details was (or will be) finalised at a later time after the substantial holding disclosure requirement in respect of the transaction has been discharged.

1.176 ASIC goes on to explain (at RG 5.303) that when a preliminary step or agreement gives rise to a change in voting power before other agreements contributing to the overall situation have been finalised, the substantial holding notice must still be accompanied by a statement setting out full and accurate details of other contracts, schemes or arrangements that have been negotiated.

1.177 Schedule 1 to the Bill exempts disclosers from the obligation to provide documents or statements in four situations.

1.178 Consistent with the existing law, if a discloser is required to give information because of a transaction taking place on a declared financial market, the discloser does not need to also provide the relevant copies or statements.

[Schedule 1, item 21, subsection 671BG(2) of the Corporations Act]

1.179 If the discloser is a bidder or an associate of a person who is a bidder under a takeover bid, and the information required to be given by the discloser includes the acceptance of offers under the bid, then the discloser is not required to provide a copy of the following documents:

•

the bidder's statement;

•

the takeover offer document;

•

any acceptance form.

[Schedule 1, item 21, subsection 671BG(3) of the Corporations Act]

1.180 This incorporates an exemption contained in ASIC Corporations (Bidder Giving Substantial Holding Notice) Instrument 2023/685.

1.181 Publicly available documents that accompanied a previous substantial holding notice are also exempt, provided that the present notice refers to and identifies both the documents and the prior substantial holding notice. This exception applies regardless of whether the prior notice was filed by the discloser or another person.

[Schedule 1, item 21, subsection 671BG(6) of the Corporations Act]

1.182 Standard form documents of a kind prescribed by ASIC need not accompany a substantial holding notice. However, in order to rely on this exception, the discloser must instead include a statement that identifies all differences from the exempted standard form and sets out the date the document was executed and any other information in any blank space that the form requires to be filled in.

[Schedule 1, item 21, subsections 671BG(4) and (5) of the Corporations Act]

1.183 If a discloser relies on the exemption from providing a standard form document, a person may request the discloser, in writing, to give them a copy of the document. The request must be made within 7 years after the discloser gives the information to which the document relates. Upon request, the discloser must provide the person with a copy of the document (endorsed with a statement that the copy is a true copy of the document) within 7 days. A failure to comply with a request is an offence and subject to a penalty of 120 penalty units.

[Schedule 1, items 21 and 24, subsections 671BI(1) to (4) of, and Schedule 3 to, the Corporations Act]

1.184 A discloser may also nominate another person to whom requests for copies of standard form documents can be directed. The discloser must nominate the person through a statement identifying the nominated person, to which the person must consent.

[Schedule 1, item 21, subsections 671BJ(1) and (2) of the Corporations Act]

1.185 A person may request, in writing, that the nominated person provide a copy of the relevant standard form document to them. The request must be made within 7 years after the discloser gives the information to which the document relates, and the nominated person must provide the copy, endorsed with a statement that the copy is a true copy of the document, within 7 days. A failure to comply with a request is an offence and subject to a penalty of 120 penalty units.

[Schedule 1, item 21 and 24, subsections 671BJ(3), (4) and (5) of, and Schedule 3 to, the Corporations Act]

1.186 A discloser or a nominated person giving a copy of a document following a request has the same ability to redact the copy of a document, to the extent necessary to conceal an individual's signature, a phone number, an email or a physical address, as the discloser would have if the document had accompanied a substantial holding notice.

[Schedule 1, item 21, subsections 671BI(5) and 671BJ(6) of the Corporations Act]

1.187 A discloser or a nominated person is not required to provide a copy of a standard form document if it is readily available to the person requesting the document. Also, a discloser need not provide the document if the discloser has nominated another person to provide the document and it is not in the discloser's possession.

[Schedule 1, item 21, subsections 671BI(6) and 671BJ(7) of the Corporations Act]

1.188 The discloser or nominated person bears an evidential burden in relation to those matters. It is appropriate to reverse the evidential burden of proof in this instance because the discloser's non-possession of the document is a matter peculiarly within their own knowledge, and would be significantly more difficult and costly for the prosecution to disprove. Similarly, the discloser or nominated person is in a unique position to indicate where or how the document is already readily available to the requester (for example, because they already sent it to the requester in the past), and this would be significantly more difficult and costly for the prosecution to disprove.

Specifying additional items of information

1.189 Schedule 1 to the Bill empowers ASIC to specify, by legislative instrument, other particulars that must be provided in a substantial holding notice, instead of requiring them to be prescribed in regulations, as is currently the case.

[Schedule 1, item 21, paragraph 671BB(1)(g) and subsection 671BB(3) of the Corporations Act]

1.190 ASIC can use this power to specify a particular for all notices relating to all Chapter 6C bodies, or can confine the particular to a subset of Chapter 6C bodies.

1.191 This is an appropriate delegation to ASIC because it supports the making of the prescribed form that ASIC will issue. Additionally, ASIC's role as regulator positions it to adapt the disclosure requirements over time in response to observed market practices and any concerns regarding information gaps, contributing to the effective operation of Australia's financial markets. The instrument will be subject to disallowance and sunsetting to allow for appropriate parliamentary scrutiny.

Other substantial holding notice changes

Manner and form of substantial holding notices

1.192 Schedule 1 to the Bill removes the requirement that substantial holding notices be given in the prescribed form, and instead, allows ASIC to approve the manner and form in which the notices must be given.

[Schedule 1, item 21, section 671BE of the Corporations Act]

1.193 This allows ASIC to impose requirements about the manner in which substantial holding notices are given, and the format of such notices. For example, in the future, ASIC could require notices to be given in a machine-readable form.

1.194 Ensuring that ASIC can prescribe a consistent reporting method that can be more easily collated (for example, through machine readability) benefits regulators, market participants and engaged third parties and achieves greater levels of transparency and accessibility. Allowing the regulator to determine the requirements ensures adaptability over time as technology develops.

1.195 An approval by ASIC of a manner or form in which a substantial holding notice is given is not a legislative instrument (see subsection 6(1) of the Legislation (Exemptions and Other Matters) Regulation 2015.

Timing for giving substantial holding disclosure

1.196 Schedule 1 to the Bill retains the existing deadline for giving substantial holding notices, namely, within 2 business days in most cases. In the case of a notice triggered by a takeover bid, the deadline remains 9.30 am on the next trading day of the relevant financial market.

[Schedule 1, item 21, subsections 671BA(1) and (3) of the Corporations Act]

1.197 Under the existing provision, the clock starts running when the person becomes aware of the 'information'. Schedule 1 to the Bill adjusts this to refer to a person becoming aware of the 'situation' that gives rise to their disclosure obligation. This adjustment ensures that persons cannot avoid their disclosure obligations by remaining wilfully unaware of particular information.

1.198 Schedule 1 to the Bill also strengthens the disclosure obligation by extending it to cases where a person ought reasonably to have been aware of a situation (the existing obligation only applies if the person is actually aware). This ensures that persons cannot avoid their disclosure obligations by remaining wilfully unaware of triggering situations or by failing to maintain adequate systems to identify changes in their relevant interests, deemed economic interests, associations and other circumstances.

[Schedule 1, item 21, subsection 671BA(2) of the Corporations Act]

Consequences for contravention

1.199 Schedule 1 to the Bill preserves the fault-based and strict liability offences for failing to comply with the requirement to give a substantial holding notice.

[Schedule 1, items 21 to 23, subsections 671B(4) and (5) of, and Schedule 3 to, the Corporations Act]

1.200 The amendments also preserve a person's existing exposure to civil liability for contravening substantial holding notice obligations. Schedule 1 to the Bill tightens the existing civil defence to require that:

•

if a person contravenes the notice requirement by inadvertence or mistake, that inadvertence or mistake must have been 'reasonable in all the circumstances'; and

•

if a person contravenes the notice requirement because they were not aware of a relevant fact or occurrence, the fact or occurrence must not have been one of which the person ought reasonably to have been aware.

[Schedule 1, item 21, subsection 671C(2) of the Corporations Act]

1.201 To the extent that a substantial holder does not know, and is not reasonably able to know, particular information required to be included in or accompany a substantial holding notice (including details of a contract, scheme or arrangement which contributed to the need to give a substantial holding notice), their disclosure will not need to contain, or be accompanied by, that information. This relief only applies if the substantial holder has taken reasonable steps to ensure they know or would reasonably be able to know the information within the time required. This gives certainty to investors who put in place systems and make arrangements to ensure information is accessible that they will not be in contravention.

[Schedule 1, item 21, section 671BC and subsections 671BG(8) and (9) of the Corporations Act]

1.202 To avail themselves of this exception, the defendant bears an evidential burden. It is appropriate to reverse the burden in this instance because the substantial holder's state of knowledge and the steps they took are matters peculiarly within their knowledge and would be significantly more difficult and costly for the prosecution to disprove.

[Schedule 1, item 21, subsections 671BC(3) and 671BG(10) of the Corporations Act]

Tracing notice changes

Issuing tracing notices to wider class of known underlying owners and interest holders

1.203 Existing section 672A of the Corporations Act provides that ASIC, a listed company, the responsible entity for a listed registered scheme or the operator of a listed notified foreign passport fund may issue a tracing notice to a member of the company, scheme or fund or a person named in a previous tracing notice response as having a relevant interest in, or having given instructions about, voting shares in the company, interests in the scheme or interests in the fund. Section 672B sets out the information that must be disclosed.

1.204 However, this does not necessarily cover the full range of underlying beneficial owners of securities that may be known to the notice issuer. In a situation where previous disclosures in a substantial holding notice indicate that a person may be a beneficial owner of securities, neither ASIC nor a listed entity can issue a tracing notice to that individual unless they are a member of the relevant entity or were named in a previous tracing notice. This unnecessarily delays the discovery of more information about the known or suspected owner's interest as the tracing must commence from the registered holder of the relevant securities.

1.205 Additionally, to the extent that it is necessary for ASIC to seek information via tracing notices concerning deemed economic interests arising from equity derivatives for the purpose of ensuing compliance with the new substantial holding disclosure obligations, there may be no registered holding from which tracing can commence.

1.206 Schedule 1 to the Bill repeals sections 672A and 672B. The successor provisions widen the class of tracing notice recipients, differentiate between ASIC's power to issue a tracing notice for regulatory purposes and the power for key persons of Chapter 6C bodies (or ASIC, via a Chapter 6C body member request) to do so, and stipulate when notices are taken to have been received and when information must be given.

[Schedule 1, items 31 to 35, sections 672A to 672BD of the Corporations Act]

1.207 The Bill defines 'instructions', in relation to derivatives and voting securities in a Chapter 6C body, as instructions about the acquisition or disposal of derivatives or voting securities, the exercise of rights attached to them, or any other related matter.

[Schedule 1, item 28, section 9 of the Corporations Act]

1.208 Table 1.4 below sets out the persons to whom ASIC may issue a tracing notice (other than at the request of a member) and the information each person is required to disclose.

Table 1.4

Note: The first row of table 1.4 sets out information that all recipients of a tracing notice must provide (unless the notice specifies that the information can be excluded from the response). The other rows then set out additional information that a recipient must provide where ASIC has the power, and has chosen, to specify certain securities in the notice.

[Schedule 1, items 31 and 32, sections 672A and 672AD of the Corporations Act]

1.209 As indicated in the table, the regulations may prescribe further particulars. Like with the power to prescribe further particulars for substantial holding notices, this power provides flexibility to adapt tracing notice requirements in response to observed market practices and any concerns regarding information gaps. However, in this case, it is a regulation-making power rather than an ASIC power, to avoid a situation where ASIC has an unrestricted power to expand the scope of its own information-gathering power (being tracing notices).

[Schedule 1, item 32, subparagraph 672AD(1)(f)(i)]

1.210 However, ASIC may determine, by legislative instrument, particulars in relation to tracing notices if those particulars have also been determined in relation to substantial holding notices. It is appropriate that the particulars of what must be disclosed in tracing notice responses can be adjusted by ASIC in this way, to allow the parameters of the tracing notice regime to remain consistent with disclosures required by substantial holding notices.

[Schedule 1, item 32, subparagraph 672AD(1)(f)(ii) and subsection 672AD(2)]

1.211 ASIC can use its power to specify particulars for tracing notice responses relating to all Chapter 6C bodies, or to a confined subset of Chapter 6C bodies, provided that ASIC also specified those particulars for substantial holding notices with the same, or broader, scope.

1.212 If a response to an ASIC-issued tracing notice includes details of a person's own, or any other person's, relevant or deemed economic interests, the disclosure must be accompanied by a copy of each document that sets out the terms of any contributing agreement that is in writing and readily available to the discloser. All copies of documents must be endorsed with a statement that the copy is a true copy.

[Schedule 1, item 32, subsections 672AF(1) and (2) of the Corporations Act]

1.213 If a contract, scheme or arrangement contributed to the circumstances giving rise to a relevant or deemed economic interest but is not both in writing and readily available, the discloser must provide a statement giving full details about it. However, if the contract, scheme or arrangement relates only to the deemed economic interests of another person, the discloser is only required to disclose the details known to them on the basis of information that is not publicly available (whether or not the details are also knowable on the basis of public information). If the contract, scheme or arrangement relates only to the relevant interests of any other person in specified securities, the discloser is only required to disclose details known to the discloser.

[Schedule 1, item 32, subsections 672AF(4) and (5) the Corporations Act]

1.214 A discloser does not need to provide accompanying documents, or have the documents provided endorsed as true copies, to the extent allowed by the direction.

[Schedule 1, item 32, subsection 672AF(3) of the Corporations Act]

1.215 Schedule 1 to the Bill also retains the mechanism requiring ASIC to exercise its tracing notice power in relation to a Chapter 6C body if a member of that body requests it to do so. ASIC may, however, refuse to do so if it considers that complying with the request would be unreasonable. The permitted targets of tracing notices issued by Chapter 6C bodies or ASIC at a member's request, and the information required to be disclosed in response, are set out in the table below.

[Schedule 1, item 34, subsection 672B(2) of the Corporations Act]

Table 1.5

Note: The first row of table 1.5 sets out information that all recipients of a tracing notice must provide (unless the notice specifies that the information can be excluded from the response). The other rows then set out additional information that a recipient must provide where the issuer has the power, and has chosen, to specify certain securities in the notice.

[Schedule 1, items 34 and 35, sections 672B and 672BC of the Corporations Act]

1.216 There could be situations in which it is not clear from a previous substantial holding notice whether a person has the requisite relevant interest or has given instructions. In such cases, in order for the key person's suspicion to be on reasonable grounds, the key person would likely need to be able to document their suspicion.

1.217 The standard of suspicion on reasonable grounds corresponds to the standard set out in the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

1.218 The higher standard for listed entities compared to ASIC (that is, the requirement for them to have formed the suspicion at least in part on prior Chapter 6C disclosures) strikes a balance between streamlining the tracing notice process and preventing its use for improper purposes.

1.219 A failure to comply with a tracing notice issued by either ASIC or a key person for a Chapter 6C body remains an offence of strict liability. Schedule 1 to the Bill also retains the offence-specific defence which provides that a person need not comply with a notice issued by a key person for a Chapter 6C body if the person can prove that it is vexatious. A defendant bears a legal burden in relation to whether the giving of the direction is vexatious. The reversal of the legal burden of proof in this instance is appropriate because its vexatiousness or otherwise is peculiarly within the knowledge of the defendant and would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish. Merely reversing the evidential burden of proof would be insufficient in this instance, in view of the difficulty and costliness for the prosecution to discharge the legal burden.

[Schedule 1, items 31 and 34, sections 672AB and 672BA of the Corporations Act]

1.220 Schedule 1 to the Bill retains the existing mechanism for regulations to prescribe a fee that a key person for a Chapter 6C body must pay to the person to whom they have issued a tracing notice, while clarifying that this is only possible for a tracing notice issued by a Chapter 6C body. Regulations cannot prescribe such a fee for an ASIC-issued tracing notice, whether issued at the request of a member or not.

1.221 As before, if the tracing notice recipient does not comply with the direction on time, they must repay the fee, even if they comply later. The fee can be recovered as a debt owed to the key person.

[Schedule 1, item 41, section 672D of the Corporations Act]

1.222 Schedule 1 to the Bill also maintains the existing deadlines for disclosure for both ASIC-issued and key person-issued tracing notices. A discloser must make a disclosure:

•

within 2 business days of being given the direction; or

•

if the discloser applies for an exemption and the exemption is refused, within 2 business days of ASIC notifying the discloser of the refusal; or

•

if the direction is given by a key person for a Chapter 6C body, within 2 business days after the key person pays any prescribed fee for complying with the direction.

[Schedule 1, items 31, 34 and 41, sections 672AC, 672BB and 672D of the Corporations Act]

Service of ASIC-issued tracing notices

1.223 Schedule 1 to the Bill provides that ASIC may send a tracing notice by pre-paid post or courier service to an address that it is reasonable to use, or email it to an email address that it is reasonable to use. If ASIC receives no response to the notice, the intended recipient (whether within or outside Australia) is deemed to have received it at either of the following times:

•

if the notice is sent by post or courier and specifies a way for the person to confirm receipt—21 days after the day that ASIC posts it or gives it to the courier (unless ASIC proves earlier receipt);

•

if the notice is sent by email and specifies a way to confirm receipt—7 days after the day that ASIC sends it by email (unless ASIC proves earlier receipt).

[Schedule 1, item 31, section 672AA of the Corporations Act]

1.224 This amendment ensures that ASIC is able to act in response to failures to provide tracing notice information despite difficulties in proving service under ordinary rules of service, particularly where delivery by pre-paid post or courier in a foreign jurisdiction cannot be confirmed. The amendment is not intended to limit the ways in which key persons may serve tracing notices and will not affect the timeline for disclosure in cases where actual receipt can be proved.

Changes to required content of tracing notice responses

1.225 There is significant, but not complete, alignment between the existing requirements for substantial holding notice and tracing notice disclosures. For example, under existing settings for tracing notices, there is no requirement to provide details of the discloser's associates or of agreements relevant to the beneficial interests of the discloser or other persons having those same interests.

1.226 Aligning the information that a holder must provide in a substantial holding notice and in response to an ASIC-issued tracing notice assists ASIC in promoting full compliance with beneficial ownership obligations.

1.227 The intention is to empower ASIC to use this information to uncover undisclosed information, particularly information relating to overseas holders. Limiting this power to ASIC (as opposed to providing it to both ASIC and listed entities) minimises both potential undue regulatory burden and privacy concerns arising from additional disclosure requirements.

1.228 As is already the case under existing settings, Schedule 1 to the Bill includes some limitations on the information required to be provided in response to a tracing notice issued by ASIC or a key person for a Chapter 6C body. Information about other persons with relevant interests must only be disclosed to the extent that such information is known to the discloser. In relation to other persons with deemed economic interests (required in response to an ASIC-issued notice), the discloser must only disclose information known to them on the basis of information not publicly available. This is intended to clarify that a discloser is not obliged to check publicly available information concerning derivative arrangements to which they have no connection (for example, they could not be required to provide information sourced from every substantial holding notice disclosing deemed economic interests of each person in the Chapter 6 body). A discloser seeking to rely on this provision as a defence to a failure to comply with a tracing notice bears the evidential burden of proof.

[Schedule 1, items 32 and 35, paragraphs 672AE(b)-(c) and 672BD(b) of the Corporations Act]

1.229 It is appropriate to reverse the evidential burden of proof in the above instances because the discloser's state of knowledge is a matter peculiarly within the knowledge of the discloser and would be significantly more difficult and costly for the prosecution to disprove.

1.230 The new provisions also introduce an express power for the issuer of a notice to limit what disclosures are required. This ensures that ASIC and listed entities can more specifically target the information they are seeking under tracing notices (within the scope of the categories of responses required) and reduces the overall burden of information requests where appropriate.

[Schedule 1, items 32 and 35, paragraphs 672AE(a) and 672BD(a) of the Corporations Act]

1.231 As shown above in the tables, the issuer may specify securities in their tracing notice, which they can use to elicit certain extra information. In such instances, the word 'specified' is intended to have a broad meaning. It is intended that the issuer may specify one or more particular securities (for example, by identifying with precision a particular registered holding), or specify by way of a more general description, a class of securities (in the broad sense of the word 'class' rather than the Corporations Act sense (see subsection 33(3AB) of the Acts Interpretation Act 1901).

Standardising form of tracing notice register information

1.232 Part 6C.2 currently obliges listed entities to keep a register of information that they receive through tracing notices they have issued, and information obtained via ASIC-issued tracing notices that ASIC has communicated. The register must be open for inspection by any member of the relevant entity without charge, or by any other person (however, a fee may be charged for this).

1.233 Schedule 1 to the Bill maintains existing requirements about keeping a register of information provided in response to tracing notices, where such a register is to be kept and how a person may access information in the register.

[Schedule 1, item 54, sections 672DA to 672DD of the Corporations Act]

1.234 Schedule 1 to the Bill retains the existing requirements regarding what information should be kept in registers. However, it empowers ASIC to determine, by legislative instrument, the form of tracing notice registers, and additional information such registers must include. The instrument may also determine information that may or must not be included in the register. ASIC may also, by legislative instrument, determine circumstances in which a register is not required to be kept.

[Schedule 1, item 54, subsections 672DA(4) and 672DB(2) of the Corporations Act]

1.235 Empowering ASIC to determine these matters by legislative instrument is appropriate as it allows ASIC to adjust the requirements for tracing notice registers in accordance with industry developments and technological advances. It's also anticipated that standardising the format for tracing notice registers will improve their usability. Any legislative instrument made under this power will be subject to both sunsetting and disallowance, ensuring appropriate parliamentary scrutiny.

1.236 Schedule 1 to the Bill allows for the collection, use and storage of information, including personal information, for the purposes of tracing and substantial holding notices and the tracing notice register. However, it does not allow ASIC or other persons to collect, use or store sensitive personal information, as defined by the Privacy Act 1988. Allowing interested parties access to non-sensitive information is essential for transparency and the efficient operation of financial markets.

Fees for inspections and copies of tracing notice registers

1.237 Schedule 1 to the Bill extends fee-free inspection of tracing notice registers to journalists and academics without altering any other settings, such as the ability for entities to charge fees for copies of the register.

[Schedule 1, item 54, section 672DD of the Corporations Act]

1.238 To this end, Schedule 1 to the Bill defines 'journalist' and 'academic' by means of an employment-based, rather than an activities-based, test. The existing definition of 'journalist' in Part 9.4AAA of the Corporations Act has been resituated in section 9, with applicability across the whole Act, while the new definition of 'academic' draws on its commonly understood meaning as a person working as a member of the academic or teaching staff of an educational institution.

[Schedule 1, items 52 and 55, section 9 of the Corporations Act]

1.239 This approach balances the advantages of fee-free access to information with the costs that entities incur in providing copies. It allows journalists and academics to identify which registers, or parts of registers, are of interest before they decide whether to pay for copies, while ensuring that entities do not receive excessive requests for copies.

Extension of the disclosure regime to foreign listed bodies

1.240 A key purpose of the substantial holding and tracing notice regimes is to underpin the integrity of markets for quoted securities. The aim is to ensure that investors and other market participants are generally informed about the existence and dealings of persons who may have substantial influence over the entities in which they are investing, and about arrangements that may be relevant to their investment decisions. This objective is relevant for any entity listed on an Australian market, regardless of whether that entity is registered in another jurisdiction.

1.241 To support this purpose, Schedule 1 to the Bill extends the application of Chapter 6C of the Corporations Act to entities incorporated or formed outside Australia and listed on a relevant market operated in Australia. Under the existing regime, holders of interests in these entities do not have disclosure obligations.

1.242 To this end, listed entities that are not incorporated or formed in Australia are included in the definition of 'Chapter 6C bodies'. However, the tracing notice provisions only apply with respect to the shares in foreign-incorporated or formed entities that are quoted on Australian markets.

[Schedule 1, items 3 and 43, sections 671A (table item 5) and 672DE of the Corporations Act]

1.243 The definition of 'register' is extended to cover registers of members of listed bodies to which table item 5 in section 671A applies, including registers of members under a foreign law.

[Schedule 1, item 12, section 9 of the Corporations Act]

1.244 There may be cases where a foreign jurisdiction, or a market operated in a foreign jurisdiction, imposes equivalent obligations to those in Part 6C.1. A holder of interests in an Australian-listed entity incorporated or formed in such a jurisdiction will not have to comply with the substantial holding notice obligations if ASIC has declared, by legislative instrument, that the relevant foreign requirements are equivalent to the requirements of Part 6C.1, and the holder:

•

is subject to those equivalent requirements; and

•

has given the information mandated by those requirements to the person they stipulate as the recipient.

[Schedule 1, item 21, section 671F of the Corporations Act]

1.245 This carve-out prevents the duplication of reporting requirements in respect of holdings in listed bodies not incorporated or formed in Australia that are subject to equivalent foreign disclosure requirements. It also reduces time, effort and compliance costs for holders of disclosable interests without affecting the integrity of the disclosure regimes.

1.246 The delegation of this instrument-making power to ASIC is appropriate because, as the regulator under Australian law, ASIC has the relevant expertise to accurately determine which overseas requirements would be equivalent. Any such instrument will be subject to disallowance and sunsetting, ensuring appropriate parliamentary scrutiny.

1.247 ASIC may only declare foreign requirements by legislative instrument if satisfied that they are equivalent to those in Part 6C.1.

[Schedule 1, item 21, subsection 671F(4) of the Corporations Act]

1.248 If a holder of relevant or deemed economic interests in an Australian-listed foreign entity is exempted from compliance with Part 6C.1, the foreign entity itself must, as soon as practicable, give the information provided by the holder under the foreign requirements to the operator of each Australian market on which the entity is listed. Schedule 1 to the Bill creates fault-based and strict liability offences for non-compliance with this obligation, and sets the resultant penalty units at 480 and 120 units respectively.

[Schedule 1, items 21 and 24, subsections 671F(3), (5) and (6) of, and Schedule 3 to, the Corporations Act]

1.249 If a person has a substantial holding in a foreign listed body at the Bill's commencement, Schedule 1 to the Bill provides that the person is taken to have begun to hold that substantial holding on commencement. The person is also taken to have become aware of that situation at the time of that commencement if the person either is so aware at that time, or ought reasonably to be so.

[Schedule 1, item 75, section 1711B of the Corporations Act]

Enforcement

Freezing orders

1.250 ASIC has broad powers to aid its oversight, investigation and enforcement activities. Sections 72 and 73 of the ASIC Act allow ASIC to make certain orders (known as a freezing order) to restrain dealings and rights in relation to securities, financial products and trust property if:

•

in ASIC's opinion, information about specified matters needs to be obtained for the purposes of investigation and information-gathering under Part 3 of the ASIC Act; but

•

ASIC cannot access that information because of the failure of relevant persons to comply with requirements under that Part.

1.251 Schedule 1 to the Bill amends Chapter 6C of the Corporations Act to empower ASIC to make freezing orders in relation to disclosable securities in Chapter 6C bodies, if ASIC considers that a person has contravened the substantial holding or tracing notice provisions in relation to a Chapter 6C body. These powers largely replicate section 72 of the ASIC Act, with an additional power (relating to the disposal of, exercise of specified rights under or compliance with, a derivative) drawn in part from section 73 of that Act.

[Schedule 1, item 61, subsection 673A(1) of the Corporations Act]

1.252 This new power is intended to provide an additional administrative mechanism allowing ASIC to act quickly to:

•

preserve the status quo while it is conducting enquiries into underlying ownership (including to prevent an undisclosed beneficial owner taking steps to further conceal their interest); and

•

temporarily protect market participants from the impacts of non-disclosure; and

•

incentivise compliance with the disclosure regimes.

1.253 Schedule 1 to the Bill defines a 'disclosable security' as a share in a listed company, an interest in a listed registered scheme, an interest in a listed notified foreign passport fund, and a share in another listed body (whether or not incorporated or formed in Australia). That is, disclosable securities are not limited to voting shares and voting interests in Chapter 6C bodies.

[Schedule 1, items 1 and 3, sections 9 and 671A of the Corporations Act]

1.254 The precondition for the exercise of these new powers is that, in ASIC's opinion, a person has failed to comply with a Chapter 6C obligation, namely, a substantial holding notice or tracing notice obligation.

1.255 ASIC may only make the freezing order if ASIC is of the opinion that doing so assists in achieving any of the following purposes:

•

protecting the rights or interests of persons or groups who have been, are being, will be or are likely to be affected by the contravention in question;

•

ensuring that persons who have failed to comply with a requirement under Chapter 6C do not benefit from, and are encouraged to rectify, that non-compliance;

•

protecting ASIC's ability to inquire about contraventions and obtain remedies from a Court or the Takeovers Panel in relation to the contravention - for example, ASIC may seek a civil order of divestiture (a form of remedial order) under section 1325A of the Corporations Act.

1.256 If ASIC believes that an order it is considering making would be likely to prejudice the rights or interests of a person not involved in the contravention, before making the order ASIC must have regard to that prejudice, and any agreement or relationship that the affected person has with a person involved in the contravention. However, ASIC is not required to come to an opinion about whether making the order would have the prejudicial effect identified.

[Schedule 1, item 61, subsections 673A(2) to (5) of the Corporations Act]

1.257 The obligation on ASIC to have regard to the prejudice is intended to involve consideration of the extent to which the prejudicial impact can and should be minimised.

1.258 However ASIC is not obliged to take specific steps to identify the persons that may have such interests, only to consider the interests of those persons of whom ASIC has otherwise become aware.

1.259 A freezing order may restrict the acquisition or disposal of interests that include derivative-based interests in securities, as well as relevant interests. ASIC can also make orders restraining the exercise of rights under, or compliance with specified provisions of, a derivative. This is intended to provide ASIC with additional flexibility to make orders that appropriately target the interests of the non-disclosing party rather than the underlying securities to which those interests relate (where this is possible while still achieving the objective of the order).

1.260 For example, ASIC may prefer an order targeting the derivative interest (by preventing a contravener from temporarily exercising rights under, or otherwise having the benefit of, the derivative) rather than freezing the disposal of underlying securities held as a hedge by an arms-length counterparty if that counterparty has not contravened Chapter 6C.

1.261 ASIC may vary, suspend or revoke a freezing order made under its new powers. Schedule 1 to the Bill expressly confirms that ASIC is not required to revoke an order if a person belatedly complies by providing information that, in ASIC's view, differs from the information the person would have provided within the prescribed timeframe (for example, because they altered their affairs or arrangements in relation to the holding after ASIC's inquiries commenced or a freezing order was made to avoid disclosing an interest they had at the relevant time). However, this confirmation is not intended to imply that ASIC is under an obligation to revoke or vary an order in any other circumstances.

[Schedule 1, item 61, section 673C of the Corporations Act]

1.262 Schedule 1 to the Bill imposes certain procedural requirements on the making of freezing orders. ASIC must make an order by notifiable instrument, and must give a copy of the order, and any related orders, to the person to whom the order is directed. The use of a notifiable instrument is appropriate in this instance as the making, varying or revoking of a freezing order is administrative in character.

[Schedule 1, item 61, section 673E of the Corporations Act]

1.263 Before making, suspending or revoking a freezing order, ASIC must give a reasonable opportunity to any interested persons to make oral or written submissions on whether the order should be made. This requirement can be met by ASIC inviting affected persons to make submissions, or by holding a hearing. ASIC may determine on a case-by-case basis the best means of inviting submissions, which could be, for example, by publishing a notice on ASIC's website, or contacting affected persons directly.

[Schedule 1, item 61, section 673D of the Corporations Act]

1.264 Additionally, ASIC may make an interim order if, in ASIC's opinion, a person has failed to comply with a disclosure requirement under Part 6C.1 or 6C.2 and ASIC is considering making a freezing order in relation to the contravention. ASIC is not required to hold a submission or hearing process when making an interim order. An interim order can consist of any of the freezing orders and lasts 21 days, unless revoked earlier. The making of interim orders allows ASIC to take immediate temporary action in circumstances where, for example, ASIC considers that the delay while the submission or hearing process is completed will prejudice the purposes the order seeks to achieve.

[Schedule 1, item 61, section 673B of the Corporations Act]

1.265 A person may make an application to the Administrative Review Tribunal under section 1317B of the Corporations Act for review of a decision to make, vary or revoke a freezing order.

1.266 Failure to comply with a freezing order is an offence of strict liability and could incur a penalty of 120 penalty units for an individual. This is appropriate as a freezing order is a necessary enforcement tool to ensure that the disclosure of ownership interests in Chapter 6C bodies is accurate and timely, ultimately leading to more transparent and efficient markets. Parties trying to avoid disclosure of interests can impact transactions and weaken the effectiveness of corporate regulation. It is key that timely regulatory action be taken as many circumstances involve time-sensitive transactions. Further, the offence will target a small cohort of individuals and entities, rather than the public at large.

[Schedule 1, items 61 and 62, section 673F of, and Schedule 3 to, the Corporations Act]

1.267 As is the case with the existing ASIC Act provisions on which the new freezing powers are based, an order made by ASIC under these powers does not prejudice or otherwise affect the rights of an operator of a financial market or clearing and settlement facility in relation to closing out or registering derivatives.

[Schedule 1, item 61, section 673G of the Corporations Act]

1.268 To avoid doubt, Schedule 1 to the Bill provides that the exemptions from providing information or details that a person does not know, despite having taken reasonable steps to ascertain them, are to be disregarded for the purposes of the freezing order and interim order provisions.

[Schedule 1, item 61, section 673H of the Corporations Act]

1.269 Schedule 1 to the Bill also amends the definition of 'remedial order' to include freezing orders.

[Schedule 1, item 59, section 9 of the Corporations Act]

Increased penalties

1.270 Schedule 1 to the Bill doubles the maximum penalties for existing offences in Chapter 6C, as follows:

•

4 years' imprisonment for the fault-based offence of failing to give the information required in a substantial holding notice (4,800 penalty units in the case of a body corporate);

•

120 penalty units for the strict liability offence of failing to give the information required in a substantial holding notice (1,200 penalty units in the case of a body corporate);

•

120 penalty units for the strict liability offence of failing to give the information required in response to a tracing notice issued by either ASIC or a key person (1,200 penalty units in the case of a body corporate);

•

60 penalty units for failing to keep a tracing notice register (600 penalty units in the case of a body corporate);

•

40 penalty units for the strict liability offences in relation to the breach of obligations relating to where the tracing notice register is kept (400 penalty units in the case of a body corporate); and

•

60 penalty units for breach of other tracing noting register-related obligations concerning content, inspection, copies and timing of entries (600 penalty units in the case of a body corporate).

[Schedule 1, items 46, 56 to 58 and 63 to 67, table items dealing with subsections 671B(4) and (5), 672AB(2), 672BA(2), 672DA(3), 672DC(3), and 672DD(2) and (5) in Schedule 3 to the Corporations Act]

1.271 These penalty increases align offence provisions for the disclosure regime with similar existing offence provisions in the Corporations Act. For example:

•

the offence of failure to comply with a direction by ASIC to submit additional information to allow ASIC to decide whether to register a document on a register kept by ASIC (subsection 1274(9)); and

•

the offence of failure by a person included on a register kept by ASIC to comply with a direction by ASIC to provide information about the person of a kind included on that register (subsection 1274(16)).

1.272 Setting the maximum monetary penalties for these breaches among the higher range for non-custodial Corporations Act offences reflects the market-sensitive nature of the information provided under the disclosure regime. While the penalty for the strict liability offences is above the maximum amount specified in the Guide to Framing Commonwealth Offences, the increased penalty reflects the seriousness of the offence and will act as a sufficient deterrent. In addition, the offences capture a small cohort of individuals and others liable rather than the public at large. Further, the punishment of offences not involving fault is likely to significantly enhance the effectiveness of the enforcement regime in deterring certain conduct and ensuring the integrity of the regulatory model. The use of strict liability offences is otherwise consistent with the Guide to Framing Commonwealth Offences.

1.273 For a failure to provide a copy of a tracing notice register, this change would increase the penalty above the level currently applied to a failure to provide a copy of a member register. Again, this reflects the market-sensitive nature of the information contained in a tracing notice register.

Minor and consequential amendments

1.274 Schedule 1 to the Bill makes minor amendments to the Corporations Act to ensure consistency of references, improve readability, and avoid duplication.

1.275 Schedule 1 to the Bill replaces various references in the Corporations Act to be consistent with the insertion of the definitions of 'Chapter 6C body', 'key person for a Chapter 6C body' and 'disclosable security in a Chapter 6C body'.

[Schedule 1, items 1 and 3 to 9, definitions of 'Chapter 6C body', 'disclosable security', 'key person' and 'substantial holding' in section 9, columns 1, 2 and 4 of the table in section 671A, Chapter 6C (heading), and sections 672C and 672E of the Corporations Act]

1.276 Schedule 1 to the Bill consolidates various references to 'evidential burden' made in the Corporations Act by defining it in the dictionary of the Act and repealing the various subsections which define it elsewhere.

[Schedule 1, items 18 to 20 and 25 to 27, section 9 of the Corporations Act]

1.277 There is also an additional change made to the definition of 'substantial holding' so that it consistently refers to voting interests in a registered scheme or notified foreign passport fund.

[Schedule 1, item 68, section 9 of the Corporations Act]

1.278 Schedule 1 to the Bill adds headings where appropriate.

[Schedule 1, items 2, 30, 33, 36, 40, 42 and 60, headings to Part 6C.1A, Divisions 1, 2 and 3 of Part 6C.2, Subdivisions A, B and C of Division 3 of Part 6C.2 and Division 1 of Part 6C.3 of the Corporations Act]

1.279 Schedule 1 to the Bill makes minor grammatical changes for clarity.

[Schedule 1, items 69 to 73, paragraph 191(2)(c), subsection 257B(2), section 601LC and subsections 608(2) and (8) of the Corporations Act]

1.280 Schedule 1 to the Bill expands a note to clarify that subsections 609(6) and (7) also apply to enforceable rights and options.

[Schedule 1, item 74, note to subsection 608(8) of the Corporations Act]

1.281 A cross-reference is updated in a provision dealing with what information a company may have regard to, in deciding for member register purposes whether a member holds shares beneficially or non-beneficially, to ensure the appropriate tracing notice responses are referenced.

[Schedule 1, item 29, subsection 169(6) of the Corporations Act]

1.282 Cross-references are updated and a heading clarified to the effect that, consistent with the existing law, ASIC:

•

may pass on information it receives in response to a tracing notice to the relevant Chapter 6C body, and

•

must pass on information it receives in the case of a member-requested notice to that member, unless ASIC considers it would be unreasonable in all the circumstances to do so.

[Schedule 1, items 37 to 39, section 672C of the Corporations Act]

1.283 Schedule 1 to the Bill updates references to the tracing notice requirements in provisions imposing civil liability for failing to comply with a tracing notice.

[Schedule 1, item 44, subsections 672F(1), (2) and (3) of the Corporations Act]

1.284 Schedule 1 to the Bill updates a provision permitting a court to make orders if a person states in response to a tracing notice that they do not know particular information, expanding the provision to cover a person that states they do not know particular information about someone who has a deemed economic interest in securities or who has given instructions in relation to a derivative.

[Schedule 1, item 45, paragraph 1325A(1)(c) of the Corporations Act]

1.285 Schedule 1 to the Bill updates a note in a provision dealing with registers to be maintained by companies and registered schemes, to reference the revised provisions regarding tracing notice registers.

[Schedule 1, item 53, note 1A to subsection 168(1) of the Corporations Act]

Commencement, application, and transitional provisions

1.286 Schedule 1 to the Bill commences 12 months after receiving Royal Assent.

1.287 Schedule 1 to the Bill includes application provisions to ensure that a person will not breach the Corporations Act because of certain actions taken prior to the commencement of Schedule 1 to the Bill, and to manage other aspects of the changes.

1.288 Specifically, for the purposes of the provisions setting out requirements to give substantial holdings information in Part 6C.1 of the Corporations Act, where a person has a substantial holding in a foreign listed body at commencement, Schedule 1 to the Bill provides that they are taken to begin to have that substantial holding on commencement. If the person is aware, or ought reasonably to be aware, of their substantial holding at that time, then the person is taken to become aware of this on commencement.

[Schedule 1, item 75, section 1711B of the Corporations Act]

1.289 If a director of a listed public company acquires a relevant interest or deemed economic interest in a number of issued securities because of a derivative entered into before commencement, this triggers their obligation under subsection 205G(4) of the Corporations Act to notify the relevant market operator within 14 days of commencement.

[Schedule 1, item 75, subsections 1711C(1) and (2) of the Corporations Act]

1.290 Annual directors' reports are only required to include information related to deemed economic interests (arising from derivatives entered into before commencement) in reports for a financial year ending on or after commencement.

[Schedule 1, item 75, subsections 1711C(1) and (3) of the Corporations Act]

1.291 If a person is, or ought reasonably to be aware that they have a deemed economic interest because of a derivative entered into before commencement, the person is taken to be aware of that deemed economic interest on commencement.

[Schedule 1, item 75, subsections 1711C(1) and (4) of the Corporations Act]

1.292 For the most part, the new derivative-based holding disclosure requirements apply only to situations that arise after the commencement of Schedule 1 to the Bill, subject to certain circumstances set out in the relevant application provisions. However, Schedule 1 to the Bill preserves disclosures that were made or required to be made before commencement, so that if a discloser's holdings change and they need to make a new disclosure, they have a baseline from which to calculate movements.

[Schedule 1, items 21 and 75, sections 671BK and 1711D of the Corporations Act]

1.293 The new requirements for disclosure notices do not apply to directions given by ASIC prior to the commencement of Schedule 1 to the Bill. However, where on or after the commencement of Schedule 1 to the Bill, a person contravenes the tracing notice provisions as in force prior to commencement in relation to a tracing notice issued prior to commencement, that person is subject to the increased penalty of 120 penalty units. References to disclosures under the new regime are taken to also encompass pre-commencement disclosures for the purpose of tracing notices issued by either ASIC or key persons.

[Schedule 1, item 75, section 1711E of the Corporations Act]

1.294 The rules regarding registers of information in Subdivision C of Division 3 of Part 6C.2 apply in relation to information received for such registers from 1 January 2005.

[Schedule 1, item 75, subsection 1711F(1) of the Corporations Act]

1.295 Schedule 1 to the Bill provides that existing approvals, notices and regulations made under section 672DA and in force immediately before commencement have effect as if they were made under the relevant amended sections.

[Schedule 1, item 75, section 1711F of the Corporations Act]