Bills Digest no. 2 2014–15
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WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Robert Dolamore, Economics Section
Paula Pyburne, Law and Bills Digest Section
3 July 2014
This is a revised version of Bills Digest 120, 2012–13, prepared for an earlier version of this Bill introduced into the 43rd Parliament.
Contents
The Bills Digest at a glance
History of the Bill
Purpose of the Bill
Structure of the Bill
Background
Committee consideration
Statement of Compatibility with Human Rights
Policy position of non-government parties/independents
Financial implications
Key issues and provisions
Date introduced: 15 May 2014
House: House of Representatives
Portfolio: Treasury
Commencement: Sections 1–3 on Royal Assent. Schedule 1 on the earlier of a date fixed by Proclamation or six months after Royal Assent.
Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation
When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.
The Australian Financial Centre Forum’s[1] report Australia as a Financial Centre: Building on our Strengths (the Johnson Review) recommended that government should reduce the regulatory requirements on corporate debt issuance to retail investors.[2] The rationale for the recommendation was that there were a number of benefits for Australia in developing a deeper and more liquid corporate bond market.[3]
Internationally, the Johnson Review argued that the need for non-bank corporate debt financing within the Asia‑Pacific region would increase over time and Australia could potentially play a role in facilitating the issuance of this type of debt and in managing Asia-Pacific corporate debt portfolios.[4]
Domestically, the Johnson Review considered that the global financial crisis had highlighted the need for the corporate sector to have access to more diversified funding sources. Further, it argued that a more developed corporate bond market was desirable in the interests of competition and efficiency, with a deeper and more liquid corporate bond market putting increased competitive pressure on Australia’s banks as a source of corporate debt finance.[5]
The Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014 (the current Bill) is the second measure that is intended to encourage the development of a deep and liquid retail corporate bond market in Australia. The first was contained the Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012.[6]
That Act was enacted:
- to facilitate the trading of Commonwealth Government Securities on financial markets that can be readily accessed by retail investors and
- to ensure that investor protection and market integrity provisions in the Corporations Act 2001[7]would apply to the Commonwealth Government securities retail market.[8]
The current Bill:
- establishes a new streamlined disclosure regime for the issuance of relatively simply (or ‘vanilla’) retail corporate bonds
- changes the civil liability provisions applying to directors when issuing simple corporate bonds to retail investors under the streamlined disclosure regime
- clarifies the application of defences in respect to misleading and deceptive statements and omissions in any document that is required to be lodged under the Corporations Act and
- amends the Corporations Act to put in place architecture to enable parallel trading of simple corporate bonds in the wholesale and retail markets.
The Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 (the previous Bill) was introduced into the 43rd Parliament on 20 March 2013.[9] The previous Bill was debated in the House of Representatives and had been introduced into the Senate, but was not passed when the Parliament was prorogued on 5 August 2013. As a result, the previous Bill lapsed.
The current Bill is in equivalent terms to the previous Bill with two exceptions:
- the current Bill applies the new two-part prospectus regime to bonds with a maturity of up to 15 years. In comparison, the previous Bill had applied the new disclosure obligations to bonds with a maturity of up to ten years and
- the current Bill does not include those amendments which were in Schedule 2 of the previous Bill, which sought to restrict the use of the terms ‘financial planner’ and ‘financial adviser’.
The purpose of the current Bill is to reduce the regulatory burden of companies offering relatively simple corporate bonds to retail investors.
The current Bill has one Schedule, which has two parts:
- Part 1 amends the Corporations Act in relation to simple corporate bonds and
- Part 2 amends the Corporations Act in relation to false or misleading statements.
The current Bill seeks to reduce the complexity and cost of issuing relatively simple (referred to as ‘vanilla’) corporate bonds in the retail market whilst at the same time ensuring retail investors continue to be adequately protected.[10]
The Australian corporate bond market
Corporate bonds are a way for companies to obtain funding and an alternative to raising capital in equity markets, borrowing domestically from Authorised Deposit-taking Institutions (ADIs) or borrowing overseas.
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Features of Australia’s non-financial corporate bond market
- By international standards, the Australian corporate sector makes relatively little use of the bond market, especially the domestic bond market.
- The number of Australian companies issuing bonds is quite small.
- On average, over recent times, only around 30 bonds have been issued in the domestic market per year, with just a few more being issued in the offshore market.
- In terms of size, offshore issues tend to be substantially larger and they also tend to have longer maturities.
- Those Australian corporations that issue bonds predominantly issue them in offshore markets.
- Currently, bonds that were issued offshore account for around 80 per cent of the outstanding value of bonds issued by Australian-based corporations.
- Reflecting the above, the Australian corporate bond market is relatively small in size and less well developed than corporate bond markets in a number of other countries.
- Total outstandings in the domestic bond market amount to around $50 billion compared with total corporate debt outstanding of $920 billion.
- Nevertheless, regular activity is occurring in the domestic bond market across much, although not all, of the credit spectrum. And, in recent times, issuance appears to have picked up a little, particularly by lower-rated companies.
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Source: P Lowe, Opportunities and challenges for market-based financing, Address to the ASIC Annual Forum 2014, Sydney, 25 March 2014, accessed 3 June 2014.
Notwithstanding its relatively small size, there are encouraging signs the Australian domestic corporate bond market is continuing to mature. In its submission to the Financial System Inquiry, the RBA noted that:
The domestic corporate bond market has matured in recent years. This has been evident in greater domestic issuance by lower-rated entities and some lengthening in the tenor of that issuance. Several recent developments in market infrastructure should further support activity, including the publication of new measures of corporate bond yields and spreads by the Reserve Bank; efforts to simplify prospectus requirements for the issuance of retail vanilla bonds; the lengthening of the Commonwealth Government yield curve; and the listing of fixed income securities on the Australian Securities Exchange.[11]
Australian corporate bonds are typically issued in the wholesale market—targeting professional and institutional investors—and are traded in markets not directly accessible to retail investors. The current situation is neatly captured by the Australian Centre for Financial Studies:
Increased issuance of corporate bonds in Australia has occurred recently with large issues by companies such as Wesfarmers, BHP Billiton, and Telstra. However, the issues have generally been aimed at institutional investors (who invest in multi-million dollar parcels) and not readily accessible to retail investors. Minimum investments are typically in the order of $500,000. Regulatory requirements associated with the issuance disclosure arrangements limit participations to sophisticated and wholesale/institutional investors. Trading in such securities occurs directly between investors or via brokers in over the counter markets rather than on the ASX.[12]
Indeed, the retail segment of the Australian corporate bond market is quite small. While Australian households had accounted for between one‑quarter and one‑half of the investor base for corporate bonds up until about the 1980s, today their direct participation in the bond market is less than one‑per cent of bonds on issue.[13] The RBA attributes this low participation to two main factors:
First, the introduction of compulsory superannuation in the early 1990s has produced a pool of household savings that is invested via the funds management industry rather than directly by households. Second, the disclosure requirements for issuers that raise funds from retail investors mean that it has usually been more cost‑effective to raise debt from institutional investors.[14]
Importantly, there is currently no mechanism for parallel trading of corporate bonds in the wholesale and retail markets.
What are the current disclosure and liability requirements?
Level of disclosure
Under current arrangements, companies issuing simple corporate bonds to retail investors would be required to issue a full prospectus. Treasury has summarised the current situation as follows:
While bonds are a ‘financial product’ for the purposes of the [Corporations] Act , they are specifically excluded from the Part 7.9 financial product disclosure rules (under section 1010A) and are therefore subject to the general prospectus disclosure rules of Chapter 6D. The starting point is that a full prospectus is required (sections 704-706 and 709), akin to an initial public offering document even when the issuer is already listed and therefore already subject to continuous disclosure requirements. The Act contains a number of general and specific requirements regarding matters that must be disclosed in prospectuses (sections 710 and 711). Subsection 715A(1) says that the information in a disclosure document must be worded and presented in a clear, concise and effective manner. While there is no limit on prospectus length, under ASIC Regulatory Guide 228 (at 228.30), prospectuses should be as short as possible, while satisfying the disclosure requirements.[15]
In contrast, it is worth noting that bonds issued to wholesale investors do not require a disclosure document such as a prospectus, as these investors are considered to have sufficient resources and experience to evaluate the risks associated with an investment.[16]
Requirement of due diligence
It is also the case that the current liability regime adds to the expense of issuing simple corporate bonds because deemed directors’ liability entails a lengthy due diligence process by directors. According to Treasury:
Section 728 of the Corporations Act prohibits a person from offering securities under a disclosure document (for example, a prospectus) if, among other things, there is a misleading or deceptive statement, an omission of required material, or a new circumstance has arisen. It is a criminal offence for the issuer to contravene subsection 728(1) where the misleading or deceptive statement or the omission or new circumstance is materially adverse from the point of view of an investor (subsection 728(3)). However, subsection 728(3) does not extend to directors of the issuer.
Section 729 gives a person who suffers loss or damage because an offer of securities under disclosure documents that contravenes section 728 the right to recover the amount of loss or damage against a certain range of people who are itemised in section 729. These potential defendants include not only the company issuing the securities, but also directors of the security issuer, underwriters, and anyone else who contravenes or is involved in the contravention. Security issuers may be able to take advantage of the due diligence defence under section 731, and other defences contained in sections 732 and 733.[17]
Further, Treasury noted that directors are required to consent to lodgement of a prospectus under Chapter 6D of the Corporations Act, which means they are subject, effectively, to deemed liability for the whole document under sections 1308 and 1309.[18] While directors may be able to fall back on having taken ‘reasonable steps’, there is currently no other defence such as ‘due diligence’ or ‘reasonable reliance’.
Recommendation of the Johnson Review
The Johnson Review considered that the Government could do relatively more to facilitate the development of the corporate bond market at the retail, rather than wholesale, level.[19]
To this end, it recommended the Government reduce the regulatory requirements on corporate debt issuance to retail investors.[20] As a general point, the Johnson Review argued the prospectus requirements for listed companies issuing listed debt securities to retail investors should not be more onerous than for the same companies issuing further shares to retail investors.
The Johnson Review envisaged that the exemption from the existing disclosure requirements would apply to those issuers of corporate bonds who have:
- listed shares and hence are already required to provide continuous disclosure and comply with the market operator’s listing rules and
- investment grade securities with a reasonably simple structure.[21]
Under the Johnson Review’s proposal, companies which satisfied these criteria would no longer have to issue a detailed prospectus but rather a single shorter document, cross referencing all relevant documents already lodged with the Australian Securities and Investments Commission (ASIC) or the market operator. Further, it was envisaged that those companies planning a program of bond issues over time would be able to use a base prospectus with a supplementary prospectus for each new issue.
Policy development
Prior to introduction of the previous Bill into Parliament there was extensive consultation on reducing the disclosure requirements for issuing simple corporate bonds to retail investors. This included the release of a discussion paper in December 2011, which canvassed a wide range of issues concerning the potential to reduce the disclosure and liability requirements for such bonds.[22] Following consideration of feedback from interested parties, the former Government released an Exposure Draft of amendments to the Corporations Act in January 2013.[23]
What changes are being proposed?
To facilitate the development of the retail corporate bond market this Bill proposes:
- introducing a mandatory two-part disclosure regime for corporate bonds that qualify as simple corporate bonds
- changing the civil liability provisions applying to directors when issuing simple corporate bonds to retail investors under the two-part prospectus regime
- clarifying the application of defences in respect to misleading and deceptive statements and omissions in any document that is required to be lodged under the Corporations Act and
- allowing simple corporate bonds in the wholesale market to be offered to retail investors using depository interests (which is a beneficial interest in the simple corporate bond).
What are the likely benefits of the proposed changes?
The changes proposed in the current Bill are a further step towards supporting the development of Australia’s corporate bond market. A well-functioning domestic corporate bond market is an important part of Australia’s financial system. The corporate bond market provides a degree of insurance by potentially giving businesses access to an alternative source of credit in the event the Australian banking system gets into trouble.[24] In such a scenario a well-functioning corporate bond market would help ensure the economy could continue to operate relatively normally—thereby promoting overall economic stability. The corporate bond market also plays a role in ensuring the efficiency of financial intermediation by applying some competitive pressure on Australia’s banks.[25] Philip Lowe from the RBA argues that Australia has:
... the infrastructure that could support a strong and very active bond market in times of stress or inadequate competition. In this way, this infrastructure provides a form of insurance. We need to make sure that we nurture this infrastructure so that we can continue to be confident that the corporate bond market will be there when it is most needed.[26]
Facilitating the development of the retail end of the corporate bond market also has a number benefits. First, it will give investors greater choice and an opportunity to diversify their investment portfolios. Second, it will give companies more choice and flexibility in how they raise their funding. These benefits have been summarised as follows:
A deeper and more liquid retail corporate bond market has benefits for corporates, business and investors. For corporates, it will broaden their funding sources and help facilitate their growth aspirations. For investors, a fully functioning retail corporate bond market will offer investors more choice and an opportunity to diversify their investments. Facilitating this funding will free up the banks’ balance sheets to continue supporting SMEs [small and medium enterprises], who traditionally do not have the same level of access to capital markets as their larger counterparts.[27]
Similarly, Treasury states that:
Australians are relatively active equity investors, but would benefit from being able to diversify into longer term, lower risk and less volatile fixed income streams. With Australians living longer simple corporate bonds provide an appropriate alternative for managing longevity risk, which is of particular interest to SMSF [self-managed superannuation fund] trustees. Growing the retail bond market will help to reduce reliance on offshore wholesale funding markets for raising corporate debt and free‑up bank balances for lending to the domestic market, particularly small businesses. Growing this market will also help to educate retail investors and increase the level of competition for retail financial services generally.[28]
Connecting the wholesale and retail corporate bond markets should improve the liquidity of the corporate bond market and the pricing of simple corporate bonds for retail investors.
When it met on 19 June 2014, the Senate Selection of Bills Committee resolved not to refer the current Bill to committee for inquiry and report.[29]
Whilst this Bill had not, at the time of writing this Bills Digest, been referred to a Committee for inquiry and report, the previous Bill was referred to the Joint Committee on Corporations and Financial Services (JCCFS) for inquiry and report by 15 May 2013.[30]
The JCCFS report of 15 May 2013 recommended that the Bill be passed.[31] During the course of its inquiry, the JCCFS received 15 submissions from relevant stakeholders and conducted a public hearing in Sydney on 22 April 2013. Further information about the representations made by key interest groups to the JCCFS is provided in the ‘Position of major interest groups’ and ‘Key issues and provisions’ sections below.
In relation to trading in retail corporate bonds, the JCCFS considered that the changes proposed in the previous Bill (which is in equivalent terms, with a minor exception, to the current Bill) would operate to encourage the development of a deeper market for simple corporate bonds.[32] This included introducing a mandatory two‑part prospectus regime for simple corporate bonds, facilitating the trading of simple corporate bonds using depository interests and removing deemed civil liability for misleading and deceptive statements in a disclosure document.
However, the JCCFS noted that the challenge of developing a market for these securities would depend on there being investor demand. It considered that generating this demand would rely on ‘educating retail investors as to the features of simple corporate bonds and offering a product that genuinely meets the needs and risk profile of investors’.[33]
The JCCFS also recommended that Treasury amend the Explanatory Memorandum for the previous Bill to clarify that the proposed changes in relation to the ‘reasonable steps’ defence available to company directors applied across the entire Corporations Act to offers of all securities.[34] Accordingly, the Explanatory Memorandum for the current Bill clarifies that the proposed amendments to the reasonable steps obligations:
... apply to disclosures made in any document that is required to be lodged under the Corporations Act. This means that they will apply not only to 2‑part simple corporate bond prospectuses as introduced by this Bill, but also to existing disclosure documents for example product disclosure statements.[35]
Senate Standing Committee for the Scrutiny of Bills
At its meeting of 18 June 2014 the Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee) resolved to seek the Parliamentary Secretary’s advice on how the objective of ensuring appropriate consumer protections remain in place under the proposed delegation of legislative power [Schedule 1, item 8, proposed subsection 283AA(4)].[36] The Scrutiny of Bills Committee’s report states:
Pending the Parliamentary Secretary’s reply, the committee draws Senators’ attention to these provisions, as they may be considered to delegate legislative powers inappropriately, in breach of principle 1(a)(iv) of the committee’s terms of reference.[37]
The Parliamentary Joint Committee on Human Rights (Human Rights Committee) considers that the current Bill does not appear to give rise to human rights concerns.[38]
As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.[39] The Statement of Compatibility with Human Rights acknowledges that the current Bill engages the human right to a fair trial and a fair hearing and states that the Government considers that the current Bill is compatible.
As the current Bill is in near equivalent terms to the previous Bill which was introduced by the former Australian Labor Party (ALP) Government it would appear to have bipartisan support.
Position of major interest groups
When the previous Bill was introduced a number of the peak bodies signalled their support for reducing the regulatory burden of issuing simple corporate bonds to retail investors with a view to facilitating the development of a deeper and more liquid corporate bond market in Australia. Their views about the proposed amendments do not appear to have materially changed since that time.
- The Australian Bankers’ Association (ABA) said it supports the commitment to develop a deep and liquid corporate bond market noting that ‘a retail corporate bond market offers an important alternative funding source for banks and may result in reduced reliance on offshore markets’.[40]
- The Law Council of Australia (LCA) commended efforts to encourage the development of a corporate bond market in Australia ‘which can be effectively accessed by retail investors by reforms aimed at improving the quality of disclosure to retail investors and which remove some of the burden of compliance from issuers’.[41]
- The Association of Superannuation Funds of Australia stated that it welcomed the facilitation of ‘improved trading of retail corporate bonds in Australia by streamlining the regulatory requirements for issuing corporate bonds to retail investors’.[42]
- The Self Managed Superannuation Funds Professionals’ Association stated that it supports amendments to ‘make simple corporate bonds more readily available to retail investors because we believe that this will allow SMSF [self-managed superannuation fund] trustees to better manage their retirement income longevity risk’.[43]
That said, it is worth noting a number of organisations which commented on the Exposure Draft of the previous Bill felt the conditions to qualify as a simple corporate bond were too prescriptive.[44] The only change the current Bill makes to these conditions is to specify that bonds should have a fixed term of no more than 15 years rather than the ten years specified in the previous Bill.
The Explanatory Memorandum states that this Bill has no financial impact.[45]
When is a bond a ‘simple corporate bond’?
Item 22 of the Bill inserts proposed sections 713A—713E into the Corporations Act.
Proposed section 713A sets out the conditions an offer of securities[46] must satisfy to be considered an offer of simple corporate bonds[47] and for the securities themselves to be considered simple corporate bonds.[48] In all, there are some 15 separate conditions specified in proposed section 713A which must be satisfied.[49] Importantly, proposed subsection 713A(2) of the Corporations Act requires that the securities must be debentures.[50]
Some organisations which commented on the Exposure Draft of the previous Bill or made a submission to the JCCFS considered the 15 conditions were too prescriptive.[51] However, the only change to the conditions made in the current Bill is to specify that bonds should have a fixed term of no more than 15 years rather than the ten years specified in the previous Bill.
Against this, is the need to ensure that bonds which qualify as simple corporate bonds are not overly complex and are relatively high quality and low risk debt instruments. For example, when asked about the rationale for specifying that the face value of the bond cannot exceed $1,000, Treasury stated in relation to the previous Bill that:
The rationale for that is to keep the type of bonds which can be offered under this streamlined disclosure regime and with the modifications to the liability of directors simple and vanilla. If the dollar value goes over $1,000 the view after consultation was that we were starting to get into slightly more complex territory. There is no hard and fast reason why $1,000 was chosen. In some sense it is just a round number and a relatively familiar number to the market.[52]
Proposed subsections 713A(21)–(23) of the Corporations Act empower ASIC to make a determination, which can effectively prevent an issuing body from using the streamlined two-part prospectus for simple corporate bonds to offer simple corporate bonds. In such cases, ASIC is required to publish the determination in the Gazette.[53]
Much of the detail about how the proposed streamlined disclosure regime will work will be set out in regulation. Proposed subsections 713A(24)–(27) of the Corporations Act specify that, in addition to satisfying the conditions set out in proposed section 713A, the securities, the offer of the securities, and the issuer, must comply with any other conditions or requirements which are set out in regulation.
The two-part simple corporate bonds prospectus
Proposed sections 713B–713E of the Corporations Act establish the legal framework for a streamlined two-part prospectus regime for simple corporate bonds.
Under the proposed framework an issuer will be able to offer a two-part prospectus comprising:
- a base document setting out the information required by regulation for the period during which the offer of securities is made and
- an offer-specific document setting out the information required by regulation relating to the specific offer.
Proposed subsections 713B(2), (3) and (4) of the Corporations Act make clear that it is the two documents together that constitute the prospectus for the offer of simple corporate bonds and that neither document constitutes a prospectus in its own right.
During consultation in relation to the previous Bill some submitters argued against making it mandatory to produce two disclosure documents for simple corporate bonds and indicated that they wanted the flexibility to be able to provide a single document. For example, Herbert Smith Freehills in its submission on the Exposure Draft of the previous Bill argued that:
... whilst the ability to have a 2-part prospectus is welcome, the use of such a prospectus should not be mandatory. Many issuers will have in mind only infrequent issues and the requirement to prepare a ‘2-part’ prospectus is an unnecessary complication when all relevant disclosures could be included in a single disclosure document.[54]
Treasury has previously indicated that it considers having both single and two-part disclosure documents could introduce a degree of complexity and confusion for retail investors. The two-part prospectus is intended to establish a clear market standard:
Flexibility is always good but, from the point of view of trying to establish a consistent standard and building investor confidence and an understanding of this product we want it to be consistent.[55]
The two-part prospectus for simple corporate bonds must be lodged with ASIC (proposed subsections 713B(5), 713C(1) and 713D(1)). The Bill specifies that the expiry date for the two-part prospectus is the day that the offer‑specific document expires (proposed subsection 713B(6)).
Proposed subsection 713C(1) of the Corporations Act provides that the base document has a life of three years starting on the date it is lodged with ASIC. In its submission to JCCFS on the previous Bill, the NAB argued that the life of the base document should be extended to five years:
The legislation states that the life of the base document is three years however NAB recommends a five year life to enable repeat issuances. This proposal to extend the life of the base document is also based on direct feedback we have received from potential issuers of Simple Corporate Bonds from corporate Australia. Furthermore, we would recommend that the five year expiration date restart when the base prospectus is replaced with a new base prospectus.[56]
A further notable requirement of the two-part prospectus regime for simple corporate bonds is that the first offer made under an offer-specific document must have a minimum subscription of $50 million (proposed subsection 713D(5)). Treasury has previously provided the following rationale for this requirement:
The thinking there is, again, to ensure that the retail corporate bonds that are issued under this regime are high quality. It will have the effect of limiting issuances to the top 200 companies in Australia. But again, because we have this trade-off between keeping the retail corporate bond simple and thereby being able to streamline the prospectus disclosure regime, our thinking is that $50 million is an appropriate figure for today.[57]
Treasury also previously indicated that once the market for simple corporate bonds has been established and retail investors have confidence in this type of investment, a future government could take another look at the $50 million minimum requirement.[58] This would enable lower capitalised companies to access funding through issuing of simple corporate bonds.
A key feature of the two-part prospectus regime for simple corporate bonds is that issuers will be able to refer to information lodged with ASIC rather than having to reproduce this material in the base or offer-specific documents (proposed subsections 713E(1)–(5)). The issuer is required to provide a copy of the lodged document (or the relevant part) free of charge to anyone who asks for it during the period covered by the base document or the application period for the offer-specific document.[59]
Item 31 inserts proposed section 719A into the Corporations Act setting out the circumstances in which it is necessary for an issuer to lodge supplementary or replacement documents for the two-part simple corporate bond prospectus (proposed subsections 719A(1)–(3)). The Bill specifies the form these documents should take (proposed subsections 719A(4)–(6)) and the consequences of lodging the documents (proposed subsections 719A(7)–(9)).
Rebalancing the prospectus liability regime for simple corporate bonds
Under current arrangements, one of the barriers to issuing simple corporate bonds to retail investors is the deemed liability provisions for directors in the Corporations Act which require a process of detailed due diligence to be undertaken by issuers. It is argued that such processes are expensive, time consuming and lengthen the time it takes for issuers to raise funds in this way.[60] On the other hand, there is a need to ensure investors have sufficient and accurate information about the issuer and the securities on offer to make an informed decision.
To reduce this impediment, the Bill proposes to streamline the prospectus liability regime for the issue of simple corporate bonds. The new streamlined liability regime does not completely remove the need for a due diligence process to be undertaken for the issue of simple corporate bonds. Rather, the measures effectively lower the bar in relation to securities which are relatively simple and straightforward and are high quality and low risk debt instruments. The changes only apply to simple corporate bonds and do not extend to more complex bond issues.
Item 41 of the Bill amends the table in subsection 729(1) of the Corporations Act to remove deemed civil liability of directors (or proposed directors) for misleading and deceptive statements in, or omissions from, a two-part simple corporate bond prospectus. However, a director (or proposed director) will still be civilly liable if they are directly involved in, among other things, the misleading or deceptive statement, the omission of required material, or where new circumstances have not been reflected in the disclosure document as required by the Corporations Act.[61]
In relation to this change, Treasury has previously stated that:
Under the existing law of the Corporations Act directors can generally be sued for damages for prospectuses which contravene the prohibition against misleading or deceptive statements or omissions, even if they are not involved in the particular contravention. The Bill relieves their liability unless they are actively involved in the contravention, so directors cease to have deemed civil liability. They continue to have involvement of a civil liability but the due diligence defences remain available.[62]
As directors are required to consent to lodge a two-part simple corporate bond prospectus, they are still subject to the criminal liability provisions for these documents under sections 1308 and 1309 of the Corporations Act. Effectively, the consent requirement for directors, together with deemed liability for the issuer and others involved in the process, means that a due diligence process will still need to be undertaken.
Under subsection 1308(4) of the Corporations Act, a person is guilty of an offence if they lodge a document required by the Act which makes a statement that is false or misleading in a material particular, or omits any matter or thing without which the document is misleading in a material respect. It is a defence if the person has taken reasonable steps to ensure that the statement was not false or misleading or to ensure that the statement did not omit any matter or thing without which the document would be misleading.
Items 50–53 of the Bill amend sections 1308 and 1309 of the Corporations Act to clarify the type of conduct by a director which will be taken to constitute ‘reasonable steps’ in relation to the criminal provisions. The Bill provides that a director will be considered to have taken reasonable steps to ensure a statement or information in, or an omission from, a disclosure document is not false and misleading where:
- the director has made all inquiries (if any) that were reasonable in the circumstances and, after doing so, the director believed on reasonable grounds that the statement was not misleading in a material particular or there was no such omission or
- the director proves they relied on information provided to them by someone other than a director, employee or agent of the issuer and the reliance placed on information by the director was reasonable in the circumstances.
During consultation in relation to the previous Bill there was a view among some submitters that the proposed changes in relation to directors’ civil and criminal liability do not go far enough. For example, in its submission to the JCCFS, the ABA argued that:
So long as directors are required to be involved in the issuance and directors’ prospectus liability remains, there continues to be a greater legal risk, administrative complexity and more costly burden involved in issuing retail corporate bonds than wholesale corporate bonds. In practice, directors will continue to be required to conduct due diligence processes rather than these processes being conducted by senior management and treasury functions. It is important for the proposed reforms to address the need for a director to be personally involved in the due diligence process.[63]
The ABA recommended that a business judgement exception (safe harbour or reasonable steps defence) be provided for directors making good faith decisions. Alternatively, the ABA argued that directors’ liability should be removed altogether and issuers should be liable for the preparation and content of a prospectus.[64]
Some interested parties also raised a concern in relation to the previous Bill, that while it streamlined the prospectus liability regime as it applies to directors, the changes did not extend to underwriters involved in the issuance of simple corporate bonds. For example, the LCA said in its submission on the Exposure Draft:
... underwriters will have deemed liability under section 729 for a defective 2-part simple corporate bonds prospectus. It is not appropriate for an underwriter to be exposed to this liability when directors of the issue are not. Again, the Committee submits that the practice of section 708AA offers is instructive. Imposing deemed liability on underwriters is not necessary to ensure that underwriters apply their expertise when advising issuers in proposed equity capital raisings.[65]
Parallel trading of simple corporate bonds on wholesale and retail markets
The Bill proposes to establish a legal framework to facilitate simple corporate bonds in the wholesale market being offered to retail investors using depository interests (see explanation of this term below). Retail investors will be able to buy and trade in simple corporate bonds depository interests in a way that is similar to trading in shares.
Ownership of depository interests will give retail investors beneficial ownership of the underlying simple corporate bond and the right to receive the periodic interest and principal payments due on the underlying security. The beneficial ownership model is already used in retail financial markets for financial products that for some reason cannot be directly traded on a financial market (for example, foreign-listed shares). It was also recently adopted to facilitate the retail trading of CGS.[66]
Simple corporate bond depository interests will be issued to retail investors by a simple corporate bond depository nominee, which will be the legal vehicle for issuing these depository interests to retail investors.
Items 6 and 7 of the Bill insert definitions of simple corporate bonds depository interest and simple corporate bonds depository nominee into section 9 of the Corporations Act as follows:
- simple corporate bonds depository interest means a beneficial interest in simple corporate bonds, where the interest is issued by a simple corporate bonds depository nominee and
- simple corporate bonds depository nominee means a person who issues to someone else beneficial interests in simple corporate bonds. The depository nominee will be able to own the simple corporate bonds in which beneficial interests are issued outright, or own beneficially the underlying simple corporate bond or have a beneficial interest in the underlying simple corporate bond. To offer beneficial interests in simple corporate bonds the depository nominee must have the agreement of the issuer of the underlying bonds.
As depository interests in simple corporate bonds can only be offered with the agreement of the issuer of the underlying bonds, the depository nominee does not have any disclosure responsibilities in relation to those bonds. This disclosure responsibility rests with the issuer of the simple corporate bonds. To remove the disclosure responsibility from the depository nominee item 10 of the Bill amends existing subsection 700(1) of the Corporations Act to clarify the meaning of the term securities for the purpose of Chapter 6D of the Corporations Act.
The details of how depository interests in simple corporate bonds will operate will be contained in regulations, which have yet to be finalised.
Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.
[1]. The Australian Financial Centre Forum (AFCF) was established on 26 September 2008 to progress the former Government’s initiative to position Australia as a leading financial services centre in the region. Information about the AFCF is set out in its website, accessed 4 June 2014.
[2]. Australian Financial Centre Forum, Australia as a financial centre: building on our strengths, Commonwealth of Australia, Canberra, November 2009, p. 96, accessed 3 June 2014.
[3]. Ibid., p. 40.
[4]. Ibid., p. 39.
[5]. Ibid., p. 40.
[6]. Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012, accessed 5 June 2014.
[7]. Corporations Act 2001, accessed 3 June 2014.
[8]. R Dolamore and P Pyburne, Commonwealth Government Securities Legislation Amendment (Retail Trading) Bill 2012, Bills digest, 13, 2012–13, Parliamentary Library, Canberra, 2012, pp. 4–5, accessed 5 June 2014.
[9]. Parliament of Australia, ‘Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 homepage’, Australian Parliament website, accessed 3 June 2014.
[10]. S Ciobo (Parliamentary Secretary to the Treasurer), ‘Second reading speech: Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, House of Representatives, Debates, 15 May 2014, p. 6, accessed 3 June 2014.
[11]. Reserve Bank of Australia, Submission to the Financial System Inquiry, March 2014, p. 124, accessed 3 June 2014.
[12]. Australian Centre for Financial Studies, Australian corporate bonds: the missing asset class for Australian retail investors, National Australia Bank, December 2012, p. 4, accessed 3 June 2014.
[13]. S Black and others, A history of Australian corporate bonds, Research discussion paper, RDP 2012‑09, Reserve Bank of Australia, December 2012, p. 21, accessed 3 June 2014.
[14]. Ibid., p. 21–22.
[15]. Australian Government, Development of the retail corporate bond market: streamlining disclosure and liability requirements, Discussion paper, Commonwealth of Australia, Canberra, December 2011, p. 4, accessed 3 June 2014.
[16]. Explanatory Memorandum, Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, p. 6, accessed 10 June 2014.
[17]. Australian Government, Development of the retail corporate bond market: streamlining disclosure and liability requirements, Discussion paper, op. cit., p. 20.
[18]. Ibid., p. 21.
[19]. Australia Financial Centre Forum, Australia as a financial centre: building on our strengths, op. cit., p. 93.
[20]. Ibid., recommendation 4.6, p. 96.
[21]. Ibid., p. 96.
[22]. Australian Government, Development of the retail corporate bond market: streamlining disclosure and liability requirements, Discussion paper, op. cit.
[23]. Australian Government, Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013: Exposure Draft, Treasury website, accessed 3 June 2014.
[24]. Lowe, Opportunities and challenges for market-based financing, op. cit., p. 7.
[25]. Ibid., p. 8.
[26]. Ibid., p. 9.
[27]. S Lambert (Executive General Manager of Debt Markets, National Australia Bank), Evidence to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, Committee Hansard, 22 April 2013, p. 1, accessed 3 June 2014.
[28]. R Sandlant (Manager, Disclosure and International Unit, Retail Investor Division, Markets Group, Treasury), Evidence to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, Committee Hansard, 22 April 2013, p. 9, accessed 3 June 2014.
[29]. Senate Selection of Bills Committee, Report No. 7 of 2014, The Senate, Canberra, 19 June 2014, accessed 2 July 2014.
[30]. Selection Committee, Report No. 78: Private Members’ business and referral of bills to committees, House of Representatives, Canberra, 21 March 2013, p. 3, accessed 4 June 2014.
[31]. Parliamentary Joint Committee on Corporations and Financial Services, Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 15 May 2013, p. 54, accessed 4 June 2014.
[32]. Ibid., p. 30.
[33]. Ibid.
[34]. Ibid.
[35]. Explanatory Memorandum, Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, op. cit., pp. 23–24.
[36]. Senate Standing Committee for the Scrutiny of Bills, Alert Digest No. 6 of 2014, Senate, Canberra, 18 June 2014, p. 18, accessed 2 July 2014.
[37]. Ibid.
[38]. Parliamentary Joint Committee on Human Rights, Seventh report of the 44th Parliament, Commonwealth of Australia, Canberra, 18 June 2014, p. 5, accessed 2 July 2014.
[39]. The Statement of Compatibility with Human Rights can be found at page 28 of the Explanatory Memorandum to the Bill.
[40]. Australian Bankers’ Association, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 26 April 2013, p. 1, accessed 4 June 2014.
[41]. Law Council of Australia, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 22 February 2013, p. 1, accessed 4 June 2014.
[42]. Association of Superannuation Funds of Australia, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 15 February 2013, p. 1, accessed 4 June 2014.
[43]. Self Managed Superannuation Funds Professionals’ Association of Australia, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 18 April 2013, p. 3, accessed 4 June 2014.
[44]. Australian Bankers’ Association, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 20 February 2013, p. 2, accessed 4 June 2014; Australian Financial Markets Association, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 15 February 2013, p. 2, accessed 4 June 2014; Herbert Smith Freehills, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 15 February 2013, p. 2, accessed 4 June 2014; and Minter Ellison, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 15 February 2013, p. 3, accessed 4 June 2014.
[45]. Explanatory Memorandum, Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, op. cit., p. 3.
[46]. According to subsection 92(2) of the Corporations Act, the expression securities, when used in relation to a body, means shares in the body, debentures of the body, interests in a managed investment scheme made available by the body or units of such shares, but does not include a derivative (as defined in chapter 7) or an excluded security.
[47]. Item 3 of the Bill inserts the definition of offer of simple corporate bonds into section 9 of the Corporations Act. The term has the meaning given by section 713A of the Corporations Act.
[48]. Item 5 of the Bill inserts the definition of simple corporate bonds into section 9 of the Corporations Act. The term has the meaning given by section 713A of the Corporations Act.
[49]. They are summarised on pages 11–15 of the Explanatory Memorandum.
[50]. The term debenture is formally defined in section 9 of the Corporations Act.
[51]. Australian Bankers’ Association, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 2; and Minter Ellison, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, op. cit., p. 4 and p. 6.
[52]. R Sandlant (Manager, Disclosure and International Unit, Retail Investor Division, Markets Group, Treasury), Evidence to the Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 12.
[53]. Proposed subsection 713A(23) of the Corporations Act.
[54]. Herbert Smith Freehills, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, op. cit., p. 2.
[55]. R Sandlant (Manager, Disclosure and International Unit, Retail Investor Division, Markets Group, Treasury), Evidence to the Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 13.
[56]. National Australia Bank, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, Inquiry into the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, 19 April 2013, p. 3, accessed 4 June 2014.
[57]. R Sandlant (Manager, Disclosure and International Unit, Retail Investor Division, Markets Group, Treasury), Evidence to the Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 13.
[58]. Ibid.
[59]. Proposed subsection 713E(5) of the Corporations Act.
[60]. Minter Ellison, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, op. cit., p. 9.
[61]. Explanatory Memorandum, Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, op. cit., pp. 21–22.
[62]. R Sandlant (Manager, Disclosure and International Unit, Retail Investor Division, Markets Group, Treasury), Evidence to the Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 10.
[63]. Australian Bankers’ Association, Submission to the Parliamentary Joint Committee on Corporations and Financial Services, op. cit., p. 5.
[64]. Ibid., p. 5.
[65]. Law Council of Australia, Submission to Treasury, Exposure Draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013, op. cit., p. 3.
[66]. Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012, accessed 4 June 2014.
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