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Merger law reform in Australia: What next after the Exposure Draft?
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
Global | Publication | November 2021
On July 7, 2021, SEC Chairman Gary Gensler addressed investment funds that advertise themselves as “investing with an emphasis on sustainability,” or environmental, social and governance (ESG) funds; and diversity in the asset management industry. With respect to ESG funds, Chairman Gensler noted “[t]he basic idea is truth in advertising,” stating that due to the “huge range of what asset managers might mean by certain terms, or what criteria they use,” the metrics employed to determine a fund’s sustainability are not necessarily objective. Chairman Gensler indicated that the requirements created by the “Names Rule” under the 1940 Act, as well as sustainability metrics published by third parties, might not provide investors with sufficient information or disclosure regarding what makes a certain fund sustainable. The Chairman expressed the view that “investors should be able to drill down to see what’s under the hood of these funds.” He indicated that he has therefore requested the SEC staff “to consider recommendations about whether fund managers should disclose the criteria and underlying data they use.”
With respect to diversity, Chairman Gensler stated that “women and people of color ‘remain dramatically underrepresented . . . at the Board and senior management levels within management firms and fund complexes.’” Noting that transparency is the first step in solving this problem, Chairman Gensler stated that he has asked the SEC staff “to consider ways that we can enhance such transparency.”
On July 19, 2021, California Attorney General Rob Bonta (AG) announced a much-awaited report on the Office of Attorney General’s enforcement of the California Consumer Privacy Act of 2018 (CCPA). The AG’s press release: summarized 27 CCPA enforcement efforts undertaken by the AG in the past year; and announced the launch of a new Consumer Privacy Interactive Tool available on the AG’s website. The tool enables users to generate notices of alleged non-compliance that they can send to companies. In addition, the AG’s website has been updated to include “CCPA Enforcement Case Examples.”
The 27 case examples are good indicators of the AG’s priorities and how the AG is conducting CCPA enforcement. In this first wave of enforcement activity, the AG appeared to zero in on cases involving non-compliant privacy policies and allegations related to sales of personal information (PI), including alleged failures to post a “Do Not Sell My Personal Information” link. Notices of alleged non-compliance also were issued on other “hot” CCPA compliance topics, including to: a social media network that allegedly failed to put CCPA-specific language in its service provider contracts; and a social media company that allegedly was not timely responding to consumer requests. The case examples addressed the AG’s view as to whether the disclosure of PI in the use of certain third-party analytics, tracking and targeted advertising technologies is a “sale” of PI.
On June 11, 2021, the US Securities and Exchange Commission (SEC) released its annual regulatory agenda (Agenda) under the Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions. Of the 49 items the SEC intends to propose or finalize in the remainder of 2021, four items are in the pre-rule stage, 36 items are in the proposed rule stage, and nine items are in the final rule stage.
The Agenda indicates that the SEC plans to finalize many recently proposed rules in the coming months, including (among others) the adoption of rule amendments to: (i) the proxy rules to permit shareholders voting by proxy to select among duly-nominated director candidates in a contested election; (ii) Rule 144, which permits the resale of unregistered securities under certain conditions, and corresponding updates to the filing requirements applicable to Form 144; and (iii) disclosure requirements for shareholder reports and registration statements of registered investment companies under the Investment Company Act of 1940. The Agenda also includes a final rule stage item pertaining to tailored shareholder reports, the treatment of annual prospectus updates, and improved fee and risk disclosures for mutual funds and exchange traded funds (ETFs).
The Agenda contains the following items in the proposed rule stage to amend: (i) Rule 17a-7, which provides conditions under which a registered investment company may engage in principal transactions with affiliates; (ii) Rule 2a-7, which governs money market funds; and (iii) liquidity and dilution management requirements applicable to open-end regulated investment companies. In addition, the Agenda indicates that the SEC’s Division of Investment Management is considering new rules to modernize the regulatory framework applicable to custody of client assets by investment advisers. The Agenda also includes in the proposed rule stage items pertaining to: rules related to investment companies and advisers to address ESG governance factors; corporate board diversity; climate change disclosure; cybersecurity risk governance; SPACs; share repurchase disclosure modernization; incentive-based compensation arrangements; and loans or borrowings of securities.
On June 28, 2021, the SEC’s Office of the Investor Advocate (OLA) issued its Report on Objectives for fiscal year 2022 (Report). The Report is one of the two reports the OIA submits to Congress each year. The Report indicates that the OIA acts for the benefit of retail investors, and it sets forth OIA’s objectives for fiscal year 2022. The Report lists nine areas of focus: ESG disclosure; Rule 10b5-l plans; capital-raising alternatives; equity market structure; novel exchange-traded funds; registered fund disclosure; cryptocurrency; broker conduct; and financial exploitation of senior investors.
Points to note in the Report include:
Regarding ESG disclosure, the Report indicates that the OIA plans to ensure that investors’ interests are “at the forefront” of the SEC’s discussion, and that retail investors “would benefit from a careful balance of prescriptive and principles-based ESG disclosure requirements.”
With regard to Rule 10b-5 plans, the OIA highlights the lack of transparency and the potential misuse of material non-public information by executives, and the Report indicates that the OIA will study the rule for appropriate adjustments.
According to the Report, in fiscal year 2022, the OIA plans to “study whether novel capital-raising methods result in adequate disclosure for investors or implicate other investor-protection considerations.”
Regarding equity market structure, the Report indicates that the OIA has been involved in the SEC’s efforts to improve trading and will continue to work to modernize the infrastructure that supports trading.
According to the Report, in fiscal year 2022, the OIA intends to monitor and react to developments effecting the regulatory framework surrounding novel ETFs (e.g., leveraged and inverse ETFs, non-transparent ETFs), in order to ensure robust protections for retail investors.
With regard to registered fund disclosure, the Report indicates that the OIA intends to continue its review of registered fund disclosure for the benefit of retail investors, by gathering data (e.g., through surveys and focus groups).
Regarding cryptocurrency, the Report indicates that the OIA intends to study not only cryptocurrencies but also the underlying block chain technology for its potential benefits and consequences, as well as trading platforms and the custody of crypto assets.
Regarding broker conduct, the Report indicates that the OIA plans to further review and provide recommendations regarding Regulation Best Interest as well as broker migration and misconduct.
With respect to senior investors, the Report expresses the OIA’s support for the creation of a taskforce to study and make recommendations regarding financial misconduct against senior investors, and indicates that the OIA will continue to work with the SEC in order to provide better support to retail and senior investors.
On June 11, 2021, the Department of Labor (DOL) released its Spring 2021 regulatory agenda. The agenda indicates that, among other items, the DOL intends to propose amendments to the definition of the term “fiduciary” pursuant to the rules promulgated under the Employee Retirement Income Security Act of 1974 (ERISA), in order to: “more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual retirement accounts are fiduciaries within the meaning of’ ERISA; evaluate the current class exemptions to prohibited transactions under ERISA; and consider whether amended or new exemptions are appropriate. If proposed, this rulemaking would represent the first attempt by the DOL to revisit the fiduciary rule since it was vacated by the Fifth Circuit Court of Appeals in June 2018.
On June 23, 2021, SEC Chairman Gary Gensler delivered remarks at London City Week regarding the SEC’s reform agenda. He focused on three key areas of the SEC’s reform agenda: public company disclosure; market structure; and transparency.
Chairman Gensler started by highlighting several initiatives aimed at enhancing public company disclosures relating to climate risk and human capital, which he stated currently are of increasing relevance to investors. In particular, he stated that he had asked SEC staff for “recommendations on mandatory company disclosures on climate risk and human capital,” “to consider potential requirements for companies that have made forward-looking climate commitments” and “to consider the ways that funds are marketing themselves to investors as sustainable, green, and ‘ESG,’ and what factors undergird those claims.” The Chairman also described initiatives aimed at promoting greater competition and efficiency in the structure of capital markets, indicating that he had asked SEC staff to review “the practice known as payment for order flow,” to review the use of alternative trading systems in the equity market and to coordinate with the Department of the Treasury, Federal Reserve and Commodity Futures Trading Commission to enhance the “transparency and resiliency” of the markets for U.S. Treasury securities. Chairman Gensler further described potential updates to various rules related to transparency - including potentially: shortening the reporting deadline for beneficial ownership filings; and imposing greater disclosure or other transparency requirements with respect to security-based swaps, short selling and stock buy-backs.
On May 20, 2021, President Joseph Biden issued an Executive Order on Climate-Related Financial Risk (Order), directing financial regulators and federal agencies to incorporate relevant climate risk considerations into regulatory decisions. In the Order, President Biden noted that “[t]he failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.” In an effort to coordinate the Federal Government’s strategy on climate-related risk, the Order is intended to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk.”
With respect to particular agencies, the Order directs the Treasury Secretary, Janet Yelling, in her capacity as chair of the Financial Stability Oversight Council (FSOC), to implement regulations intended to address climate related issues in the financial regulatory context and to encourage FSOC member agencies to share information and data regarding climate-related financial risks. The Order further directs FSOC to issue a report within 180 days of the Order regarding efforts to integrate climate-related considerations into the policies of FSOC member agencies.
Further, the Order instructs the Secretary of Labor to identify agency actions that can be taken “to protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk,” as well as to “consider publishing, by September 2021, for notice and comment a proposed rule to suspend, revise or rescind” Department of Labor regulations from the Trump administration that limited investment managers from considering ESG factors (e.g., climate-related risks) in retirement-plan investment and proxy voting decisions. The Order calls for the Secretary of Labor to submit a report to the President within 180 days of the Order on the actions taken to address these matters.
The SEC’s Investor Advisory Committee announced on September 10, 2021 that it has recommended to the SEC the adoption of enhanced disclosures concerning conflicts of interest and executive compensation for special purpose acquisition companies - SPACs. SPACs are corporate entities that combine corporate mergers and initial public offerings. The SEC’s Committee also identified investor dilution and executive insider trading through 10b-5-1 programs which permit executives to invest in their company while possessing material, non-public information, subject to certain rules. There were 248 SPACs in 2020 and 424 SPACs so far in 2021.
On July 26, 2021, the U.S. Court of Appeals for the Tenth Circuit affirmed the lower court’s trial ruling in the Section 36(b) lawsuit, Obeslo v. Great-West Capital Management, LLC et al.
The U.S. District Court for the District of Colorado issued its trial ruling on August 7, 2020 in favor of the adviser, concluding that plaintiffs failed to meet their burden of proof that the adviser breached its fiduciary duty under Section 36(b) of the Investment Company Act of 1940. More specifically, the trial court held that plaintiffs had “failed to meet their burden of proof with respect to all of the Gartenberg factors (emphasis in original).” Moreover, the court held that “even though they did not have the burden to do so, [D]efendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.”
In affirming the lower court ruling in its entirety, the Tenth Circuit emphasized shareholders’ burden of satisfying the “arduous standard” set forth in Jones v. Harris, and remarked upon the historical track record of adviser victories in Section 36(b) cases. The court explained that “[b]ecause no single factor is dispositive, plaintiffs must convince this panel that the district court erred on enough issues to justify overturning a multifactor balancing test on clear error review. They cannot carry such a heavy burden.” Further, the court emphasized that “[t]he record is so flush with support for the district court’s factual findings that plaintiffs are left with little recourse beyond relitigating facts decided in district court. The substantial deference this court affords the district court’s factual conclusions dooms this effort.”
Particularly persuasive for the court to affirm the lower court’s ruling was the fact that plaintiffs never presented evidence establishing the outer bounds of arm’s-length bargaining, nor showed why defendants’ fees are outside that range.
Thus, after reviewing the district court’s factual findings and legal conclusions at great length, the Tenth Circuit affirmed the district court’s findings on all Gartenberg factors.
On May 27, 2021, the SEC filed a civil complaint against LJM Funds Management, Ltd. and LJM Partners, Ltd., two investment advisers under common ownership, and two of the advisers’ portfolio managers (collectively, “Defendants”). The SEC claimed that the Defendants made “material misrepresentations and breaches of fiduciary duty relating to the risks of an options trading strategy they employed” as investment advisers to a mutual fund and several private funds.
The complaint alleges that the Defendants intentionally misled investors and the mutual fund’s board of directors about the advisers’ risk management practices. Specifically, the SEC alleged that the Defendants made a series of misstatements to investors and the mutual fund’s board of directors about the advisers’ risk management practices, including “false statements about its use of historical event stress testing and its commitment to maintaining a consistent risk profile instead of prioritizing returns.” Moreover, the complaint alleges that the Defendants falsely told investors that the level of risk of portfolios remained stable, while actually increasing the risk level of the portfolios to reach certain targets. Specifically, the SEC alleged that such actions caused “catastrophic losses” of approximately 80% of the value of the mutual fund and the private funds.
On September 1, 2021, the SEC filed an action against BitConnect, an on-line crypto lending platform, its founder, Satish Kumbhani, and its top US promoter and his affiliated company, alleging that they defrauded retail investors out of $2 billion through a global fraudulent and unregistered offering of investments into a program involving digital assets. According to the SEC’s complaint, filed in the US District Court for the Southern District of New York, from 2017 through January 2018, the defendants conducted a fraudulent lending program offered by BitConnect through a global network of promoters.
Publication
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
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