We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
19 February 2002
Australia's corporations and securities legislation, and the structure for regulating financial services, have undergone major reform in the past three years. (For more detail on some of these reforms see Financial Services Law is Reformed, Legislative Update and Fundraising Law Rewrite and Reforms).
Equity capital raising is regulated by the Corporations Act. Listed entities are also subject to the listing rules of the Australian Stock Exchange Limited (ASX).
Legal documentation for an equity raising generally comprises an underwriting or placement agreement between the issuer and the underwriters or placing agents, and a disclosure document (used to market the securities) that is registered by the Australian Securities and Investments Commission (ASIC).
As most ASX-listed securities are now uncertificated, share or option certificates are not usually issued. Issuers generally appoint external registry service companies to establish and maintain their share registers.
Debt raised through the issue of securities is generally regulated by the Corporations Act. Most debt securities are issued and traded in the wholesale markets alone. Few are listed on the ASX. Most are held within the Austraclear system, which is a securities depository and settlement system that is functionally similar to the Euroclear, Clearstream and Depository Trust Company (DTC) systems. Federal government debt securities are generally held and traded within the Reserve Bank Information and Transfer System (RITS). However, in the week commencing February 18 2002, all securities held in RITS will be transferred to the Austraclear system. Further information about the Austraclear and RITS systems is provided below.
Legal documentation for an issue of debt securities generally comprises:
For wholesale market offers of securities, the offering document is generally not registered with ASIC. A trust deed (in replacement of the deed poll) is not required unless a registered offering document is needed and in certain other circumstances. Nevertheless, a trust deed is used in some cases where there is no statutory requirement to do so, particularly where the holders of the debt securities share the benefit (with other financiers of the issuer) of charges, mortgages and other securities provided by the issuer and other parties.
Over-the-counter derivatives are the most common form of derivatives created and traded in Australia. International Swaps and Derivatives Association documentation is frequently used, although the short-form foreign exchange master agreement developed by the Australian Financial Markets Association is also popular.
Extensive changes to the Corporations Act made by the Financial Services Reform Act 2001 mean that from March 11 2002 the following groups of people will be required to hold a financial services licence under the Corporations Act:
A person will need a licence even if he or she has no permanent establishment in Australia but engages in conduct intended to induce people in Australia to purchase a financial product or service (including equity or debt securities and derivatives), unless he or she qualifies for an exemption. Current holders of dealer's licences and investment adviser's licences will generally need to obtain a financial services licence within a two-year transition period.
Generally, no licence or other form of authorization is required to issue debt or equity securities in Australia, and issuers have no obligation to report their issuance or other activities to any government authority in Australia. Some exceptions are outlined below.
The Corporations Act regulates:
The Corporations Act 2001 and related legislation came into force on July 15 2001, and represent a truly national scheme of corporate regulation in Australia. It replaces the Corporations Law (comprising identical legislation adopted by each state and territory of Australia) and related legislation in existence since January 1 1991. The Corporations Act substantially re-enacted the text of the Corporations Law, most changes relating to the move from a cooperative state and territory regime to a national scheme. The regulatory scheme it sets out is administered by ASIC, whose functions and powers are conferred by the Australian Securities and Investments Commission Act 2001.
The provisions of the Corporations Act relating to offers of securities do not apply to offers of securities outside Australia (eg, by an Australian issuer under a euronote programme or a Rule 144A offering in the United States).
Jurisdiction for civil matters arising under the corporations legislation lies with the Federal Court and the supreme courts of each state and territory. Lower courts have jurisdiction to deal with some civil matters. ASIC may commence and carry on civil proceedings for the recovery of damages for fraud, negligence and other misconduct or the recovery of property, and may intervene in proceedings in relation to any matter arising under the Corporations Act.
In respect to criminal matters, the relevant courts of each state and territory have jurisdiction. Either ASIC or the commonwealth director of public prosecutions may institute criminal proceedings. In most circumstances, ASIC prepares a brief of evidence for the director of public prosecutions, who undertakes the primary enforcement role.
Financial Services Reform Act
The Financial Services Reform Act 2001 will come into force on March 11 2002, although some parts of it took effect on September 27 2001. It amends the Corporations Act and will fundamentally change Australia's regulation of financial services (for more detail see Financial Services Law is Reformed).
The act introduces a new investor disclosure regime for all financial products (other than securities), which will largely apply only in relation to dealings with retail clients, unless a financial services provider chooses to comply with the regime in relation to its dealings with all clients.
The current disclosure document regime (and exemptions from it) in Part 6D of the Corporations Act will continue to apply (subject to minor changes) to offers of securities.
In addition, the act introduces a new licensing regime for financial market participants. Current holders of various types of licences issued under the previous law will generally need to obtain licences under the new law (see comments under "Government authorizations" above). A two-year transitional period applies. However, persons who currently need not be licensed but who must become licensed under the new regime must do so by March 11 2002.
To ensure compliance with the new law it will be necessary for providers of financial services to review and, where necessary, revise their systems and administrative procedures, marketing materials, training programmes and arrangements with authorized representatives.
Liability when offering securities
An offer of securities in Australia requires disclosure to investors under a standard full-disclosure document that must be registered with ASIC. This is unless an exemption applies or the offer is of a type that allows a short-form prospectus to be used.
Most offers of debt securities are structured so that a disclosure document is not required. The most common exemption used to achieve this is one of the 'sophisticated investor' exemptions, under which the amount payable for the securities on acceptance of the offer is at least A$500,000.
Although a registered disclosure document may not be required, it is usual for an offering document to be used to market the securities.
The grounds on which an issuer may incur liability for acts in connection with an offer of its securities include:
These matters usually arise in connection with the distribution of an offering document for the securities and the undertaking of presentations to potential investors. As a result, it is customary for due diligence to be undertaken by issuers and underwriters to ensure that information contained in the offering document (or otherwise presented to investors) is correct and not misleading.
Due diligence will not amount to a legal defence to an action for misrepresentation in an offering document for securities distributed in the wholesale market, but may do so for a disclosure document registered with ASIC (ie, for a retail offering document). This position is plainly anomalous when considered in the context of the desirability of affording greater protection to retail investors.
In the past three years, legislative changes have occurred to abolish the liability for misleading and deceptive conduct in relation to securities under the Trade Practices Act, the Australian Securities and Investments Commission Act, and the fair trading legislation of the states and territories. Statutory liability for such conduct now arises only under the Corporations Act.
In addition, issuers may be liable at general law (in tort or contract) if the information contained in an offering document is incorrect or misleading.
In general terms, the Corporations Act and the general law are unlikely to impose greater liability on an issuer than would be encountered in international capital markets.
Foreign Acquisitions and Takeovers Act
To the extent that a transaction involves foreign investment in Australia, it may be regulated by the Foreign Acquisitions and Takeovers Act 1975 (FATA) and the federal government's foreign investment policy.
The federal treasurer has power under the FATA to make orders prohibiting foreign persons from the following regulated activities:
The FATA does not restrict the acquisition of debt securities by foreign investors, unless such acquisition would be a regulated activity (eg, if convertible notes are being acquired).
It is usual to give prior notification under the FATA of regulated activities and to request notification from the treasurer that the federal government has no objection to the proposal. In a limited number of circumstances (relating to the acquisition of substantial shareholdings and voting rights), obtaining the treasurer's prior approval is compulsory.
Certain thresholds apply under the FATA and related policy but, in general, if the acquisition is in a non-sensitive area (ie, other than media, forestry or banking) and involves less than A$50 million, the proposal will normally receive automatic approval. A proposal exceeding the A$50 million threshold should receive approval if it is not contrary to the national interest, at least in non-sensitive areas. There is no relevant legislative guidance about the meaning of 'national interest'.
Applications are lodged with the Foreign Investment Review Board, the body that administers the FATA. The board assesses each proposal it receives and makes a recommendation to the treasurer. The board also monitors compliance with any conditions attaching to approvals, particularly in relation to property acquisitions.
The Banking Act 1959 limits the use of certain expressions such as 'authorized deposit taking institution', 'bank', 'building society' and 'credit union' in a corporation's name or in relation to a financial services business it carries on in Australia other than in specified circumstances (eg, if the relevant regulator, the Australian Prudential Regulation Authority, consents to such use or, if the corporation is an 'authorized deposit-taking institution' in Australia, it may use 'banking' in referring to the authority granted to it under the act). A foreign issuer that is a bank in its home jurisdiction may use the word 'bank' when issuing securities in its own name in Australia's wholesale capital markets provided (i) the securities are offered and/or traded in parcels of not less than A$500,000, and (ii) it is clearly stated on the securities (if in certificated form) and any related offering document that the securities are being issued by a bank that is not an 'authorized deposit taking institution' under the Banking Act.
Australian Stock Exchange
The primary stock exchange in Australia is the ASX. Its listing rules (together with the Corporations Act) regulate entities whose equity or debt securities are quoted on the ASX. Hybrid securities (eg, convertible notes) may also be quoted on the ASX.
Only public companies and public unit trusts are permitted to list on the ASX, being entities in which any member of the general public may acquire shares (or units, in the case of trusts) and in respect of which there are no restrictions on the maximum number of shareholders (or unitholders). Restrictions with respect to foreign ownership are permissible.
The ASX's listing rules:
A fully electronic trading and settlement system, known as the Clearing House Electronic Subregister System (CHESS), is used for most transactions in securities quoted on the ASX.
CHESS facilitates the settlement of such transactions and provides an electronic subregister for relevant holdings. Using CHESS, no paper documentation is required for the transfer of legal title. Transfer takes place against payment in real time.
Some ASX-listed companies and unit trusts still issue securities in certificated (ie, paper) form. Transactions involving such securities cannot be undertaken through CHESS. On-market trading in listed certificated shares, share warrants, share options, debt securities and exchange traded options occurs electronically either on the Stock Exchange Automated Trading System or on the ASX Derivatives Trading Facility.
The ASX also operates a bulletin board for the wholesale debt securities market. (For more detail see Bulletin Board Introduced for Wholesale Loan Securities).
SFE Corporation Limited, through its subsidiary Austraclear Limited, operates the Austraclear system. Members of the system include Australia's leading banks, investment banks, stockbrokers, life insurance companies, superannuation fund managers and trustees. Issuers of debt securities are generally also members. A foreign issuer who does not wish to become a member but whose securities are to be held within the system must arrange for a paying agent who is a member of the system to act in relation to the securities.
When it was first established, the system accepted only certain types of bearer security commonly traded in Australia: bank and non-bank accepted bills of exchange, promissory notes and certificates of deposit. In more recent years it has accepted securities in registered form. Due to Australian income tax and stamp duty considerations, debt securities subject to terms and conditions (which, therefore, do not meet the statutory definition of 'promissory notes') are generally issued in Australia in registered form.
In May 1999 a regime was established under which dematerialized securities could be lodged and settled, to complement and potentially replace the traditional bearer securities accepted by the system.
Dematerialized securities are debt obligations recorded in electronic form within the Austraclear system only. Their characteristics (including negotiability) and terms are established by virtue of contractual relationships existing between members under the system's regulations. Unlike other securities in the system, dematerialized securities cannot be uplifted from the system other than by the creation of equivalent physical instruments.
Dematerialized securities differ from book-entry securities held within the DTC system by not being evidenced by a written acknowledgement (signed by their issuer) of the debt they represent.
Since August 30 1999 Austraclear members have been able to settle trades in certain securities held within either (or both) the Clearstream or Euroclear systems.
During the week commencing February 18 2002, debt securities issued by the federal government and held within the RITS system will be transferred to the Austraclear system. Thereafter, most securities of that type will be held and traded in the Austraclear system.
Trading in securities lodged in the Austraclear system takes place between members, usually by telephone. The Austraclear system is fully electronic. Once details of a trade have been agreed, members input relevant details electronically and the system settles the trade on a delivery versus payment basis in real time. At all times, Austraclear retains legal title to lodged securities in which members obtain an equitable interest. Equitable title is transferred electronically in the settlement process.
Functionally, the Austraclear system is similar to the Clearstream, Euroclear and DTC systems. However, there are some important legal differences between them. Comparisons are not straightforward due to the Clearstream and Euroclear systems being governed (respectively) by the laws of Luxembourg and Belgium, which are civil law jurisdictions.
Participants in the Clearstream and Euroclear systems do not obtain what would be considered under Australian law to be either a legal or equitable interest in the lodged securities. Rather, they have a contractual right against the relevant operator to require delivery of securities of the same type, and certain statutory rights (exercisable in the event of the operator's insolvency), including the right to share (along with other participants in whose accounts with the operator securities of the same type are held) in the pool of securities of the same type held by the operator for the purposes of the system.
Participants hold cash accounts (in various currencies) with the operators of those systems. When the cash elements of transactions in relevant securities are settled, debits or credits are made to those accounts. By comparison, each member of the Austraclear system must nominate a bank (or other approved financial institution) in Australia which will act for it to settle the cash elements of all transactions it undertakes using the Austraclear system.
Reserve Bank Information and Transfer System
The Reserve Bank of Australia operates RITS, an electronic system with two principal functions: the first related to depository and settlement services in respect of debt securities issued by the federal government, the second related to the payments system. The first function will be phased out in the week commencing February 18 2002. Membership of RITS will then be limited to holders of exchange settlement accounts and persons who take part in tenders for debt securities issued by the federal government or who undertake transactions with the Reserve Bank of Australia under repurchase agreements.
For an overview of income and other taxation in Australia please see the Legislative Update.
Effect of stamp duty on issues of debt securities
The creation of debt securities (or other acknowledgements of debt) may attract liability for stamp duty (at a rate of up to 0.4% of their principal amount) in Queensland, Western Australia, South Australia and the Northern Territory. However, no duty will generally be paid on these instruments in the Australian Capital Territory, New South Wales, Victoria and Tasmania.
Transfers of inscribed debt securities are exempt from duty in all states and territories (subject, in some cases, to satisfying exemption criteria) other than the Northern Territory.
This tax is imposed by some Australian jurisdictions on certain transactions involving accounts with banks and other financial institutions located in the jurisdiction. Documentation for the issuance of debt securities generally provides that the issuer is liable to reimburse other parties (other than investors) for them.
Interest withholding tax
Broadly speaking, interest withholding tax at a rate of 10% is imposed on payments of interest (and payments in the nature of interest) by residents of Australia to non-residents. Withholding tax is also generally payable where interest is paid to a non-resident by a non-resident carrying on business through a permanent establishment in Australia. It is not payable if the interest is paid by a resident carrying on business through a permanent establishment outside Australia.
A non-resident issuer of debt securities in the Australian market (eg, an issuer of 'Kangaroo bonds') would not be liable for Australian interest withholding tax, unless it carries on a business through a permanent establishment in Australia. This is also the case for a non-resident who issues debt securities simultaneously in the Australian and offshore markets (eg, issuers of 'Matilda bonds').
An exemption from the requirement to pay withholding tax on interest paid to non-residents may be available to resident issuers (other than governments and government authorities) under Section 128F of the Income Tax Assessment Act 1936. In broad terms, the requirements of the exemption are as follows:
Many issues of debt securities in Australia by corporations are now structured to take advantage of this exemption. A significant exception (due to the anomalous inclusion of residents in the 'associate' definition for Section 128F) are issues of securities by financial institutions with domestic funds management associates who are expected to be significant investors in the securities. Such issuers will generally have separate domestic and offshore debt issuance programmes, with only the latter structured to take advantage of the Section 128F exemption (including containing a prohibition on distribution of the securities to associates), while the former will not require the issuer to gross up for interest withholding tax (with the result that the domestic securities will generally not be attractive to foreign investors).
On August 29 2001 the Australian treasurer announced his intention to introduce legislation (having effect from that date) to remove onshore associates (ie, Australian residents and non-residents carrying on a business at or through a permanent establishment in Australia) from the definition of 'associate' for the purposes of Section 128F. As a result, financial institutions with domestic funds management associates will no longer need to maintain separate domestic and offshore issuance programmes.
In the same announcement the intention of removing from this definition offshore associates that are acting in the capacity of a clearing house, paying agent, custodian or funds manager was also announced. However, it is unclear from the announcement whether all such associates will be removed or only those that hold the securities to which the Section 128F exemption is to apply non-beneficially. Until the legislation becomes available it would be prudent to assume the latter.
A type of domestic withholding tax (at the rate of 47%) is also imposed under Section 126 of the Income Tax Assessment Act 1936 on the payment of interest on bearer debt securities if the issuer fails to disclose the names and addresses of the holders to the Australian Taxation Office. This provision does not operate in respect of interest received through issuance of securities at a discount to their face value (eg, on promissory notes). However, its existence results in other forms of bearer security rarely being issued in Australia.
On August 8 2001 the Australian Tax Office issued a tax determination confirming that where a bearer global debt security is held in a clearing system, the 'holder' for the purposes of Section 126 will be the clearing system.
Until this determination was issued there was a risk that the Tax Office would view a participant in a clearing system who holds an indirect interest in the security through that system as a 'holder' for Section 126 purposes, requiring the issuer of relevant securities either to deduct tax or to disclose to the Tax Office the names and addresses of all such participants who were Australian residents or who carried on business at or through a permanent establishment in Australia. In the light of current euromarket practice and the rules and regulations of relevant clearing systems, issuers faced practical difficulties in obtaining such information.
As a result of the determination, an Australian issuer of a global bearer debt security need no longer be concerned about the possible application of withholding tax under Section 126 provided that:
If a global bearer debt security is exchanged for securities in definitive bearer form (as is usually provided for in the case of a payment default and certain other circumstances set out in its terms and conditions) then participants of clearing systems holding indirect interests in the global security at the time of such exchange will become direct holders of the definitive securities. In those circumstances, Section 126 may apply.
The terms and conditions of global bearer securities usually include a tax gross-up provision and the exceptions to it applicable to securities of Australian issuers usually include one relating to Section 126. While the new tax determination applies that exception may be removed, although its retention is appropriate in the terms and conditions of related definitive bearer securities.
Payments of interest under debt securities in registered form may be subject to a type of domestic withholding tax (at the rate of 48.5%) if payees do not provide their tax file numbers or Australian Business Numbers (ABNs), or an appropriate exemption basis, to the payer. An exemption from the need to provide a tax file number is available to many non-resident holders of such debt securities.
Goods and services tax
Goods and services tax (GST) applies to all taxable supplies. Neither the issuance of debt securities nor the payment of principal or interest under them is a taxable supply. Fees payable to underwriters, placing agents, registrars and paying agents generally will be subject to GST.
ABNs were introduced concurrently with GST. A new domestic withholding tax was introduced separately and in addition to GST, principally as an anti-avoidance measure. It does not apply in circumstances where payers and payees quote their ABNs to each other or an exemption applies. For this reason, it is wise to include a party's ABN in all legal documents. A foreign investor in Australian debt securities will not be required to have an ABN if it does not make any 'supply' in the course or furtherance of an enterprise carried on in Australia.
Debit and equity characterization
In relation to debt securities issued after July 1 2001, regard must be paid to the debt characterization rules now contained in the Australian taxation legislation. These rules essentially look to the economic substance and effect of a security or other interest to determine whether it is in substance debt or in substance equity. The strict legal form of a security or other interest is no longer relevant.
Care must be taken in structuring any debt issuance to ensure that it satisfies the debt criteria in the legislation. Failure to satisfy the criteria will result in the non-availability of deductions for 'interest' payments. For debt securities issued before July 1 2001 transitional rules apply and need to be considered in relation to payment of interest after that date.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.