House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 1 - General amendments

Outline of chapter

1.1 Schedule 1 to this Bill amends the Corporations Act 2001 (Corporations Act) to facilitate increased trading in retail corporate bonds in Australia, through both direct and indirect processes.

Context of amendments

1.2 The proposed measures to facilitate increased trading of retail corporate bonds in Australia are one of the initiatives undertaken by the Government to reduce the regulatory burden on the financial system and promote a competitive and sustainable financial system. The overall objective of the measures are to improve the attractiveness for corporations issuing corporate bonds to retail investors while ensuring effective consumer protections are maintained.

1.3 The measures in this Bill will aid the establishment of a strong and liquid retail debt market in Australia by facilitating increased offerings of corporate bonds to retail investors in Australia through:

•

a streamlined disclosure regime;

•

changes to the civil liability provisions in respect to corporate bonds issued to retail investors; and

•

clarifying the application of the defences in respect to misleading and deceptive statements and omissions in disclosure documents relating to corporate bonds issued to retail investors.

1.4 The Corporations Act governs the fundraising practices of corporate entities in Australia. The provisions in the Corporations Act that relate to fundraising, particularly those that relate to the obligation to prepare a disclosure document (generally a prospectus) and its content, are contained in Chapter 6D.

1.5 Currently, the Corporations Act requires a corporation to prepare a full prospectus for the offer of corporate bonds to retail investors. In a full prospectus a corporation is required to disclose all of the information that investors and their professional advisors may reasonably require to make an informed assessment of:

•

the rights and liabilities attaching to the securities offered; and

•

the assets and liabilities, financial position and performance, profits and losses and prospects of the body that is to issue the securities.

1.6 The prospectus must contain this information to the extent that relevant persons involved in the preparation of the prospectus actually know the information or ought reasonably to have obtained the information by making inquiries. In addition to the general disclosure requirement, the Corporations Act also sets out a number of specific requirements for specific information to be disclosed.

1.7 While the issue of corporate bonds to retail investors requires a full prospectus, the issue of corporate bonds to sophisticated or professional investors (commonly referred to as 'wholesale investors') does not require a disclosure document such as a prospectus, on the basis that wholesale investors are considered to have sufficient resources and experience to evaluate the risks associated with an investment.

1.8 The Corporations Act also sets out a number of prohibitions in connection with the offering of securities, including an:

•

offer of securities in a body that does not exist;

•

offer of securities without a current disclosure document; and

•

offer of securities under a disclosure document that contains a misleading or deceptive statement or has an omission of material impact.

1.9 A contravention of the prohibitions in connection with the offering of securities could lead to both civil and criminal liability. Chapter 6D of the Corporations Act currently includes a special civil liability regime. This civil liability regime provides that each current or proposed director of the company making the offer and an underwriter to the offer, may all be held liable in respect of a misstatement or omission in a prospectus. A person who suffers loss or damage as a result of such a contravention may recover the amount of that loss or damage from any of those persons even if the person did not commit or were not involved in the particular contravention.

1.10 There are a number of defences that apply in relation to civil and criminal liability for a misstatement or omission in a disclosure document. The most important is the due diligence defence for prospectuses. It provides that a person will not be liable because of a misleading or deceptive statement in a prospectus or an omission from a prospectus if a person can prove that:

•

they made all inquiries (if any) that were reasonable in the circumstances; and

•

after doing so believed, on reasonable grounds, that the statement was either not misleading or deceptive, or that there was no omission from the prospectus in relation to a particular matter.

1.11 Stakeholders have indicated that the current requirements under the Corporations Act for offers of corporate bonds to retail investors create a regulatory bias. Companies structure their fundraising either solely to wholesale investors, or only to retail investors in the form of a rights issue or share purchase plan, in order to avoid the obligation to prepare a disclosure document and reduce the liability risk of directors of issuing corporations. This Bill contains measures to address this perceived regulatory bias.

1.12 All legislative references in this chapter are to the Corporations Act, unless otherwise specified.

Summary of new law

1.13 The amendments in this Bill introduce a mandatory, '2-part prospectus' for certain bond issuances to simplify the disclosure obligations for companies. While the framework for the 2-part prospectus will be contained in the Corporations Act, in particular, the eligibility criteria for using a 2-part prospectus, the content and structure of the 2-part prospectus will be specified by regulations.

1.14 The 2-part prospectus will be structured in the following manner:

•

Base: the base part would have a life of three years. The base prospectus will have general information that is unlikely to change significantly over three years about the issuer and the bond issue. Issuers will have the option of releasing a base prospectus in anticipation of making an actual offer of bonds. Issuers will not generally need to update the base document for further tranches of the same bond issue if there was no change in the risk information about the issuer.

•

Offer-specific: for each fund raising tranche, issuers will need to provide a second document outlining the key details of the offer, that being the offer-specific prospectus. The offer-specific prospectus will have similarities with the cleansing notice regime for other offerings, whereby it will include a statement outlining that the issuer has complied with their continuous disclosure obligations. Issuers will also need to disclose in the offer-specific prospectus any matters material to a consideration of an investment in the bonds that have not already been the subject of continuous disclosure.

1.15 To ensure that the new 2-part prospectus regime is sufficiently streamlined, certain material (as prescribed in regulations) will be able to be incorporated by reference in both the base prospectus and the offer-specific prospectus.

1.16 The amendments in this Bill to the directors' liabilities have been designed to reduce the burden on directors when issuing corporate bonds to retail investors under the 2-part prospectus regime and will provide directors with greater clarity on the steps required as part of the due diligence process in relation to certain criminal liability offences.

Comparison of key features of new law and current law

Detailed explanation of new law

Part 1: Amendments Relating to Simple Corporate Bonds

1.17 The amendments to the Corporations Act provide a new disclosure regime for bodies undertaking a fundraising by making an 'offer of simple corporate bonds' (as provided in new section 713A). The subject of the offer, that is the 'simple corporate bonds' are debt securities that satisfy the conditions prescribed in new section 713A. [Schedule 1, items 3 and 5, section 9]

1.18 The new disclosure regime will require body corporates to issue a 2-part simple corporate bonds prospectus (as outlined in new section 713B). The 2-part simple corporate bonds prospectus will consist of a base prospectus (as outlined in new section 713C) and an offer-specific prospectus (as outlined in new section 713D). [Schedule 1, items 1, 2 and 4, section 9]

Parallel trading of simple corporate bonds in the wholesale and retail markets

1.19 To facilitate parallel trading of simple corporate bonds in the wholesale and retail markets, the Corporations Act is amended to allow 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).

1.20 Depository interests provide retail investors with a beneficial ownership in an underlying security. This practice is commonly used in financial markets. The Commonwealth Government Securities Legislation Amendment (Retail Trading) Act 2012 passed in late 2012 for the trading of Commonwealth Government Securities (CGS) utilises depository interests to facilitate retail trading of CGS. The use of depository interests for simple corporate bonds recognises the benefits of aligning the market practices associated with retail trading of CGS with simple corporate bonds.

1.21 To enable the beneficial interests to be used for simple corporate bonds, two new definitions have been inserted into the Corporations Act.

•

The definition of a simple corporate bond depository interest means a beneficial interest in simple corporate bonds, where the interest is or was issued by a simple corporate bonds depository nominee

•

The definition of a simple corporate bond depository nominee means a person who issues to someone else one or more beneficial interests, with the agreement of the body that issued the simple corporate bonds, in simple corporate bonds that the person:

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legally owns;

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would beneficially own, apart from the issue of those interests; or

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has a beneficial interest.

[Schedule 1, items 6 and 7, section 9]

1.22 A depository nominee is only able to make an offer of simple corporate bond depository interests if they have the agreement of the issuing body. As such, the disclosure for an offer of simple corporate bond depository interests is the disclosure required to be provided by the issuer of the simple corporate bond (the underlying asset) not the simple corporate bond depository nominee.

1.23 Therefore, in order to remove the disclosure requirements from the depository nominee for the offer of simple corporate bond depository interests, where the simple corporate bonds depository interests are issued under a 2-part simple corporate bonds prospectus, the depository interests are not a security to which provisions that relate to fundraising, particularly those that relate to the requirement to prepare a disclosure document and its content, applies. [Schedule 1, item 10, subsection 700(1)]

1.24 To ensure that the disclosure requirements for the offer of simple corporate bond depository interests are appropriately dealt with in the Corporations Act, the definition of 'security' in section 761A has been modified to include a simple corporate bonds depository interest. [Schedule 1, items 45 and 46, section 761A]

1.25 A regulation making power has been inserted into Chapter 2L so that the requirement for a trust deed and trustee is able to be removed when making specified offers of debentures or a specified class of offers of debentures. This regulation making power has been inserted to ensure that regulations can be made to remove an offer of simple corporate bonds depository interests from Chapter 2L and provided appropriate consumer protections remain in place. [Schedule 1, item 8, subsection 283AA(4)]

1.26 Divisions 3 and 4 of Part 7.11 of the Corporations Act regulate the transfer of title in relation to designated securities. It is necessary to ensure that these provisions apply to simple corporate bonds depository interests, which would partly be achieved by expanding the list of securities in existing section 1073A to include simple corporate bonds depository interests. It is noted that, because of the way the law in this part of the Corporations Act is drafted, an additional regulation will have to be made to ensure that Division 4 of Part 7.11 applies to simple corporate bonds depository interests.

1.27 Therefore, a simple corporate bonds depository interest has been inserted into subsection 1073A(1) and a consequential amendment has been made to the note in subsection 1073E(1). [Schedule 1, items 47 and 48, paragraph 1073A(1)(da) and subsection 1073E(1)]

1.28 The changes to the Corporations Act in respect to simple corporate bonds depository interests provide a strong platform for the parallel trading of simple corporate bonds in the wholesale and retail markets. However, further changes will be required to ensure that all regulatory requirements that affect the trading of simple corporate bonds in wholesale and retail markets can be appropriately satisfied.

Offer of simple corporate bonds

1.29 If a body corporate makes an offer of debt securities where the debt securities are taken to be simple corporate bonds (as they satisfy the conditions set out in the Corporations Act), the offer will be considered to be an offer of simple corporate bonds. [Schedule 1, item 22, subsection 713A(1)]

Simple corporate bonds

1.30 To reduce the possible risk to investors, only relatively low risk and less complex bonds are able to take qualify for the streamlined disclosure regime, which requires that the debt securities satisfy all of the following conditions:

•

The securities must be debentures as defined in section 9 of the Corporations Act. [Schedule 1, item 22, subsection 713A(2)]

•

The securities must be quoted on a prescribed financial market. [Schedule 1, item 22, subsections 713A(3) and (4)]

•

The securities must be denominated in Australian currency. [Schedule 1, item 22, subsection 713A(5)]

•

The fixed term of the securities cannot exceed 15 years. [Schedule 1, item 22, subsection 713A(6)]

•

The principal and any accrued interest must be repaid to the holder at the end of the fixed term of the security. [Schedule 1, item 22, subsection 713A(7)]

•

The interest rate must be either a fixed or floating rate. A floating rate is comprised of a reference rate (to which the issuer has no direct control) and a fixed margin set by the issuer. [Schedule 1, item 22, subsection 713A(8)]

•

The securities can be subject to an increase in the fixed rate or the fixed margin in respect to the interest payable, but cannot be subject to a decrease in the interest payable. [Schedule 1, item 22, subsections 713A(9) and (10)]

•

Interest payments under the security must be paid periodically and cannot be deferred or capitalised by the issuing body. [Schedule 1, item 22, subsection 713A(11)]

•

The face value for the security cannot exceed $1,000. [Schedule 1, item 22, subsection 713A(12)]

•

Securities can only be redeemed prior to the end of the fixed term in the following specific circumstances:

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at the option of the holder of the security;

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as a result of the acceptance of an offer made to the holder by the issuing body to buy back the security;

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due to a change in a law, or in the application or interpretation of a law, if that change, application or interpretation has a negative effect on the tax treatment of the securities;

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when there is a change of control of the issuing body (as defined in the terms of the security) and the redemption does not take effect unless all securities issued under the offer are redeemed; and

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when fewer than 10 per cent of the securities issued under the offer remain on issue and the redemption does not take effect unless all securities in the class are redeemed.

[Schedule 1, item 22, subsection 713A(13)]

•

Debt to security holders is not subordinated to debts to unsecured creditors. [Schedule 1, item 22, subsection 713A(14)]

•

The securities must not be able to be converted into another class of securities. [Schedule 1, item 22, subsection 713A(15)

•

The price payable for the securities must be the same for all persons who accept the offer. [Schedule 1, item 22, subsection 713A(16)]

•

The body offering the securities must have continuously quoted securities, or is a wholly-owned subsidiary of a body corporate that has continuously quoted securities.

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If the issuing body is a wholly-owned subsidiary of a body corporate the body corporate must guarantee, or agreed to guarantee, the repayment of any money deposited or lent to the borrower under the securities, and must also guarantee, or agree to guarantee, the repayment of interest payable on the securities.

The trading in those continuously quoted securities must not have been suspended for more than a total of five days during the 12-month period preceding the offer (or if the securities have been quoted for less than 12 months, during the period which the securities have been quoted).

If at a particular time, there is no prospectus, to determine whether a body has continuously quoted securities, it can be assumed that a prospectus exists and the date of that prospectus is the first day of the offer made under that prospectus.

[Schedule 1, item 22, subsections 713A(17) and (18)]

•

The most recent auditor's report on the most recent financial statements (either the yearly or half yearly statements) for the body issuing the securities (and if the securities are issued by a wholly-owned subsidiary of a body corporate which has continuously quoted securities, for that body corporate) must not include:

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a statement that the auditor is of the opinion that the report is not in accordance with this Act; or

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a description of a defect or an irregularity in the financial report; or

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a description of a deficiency, failure or shortcoming in respect of the matters referred to in paragraph 307(b), (c) or (d); or

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an emphasis of matter paragraph related to going concern.

a.

An auditor is required to include in their report an 'emphasis of matter' paragraph if they conclude that a material uncertainty exists that leads to significant doubt about the ability of the company to continue as a going concern (continue to operate) and that uncertainty has been adequately disclosed in the financial reports. The purpose of the inclusion of an 'emphasis of matter' paragraph is to draw the readers' attention to the relevant disclosures relating to the particular matters.

[Schedule 1, item 22, subsections 713A(19) and 713A(20)]

1.31 In addition to satisfying the above conditions:

•

the securities;

•

the offer of the securities;

•

the body issuing the securities; and

•

if the issuing body is a wholly-owned subsidiary of a body corporate which has continuously quoted securities, that body corporate;

must comply with any other conditions or requirements as set out in the regulations. [Schedule 1, item 22, subsections 713A(24) to (27)]

1.32 The Australian Securities and Investments Commission (ASIC) has the power to make a determination, which has the effect of preventing a body from relying on a 2-part simple corporate bond prospectus to offer simple corporate bonds. The determination must be published by ASIC in the Gazette. [Schedule 1, item 22, subsections 713A(21), (22) and (23)]

2-part prospectus for simple corporate bonds

1.33 When investing in debt securities it is important that retail investors receive all relevant information to enable them to make effective, informed investment decisions. In respect to debt securities, this is facilitated through the requirement for issuers to provide a full prospectus when offering debt securities. However, recognising that the terms of some debt securities make them relatively lower risk and less complex, the measures in the Bill require a 2-part prospectus to be used as the appropriate vehicle to ensure retail investors receive the relevant information.

1.34 A 2-part simple corporate bonds prospectus is a type of prospectus described in Division 3 of Chapter 6D of the Corporations Act as a type of disclosure document. As such, a 2-part simple corporate bonds prospectus will be taken to be a disclosure document of Chapter 6D for all related purposes. [Schedule 1, item 22, subsection 713B(2)]

1.35 A 2-part simple corporate bonds prospectus for an offer of simple corporate bonds for issue by a body is a combination of a base prospectus for the period during which the offer is made and an offer-specific prospectus for the offer. As a 2-part simple corporate bonds prospectus is a combination of a base prospectus and an offer-specific prospectus, the base prospectus and the offer-specific prospectus are not seen to be prospectuses in their own right, and as such they are not taken to be prospectuses or a disclosure document for the purpose of Chapter 6D. [Schedule 1, item 22, subsections 713B(1), (3) and (4)]

1.36 The life of a 2-part simple corporate bonds prospectus for an offer of simple corporate bonds commences on the day the relevant offer-specific prospectus for the offer is lodged with ASIC. The expiry of a 2-part simple corporate bonds prospectus for a simple corporate bond offer is the expiry date for the offer-specific prospectus for the offer. [Schedule 1, item 22, subsections 713B(5) and (6)]

Example 1.1

On 1 August 2013, Marley Ltd lodged a base prospectus with ASIC for offering simple corporate bonds. At the time of lodging the base prospectus, Marley Ltd also lodged with ASIC an offer-specific prospectus for simple corporate bonds. Under the offer of the simple corporate bonds, Marley Ltd disclosed in the offer-specific that the offer ended on 30 September 2013. After the initial success of the first offering of the simple corporate bonds, Marley Ltd undertook a second tranche. In respect to the second tranche, Marly Ltd lodged an offer-specific prospectus with ASIC on 1 March 2014 and disclosed that the offer would end on the 31 April 2014.

Under the initial offering (the first tranche) the life of the 2-part prospectus was two months (1 August to 30 September) and under the second tranche the life of the 2-part simple corporate bonds prospectus was two months (1 March to 31 April).

1.37 To facilitate consumer outcomes, the use of electronic communication in the form of website publication of the 2-part prospectus is required. In this regard, the base prospectus lodged for offering simple corporate bonds must be available on the issuing body's website throughout its life of three years (which begins the date on which the base prospectus is lodged with ASIC). For an offer specific prospectus, the issuing body must make their offer specific prospectus available on their body's website throughout the application period of the offer. [Schedule 1, item 22, subsections 713B(7) and (8)]

Base prospectus

1.38 A document prepared and lodged with ASIC for the purpose of making an offer of debt securities - that satisfies the conditions that establish the debt securities as simple corporate bonds - is a base prospectus for simple corporate bonds if the following requirements are satisfied:

•

the document is expressed such that is to be taken to be the base prospectus for all offers of simple corporate bonds made by the body during the three year life of the document;

•

the document must state that there will be an offer-specific prospectus for each offer of simple corporate bonds during the three year life of the document; and

•

the document must state that the 2-part simple corporate bond prospectus for each such offer will consist of the base prospectus and an offer-specific prospectus for the particular offer.

[Schedule 1, item 22, subsections 713C(1) to (3)]

1.39 If a base prospectus is replaced with a new base prospectus (the replacement document), the period to which the replacement document applies commences at the time at which it is lodged with ASIC and ends at the time the original base prospectus was to end. [Schedule 1, item 22, subsection 713C(4)]

1.40 In addition to satisfying the above conditions, a base prospectus must also contain any information or statements specified in the regulations. [Schedule 1, item 22, subsections 713C(5) and (6)]

1.41 When setting out information in the base prospectus, information contained in documents lodged with ASIC does not need to be incorporated into the base prospectus. Instead it can be incorporated into the base prospectus by reference. When referring to a document lodged with ASIC, the base prospectus must identify the document or the part of the document that contains the information that was lodged with ASIC. The reference must also inform people of their right to obtain a copy of the document lodged with ASIC. [Schedule 1, item 22, subsection 713E(1)]

1.42 Further, the reference must have sufficient information about the contents of the document (to which the reference is being made) to allow a person to decide whether they wish, or need to obtain a copy of a document or the part of a document. [Schedule 1, item 22, paragraph 713E(2)(b)]

1.43 If the information referred to is primarily of interest to professional analysts, advisors or investors with specialist information needs, the reference must also include a description of the document or part of the document. The reference must also include a statement indicating that the information is primarily of interest to those people. [Schedule 1, item 22, paragraph 713E(2)(a)]

1.44 The document, or part of a document to which the reference is being made, must be lodged with ASIC. In addition to documents required by the Corporations Act to be lodged with ASIC, other supplementary documents to which references are made can be lodged with ASIC for this purpose. [Schedule 1, item 22, subsections 713E(3) and (4)]

1.45 The issuer of the proposed offer must provide any documents lodged with ASIC, to which references are made in the base prospectus, free to retail investors during the life of the base prospectus which is the three-year period beginning on the date that the base prospectus was lodged with ASIC. [Schedule 1, item 22, paragraph 713E(5)(a)]

Offer-specific prospectus

1.46 A document that is prepared and lodged with ASIC for the proposed making of a particular offer of debt securities (that satisfy the conditions that establish the debt securities as simple corporate bonds) is an offer-specific prospectus if the following requirements are satisfied:

•

the document must state that it is the offer-specific prospectus for the offer;

•

the document must state that no securities will be issued under the offer after the expiry date specified in the document.

-

The expiry date must not be later than 13 months after the date the document is lodged with ASIC. If a replacement document is provided, the expiry date of the replacement document must be the same as that of the original document;

•

the document must state that there is a base prospectus that is applicable to the offer and that the disclosure document for the offer consists of the offer-specific prospectus and the base prospectus; and

•

the first offer made under the document, which purports to rely on a particular base prospectus lodged with ASIC for offering simple corporate bonds, will be required to have a minimum subscription of $50 million in order for that document to be an offer-specific prospectus. Subsequent offers made in respect to the base prospectus to which an offer has been made (where the minimum subscription requirement has been satisfied) do not have to satisfy the minimum subscription requirement.

[Schedule 1, item 22, subsections 713D(1) to (5)]

1.47 In addition to satisfying the above conditions, the offer-specific prospectus must also contain any information or statements specified in the regulations. [Schedule 1, item 22, subsections 713C(6) and (7)]

1.48 To ensure retail investors are provided with up to date disclosure in respect of a particular offer, the offer-specific prospectus may include material that modifies or supplements the base prospectus. [Schedule 1, item 22, subsection 713C(8)]

1.49 Consistent with the base prospectus, when setting out information in the offer-specific prospectus, information contained in documents lodged with ASIC does not need to be incorporated into the offer-specific prospectus. Instead it can be incorporated by reference. When referring to a document lodged with ASIC, the offer-specific prospectus must identify the document or the part of the document that contains the information lodged with ASIC. The reference must also inform people of their right to obtain a copy of the document lodged with ASIC. [Schedule 1, item 22, subsection 713E(1)]

1.50 Further, the reference must have sufficient information about the contents of the document (to which the reference is being made) to allow a person to decide whether they wish or need to obtain a copy of a document or part of a document. [Schedule 1, item 22, paragraph713E(2)(b)]

1.51 If the information referred to is primarily of interest to professional analysts, advisors or investors with specialist information needs, the reference must also include a description of the document or part of the document and must include a statement indicating that the information is primarily of interest to those people. [Schedule 1, item 22, paragraph 713E(2)(a)]

1.52 The document or part of a document to which the reference is being made must be lodged with ASIC. In addition to documents required by the Corporations Act to be lodged with ASIC, documents to which references are being made can be lodged with AISC for this purpose. [Schedule 1, item 22, subsections 713E(3) and (4)]

1.53 The issuer of the proposed offer must provide any documents lodged with ASIC to which references are being made in the offer-specific prospectus for free during the application period of the offer-specific prospectus. [Schedule 1, item 22, paragraph 713E(5)(a)]

Supplementary or replacement document

1.54 If an issuer becomes aware of a misleading or deceptive statement in the 2-part simple corporate bond prospectus or an omission from the document of information required for the document to be compliant with the 2-part prospectus regime (where there is a material adverse impact on an investor), or when a new circumstance has arisen since the disclosure document was lodged with ASIC, and that particular circumstance would have been required to be disclosed in the document to be compliant with the 2-part simple corporate bonds prospectus regime, an issuer may:

•

if the document is the base prospectus:

-

include material in the offer-specific prospectus to supplement or modify the base prospectus; or

-

lodge a replacement document with ASIC;

•

if the document is the offer-specific prospectus

-

lodge a supplementary offer-specific prospectus with ASIC; or

-

lodge a replacement document with ASIC.

[Schedule 1, item 31, subsection 719A(1)]

1.55 If the bond offerer becomes aware that the wording in a base prospectus or offer-specific prospectus becomes or is not presented in a clear, concise and effective manner, a replacement base prospectus or offer-specific prospectus may be lodged with ASIC. [Schedule 1, item 31, subsections 719A(2) and (3)]

1.56 Section 715A of the Corporations Act provides the general requirement that information in a disclosure document must be worded and presented in a clear concise and effective manner.

1.57 In recognition of the fact that both the base prospectus and the offer-specific prospectus are taken 'in totality' to be the disclosure document in respect to a particular offer of simple corporate bonds, the requirement for the base and offer-specific prospectuses to be presented in a clear, concise and effective manner will apply in such a way that both the base prospectus and the offer prospectus will need to, when read together, be clear, concise and effective.

1.58 While any inconsistencies between the base and offer-specific prospectuses may be seen to result in the simple corporate bond 2-part prospectus not being clear, concise and effective, the fact that the offer-specific prospectus contains information that supplements and/or modifies the base document does not necessarily imply that the 2-part prospectus is not presented in a clear, concise and effective manner.

1.59 If an issuer lodges a supplementary offer-specific prospectus, the issuer must provide, at the beginning of the document, a statement that the document is a supplementary document, a reference to the offer-specific prospectus to which the document supplements, and references to any other previous supplementary documents lodged in respect of the particular offer. [Schedule 1, item 31, subsection 719A]

1.60 A statement that the supplementary document should be read together with the offer-specific prospectus and any other supplementary documents lodged with ASIC is also required to be provided at the start of the document. [Schedule 1, item 31, paragraph 719A(4)(d)]

1.61 Once a supplementary offer-specific prospectus has been lodged with ASIC, it is taken in conjunction with the offer-specific prospectus, which it supplements to be the relevant offer-specific prospectus for the issuance from the time of lodgement. [Schedule 1, item 31, subsection 719A(7)]

1.62 If an issuer lodges a replacement document for a base prospectus or offer-specific prospectus, the issuer must provide, at the beginning of the document, a statement indicating that the document is a replacement document and that it is the replacement document for the previous base prospectus or offer-specific prospectus. [Schedule 1, item 31, subsections 719A(5) and (6) ]

1.63 Once the replacement document is lodged with ASIC, it is taken that:

•

if the replacement document is replacing the offer-specific prospectus, the replacement document is taken to be the specific prospectus for the issuance from that time; or

•

if the replacement document is replacing the base prospectus, the replacement document is taken to be the base prospectus for the issuance from that time.

[Schedule 1, item 31, subsections 719A(8)and (9)]

Directors' liability

Liability to pay compensation

1.64 The Corporations Act prohibits a person from offering securities under a disclosure document if, among other things, there is a misleading or deceptive statement, an omission of required material, or a new circumstance has arisen.

1.65 If there is an offer of securities and a person suffers loss or damage because of a misleading or deceptive statement, an omission of required material, or where a new circumstance had arisen in a disclosure a document, the person has the right to recover compensation for that loss or damage from a range of persons including each director of the body making the offer.

1.66 However, for an offer of simple corporate bonds under the 2-part simple corporate bonds prospectus, the range of persons to which the person has the right to recover compensation for a loss or damage does not include directors or proposed directors of the body making the offer (and, if the body is a wholly-owned subsidiary of a body corporate, does not include directors or proposed directors of that body corporate) unless the director or proposed director is 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.

1.67 To ensure that the provisions dealing with misstatement in, or omission from, disclosure documents apply to simple corporate bonds prospectuses, references to the 2-part simple corporate prospectus disclosure documents have been made to cover an omission from the disclosure document of information or where a new circumstance has arisen that would have been required to be included in the 2-part simple corporate bond prospectus. [Schedule 1, items 39 and 40, paragraph 728(1)(b) and subparagraph 728(1)(c)(ii)]

1.68 The table in subsection 729(1) has been amended such that the liability for loss or damage for a contravention of subsection 728(1) for each director or person named as a proposed director of a body making an offer if the offer is made by the body, does not apply in respect to a 2-part simple corporate bond prospectus. [Schedule 1, item 41, section 729]

1.69 The liability placed on people liable on a disclosure document to inform the person making the offer about deficiencies in the disclosure document will continue to apply to directors and proposed directors. [Schedule 1, item 44, subsection 730(14)]

1.70 Furthermore, references to the 2-part simple corporate prospectus disclosure documents have been made to ensure that section 730 of the Corporations Act applies appropriately. [Schedule 1, items 42 and 43, paragraph 730(1)(b) and subparagraph 730(1)(c)(ii)]

Part 2 amendments relating to false or misleading statements etc

Reasonable steps obligations

1.71 In respect to the requirement to take reasonable steps in Part 9.4 of the Corporations Act, the person will be taken to have taken reasonable steps to ensure that:

•

a statement or information was not false or misleading in a material particular:

-

if the person proves that all inquiries (if any) that were reasonable in the circumstances were made, and after making those inquiries the person believed on reasonable grounds that the statement or information was not misleading in a material particular. [Schedule 1, items 52 and 53, subsections 1308(10) and 1309(7)]

-

if the person proves that they relied on information provided to them by somebody other than a director, employee or agent of the body (if the person is a body) or someone other than an employee or agent of the individual (if the person is an individual) and the reliance placed on the information by the person was reasonable in the circumstances. [Schedule 1, items 52 and 53, subsections 1308(12) and 1309(9)]

•

the information in a document did not omit or have omitted from it any matter or thing that without which the document would be misleading or deceptive in a material respect:

-

if the person proves that all inquiries (if any) that were reasonable in the circumstances were made, and after making those inquiries the person believed on reasonable grounds that there was no such omission. [Schedule 1, item 52, subsection 1308(11)]

-

if the person proves that they relied on information provided to the person by somebody other than a director, employee or agent of the body (if the person is a body), or someone other than an employee or agent of the individual (if the person is an individual), and the reliance placed on the information by the person was reasonable in the circumstances. [Schedule 1, item 52, subsection 1308(13)]

•

the information in the document did not omit or have omitted from it any matter or thing that would render the information in the document misleading in a material particular:

-

if the person has made all inquiries (if any) that were reasonable in the circumstances to make, and after making those inquiries the person believed on reasonable grounds that there was no such omission. [Schedule 1, item 53, subsection 1309(8)]

-

if the person proves that they relied on information provided to the person by somebody other than a director, employee or agent of the body (if the person is a body), or someone other than an employee or agent of the individual (if the person is an individual), and the reliance placed on the information by the person was reasonable in the circumstances. [Schedule 1, item 53, subsection 1309(10)]

1.72 These amendments 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.

Application and transitional provisions

1.73 The amendments in sections 1 to 3 of the Bill have effect the day the Act receives the Royal Assent. Schedule 1 to the Bill has effect on a day to be fixed by Proclamation. However, if the provisions do not commence within the period of six months from the day the Bill receives the Royal Assent, they will commence on the day after the end of that period.

Consequential amendments

1.74 The content requirements under Division 2 of Part 6.5 in respect of the contents of a bidder's statement are being amended to include material required by sections 710 to 713, or sections 713C to 713E where:

•

securities (other than managed investment products) are offered as consideration under the bid; and

•

the bidder is the body that has issued or will issue the securities, or a person who controls that body.

[Schedule 1, item 9, paragraph 636(1)(g)]

1.75 The table in section 705 shows which disclosure documents must be used if an offer of securities needs disclosure to investors under Part 6D.2 has been amended to include the 2-part simple corporate bonds prospectus in the types of disclosure documents required when there is an offer of simple corporate bonds.

1.76 Further, to ensure the ability of an issuer of simple corporate bonds to continue to offer simple corporate bonds for two years after commencement, a note has been added to section 705. This note clarifies that in accordance with subsection 709(1) a prospectus other than a 2-part simple corporate bonds prospectus can be issued for retail corporate bonds for two years after commencement. [Schedule 1, items 11 and 12, section 705]

1.77 The ability for issuers to not provide investors with disclosure in respect to offers that are made to existing debenture holders, does not extend to the offer of simple corporate bonds or the offer of debentures if the offer is made to holders of simple corporate bonds. [Schedule 1, item 13, subsection 708(14A)]

1.78 To remove the requirement that a prospectus be prepared for an offer of simple corporate bonds, an amendment has been made so that a prospectus or a short form prospectus disclosure document will not include an offer of securities that is an offer of simple corporate bonds. [Schedule 1, item 14, subsection 709(1)]

1.79 To provide flexibility for issuers of simple corporate bonds for the period of two years after commencement, an issuer will:

•

if the offer of simple corporate bonds needs disclosure under Part 6D.2 and the offer begins during the two-year period:

either prepare:

-

a prospectus; or

-

a 2-part simple corporate bonds prospectus in accordance with sections 713B to 713E; or

•

if an offer of simple corporate bonds needs disclosure under Part 6D.2 and the offer begins after the two year period the issuer must prepare a 2-part simple corporate bonds prospectus.

[Schedule 1, item 15, subsections 709(1A), (1B) and (1C)]

1.80 Under Chapter 6D and issuer may be able to provide a profile statement for an offer of corporate bonds. However, an issuer is not able to provide a profile statement for an offer of simple corporate bonds. [Schedule 1, item 16, subsection 709(2A)]

1.81 An issuer is not able to provide an information statement for an offer of simple corporate bonds after the twoyear period has ended. Prior to the twoyear period ending an issuer will be able to use an information statement if they satisfy subsection 709(4). [Schedule 1, item 17, subsection 709(4)]

1.82 The general disclosure test for content and the specific disclosure requirements that apply to prospectuses do not apply to a 2-part simple corporate bond prospectus. [Schedule 1, items 18 and 19, subsections 710(4) and 711(9)]

1.83 Further, the content requirements for short form prospectuses and the special content rules for continuously quoted securities do not apply to 2-part simple corporate bonds prospectuses. [Schedule 1, items 20 and 21, subsections 712(6) and 713(7)]

1.84 The outcome that a disclosure document is given the date on which it is lodged with ASIC does not apply to a 2-part simple corporate bonds prospectus. Instead the date of a 2- part simple corporate bonds prospectus is the date on which the offer-specific prospectus for the offer is lodged with ASIC. [Schedule 1, item 23, subsections 716(1A) and 716(1B)]

1.85 The table in section 717 that provides an overview of the procedure for offering securities has been amended to include references for the preparation of a 2-part simple corporate bonds prospectus and to include a reference for when supplementary or replacement documents relating to 2-part simple corporate bonds prospectus may be lodged with ASIC. [Schedule 1, items 24, 25 and 26, section 717]

1.86 The general requirement for lodging a disclosure document for an offer of securities does not apply to the 2-part simple corporate bonds prospectus. The requirement for the lodging of the 2-part simple corporate bonds prospectus is set out in section 713B. [Schedule 1, items 27 and 28, section 718]

1.87 A simple corporate bond requires a tailored approach to the lodgement of supplementary or replacement documents. This results in 2-part simple corporate bonds prospectuses not being covered by the operation of section 719. Reflecting this, the heading of section 719 has been repealed and replaced with the heading 'Lodging supplementary or replacement document-general'. [Schedule 1, items 29 and 30, section 719 (Heading), subsection 719(6)]

1.88 The table in section 720 that outlines the consent required for the lodgement of a disclosure document has been amended to ensure that simple corporate bonds offered under a 2-part simple corporate bond prospectus are not included 'offers of securities for issue' and has been amended such that the consent requirements for an offer of simple corporate bonds are outlined as a separate offer.

1.89 In this regard, an offer of simple corporate bonds under the 2-part simple corporate bonds prospectus requires the consent of:

•

every director of, and every person named in the document as a proposed director of, the body; and

•

if the simple corporate bond is in a managed investment scheme made available:

-

by the body every director of that body; or

-

by an individual.

[Schedule 1, items 32 and 33, section 720]

1.90 Issuers of 2-part simple corporate bond prospectuses are given choices in how they must act if there is an omission from the disclosure document, or where a person becomes aware of a new circumstance that would have been required to be included in the 2-part simple corporate bond prospectus. [Schedule 1, items 34, 36 and 37, subparagraphs 724(1)(c)(ii) and (d)(ii), subsection 724(3)]

1.91 The note to subsection 724(2) has been amended to provide a reference to new section 719A in respect to the lodging of supplementary or replacement documents for a 2-part simple corporate bonds prospectuses. [Schedule 1, item 35, subsection 724(2)]

1.92 The table in subsection 724(3) has been amended to exclude 2-part simple corporate bonds prospectuses from a prospectus in row 3, and inserts a new circumstance - that being the disclosure document is a 2-part simple corporate bonds prospectus. The document requirements for this new circumstance - that of a supplementary or replacement document - corrects deficiencies or changes the terms of the offer is also inserted. [Schedule 1, items 36 and 37, subsection 724(3)]

1.93 Under a 2-part simple corporate bond prospectus, an issuer is able to lodge a base prospectus with ASIC and use that base prospectus for a period of three years. In order to make an offer of simple corporate bonds the issuer is required to provide an offer-specific prospectus that together with the base prospectus forms the disclosure document for the offer. As the base document can be used for a period of three years, the issuer may wish to offer subsequent tranches of the simple corporate bonds. When the issuer makes additional offers no waiting period will apply after the lodgement of the offer-specific prospectus before processing applications for simple corporate bonds provided the simple corporate bonds are the same class as existing securities that are quoted on a prescribed market immediately before the application period with the exception of differences in respect to the:

•

fixed term of the securities (if any);

•

rate at which the interest is payable under the securities; or

•

date on which the holders are to be paid interest under the securities.

[Schedule 1, item 38, subsection 727(3)]

1.94 To avoid doubt that ASIC is not prevented from making a determination under new section 713A(23) a reference to the new subsection has been inserted into the provisions relating to the effect of a failure to comply with an infringement notice in Chapter 9 of the Corporations Act. [Schedule 1, item 49, subparagraph 1317DAG(5)(a)]

1.95 When considering whether reasonable steps have been taken when there was false or misleading, or if an omission of a thing that without that thing the document would be misleading in respect to an offer, materiality is to be taken into account. [Schedule 1, items 50 and 51, subsection 1308(4)]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014

1.96 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

1.97 This Bill amends the Corporations Act to reduce the regulatory burden on issuers of corporate bonds and to provide company directors with more certainty of their liability in relation to disclosure material.

1.98 This Bill fulfils the Government's commitment to reduce regulatory burdens on business. It also delivers on the Government's commitment in Our plan: real solutions for all Australians in which it states it will give priority to the recommendations of the report by the Australian Financial Services Task Force, Australia as a Financial Centre: Building on our Strengths (Johnson Report).

1.99 The Johnson Report recommendation 4.6 is that, 'Such issuers [retail corporate bonds issuers] would no longer be required to issue a detailed prospectus. Rather a short prospectus could be issued, cross referencing all relevant documents already lodged with ASIC or the market operator [such as the ASX]. Those companies with a program of issues over time could use a base prospectus with a supplementary prospectus for each new issue.'

Human rights implications

1.100 The impact of the reforms in this Bill have been considered in relation to the human right to a fair trial and fair hearing.

1.101 The Bill provides greater clarity on what constitutes 'reasonable steps' in relation to the criminal offences of making false or misleading statements where those statements are required by, or for the purposes of, the Corporations Act 2001 (Corporations Act) or lodged with or submitted to the Australian Securities and Investments Commission (ASIC).

1.102 The Bill provides for a person to be deemed to have taken reasonable steps if they made reasonable inquiries or placed reasonable reliance on information provided by others, and after making their inquiries the person believed that the statement or information was not misleading in a material way.

1.103 The changes to what constitutes reasonable steps will take effect from the date on which the Bill receives the Royal Assent.

1.104 The changes reflect the practical application of the criminal liability provisions in the Corporations Act (sections 1308 and 1309). This clarifies duties required by individuals who make or authorises disclosure material. It is not a dilution of criminal liability.

1.105 Article 15 of the International Covenant on Civil and Political Rights (ICCPR) provides that no one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence, under national or international law, at the time when it was committed. Nor shall a heavier penalty be imposed than the one that was applicable at the time when the criminal offence was committed. If, subsequent to the commission of the offence, provision is made by law for the imposition of a lighter penalty, the offender shall benefit thereby.

1.106 The Bill engages Article 15 in that it provides clarity on the defence available to those who authorise or make statements.

1.107 The amendments to the Corporations Act provided by the Bill will give those involved in preparing and authorising statements required by the Corporations Act or lodged/submitted to ASIC greater certainty in their defence of any claims of them having made a false or misleading statement. It does not diminish the defence available to a person accused of making a false or misleading statement. The reforms do not apply any changes retrospectively. It has the potential to improve the person's rights in defending themselves against accusations of making a false or misleading statement.

Conclusion

1.108 This Bill is compatible with human rights as it does not raise any human rights issues.