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Who’s in control? Changes of control to a licensed entity and your obligations

In this article, we examine the obligation of AFSL holders and credit licensees to determine whether there has been a change of control in their entity, and subsequently report any changes to ASIC.

ASIC has recently been clamping down on licensees who become aware of any changes in control over their entity but have failed to notify ASIC of this change.

You may be aware that companies have to notify ASIC when their shareholders or officeholders change, which could denote a change of control.  However, these notifications do not constitute a notification to ASIC to satisfy the obligations under your licence.  If the change also results in a change of the AFSL holder’s ultimate holding company, a single transaction could result in three separate notifications to ASIC!

Changes of control for all AFSL holders

Regulation 7.6.04(2) of the Corporations Regulations 2001 provides details on how you can determine if a change of control has taken place.  It applies to all AFSL holders.

A ‘change in control’ includes a transaction, or a series of transactions, in a 12-month period that results in a person having control of the financial services licensee (either alone or together with associates of the person).

Under the regulations, ‘control’ means:

(a) Having the capacity to cast, or control the casting of, more than one half of the maximum number of votes that might be cast at a general meeting of the financial services licensee; or

(b) Directly or indirectly holding more than one half of the issued share capital of the financial services licensee (not including any part of the issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or

(c) The capacity to control the composition of the financial services licensee’s board or governing body; or

(d) The capacity to determine the outcome of decisions about the licensee’s financial and operating policies, taking into account:

(i) the practical influences the person can exert (rather than the rights it can enforce)

(ii) any practice or pattern of behaviour affecting the financial services licensee’s financial or operating policies to be taken into account (whether or not it involves a breach of an agreement or a breach of trust)

It is important to note that there can be (and often are) several parties that have control under one or more of the tests, and a change in any of these tests triggers the requirements to notify ASIC.

For example, you may have a majority shareholder that controls the casting of votes at a general meeting, but there may be a related entity that controls the composition of the licensee’s board as well as a powerful CEO that can practically influence the outcome of decisions about the licensee’s policies.  A change in either:

  • a majority shareholding;
  • the power to compose the board; or
  • the identity of the CEO,

would, in this case, trigger the need to notify ASIC under the AFSL.

There may also be a case where there is a technical, but not substantive, change of control.  For example, imagine a licensee that is a wholly owned subsidiary of Company B, where Company B is wholly owned by Company X.  Company X owns a range of businesses, and would prefer that the licensee is instead owned by Company C.  In this case there is no change of ultimate control, but the entity with the capacity to cast votes at a general meeting is no longer Company B, but now Company C.  Therefore, this is a change of control under the first limb of the definition which would trigger the need to notify ASIC.

Changes of control for Credit licensees

Regulation 9(11) of the National Consumer Credit Protection Regulations 2010 provides details on how you can determine if a change of control has taken place.

The details mirror those set out above for AFSL holders.

Notifying ASIC of a change of control

If you become aware of a “change in control” of your AFSL holder or your Australian credit licensee, it is a condition of your licence that you must, within 10 business days, lodge with ASIC particulars of the change that has occurred.

For an AFSL holder, the notice must be a prescribed form.  The Form FS20 is the prescribed form for notifying ASIC of these changes.

There is no prescribed form that must be lodged with ASIC for changes of control to Australian credit licensees.  Instead, you must provide notice in a letter to ASIC.  The letter must:

  • identify the licensee;
  • identify who, if anyone, has lost control and the date of this change;
  • identify who, if anyone, has gained control and the date of this change.

What can ASIC do following notification of a change of control?

There is no need to obtain ASIC’s approval to a change of control – either before or after it occurs.

However, ASIC will use this new information to monitor and ensure that any new management of a company is still compliant with its licensing requirements.  Subsequently, any entity that is unable to comply with its licensing obligations after a change in control, incurs the risk of having its licence suspended or cancelled.

In our experience, ASIC tends to focus on changes in direct shareholdings of licensees when raising change of control issues.  This is because ASIC keeps records of company shareholdings, and it is easy for ASIC to show that the licensee should have been aware of the change.

For example, in June 2015, ASIC suspended the AFSL of retail OTC derivative provider Australian Capital Markets Advisory Services Pty Ltd (ACMAS) after the entity became a wholly owned subsidiary of Formax International Market Limited.  The new management failed to demonstrate their ability to comply with the AFS licensing requirements.

Change in control for certain AFSL holders providing personal advice

Certain AFSL holders have additional obligations when it comes to notifying ASIC of a change in control.

This additional obligation only applies to AFSL holders that are “body corporate licensees”.  These are body corporates that are authorised to provide personal advice to retail clients in relation to financial products other than basic banking products, general insurance products, consumer credit insurance, or any combination of these.  This will cover most financial planning practices that hold an AFSL.

The general requirement discussed above applies to a transaction that “results in a person having control”.  However, the rules for “body corporate licensees” apply if a person:

  • starts to have control; or
  • ceases to have control.

The interesting aspect of this obligation is that the AFSL holder has 30 business days to notify ASIC of the change in control.

10 business days or 30 business days to notify ASIC?

This poses the question: does an AFSL holder that is authorised to provide personal advice on more complex financial products have 10 business days or 30 business days to notify ASIC of a change of control?

Because there is no provision turning off the 10 business days notification requirement that applies to all licensees when a change in control occurs to a body corporate licensee, it would appear that both obligations apply to body corporate licensees.

However, ASIC’s webpage on change of control clearly states that body corporate licensees have 30 business days to notify ASIC:

When does ASIC need to be notified?

An AFS licensee must notify us of the particulars of the change in control not later than:

    • 10 business days for changes to controlling entity details for licensees other than body corporate licensees as defined by s922C of the Corporations Act 2001.
    • 30 business days for changes to controlling entity details for licensees who are body corporate licensees as defined by s922C of the Corporations Act 2001.

We note that ASIC has prescribed the same form (Form FS 20) for notifying changes in control.  This means that by submitting the form, the body corporate licensee will be complying with both its obligations.

Given that the licence condition requiring all AFSL holders to notify ASIC within 10 business days of becoming aware of a change of control was not changed when the Government introduced the new obligation for body corporate licensees, we consider that it is prudent for all AFSL holders (including those who provide personal advice to retail clients on more complex products) to continue to comply with this requirement and notify ASIC within 10 business days of becoming aware of such a change.

Changes of control for all companies

There is also an obligation to notify ASIC of changes to details of the company.  These obligations arise under the Corporations Act and apply equally to all companies, not just AFSL holders.

Companies must notify ASIC when:

  • there is change to their register of members (if you have more than 20 members, you only need to notify ASIC about the top 20 members);
  • there is a change to the share structure,
  • there is a change to the directors or secretaries of the company;
  • there is a change to the ultimate holding company of a proprietary company.

Such notifications are generally made to ASIC using a Form 484 and need to be made within 28 days of the change.

If you have any  specific questions about what was discussed in this article, please contact us to speak to one of our financial services lawyers.

Author: David Court, Partner