ASIC has issued a consultation paper in which it proposes to minimise the harm done by offers of ‘stub-equity’ to retail/HNW investors in control transactions.

The regulator wants to 'restrict' certain structures that prevent retail/HNW investors from being covered by normal protective laws when participating in broad offers of securities. This can occur when someone is offering them shares in a proprietary, rather than public, company as consideration in the course of a takeover bid or scheme of arrangement. It can also arise when a custodian must hold scrip consideration by law. ASIC says that offers of consideration of this kind, often known as ‘stub-equity,’ deny investors important rights. To cope with this, the regulator wants to modify the law.

ASIC Commissioner John Price said: "Proprietary companies are restricted from making public offers to retail investors under a prospectus and are generally required to be closely held. In recognition of this they are not subject to the same disclosure and governance requirements that apply to public companies. Offers of their securities to the typically large and diverse shareholder base of a takeover target or scheme company runs counter to the underlying policy of the provisions governing proprietary companies."

ASIC has also observed stub-equity offers of public company scrip on terms that mandate the use of nominee or custody arrangements or the signing of securityholder agreements. It therefore also proposes to restrict such arrangements from being used in a way that deprives investors of the protection that they would otherwise have under laws pertaining to takeovers and disclosing entities. Comments are welcome until 17 July.

‘Stub equity’ is sometimes offered as consideration in the course of a takeover or scheme of arrangement. It typically consists of securities or interests in an unlisted bid or holding vehicle that provides offerees the option to retain continued economic exposure to the performance of the underlying business of an entity as an alternative to another form of consideration (such as cash) that does not provide the same exposure.

The regulator is planning to effect its two reforms by executing a legislative instrument - something that it is entitled to do unilaterally in accordance with the Corporations Act 2001, which it enforces on financial firms. It also issues class orders.