The corporate regulator has issued a consultation paper seeking feedback on proposals to address stub-equities to retail investors in control transactions.
What are stub-equities
In simple terms, a stub-equity is typically created as a result of financial distress or takeover. It gives investors risky, but relatively cheaper, buy-ins to a company.
In technical terms, according to law firm Allens, a stub-equity is an alternative form of consideration in public control transactions. The stub-equity is used when the bidder, in addition to offering standard cash consideration, offers scrip consideration in the form of shares in the bid vehicle. The offer provides an opportunity for target shareholders to retain an economic exposure to the underlying business of the target company, through holding scrip in the company created, stated Allens.
In a nutshell, these offerings can act as a loophole that large equity firms can use to gain control over publicly traded companies.
ASIC has previously raised concerns with the proprietary HoldCO, which was created to help in the takeover bid for Capilano honey.
ASIC is concerned about the control transactions where part or all of the consideration includes stub-equity in Australian publicly listed companies.
Proprietary companies are required to be closely held and are prohibited from making broad public offers of their shares. By structuring control transactions to avoid these restrictions, retail investors who accept scrip considerations miss out on the disclosure and government protections that apply to public companies, but from which proprietary companies are exempt.