Disclosure in scheme booklets: too long, too repetitive

In brief

• Following ASIC’s recent discussion paper and symposium on the dynamics between private and public markets, market commentators have expressed concerns regarding the length and complexity of public market transaction documents. Scheme booklets, which have significantly increased in length over the years, are not immune from this criticism.
• Although there are sometimes legitimate reasons why a scheme booklet may need to be lengthy (a complex transaction structure, for example), often the driving factor for increased length is poor attention to detail, which has been facilitated by decreased production costs, the creeping inclusion of immaterial information (which is “nice to have” but not essential) and an adherence to precedents, whether or not the disclosure is material for the current booklet.
• A comparison with the UK approach to scheme booklets reveals differences in structure and regulatory expectations, indicating potential avenues for Australian practices to streamline disclosures. While it is unlikely there will be any major changes to Australia’s regulatory framework soon to mimic the UK’s, there are some things transaction participants can bear in mind within the current framework to keep scheme booklets as short as possible.
• It would help target shareholders and the broader market if, after consulting with practitioners, ASIC published more specific guidance as to the content requirements for scheme booklets.

Background

There has been renewed focus on improving the efficiency of public market transactions following ASIC’s recent discussion paper and symposium on the dynamics between private and public markets (see HSF Kramer’s article here). In a recent editorial, the AFR observed that disclosure documents for public market transactions have become too long-winded and unwieldy, pointing to Virgin’s recent prospectus that clocks in at a hefty 360 pages. We think scheme booklets are in the same boat.

It is no secret that schemes booklets have become increasingly lengthy and complex over the years. We estimate that the average length of scheme booklets in cash only deals in recent years is just under 100 pages, excluding all of the annexures, such as the independent expert’s report, scheme itself, deed poll and notice of meeting. This compares to an average of around 50 pages from a selection of equivalent scheme booklets in cash only deals in the late 1990s and early 2000s. If we wind the clock back even further, the booklet for the HC Sleigh Limited scheme in 1979, a top hat scheme which introduced a new holding company, was only 27 pages long (including the annexures). Page count is obviously not a perfect method of comparison, but the general trend towards lengthier scheme booklets is clear.

On one level, having lengthier documents is not such a big deal. However, as several judges have warned over the years, too much information in a scheme booklet can lead to the disclosure being unintelligible or incomprehensible, especially for retail shareholders.

For example, in Re Signature Capital Investments Ltd [2016] FCA 258, Kathy Farrell J made a general criticism of scheme booklets being “repetitious and unnecessarily long.” Her Honour observed that: “such documents are unapproachable to people who do not commonly read them and their prolixity makes material information difficult to discern. Repetition obscures the message because elements are added or subtracted at each repetition and a reader can be led to believe that he or she has already considered the information being repeated without appreciating those elements which have been added or lost.”

Apart from creating potential confusion for shareholders, lengthier, more complex documents take more time to produce, and necessitate longer periods of review by ASIC and the Court. The extra time required means a longer transaction timetable and, as evidenced by some notable recent examples, may reduce deal certainty. For a bidder, it increases the risk of an interloper and, for a target, it increases the period in which shareholders are exposed to risks like a material adverse change condition.

Factors driving lengthier scheme booklets

The fundamental scheme booklet content requirement — that the document must contain all material information to a shareholder’s decision as to whether to vote in favour of the scheme — has not changed for 100 years. Any changes in requirements of ASIC and the Courts have been at the margins for particular issues (for example, ASIC and the Courts require more thorough disclosure of the treatment of director benefits than they did in the past).¹

If there has not been any fundamental change in the basic content requirements, what is driving lengthier scheme booklets?

One explanation is that often transactions are more complicated now than they used to be. Mechanisms such as stub equity, deferred consideration, and dual schemes and takeovers, as well as intricate funding arrangements for financial buyers, require additional disclosures to shareholders that would not be found in a simple cash or listed scrip scheme.

However, that does not apply to a simple cash scheme, where other less valid factors drive lengthier booklets:

• Reduced production and distribution costs — Historically, scheme booklets needed to be printed in full and posted to all shareholders (a costly exercise). Today, with most booklets being distributed electronically, or by way of one-page “postcards” telling shareholders where to access the document online, these cost constraints have largely vanished. Without the burden of printing and postage, there is less motivation to limit length.
• Inclusion of immaterial information — The principle of materiality is intended to focus disclosure on what genuinely matters to the shareholders’ voting decision. Yet, in practice, scheme booklets can contain potentially superfluous detail, cautious drafting, repetition and “just to be safe” disclosure. There is limited incentive for practitioners to go back to basics and work out what disclosure is most important on each transaction.
• Market practice and deal precedent — Drafters of scheme booklets often copy documents from other deals, meaning lengthy scheme booklets become the market norm. This creates a self-reinforcing cycle where parties hesitate to deviate from precedent for fear of being questioned by ASIC or the Court. As a result, market practice perpetuates lengthier documents, even where some disclosures may not be strictly necessary.

Comparison with the UK

Given the shared history between Australian and English corporate law, the scheme booklet content requirements are broadly similar in the two jurisdictions (and, in fact, the fundamental disclosure rule is essentially the same). However, English scheme booklets (also known as “scheme circulars”) are typically shorter than their Australian equivalents.

A review of some recent English schemes involving ASX-listed companies (namely, Deterra/Trident, Nationwide/Virgin Money and Ramsay/Spire Healthcare) highlights several structural differences. The English scheme booklets omit comprehensive information about the target’s and bidder’s businesses, directors, and management, an FAQ section (instead there is a longer letter from the target company’s chair that serves as an executive summary) and detailed target risk disclosure. English scheme booklets also rarely include an independent expert’s report, unless all directors are conflicted and unable to make a recommendation. These elements are standard in Australian scheme booklets and contribute to their length and complexity.

Why the difference in approach? Perhaps it can partly be explained by the fact that, in the UK, scheme booklets must be published within 28 days of the bidder announcing a firm intention to proceed with the scheme, unless an extension is granted. This deadline potentially encourages a more focused and streamlined approach. English law also permits incorporation by reference in scheme booklets (unlike Australian law), allowing financial and other information to be linked to external sources, such as annual reports, rather than reproduced or summarised in detail. Despite these differences, we do not regard the English approach as giving a lesser standard of investor protection.

One other aspect which significantly shortens the time from signing to publication of the scheme booklet in the UK is the lack of any regulatory pre-vetting — English scheme booklets are submitted directly to the Court without prior regulatory review, whereas in Australia, ASIC must be given a “reasonable opportunity” to review the document before the first court hearing (generally 14 days) and often requires further or amended disclosure. Knowing that ASIC must be comfortable with the scheme booklet before it is published encourages companies in Australia to take a cautious approach.

What can companies do?

It is unlikely that some of the things that make English scheme booklets quicker to produce, like the 28-day rule, and lack of an independent expert’s report or regulatory pre-vetting, will be adopted in Australia any time soon. Similarly, changes to the scheme process that would require new legislation or regulations, such as introducing a prescribed limit on page numbers and word counts (like they have in New Zealand for product disclosure statements), would require more appetite for reform than currently present.

However, there are still a few things Australian companies can bear in mind within our current regulatory framework to keep the length of a scheme booklet under control, minimise the time needed to produce it and improve the disclosure for the benefit of its shareholders:

• Focus on materiality — Target companies and their advisers should consider all information for potential inclusion in the scheme booklet through a materiality lens. For instance, in a scrip scheme, where the target company will form a small part of the combined bidder and target groups post-implementation, query whether comprehensive pro forma financial information for the combined group is really necessary. It may be that only a pro forma balance sheet is needed (or indeed, it may be that no pro forma financial information is needed at all).
• Avoid repetition where possible — This is easier said than done, especially across the Chair’s letter, FAQ and more substantive sections. However, ensuring the FAQs represent a brief summary of the key points only can cut down repetition. One alternative approach would be to remove the FAQs entirely in favour of a more comprehensive Chair’s letter, similar to an English scheme booklet. We would hope ASIC would not object to that approach as it would accord with the regulator’s expectation that scheme booklets be kept as short as possible.²
• Information previously provided to shareholders — If information has been recently provided to shareholders, it may be possible to exclude it from the scheme booklet on the basis that, in the circumstances, shareholders could not reasonably expect for it to be provided again. For instance, summary financial information for the target company (particularly in a cash scheme) could be omitted and shareholders instead referred to a recently released half year or annual report. Although ASIC tends to prefer that financial information is re-provided, there are examples of scheme booklets that have omitted it. A similar approach could be considered for target business risks that appear in the annual report.
• Start the independent expert early — Usually, the part of the scheme booklet that takes the most time for even a simple cash scheme is the preparation of the independent expert’s report. To preserve their independence, experts generally do not commence their work until the transaction has been agreed and announced. However, experts should be able to commence familiarising themselves with the target company, the proposed transaction terms and other information that is relevant to their report prior to the transaction being agreed and announced, provided appropriate safeguards are in place in line with ASIC’s guidance. Staging the expert’s work like this ensures they can hit the ground running to produce their valuation once the transaction is agreed.

ASIC’s role

One other idea that has been raised a few times (including by the Commercial Bar Association of Victoria in its submission to Treasury’s 2022 consultation on improving schemes and takeovers) is for ASIC to publish more specific guidance on its expectations as to scheme booklet disclosure. Although practitioners and ASIC often refer to ASIC Regulatory Guide 228 (which is specifically for prospectuses, though some of the general concepts carry across to schemes), something which is more tailored to schemes would assist transaction participants in the preparation and presentation of scheme booklets. It would help to resolve the growing divergence between ASIC’s policy to have disclosure documents that are “clear, concise and effective” and market practice in this area.

With the renewed focus on efficiency in public markets transactions, now is the right time for ASIC to consult with practitioners on these issues.