If there is a change in controlling entity of the AFS, the licensee is obliged to inform ASIC. The term controlling entity applies to both natural persons and companies.
Control means:
- having voting power of more than 50% of voting shares, or
- directly or indirectly holding more than 50% of the issued share capital (this excludes 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 (i.e. preference shares)), or
- the capacity to control the composition of the licensee’s board or governing body, or
- the capacity to determine the outcome of decisions
about the licensee’s financial and operating policies. In determining this the
following matters are taken into account:
- the practical influence the person can exert (rather than the rights it can enforce); Section 50AA (2) (a); and
- any practice or pattern of behaviour affecting the licensee’s financial or operating policies is to be taken into account (whether or not it involves a breach of an agreement or a breach of trust). Section 50AA (2) (b).
An important question arises as to whether control must be positive or whether negative power over decision making ie the right to veto, constitutes control.
The key words in section 50AA(1) of the Corporations Act, which defines control, are ‘..the capacity to determine the outcome of decisions’. There is an argument that this wording indicates a positive and not simply negative control of the kind conferring veto rights, i.e. a person with veto rights can only direct the continuation of the status quo in decision making, not negatively determine outcomes.
In Re News Corporation Ltd, Bowen CJ took a less restrictive view of the definition of control as ‘to exercise restraint or direction’, stating that ‘a power to veto is a power to restrain and hence to control’. This approach has been followed in subsequent decisions.
Associated Entities
Section 50AAA of the Corporations Act 2001 (‘Cth’) defines associated entities. An entity is associated with another entity if they are members of the same corporate group, or if one entity has a certain degree of control over the other. For example, 2 companies are associated entities if one controls the composition of the board of another, such that the second company is a subsidiary of the first.
The control might also arise in other ways, such as under a business loan agreement by one individual to another which requires that the lender approve all significant financial and operational decisions that the borrower makes as part of his or her business. By reason of this control, the borrower and the lender are associated entities.
Ongoing Obligation to Report
Clients should be mindful of their ongoing obligation to comply with the conditions of their licence and to inform ASIC of any changes in structure of ownership and/or control which materially affect the manner in which management decisions are taken.
Regulations
ASIC Regulation 7 should be read together with Section 50AA.
An AFS licence is subject to conditions prescribed by regulations in addition to the conditions imposed on the AFS licence certificate (s914A(8) of the Corporations Act 2001). One of these conditions is that an AFS licensee which becomes aware of any change in control of the financial services licensee must notify ASIC (reg 7.6.04(1)(i) of the Corporations Regulations 2001 (the Regulations)).
What is a change in control?
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) (reg 7.6.04(2)(a) of the Regulations).
Control means:
- if
the financial services licensee is a body corporate:
- 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
- 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
- the capacity to control the composition of the financial services licensees board or governing body, or
- the capacity to determine the outcome of decisions about the licensees financial and operating policies. In determining whether a person has the capacity to determine the outcome of decisions about a financial services licensees financial and operating policies, the following matters are taken into account:
- the practical influence the person can exert (rather than the rights it can enforce)
- any practice or pattern of behaviour affecting the financial services licensees financial or operating policies is to be taken into account (whether or not it involves a breach of an agreement or a breach of trust).
When does ASIC need to be notified?
An AFS licensee must notify ASIC 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.
Know Compliance
Should you be in any doubt as to whether ASIC should be notified, Know Compliance is available to give you advice.