Substantial holder notices: Forms 603, 604 and 605, and the errors that make them defective

The substantial holding regime in Chapter 6C of the Corporations Act 2001 (Cth) is short, mechanical and routinely got wrong. The obligation is not to disclose what you own. It is to disclose your voting power, which counts your associates’ holdings and every relevant interest you have, whether or not you are the registered holder and whether or not you paid anything for it.

When the obligation arises

A person has a substantial holding if they and their associates have relevant interests in 5 per cent or more of the voting shares in a listed company, or if they have made a takeover bid for voting shares that has not closed. Section 671B requires notice to the company, and to ASX where the company is listed, in three situations:

• Form 603. On becoming a substantial holder.
• Form 604. On a movement of at least 1 per cent in the substantial holding.
• Form 605. On ceasing to be a substantial holder.

The notice is due within two business days after the person becomes aware of the information. During a bid period the deadline compresses to 9.30 am on the next trading day. The clock runs from awareness, not from the transaction, which cuts both ways: it does not excuse a slow back office, but it does start later where the movement was caused by someone else.

The three concepts that decide the answer

• Relevant interest. Section 608 gives a person a relevant interest in securities if they hold them, or have power to exercise or control the exercise of a vote attaching to them, or power to dispose of them or control their disposal. The power can be direct or indirect, express or implied, and it does not matter that it is conditional or shared with others. Section 609 carves out specific situations. Registered ownership is neither necessary nor sufficient.
• Voting power. Section 610 measures the holding as a percentage of the total votes in the company, aggregating the person’s relevant interests with those of their associates.
• Associate. Sections 10 to 17 define the concept. It is wider than corporate group membership and reaches persons acting, or proposing to act, in concert in relation to the company’s affairs. Two shareholders who coordinate a vote are exposed to the aggregation whether or not there is anything in writing.

The errors

• Not attaching the document. Section 671B requires a copy of any document setting out the terms of any agreement that contributed to the situation giving rise to the notice, or a written statement of its terms where it is not in writing. Notices are lodged without the subscription agreement, the voting deed or the option terms more often than any other defect. The notice is defective without it.
• Missing a dilution movement. Voting power is a percentage. A placement by the company can move a substantial holder’s voting power by more than 1 per cent without the holder doing anything at all. The obligation still arises. Anyone holding above 5 per cent needs a process that reads the company’s announcements, not just their own trade confirmations.
• Not aggregating associates. Funds under common management, a group of related entities and a family holding structure are the usual culprits. The count applies to the aggregate, not to the individual vehicle.
• Describing the interest as registered ownership and stopping there. The form asks for the nature of the relevant interest. Where the interest arises from a power over voting or disposal rather than from registration, that is what must be described, and the source of the power identified.
• Options, convertible notes and pre-emptive rights. These frequently create a relevant interest in the underlying securities before any conversion. So do the transfer restrictions and drag along provisions in a shareholders’ agreement. Run the analysis on the instrument, not on the label.
• Cash-settled equity derivatives. These generally do not create a relevant interest under section 608, but the Takeovers Panel expects long positions of 5 per cent or more to be disclosed, and non-disclosure is a recognised route to a declaration of unacceptable circumstances. The technical answer under section 608 is not the end of the question.

If a notice is wrong

There is no formal correction mechanism. Lodge a fresh notice promptly, marked as a corrective notice, setting out the correct position and explaining what changed. Do it before someone else raises it. A contravention of section 671B is an offence, and a defective or late notice in the lead-up to a control transaction is a standard basis for a Panel application. The cost of a voluntary correction is low. The cost of defending the omission is not.

Practical points for issuers

• Substantial holder notices are lodged by the holder, not by the company, but the company is the one that has to answer the market’s questions about its register. Track incoming notices and reconcile them against the registry.
• After every placement, tell the participants what percentage they will hold on allotment. It is a courtesy that prevents a defective notice being attributed to your raising.
• Where a placement takes a participant through 5 per cent, or through 20 per cent under section 606, deal with it in the term sheet. It is not a post-allotment discovery.
• Where a substantial holder appears on the register through an escrowed or restricted parcel, the securities still carry votes and still count.

How Luma Legal can help

We advise substantial holders and issuers on relevant interest and associate analysis, prepare Forms 603, 604 and 605, and deal with defective or contested notices. The analysis is usually not close, but it is rarely obvious from the register alone, and the two business day deadline is not the time to start it.