It’s time to change the definition of control


Jaime Lumsden Kelly

This is the third article in The Fold’s series on the ASIC Enforcement Review Taskforce’s third Position and Consultation paper on Strengthening ASIC’s licensing powers (the Position Paper).

The Position Paper contemplates several changes to the concept of control that will broaden ASIC’s powers and may create more uncertainty for businesses.

The concept of group control is fraught with issues

The Position Paper introduced a new concept – the group of controllers. This is perplexing because section 50AA of the Corporations Act contemplates that only one person can have control of a company. That section specifically states that if two people can determine the outcome of a decision together, then neither has control.

Introducing the concept of group control over a licensee raises a lot more issues than it solves.

For example, if one member of the group fails to meet the fit and proper test, can ASIC take action? After all, it would be unfair for ASIC to cancel or suspend a licence if an individual, who is not in a position to individually exert control over the licensee, fails the test.

One solution to address this issue could be that ASIC’s powers only apply when more than 50% of the controlling group fail to meet the fit and proper person test. However, even this approach is difficult when the controlling group could change week to week or even day to day, depending on how shareholders and other managers align on particular issues.

Before the concept of a group of controllers is introduced, these and other potential issues need to be thought through and ironed out.

Practical control is difficult to assess

The concept of “control” isn’t just about what rights an entity has to control a licensee. It also extends to practical influence and patterns of behaviour. This is a very broad definition that raises many questions, particularly when trying to identify whether a change of control has occurred.

Currently, a licensee must notify ASIC within 10 days of becoming aware of a change in control. ASIC wants to tighten this by requiring the licensee to notify them within 10 days of the change in control occurring. Once ASIC receives the notice, they will then assess whether the new controllers are fit and proper to control the licensee. ASIC also wants to introduce penalties if the licensee doesn’t notify them.

In my experience, change of control notices are usually only lodged when there has been a change of ownership of more than 50% of the issued share capital. That’s due to the fact it is otherwise difficult to pinpoint when practical control changes because:

  • Practical control is a subjective assessment, but ownership of share capital is objective;
  • The person responsible for reporting, like the Compliance Manager, often has no oversight over practical control as they may not attend board or management meetings; and
  • Human ego makes it unlikely that a majority owner will admit that they have ceded control to another.

Practical control can also shift often. For example, if a company has two equal shareholders but one holds practical control, their control may shift temporarily to the other shareholder if they are on holidays or fall ill. In a company with three equal shareholders, control may shift between different groups of two shareholders, depending on how shareholders ally with each other to make decisions.

In this scenario, it’s not appropriate to issue multiple change of control notifications. It’s also an inefficient use of ASIC’s resources for them to assess compliance with the fit and proper test each time practical control shifts.

The definition of control needs to be restricted

These issues highlight why the definition of control, when it comes to assessing whether a controller is a fit and proper person, should be limited to shareholders.

This would bring the Australian regime in line with other countries, including the UK, Hong Kong and Singapore.

In the Position Paper, ASIC introduces the concept of pre-approving a change of control. While good in theory, this is impractical unless the control test is changed. After all, it’s possible to delay a transfer of shares, but it’s not always possible for a controller to avoid a change of control occurring because the controller is injured or unwell.

By restricting the change of control requirements so they only apply to changes in shareholdings, businesses can plan their transactions and ASIC can avoid an unnecessary increase in its compliance workload.

In the next post, I’ll explore ASIC’s powers to assess organisational competence when there is a change of control.

By Jaime Lumsden Kelly

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