Who’s in control? Changes of control to a licensed entity and your obligations

In this article, we examine the obligation of AFSL holders and credit licensees to determine whether there has been a change of control in their entity, and subsequently report any changes to ASIC.

ASIC has recently been clamping down on licensees who become aware of any changes in control over their entity but have failed to notify ASIC of this change.

You may be aware that companies have to notify ASIC when their shareholders or officeholders change, which could denote a change of control.  However, these notifications do not constitute a notification to ASIC to satisfy the obligations under your licence.  If the change also results in a change of the AFSL holder’s ultimate holding company, a single transaction could result in three separate notifications to ASIC!

Changes of control for AFSL holders

Confusingly, there are two change of control notification obligations that apply to AFSL holders:

• Section 912DA of the Corporations Act 2001 requires an AFSL holder to notify ASIC if “an entity starts to control, or stops controlling” the AFSL holder. The notification must be made before the end of 30 business days after the day the entity starts to control, or stops controlling, the AFSL holder.  A breach of this requirement is a strict liability offence.
• Regulation 7.6.04(2) of the Corporations Regulations 2001requires an AFSL holder to notify ASIC if the AFSL holder “becomes aware of any change in control” of the AFSL holder.  The notification must be made no later than 10 business days after the change.  This requirement is a licence condition and a breach would, therefore, constitute a breach of section 912A of the Act.

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 AFSL holder (either alone or together with associates of the person).

It should be noted that there are subtle differences between these obligations (in addition to the difference in the notification period which is discussed further below).

The regulation only applies once the AFS holder “becomes aware” of the change which takes into account the situation where the AFS holder does not become aware that a change of control has occurred.

However, section 912DA simply requires the AFSL holder to notify ASIC of the start or cessation of control – which seems to assume that the AFSL holder will always know of such a change occurring.  In this regard the Explanatory Memorandum for the legislation that introduced the section stated that:

“To comply with this obligation, [AFSL holders] are expected to implement systems and procedures to ensure they are aware of changes in control in a timely manner.”

This may go to explain why the longer 30 business day period is provided for such a notification.  That said, it seems harsh to penalise an AFSL holder for failing to notify ASIC of the occurrence of an event that the AFSL holder was not aware of.

AFSL holders should, therefore, include procedures in their compliance program for identifying controllers and ensuring that changes of control are brought to the AFSL holder’s attention.

What is control?

Even more confusingly, each provision has its own definition of “control”.  Thankfully, the definitions are essentially identical.  Under the definitions, ‘control’ means:

(a) 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 licensee; or

(b) Directly or indirectly holding more than one half of the issued share capital of the 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

(c) The capacity to control the composition of the licensee’s board or governing body; or

(d) The capacity to determine the outcome of decisions about the licensee’s financial and operating policies, taking into account:

(i) the practical influences the person can exert (rather than the rights it can enforce)

(ii) any practice or pattern of behaviour affecting the financial services licensee’s financial or operating policies to be taken into account (whether or not it involves a breach of an agreement or a breach of trust)

It is important to note that there can be (and often are) several parties that have control under one or more of the tests, and a change in any of these tests triggers the requirements to notify ASIC.

For example, you may have a majority shareholder that controls the casting of votes at a general meeting, but there may be a related entity that controls the composition of the licensee’s board as well as a powerful CEO that can practically influence the outcome of decisions about the licensee’s policies.  A change in either:

• a majority shareholding;
• the power to compose the board; or
• the identity of the CEO,

would, in this case, trigger the need to notify ASIC.

There may also be a case where there is a technical, but not substantive, change of control.  For example, imagine a licensee that is a wholly owned subsidiary of Company B, where Company B is wholly owned by Company X.  Company X owns a range of businesses, and would prefer that the licensee is instead owned by Company C.  In this case there is no change of ultimate control, but the entity with the capacity to cast votes at a general meeting is no longer Company B, but now Company C.  Therefore, this is a change of control under the first paragraph of the definition which would trigger the need to notify ASIC.

Changes of control for Credit licensees

Regulation 9(10) of the National Consumer Credit Protection Regulations 2010 imposes a change of control notification requirement on credit licensees that is essentially the same as the requirement under regulation 7.6.04(2) of the Corporations Regulations 2001.

The definition of “control” is also essentially the same as set out in the section above.

Notifying ASIC of a change of control

If you become aware of a “change in control” of your AFSL holder or your credit licensee, it is a condition of your licence that you must lodge with ASIC particulars of the change that has occurred.

For an AFSL holder, the notice must be in the prescribed form.  The Form FS20 is the prescribed form for notifying ASIC of these changes.

There is no prescribed form that must be lodged with ASIC for changes of control to credit licensees.  Instead, you must provide notice in a letter to ASIC.  The letter must:

• identify the licensee;
• identify who, if anyone, has lost control and the date of this change;
• identify who, if anyone, has gained control and the date of this change.

What can ASIC do following notification of a change of control?

There is no need to obtain ASIC’s approval to a change of control – either before or after it occurs.

However, ASIC will use this new information to monitor and ensure that any new management of a company is still compliant with its licensing requirements.  Subsequently, any entity that is unable to comply with its licensing obligations after a change in control, incurs the risk of having its licence suspended or cancelled.

In our experience, ASIC tends to focus on changes in direct shareholdings of licensees when raising change of control issues.  This is because ASIC keeps records of company shareholdings, and it is easy for ASIC to show that the licensee should have been aware of the change.

For example, ASIC suspended the AFSL of retail OTC derivative provider Australian Capital Markets Advisory Services Pty Ltd (ACMAS) after the entity became a wholly owned subsidiary of Formax International Market Limited.  The new management failed to demonstrate their ability to comply with the AFS licensing requirements.

10 business days or 30 business days to notify ASIC?

So, does an AFSL holder have 10 business days or 30 business days to notify ASIC of a change of control?

ASIC’s webpage on change of control clearly states that AFSL holders have 30 business days to notify ASIC:

When does ASIC need to be notified?

An AFS licensee must notify us of the particulars of the change in control not later than the end of 30 business days after the day the entity starts to control, or stops controlling, the AFS licensee.

We note that ASIC has prescribed the same form (Form FS 20) for notifying changes in control.  This means that by submitting the form, the AFSL holder will be complying with both obligations.

Given that the licence condition requiring all AFSL holders to notify ASIC within 10 business days of becoming aware of a change of control was not changed when the Government introduced the section 912DA obligation, we consider that it is prudent for all AFSL holders to comply with this requirement and notify ASIC within 10 business days of becoming aware of such a change.

Changes of control for all companies

There is also an obligation to notify ASIC of changes to details of the company.  These obligations arise under the Corporations Act and apply equally to all companies, not just licensees.

Companies must notify ASIC when:

• there is change to their register of members (if you have more than 20 members, you only need to notify ASIC about the top 20 members);
• there is a change to the share structure,
• there is a change to the directors or secretaries of the company;
• there is a change to the ultimate holding company of a proprietary company.

Such notifications are generally made to ASIC using a Form 484 and need to be made within 28 days of the change.

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Author: David Court (Partner)

This article was updated as at January 2023.