After almost three decades since the FSSA commenced, navigating the FSSA remains a complex and often confusing exercise – one capable of jeopardising (or at least delaying) transactions and restructures if not expertly managed.
We consider some of the key challenges below.
Key takeaways
- Navigating the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA) can be difficult especially with complex upstream ownership and decision making structures.
- The FSSA is more complex and onerous than the equivalent legislation in other jurisdictions.
- APRA approval under the FSSA is typically an iterative process, with timing driven by the quality and completeness of the initial submission.
- Given the regime’s complexity, particularly in requiring tracing through to associates to calculate a person’s aggregate stake, a robust first application minimises follow-up queries and the risk of delaying a transaction.
What is the ownership hurdle?
The FSSA imposes safeguards to restrict control of ‘financial sector companies’ (being authorised deposit-taking institutions (ADIs), general insurance companies and life insurance companies (together Authorised Insurance Companies), and their holding companies). The FSSA is also largely adopted for the controls that apply to restrict control over RSE licensees under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
In practice, anyone proposing to hold a ‘stake’ of more than 20% in an ADI, an Authorised Insurance Company, or their holding companies must obtain approval from APRA (as the delegated decision-maker on behalf of the Treasurer) prior to the stake being acquired. For anyone proposing to hold a stake in a RSE licensee or their holding companies, the threshold is lower, being a stake of more than 15%.
This seemingly simple requirement may have significant consequences for restructures and transactions, with the potential to cause delays in completion. Regulatory approval should therefore be considered early, with the approval timeline built into the overall deal timetable and conditions precedent.
Given that the FSSA contains an anti-avoidance provision, parties should also ensure that a scheme is not implemented for the sole or dominant purpose of circumventing the FSSA obligations.
How to determine whether you need to navigate the ownership hurdle?
A common misconception is that the relevant threshold imposed by the FSSA or SIS Act applies only to a person’s direct shareholding in a financial sector company.
However, the FSSA’s definition of ‘stake’ is much broader.
Firstly, a person only holds a ‘stake’ in a company if they hold a ‘direct control interest’ in the company. A person’s ‘direct control interest’ is determined based on their ‘voting power’ in the company. A person’s voting power will not necessarily correlate with their shareholding in the company and a person may have voting power in the absence of any shareholding. This is because the reference to ‘voting power’ is very broad, and extends to the right to vote, or participate in any decision-making, concerning the making of distributions of capital or profits, the constituent document of the company, any variation of the share capital, or any appointment of a director. Accordingly, any rights to appoint a director must be carefully considered.
A person’s ‘stake’ is then calculated by aggregating the percentage of a person’s direct control interests and the direct control interests of their associates. The term ‘associate’ is broadly defined and captures (amongst others):
- a company whose directors are accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the person;
- a company in which the person has a stake of not less than 20%; and
- associates of associates.
In addition, where a person has a direct control interest in a company, and that company in turn has a direct control interest in a second company, then the person is also taken to have a direct control interest in the second company determined by multiplying the two percentages. For example, if Company A has a 80% direct control interest in Company B, which in turn has a 60% direct control interest in Company C, Company A is taken to have a 48% direct control interest in Company C.
What happens if you do not?
An ‘unacceptable shareholding situation’ will arise if a person holds a stake in a financial sector company which is either more than the relevant threshold or, if the Treasurer has approved a higher percentage, that higher percentage. Accordingly, approval must be obtained prior to the completion of a transaction otherwise a person’s ownership stake may have to be limited so it is under the relevant threshold.
Common triggers include not receiving APRA approval for an entity to increase an existing stake (either directly or through their associates), transactions which push aggregated stakes above the threshold, and transactions that grant director appointment rights. Mergers of superannuation funds can also inadvertently create unacceptable shareholding situations.
Where an unacceptable shareholding situation arises, the Treasurer may make an application to the Federal Court seeking orders:
- directing the disposal of shares;
- restraining the exercise of any rights attached to the shares;
- prohibiting or deferring the payment of any sums due to a person in respect of shares held by the person; or
- to disregard the exercise of any rights attached to the shares.
Do you need to be concerned even if you do not reach the ownership hurdle?
Even where the relevant threshold is not reached, obligations under the FSSA can still apply. This occurs when a person is deemed to have ‘practical control’ over a financial sector company. Practical control exists where:
- the company’s directors are accustomed or under an obligation to act in accordance with the directions, instructions or wishes of a person (either alone or together with associates); or
- a person (either alone or together with associates) is in a position to exercise control over a financial sector company.
In these instances, the person must take active steps to address their position of influence.
Applications for approval and relevant timing
APRA approval under the FSSA is typically an iterative process, with timing driven by the quality and completeness of the initial submission. Given the regime’s complexity, particularly in requiring tracing through to associates to calculate a person’s aggregate stake, a robust first application minimises follow-up queries.
The FSSA requires careful and early consideration, as it is notably broader in scope than comparable legislation in other jurisdictions and may therefore capture entities not previously contemplated.
If you are considering transactions or restructures involving ADIs, insurers, superannuation trustees or their holding companies, specialist advice at the outset may help you keep transactions on track.
