By Daniel Livingston, Partner, Billy Riddle, Lawyer and Hannah Robbins, Law Graduate

The ASIC Corporations (Amendment) Instrument 2020/721 has amended ASIC Class Order 13/520 to facilitate voluntary escrow arrangements in connection with an initial public offer (IPOs). The effect of the amendment is that those who enter into a voluntary escrow arrangement with a holder of securities in connection with an IPO do not have a relevant interest in securities merely because the voluntary escrow arrangement applies restrictions on the disposal of securities. As such, the relevant interests of an issuer, professional underwriter or lead manager arising out of voluntary escrow arrangements are disregarded for the purposes of the takeover provisions in the Corporations Act 2001 (Cth) (Corporations Act).

Accordingly, those seeking to enter into a voluntary escrow arrangement no longer need to seek relief from ASIC to enter into such an arrangement.

The changes to Class Order 13/520 followed ASIC’s consultation with the public in which they sought feedback from stakeholders on ASIC’s proposal to amend the rules concerning voluntary escrow arrangements, and the requirement to seek ASIC’s approval prior to entering into such an arrangement.

The amendments to Class Order 13/520 are welcomed as they remove an element of red tape for entities seeking to be listed as voluntary escrow arrangements are regularly utilised in the listing process. Those seeking listing were formerly required to make an application to ASIC for relief to enter into an escrow arrangement. This involved ASIC fees and legal fees, and time to make the application for relief was factored into the IPO timetable. The overall reduction in compliance costs will undoubtedly serve to encourage more entities to seek listing on the ASX.

What is a voluntary escrow arrangement?

A voluntary escrow arrangement is a contractual agreement whereby the holder of securities agrees not to dispose of its securities, or rights or interests connected with the securities, for the duration of the arrangement.  As such, any decision to use a voluntary escrow arrangement, the terms and the period of the escrow is a matter for negotiation between the relevant parties (the entity, the holder and often an underwriter or lead manager).

Voluntary escrow arrangements are sometimes offered up in a new listing by a founder or promoter with a substantial holding to make the listing more attractive to investors. This serves to demonstrate their continuing commitment to the entity.

On the other hand, they can also be demanded by underwriters or lead managers as a condition of their involvement in a new listing.

How do voluntary escrow arrangements affect interests in securities?

Chapter 6 of the Corporations Act sets out the takeover provisions and defines when a person has a ‘relevant interest’ in securities.

A ‘relevant interest’ pertains to a person’s capacity to exercise a degree of influence over securities. Prior to the changes to Class Order 13/520, a person could acquire a relevant interest in securities through an agreement placing the securities into a voluntary escrow arrangement. This is because, under the arrangement, that person has the power to control the disposal of the securities in accordance with 608(1)(c) of the Corporations Act.

This concept also applies to Chapter 6A of the Corporations Act, which deals with compulsory acquisitions and buy-outs.

The changes to voluntary escrow relief do not apply to the substantial holding provisions in Chapter 6C of the Corporations Act.

The changes

The amending instrument provides relief to issuers, underwriters and lead managers to facilitate voluntary escrow arrangements concerning IPOs by modifying Class Order 13/520.

The declarations in the amending instrument are effected with regard to references to ‘substantial holding’ in Chapters 6, 6A and 6C of the Corporations Act, as defined in section 9 of the Corporations Act. Similarly, subsection 671B(7) has been amended so that it remains consistent with the changes.

In addition, subsection 609 specifies the situations that do not give rise to having a relevant interest in securities. This section has been updated to reflect that ‘an issuer undertaking an IPO does not have a relevant interest in its securities held in escrow merely because of an escrow agreement’ (see notional subsection 609(13A)). Consistent with this change is the updated application to underwriters and lead managers see notional subsection 609(13B)).

Similarly, notional subsection 609(13C) sets out the permitted terms of the escrow agreement, including restrictions on the disposal of escrow securities but not in relation to voting rights, the duration of the escrow agreement and permitted transfers of escrow securities under the escrow agreement.

However, the relief is only available where the voluntary escrow arrangement meets the following requirements:

1. the agreement restricts disposal but not voting;
2. the agreement allows the holder to accept a successful takeover bid and allow the securities to be transferred or cancelled as part of a merger by scheme of arrangement;
3. the escrow must terminate no later than:
   1. two years after the date that the parties enter into the escrow agreement for an escrow arrangement with the issuer;
   2. one year for an escrow arrangement with the underwriter or lead manager;
4. where the escrow securities are beneficially held, there must be no change in beneficial ownership; and
5. the escrow securities may not be transferred to a bona fide third-party financial institution for a loan or other financial accommodation in connection with the security interest until the expiry of the escrow period.

If you would like any further information on voluntary escrow arrangements, or other ways in which we can assist you with facilitating an IPO, please contact: