Corporate Advisory Update - July 2023 | Gilbert + Tobin Lawyers: Law Firm in Sydney, Melbourne & Perth

05/07/2023

In this edition of Gilbert + Tobin's Corporate Advisory Update, we focus on key legal developments over the last month which are particularly relevant to in-house counsel.

ISSB launches global sustainability and climate disclosure standards and Treasury releases second round of consultation

After more than a year of consultations, on 26 June 2023, the International Sustainability Standards Board (ISSB) issued its first two International Financial Reporting Standards: ‘IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information’ (IFRS S1) and ‘IFRS S2 Climate-related Disclosures’ (IFRS S2) (together, the ISSB Standards).

IFRS S1 requires companies to disclose information about their sustainability-related risks and opportunities that is useful to investors when making decisions about providing resources to these companies. Meanwhile, IFRS S2 requires disclosure of information specifically linked to climate-related risks and opportunities, and is designed to be used in conjunction with IFRS S1.

Closer to home, the day after the ISSB Standards were launched, the Federal Government released its second round of consultation on the design of a framework for mandatory climate-related financial disclosures by Australian businesses which is open until 21 July 2023. The Australian framework will be formally established by the Australian Accounting Standards Board, and is intended to align as much as practicable with the ISSB Standards and in particular, IFRS S2.

A recent G+T Insight canvasses key requirements of the ISSB Standards, what they mean for Australian businesses as the Government develops Australia’s climate-related financial disclosure framework, and what lies ahead as frameworks for nature-related disclosures emerge.

New foreign ownership register from 1 July 2023 – update on ATO platform

Following the finalisation of the relevant Regulations and Standards, the new Register of Foreign Ownership of Australian Assets (Register) under Part 7A of the Foreign Acquisition and Takeovers Act 1975 (Cth) will commence from 1 July 2023.

A recent G+T Insight outlines the changes to notification obligations with the commencement of the Register. Importantly, Australian advisers are generally not able to submit notifications on behalf of foreign investors (due to privacy and confidentiality issues) and so investors will need to set up their own access to the ATO Portal. This requires obtaining a myGovID (which is a personal digital ID to authenticate use of Australian Government websites).

Read more: New foreign ownership register from 1 July 2023 – update on ATO platform

Unfair contract terms – it’s time to get your house in order

From 10 November 2023, Australia’s unfair contract terms (UCT) regime will apply to a much larger pool of contracts than it has in the past. Businesses that might previously have been comfortable that the UCT regime did not affect them, now need to take notice. At the same time, the regime now attracts significantly increased penalties for non-compliance than it has in the past.

Australian businesses should be taking stock of the standard documents they use to contract with customers and suppliers to assess what they need to do to comply with the updated UCT regime.

Read more: Unfair contract terms: it’s time to get your house in order

Review of Australia’s Modern Slavery Act: key proposals and implications

On 25 May 2023, the Commonwealth Department of the Attorney General tabled a report (Review Report) in Parliament which was based on a statutory review of the Modern Slavery Act 2018 (Cth) (Act). The review, led by Professor John McMillan AO, was required to be conducted 3 years after the Act commenced on 1 January 2019. See also media release by Australia’s Minister for Foreign Affairs.

The Review Report reveals a broad spectrum of opinions on the effectiveness and utility of the overall regime, with 64% of respondents viewing it positively, while 21% felt its impact was poor. Over 130 written submissions were made in response to the review’s Terms of Reference and associated Issues Paper (see previous G+T Insight for a discussion of the Act and the Issues Paper in more depth).

A recent G+T Insight summarises a number of the key recommendations made by the Review Report and their potential implications for businesses including:

lowering the reporting threshold from $100million to $50million in annual revenues;
changing the mandatory reporting criteria under the Act including the introduction of additional minimum criteria relating to reporting on modern slavery incidents or risks, implementing grievances and complaints mechanisms for staff and internal and external consultation on modern slavery risk management;
expanding administrative guidance (including publishing supplementary sector specific guidance);
proposing new functions for the federal Anti-Slavery Commissioner;
requiring entities to have a due diligence system in place; and
introducing penalties for non-compliance with statutory reporting requirements;

The Government will now consider the report and consult across government and with stakeholders in formulating its response to the recommendations.

Multinational tax integrity: changes to the thin capitalisation rules and reporting on subsidiaries

Following a lengthy consultation process, Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Bill 2023 (Bill) was introduced into Parliament on 22 June 2023 (although it has been referred to the Senate Economics Legislation Committee for report by 31 August 2023).

The measures will significantly change Australia’s thin capitalisation rules and are expected to drastically reduce the scope for interest deductions, including in relation to related party transactions. The Bill includes the following proposed measures:

replacing the safe harbour debt amount to work out a taxpayer’s maximum allowable debt under the thin capitalisation rules. Under this commonly used method, taxpayers are currently permitted to gear up to a debt-to-equity ratio of approximately 1.5:1 but, from 1 July 2023, this method will be replaced with a cap on interest deductions for an income year up to 30% of earnings before interest, taxes, depreciation and amortisation (calculated according to tax concepts rather than commonly used financial measures);
introducing a new third party debt test to replace the current arm’s length debt test;
introducing a new group ratio test which will replace the worldwide gearing debt test for most taxpayers; and
as a surprise addition in the Bill, introducing a new “debt creation” rule as a separate measure to the thin capitalisation changes which denies debt deductions for debt created through certain related-party transactions.

The Bill also contains the new transparency rules requiring Australian public companies (listed and unlisted) to disclose tax-related information about subsidiaries in their annual financial reports, commencing for financial years on or after 1 July 2023. Such entities will be required to provide a “consolidated entity disclosure statement” as part of their annual financial reporting obligation. Information that will be required to be disclosed include names and tax residency of entities in the group, and their entity types. Interestingly, directors will be required to sign off on the information contained in this statement.

Measures relating to the intangible deductions, country by country public reporting and the public register of beneficial ownership are not included in the Bill. However, Treasury has released revised exposure draft legislation in relation to the intangible deductions

A recent G+T Insight considers the thin capitalisation measures in the Bill in more detail and the changes since the exposure draft.

Buy now pay later – preparing for tougher regulation

On 22 May 2023, Treasury announced the Government’s intention to regulate the Buy Now Pay Later (BNPL) industry under the proposed Option 2 as presented by Treasury in its BNPL consultation last November (which involves services being subject to limited regulation under the National Consumer Credit Protection Act 2009 (Cth)).

Further, on 26 May 2023, ASIC announced a stop order relating to humm's BNPL products over concerns about its target market determination for the products.

With heightened regulatory focus on consumer protection, it's crucial to stay ahead of the curve. A recent G+T Insight provides insights into what BNPL providers and distributors should do to prepare for tougher regulatory scrutiny and regulation.

Australia’s payment system to undergo regulatory transformation

On 7 June 2023, the Australian Government unveiled its Strategic Plan for Australia's Payments System, setting the stage for a transformative era of digital transactions.

This comprehensive plan stems from extensive consultations and the Treasury's dedicated efforts to gather valuable insights on Australia’s payments framework. It addresses the pressing needs of our evolving society and embraces the principles of "trustworthiness", "accessibility", "innovation" and "efficiency" to guide the future direction of Australia's payments regulatory regime.

A recent G+T Insight unpacks the Strategic Plan and the Government’s guidance regarding the rollout of its proposed supporting initiatives.

Net Zero Economy Authority to commence on 1 July 2023

On 11 May 2023, the Commonwealth Government made an order establishing an interim Net Zero Economy Agency (Agency) to advise on the formation and commencement of the projected permanent Net Zero Authority. The Agency will commence its functions on 1 July 2023.

The Agency aims to promote the orderly and positive economic transformation associated with decarbonisation and energy system change, including through:

the development of government strategies to support the net zero economic transformation for workers and regional communities;
facilitating engagement between investors and regional industries and communities in the net zero transformation;
supporting workers in emissions-intensive sectors to access new employment, skills and other opportunities; and
reporting regularly to the Prime Minister, Treasurer and Minister for Climate Change and Energy on progress on net zero economic transformation and government responses.

New National Anti-Scam Centre to be phased in from 1 July

The new National Anti-Scams Centre (NASC), has been established by the ACCC, and will support high frequency data sharing between government agencies, law enforcement and the private sector in order to combat scam activities. The NASC is being phased in from 1 July 2023 with funding allocated to build its capabilities over the next three years. ACCC Deputy Chair, Catriona Lowe, stated that the NASC “will help inform finance, telecommunications and digital platforms sectors to take more timely and effective steps to stop scammers”. Ms Lowe also reiterated the ACCC’s policy position that there should be “effective cross-industry standards with coverage and teeth”. See ACCC media release.

On 3 July 2023, ASIC and the ACCC announced that first off the rank for the NASC will be an investment scam fusion cell (led by the ACCC and ASIC with representatives from the banks, telecommunications industry and digital platforms) to combat the growing problem of investment scams which are costing Australians more than $1 billion a year. The cell with be set up initially for 6 months with the NASC to then publicly report the outcomes. The fusion cell aims for early intervention to disrupt investment scams, removing investments scams from websites, sharing information to assist the private sector to take disruptive action, providing information to the public about how to avoid investment scams, and identifying intelligence to refer to law enforcement in Australia and overseas.

The NASC follows the following reports:

the ACCC report - Targeting scams: report on scams activity released on 17 April 2023, which details the impact that scam activity had on Australians in 2022. This Report:
- found that losses to scams are rapidly increasing, with total reported losses in 2022 of at least $3.1 billion – an 80% increase from 2021;
- called for greater coordination between government, law enforcement and the private sector to combat scams, as well as minimum standards to address current gaps between institutions, industries and regulators; and
- noted that stolen personal data is being used to scam customers of companies that have been subject to cyberattacks (like Medibank and Optus). This scam risk adds to the potential liability of such companies and reinforces the importance of maintaining stringent cyber risk management systems. See ACCC media release.
a subsequent ASIC Report 761, Scam prevention, detection and response by the four major banks released on 20 April 2023 which supported the ACCC report and recommended that all financial institutions improve their approaches to scam prevention, detection, and responses.

Many thanks to Justin Mannolini and Cassandra Lee for their contribution to this insight.

AI Regulation in Australia: A centralised or decentralised approach?

The Australian Government has released a Discussion Paper (Supporting responsible AI: discussion paper) seeking industry feedback to inform the government’s approach to regulating AI (whether through mandatory or voluntary mechanisms) to help support responsible AI practices and mitigate potential risks. It is great to see this level of federal government engagement. However, the Discussion Paper illustrates the size of task ahead.

Among the questions posed by the Discussion Paper are whether there are potential risks from AI that are not covered by Australia’s existing regulatory framework, whether there is support for a risk-based approach to regulating potential AI risks or whether there is a better approach, and whether any high-risk AI applications should be banned completely.

Why your current cybersecurity policies won’t cover you for AI

Georgetown University’s Center for Security and Emerging Technology (CSET) recently convened an industry workshop to consider security threats posed to AI, with technology, legal, industry and policy attendees. There were two somewhat disturbing outcomes from the meeting:

while AI has been deployed quickly and widely into the real world, most of the learning about AI’s cybersecurity vulnerabilities still comes from testing in a lab environment. As such, while AI is ‘out there in the wild’, the CSET paper acknowledges “a holistic understanding of vulnerabilities in deployed systems is lacking.”
yet we know enough to know that “AI vulnerabilities may not map straightforwardly onto the traditional definition of a patch-to-fix cybersecurity vulnerability.” If you are introducing AI into your organisation, it would be a mistake to re-purpose your existing cybersecurity policies and teams without substantial rethinking, retraining and additional resources.

A recent G+T Insight considers the differences between AI vulnerabilities and traditional software vulnerabilities, and the recommendations from the CSET meeting about how to address AI risks.

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NSW Court of Appeal provides useful guidance on the enforceability of restraints of trade in a business sale context

The NSW Court of Appeal has provided useful guidance on the reasonableness of restraints in a business acquisition context in DXC Eclipse Pty Ltd v Wildsmith [2023] NSWCA 98. The decision is a useful reminder to purchasers to take care when drafting such clauses to ensure they are enforceable. The length of any post completion employment requirement for the seller will also be important.

In April 2018, DXC Eclipse Pty Ltd (DXC) acquired Sable37 (a Microsoft software solutions business) from Mr Wildsmith and others.

The Share Purchase Agreement (SPA) imposed the following on Mr Wildsmith from Completion:

Mr Wildsmith to remain employed at DXC for at least one year; and
non-competition and non-solicitation restraints for a period of 7 years.

After resigning from DXC more than 3 years after Completion, Mr Wildsmith set up a new business that offered services relating to different Microsoft products than Sable37 (New Business).

In rejecting DXC’s injunction application, the NSWCA held firstly that the New Business was not competitive with the Existing Business because the product which the

New Business supplied was not caught by the relevant definition of “Business” in the SPA.

The NSWCA then held that, in any event, the restraints were unreasonable. In so finding, the Court observed:

In circumstances where the level of competition is slight, the greater the nature or extent of the restraint, the less likely it is to be reasonable. Slight or insubstantial competition will not generally be enough to establish a breach (but the Court accepted that every restraint will turn on the particular language, and reasonableness, of the relevant restraint);
The New Business was not selling or threatening to sell similar products to the Existing Business “so as to compete with it seriously” or “pose a real commercial threat”;
There was no suggestion that Microsoft’s dealings with the New Business would have any effect on its relationship with DXC, and DXC’s form of injunction was not reasonably necessary to protect the legitimate business interests of DXC;
While in the context of business acquisition agreements, there is authority that recognises the importance of holding parties to their bargains, “such a consideration is not determinative nor is it capable of providing a finding of reasonableness”;
There was considerable force in the argument that the fact that the restraint was a cascading restraint diminished the clarity and force of parties’ express acknowledgement in the SPA, particularly because it included an acknowledgement that aspects of the restraint may be struck down;
Even where the purchase price is significant, the focus is on how long it takes to protect the goodwill, not how long it will take to recover the full investment; and
The terms of any post Completion employment arrangement may provide some indication as to how long the purchaser considered necessary to realise the goodwill acquired. In this case, Mr Wildsmith had stayed considerably longer than the 12 months he was contractually obliged to.

Many thanks to Reuben Challis, graduate, for his assistance in preparing this summary.

Federal Court removes requirement for foreign counsel opinion of due execution of scheme deed poll

On 13 June 2023, Jackman J of the Federal Court handed down reasons in Re Blackmores Ltd [2023] FCA 624, amending the evidence requirements for foreign companies in a scheme of arrangement.

Prior to the Blackmores decision, foreign companies had to provide an affidavit from an appropriately qualified lawyer in the respective foreign jurisdiction proving due execution of a deed poll at the relevant scheme hearing.

In Blackmores, Jackman J held that such a requirement was both ‘unnecessary’ and ‘wrong in principle’, echoing His Honour’s earlier reasoning in Re Vita Group Ltd [2023] FCA 400 to streamline the process for approval for schemes of arrangement (see April 2023 Corporate Advisory Update).

Many thanks to Justin Mannolini and Cassandra Lee for this insight.

Insolvency update

Gilbert + Tobin has recently published 2 insolvency updates:

High Court kicks off 2023 with Landmark insolvency rulings

In this insight, the Restructuring + Insolvency and the Disputes + Investigations teams consider 2 landmark decisions by the High Court this year that have significant implications for insolvency practitioners - Bryan v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 and Metal Manufactures Pty Limited v Morton [2023] HCA 1.

These decisions clarify the operation of important aspects of Australia’s insolvency regime and put to rest two questions long held by practitioners: whether liquidators are entitled to apply the peak indebtedness rule when assessing unfair preference claims and whether creditors are entitled to a right of set off against a liquidator’s claim to recover an unfair preference.

Insolvency practitioners beware: Court denies application to extend convening period

This insight by the Restructuring + Insolvency team examines the decision in Frisken, Xpress Transport Solutions Pty Ltd (Receivers and Managers Appointed) (Administrator Appointed) [2023] FCA 448. The decision provides insolvency practitioners with a timely reminder that the Court will not just “rubber stamp” an application to extend the period in which the second meeting of creditors must be convened under section 439A(6) of the Corporations Act 2001 (Cth) in all circumstances and will not exercise its powers under section 439A(6) lightly.