Corporate Advisory Update - March 2023

09/03/2023

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.

ASIC launches first court proceedings alleging greenwashing

ASIC has recently warned that this year it will be targeting greenwashing, predator lending and misleading insurance pricing promises. The warning coincides with the release of its latest enforcement and regulatory report (REP 757) which highlights actions taken during the last three months of 2022 and the full list of enforcement priorities for the year ahead (which includes sustainable finance practices and disclosure of climate risks as well as financial scams, cyber and operational resilience, and investor harms involving crypto-assets).

True to its word, on 28 February 2023, AISC announced that it had launched its first court action against alleged greenwashing conduct. The civil penalty proceedings in the Federal Court are against Mercer Superannuation (Australia) Limited (Mercer) for allegedly making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options.

ASIC alleges Mercer made statements on its website about seven ‘Sustainable Plus’ investment options offered by the Mercer Super Trust, of which Mercer is the trustee. These statements marketed the Sustainable Plus options as suitable for members who ‘are deeply committed to sustainability’ because they excluded investments in companies involved in carbon intensive fossil fuels like thermal coal. Exclusions were also stated to apply to companies involved in alcohol production and gambling. However, ASIC alleges members who took up the Sustainable Plus options had investments in companies involved in industries the website statements said were excluded.

A recent G+T Insight considers the key aspects of the proceedings and how regulated entities offering sustainable investment products can reduce risks of similar claims by ASIC.

Greenwashing is also listed as one of the ACCC’s compliance and enforcement priorities for 2022/2023, and the ACCC announced last week that it will investigate a number of businesses for greenwashing, following an ‘internet sweep’ of 247 businesses across eight sectors that identified 57% of those businesses as making what the ACCC considered to be concerning environmental claims (see the ACCC’s report published on 2 March 2023).

In overseas developments, on 9 February 2023, environmental law charity ClientEarth announced that, as a shareholder in Shell, it had filed a derivative claim in the UK High Court against Shell’s Board for its management of climate risk. This marks the first time a Board has faced such legal action. A recent G+T Insight discusses the significance of the claim for directors of Australian companies and steps that boards can take to mitigate the risk of similar actions in Australia.

Privacy Act Review Report: Highlights and hot takes

On 16 February 2023, the Attorney-General released the Privacy Act Review Report (Report) which contains 116 proposals for reforming the Privacy Act 1988 (Cth) (the Privacy Act). These proposals aim to make, in the Attorney-General’s words, the Privacy Act “fit for purpose” to “adequately protect Australians’ privacy in the digital age”.

The 116 proposals are described at a principles level. The Report does not attach an exposure draft of any reform legislation and many of the proposals are marked as being subject to further consultation. While the Report gives us a clearer picture of the future direction of the Privacy Act, there are still many important details that need to be filled in.

Despite this lack of detail, it’s becoming very clear that the upcoming Privacy Act reforms will require businesses to make substantial changes to the way they interact with individuals and handle personal information.

A recent G+T Insight examines the highlights of the Report. The deadline for feedback on the Report is 31 March 2023.

ASIC focus on whistleblowing

On 1 March 2023, ASIC announced that it had commenced its first action for alleged breaches of the whistleblower provisions under the Corporations Act 2001 (Cth). The civil penalty proceedings in the Federal Court against TerraCom Limited (TerraCom), an ASX--listed coal producer based in Queensland, as well as its managing director, chief commercial officer, former Chair and former director and Deputy Chair.

The case concerns the conduct of TerraCom and its directors and officers following whistleblower allegations made by a former employee that TerraCom had been involved in the falsification of coal quality results. TerraCom had made two ASX announcements in early 2020 and had also published an open letter to shareholders in the Australian Financial Review and The Australian denying the whistleblower's allegations, stating that TerraCom had the allegations independently investigated and had dismissed the allegations as a result.

In summary, ASIC alleges that the various individual defendants, who were then members of TerraCom's disclosure committee:

failed to take reasonable steps to ensure statements to the ASX were not false or misleading;
by allowing the false or misleading statements to be published, engaged in conduct that caused detriment to the whistleblower's reputation, earning capacity and psychological and emotional state; and
failed to take reasonable steps upon receipt of the independent investigator's report into the issues raised by the whistleblower, in breach of their duty to exercise reasonable care and skill in the discharge of their duties as directors and officers.

The following day, on 2 March 2023 (following its review of 7 entities’ whistleblower programs from a cross section of industries), ASIC published a report (REP 758) on good practice for handling whistleblower disclosures to ensure that arrangements are effective and encourage people to speak up.

In summary, ASIC reported that entities with stronger programs:

established a strong foundation for the program - for example, through procedures and systems to embed the program’s requirements;
fostered a culture and practices to support whistleblowers;
informed and trained those involved in receiving or handling disclosures about protecting whistleblowers and treating material confidentially;
monitored, reviewed, and improved the program, including seeking feedback from whistleblowers;
used information from disclosures to address underlying harms and improve company performance; and
embedded senior executive accountability for the program.

ASIC stated its expectation that entities analyse the features and good practices identified in REP 758 and consider how they can be scaled and tailored to suit their operations. ASIC also signalled its intention to continue to review entities whistleblower policies and arrangements for handling whistleblower disclosures, and that it will consider the full range of enforcement action where necessary.

New franking credit and capital loss rules impact share buyback pricing

On 16 February 2023, the Government introduced the Treasury Laws Amendment (2023 Measures No.1) Bill, Schedule 1 of which effectively removes off-market share buy-backs as a capital management tool for listed companies and deny franking credits and capital losses for shareholders. The proposed measures may impact the price at which off-market buy backs occur and reduce how frequently listed companies conduct them.

G+T’s experts Muhunthan Kanagaratnam, Mark Goldsmith and Kevin Ko delve into the reasons behind the changes and explore the potential practical impacts.

ASIC Instrument to facilitate new employee share scheme regime

Following consultation late last year (see our December 2022 Corporate Advisory Update), ASIC published ASIC Corporations (Employee share schemes) Instrument 2022/1021 (Instrument) on 16 December 2022 which provides relief in relation to some technical issues which were causing difficulty with the recently amended employee share scheme (ESS) regime in the new Div 1A of Part 7.12 of the Corporations Act 2001 (Cth) which came into effect on 1 October 2022.

The new ESS regime replaces ASIC’s existing relief in Class Orders [CO 14/1000] Employee Incentive Schemes: Listed bodies and [CO 14/1001] Employee Incentive Schemes: Unlisted bodies and this previous relief is only available for offers that were made before 1 March 2023 (and where the offer is only capable of acceptance until 1 April 2024).

The relief in the Instrument includes:

a broader exemption for secondary sales of financial products that are quoted on a financial market;
clarification on the requirement to update disclosure documents;
for unlisted bodies, more options for the financial information that foreign companies can provide ESS participants;
for unlisted bodies, the ability to provide an expert valuation of ESS interests that are not ordinary shares;
technical relief so that salary sacrificing arrangements can comply with the requirements for contribution plans; and
clarification that financial products offered outside Australia do not need to be included when calculating the issue cap in section 1100V of the Corporations Act.

See also ASIC media release - ASIC provides legislative relief to facilitate employee share schemes

Unfair trading practices; ACCC Chair Gina Cass-Gottlieb at G+T

On 14 February 2023, Gilbert + Tobin hosted a panel discussion with ACCC Chair Gina Cass-Gottlieb, head of Gilbert + Tobin’s Competition, Consumer + Market Regulation practice Elizabeth Avery, Chair of the Consumers’ Federation of Australia Gerard Brody, and a virtual foreword from Assistant Minister for Competition, Charities and Treasury the Hon Dr Andrew Leigh MP.

The topic of debate was the role of fairness in competition and consumer law. The panelists considered the ACCC’s recommendation that Australia should legislate a new prohibition against unfair trading practices.

A recent G+T Insight recaps the key takeaways from the session.

Read more: Unfair Trading Practices: ACCC Chair Gina Cass-Gottlieb at G+T

SOCI Critical infrastructure risk management program rules now released

Following a period of consultation at the end of 2022, the Security of Critical Infrastructure (Critical infrastructure risk management program) Rules (CIRMP Rules) have now been registered under the Security of Critical Infrastructure Act 2018 (Cth).

The Rules commenced on Friday 17 February 2023, kicking off a 6 month grace period during which responsible entities for relevant critical infrastructure assets will need to put in place a critical infrastructure risk management program (CIRMP). The CIRMP must be signed off by the entity’s board and is required to be regularly reviewed and reported on annually.

Importantly, within 18 months of the Rules commencing (i.e., by 17 August 2024), responsible entities must also ensure the CIRMP establishes and maintains a process/system to comply with one of certain specified cyber frameworks or an equivalent framework.

Takeovers Panel consultation in relation to deal protection and insider participation

The Takeovers Panel has released consultation papers in relation to proposed revisions to its Guidance Note 7 on deal protection arrangements (see here) and Guidance Note 19 on insider participation in control transactions (see here). Consultation closed on 28 February 2023.

The proposed revisions to Guidance Note 7 provide guidance that the emerging practice of target boards agreeing to provide periods of ‘hard exclusivity’ (being exclusivity arrangements without an effective ‘fiduciary out’) to a potential bidder in the context of a non-binding control proposal is likely to give rise to unacceptable circumstances. However, the Panel has recognised that there may be limited circumstances in which granting a short period (of no more than four weeks) of ‘hard exclusivity’ in relation to a non-binding proposal may not be unacceptable.

Some examples of such circumstances have been provided, but the Panel emphasises that it will consider the circumstances and context in which the arrangements were entered into when determining whether such arrangements are unacceptable. This proposal suggest that the Panel is concerned about ‘hard exclusivity’ arrangements and attempts by bidders to prematurely restrict competition for control before target shareholders have the benefit of a binding transaction. Our own experience suggests these concerns may be misplaced.

Most target company directors (and their advisors) are alert to the impact of proposed deal protection arrangements on competition and are prepared to push back on unreasonable requests from bidders. Despite the Panel’s concerns, in our view there remains a pathway for target directors to justifiably trade ‘hard exclusivity’ in the right circumstances.

The proposed revised Guidance Note 19 helpfully provides further clarity to the Panel’s approach to insider participation in control transactions, with a non-exhaustive list of factors which may give rise to unacceptable circumstances based on the Panel’s previous decisions.

The proposed amendments also broaden the key concepts of ‘insider’ and ‘participating insider’ and clarify that insiders should, among other things, take reasonable steps to avoid actual or perceived conflicts prior to disclosing an approach to the target board. The revised guidance also sets an expectation that a target board would consider appointing at least one independent director when all current directors are participating insiders. However, there are likely to be practical limitations on the identification and appointment of suitable candidates in time to properly consider control proposals.

This Insight is extracted from G+T’s Expert Adviser publication.

Federal Court considers the “last director rule” for the first time

As part of a suite of reforms enacted in 2020 to prevent illegal phoenix activity, the Federal Government passed the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 (Cth) which came into effect on 18 February 2021. The Act introduced section 203AB to the Corporations Act 2001 (Cth) to prevent a company from being abandoned by its directors and left without a board.

The recent case of Hutton, in the Matter of Big Village Australia Pty Ltd (Administrators Appointed) [2023] FCA 48, in which Gilbert + Tobin acted for Matthew Hutton and Rob Smith of McGrathNicol in their capacity as joint and several administrators of Big Village Australia, marks the first time section 203AB has been applied by a Court.

Clarity at last on s451E: Federal Court in Rathner confirms Ipso Facto operates as expected

What is now known as the ‘ipso facto regime’ was introduced by the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) in September 2017, which inserted a number of provisions that provided for a stay on the exercise of certain ipso facto contractual rights in the context of corporate restructuring and insolvency procedures.

Put simply, an ipso facto clause in this context is a provision that allows one party to a contract to terminate or modify the operation of the contract in the event of a specified insolvency related event. Despite the significance of the regime, and its implications in corporate restructuring and insolvency space, the provision giving rise to the stay, section 451E of the Corporations Act, has only recently been judicially considered by the Federal Court in the decision of Rathner Citius Property Pty Ltd (Admins Apptd) [2023] FCA 26.

A recent Insight by G+T’s Restructuring + Insolvency team considers the decision which is helpful in providing some comfort around the operation of the ipso facto stay.

Federal Court sanctions GetSwift with record continuous disclosure penalty

GetSwift Limited (formerly ASX:GSW) (GetSwift) (in liquidation), a logistics software start up, has been ordered to pay a $15 million penalty for contravening its continuous disclosure obligations under section 674 of the Corporations Act 2001 (Cth).

In February 2019, ASIC commenced civil proceedings against GetSwift, its former director, CEO and executive chairman, Mr Hunter and two former directors, Mr Macdonald and Mr Eagle. In November 2021, the Court found that GetSwift made numerous misleading statements in its announcements on the ASX and breached its continuous disclosure obligations on 22 separate occasions. The directors were found to have knowingly misled the market, as well as being aware of GetSwift’s continuous disclosure breaches.

The Federal Court described GetSwift as a company that ‘became a market darling because it adopted an unlawful public-relations-driven approach to corporate disclosure instigated and driven by those wielding power within the company’. Justice Lee found Mr Macdonald was focussed on making money and had ‘little understanding or regard for his legal obligations as a director’.

Previously, the maximum penalty per contravention of section 674 comprised a maximum fine of $1 million for a company and $200,000 for an individual. However, higher penalties of up to $10.5 million for a company and $1.05 million for an individual were introduced in March 2019. Under the new regime, Mr Hunter was ordered to pay a penalty of $2 million and disqualified from managing corporations for 15 years and Mr Macdonald was ordered to pay a penalty of $1 million and disqualified for 12 years.

ASIC notes the penalties to Mr Hunter and Mr McDonald are two of the highest penalties against directors for corporate misconduct. ASIC Deputy Chair Sarah Court said ‘Disclosure is critical to market integrity and consumer protection. The penalties imposed by the Court demonstrate the extent and seriousness of the misconduct in this matter and the importance placed by the Court on deterring others from engaging in similar behaviour. ASIC will continue to take action to hold companies and individuals to account for corporate misconduct of this kind.’ See ASIC media release.

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