Insights

17/11/15

Corporate Advisory Update - November 2015

By Hiroshi Narushima and Jessica van Rooy

Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team.

The update provides a summary of key recent legal developments, particularly relevant to in-house counsel.

Legislation and proposed legislation

New foreign investment rules from 1 December 2015

New foreign investment rules came into effect in Australia on 1 December 2015.  The basic process (including a 30 day examination period and a 10 day notification period) remains the same, but there are a number of important changes to the way Australia’s foreign investment screening regime works.

For further details, see New foreign investment rules by Deborah Johns dated 8 December 2015.


ChAFTA to come into effect on 20 December 2015

Following an ‘exchange of notes’ in Sydney (confirming the completion of domestic processes in both countries), the free trade agreement between Australia and China (ChAFTA) will come into force on 20 December 2015. 

Once ChAFTA comes into effect on 20 December 2015, the following legislation to give effect to it will also come into effect:

See also July 2015 Corporate Advisory Update for further details of ChAFTA.


Negotiations for a free trade agreement between Australia and the European Union to commence

Discussions between Australian and European Union officials on the next steps to launching negotiations on a free trade agreement will begin shortly.  Submissions from interested stakeholders on potential opportunities and impacts are due by 26 February 2016.

The Australian Prime Minister together with the President of the European Council and the President of the European Commission have agreed in a joint statement on 15 November 2015 to start the process towards a free trade agreement which will:

  • support sustainable growth and investment, open up new commercial opportunities and promote innovation and employment in Australia and the European Union; and
  • aim to achieve a comprehensive and balanced outcome that liberalises trade, promotes productive investment flows and enhances the regulatory environment for business.

Australian and European Union officials will now begin bilateral discussions on the next steps to launch negotiations.

As part of this process, the Department of Foreign Affairs and Trade is seeking submissions from interested stakeholders on the potential opportunities and impacts by 26 February 2015.

See also Department of Foreign Affairs and Trade website.


Government releases National Innovation and Science Agenda

The Federal Government has released details of a $1.1 billion reform package focussed on the “National Innovation and Science Agenda”, aimed at boosting innovation and driving an ‘ideas boom’ in Australia.

On 7 December 2015, Prime Minister Malcolm Turnbull announced the $1.1 billion National Innovation and Science Agenda (NISA).  With a stated vision of sparking an “ideas boom”, the scheme looks to promote investment in business-based research, development and innovation over the next four years.  The 4 key themes are as follows:

  • Taking the leap – backing Australian entrepreneurs by helping them access finance and having fewer penalties for failure;
  • Working together – increasing collaboration to help solve real world problems and create jobs;
  • Best and brightest – developing and attracting world-class talent for the jobs of the future; and
  • Leading by example – government will lead by example by embracing innovation and agility in the way it does business.
  • Amongst the various initiatives falling within these key themes, the Federal Government has unveiled the following new initiatives:

A combination of tax incentives and offsets – see Turnbull Government innovation statement - Australian tax changes dated 14 December 2015;

  • reforming Australia’s corporate insolvency laws to encourage entrepreneurship and innovation.  The NISA coincides with the release of the Productivity Commission’s final report on business set-up, transfer and closure, the focus of which is improving the timing and effectiveness of restructuring options and to guide a cultural shift away from penalising and stigmatising business failure.  We will provide further details of these reforms in the new year;
  • making it easier for companies to access crowd-sourced equity funding to develop their innovative ideas – see “Crowd-sourced funding Bill introduced into Parliament” item below; and
  • making existing employee share scheme rules more user-friendly to make it easier for promising businesses to hire and retain top staff.

More information on the NISA, including the complete series of fact sheets published by the Government are available on the NISA website.


Crowd-sourced funding Bill introduced into Parliament

The Corporations Amendment (Crowd Sourced Funding) Bill 2015 proposes to introduce a regulatory framework to facilitate crowd sourced funding by small, unlisted public companies.  We will continue to monitor the progress of the Bill.

Crowd sourced funding (CSF) is receiving increasing attention globally as an alternative form of fundraising for start-up or other small to medium sized businesses which allow them to raise funds from a large number of investors.  Although it is theoretically available in Australia, it is subject to regulatory barriers including fundraising, licensing and other restrictions under the Corporations Act 2001 (Cth) (Act).

Following consultation earlier this year, the Corporations Amendment (Crowd Sourced Funding) Bill 2015 (Bill) was introduced into Parliament on 3 December 2015.  See G+T Alert on 20 August 2015 for further details on the consultation.

According to the Explanatory Memorandum, the Bill amends the Act to establish a regulatory framework to facilitate CSF by small, unlisted public companies, with the CSF regime to include:

  • eligibility requirements for a company to fundraise via CSF, including disclosure requirements for CSF offers;
  • obligations of a CSF intermediary in facilitating CSF offers;
  • the process for making CSF offers;
  • rules relating to defective disclosure as part of a CSF offer; and
  • investor protection provisions.

Essentially, an unlisted public company which satisfies the following tests:

  • the “gross assets test” – the value of the consolidated gross assets of the issuer and any related parties must be less than $5 million; and
  • the “turnover test” – the consolidated annual revenue of the issuer and any related parties must be less than $5 million, will be able to raise up to an “issuer cap” of $5 million in any 12 month period using CSF.

Retail clients will also be subject to an investor cap of $10,000 per issuer via a particular intermediary within a 12 month period, and will also have cooling off rights.

The Bill also:

  • provides new public companies that are eligible to crowd-fund with temporary relief from the reporting and corporate governance requirements that would usually apply by reducing the potential barriers to adopting the required public company structure; and
  • provide greater flexibility in the AML and clearing and settlement facility licencing regimes, which will enable secondary trading markets for CSF securities to be licensed once the CSF regime is established, and will facilitate the development of other emerging or specialised markets by subjecting them to a regulatory regime which is tailored to best suit their activities.

ASIC

ASIC updates guidance on employee incentive schemes

The amendments to ASIC’s relief and guidance on employee incentive schemes do not reflect any significant change to underlying policy.  Rather, they are intended to clarify the scope and operation of the relief and remove certain practical burdens for complying with relief.

ASIC has made some changes to Class Orders [CO 14/1000Employee Incentive Schemes: Listed Companies and [CO 14/1001Employee Incentive Schemes: Unlisted Companies (Class Orders) which provide relief to listed and unlisted entities which operate employee incentive schemes (EISs) from certain requirements and restrictions under the Corporations Act 2001 (Cth) (see ASIC Corporations (Amendment) Instrument 2015/943 (Instrument) and the associated explanatory statement).  ASIC has also updated Regulatory Guide 49: Employee incentive schemes (RG 49) to provide further guidance.

According to ASIC, there have been no significant changes to the underlying policy but the changes are intended to clarify the intended operation and scope of relief, to ensure that the relief in the Class Orders aligns with the intended policy as outlined in their explanatory statements and also with RG 49, as well as to reduce unnecessary repetition and removal of certain unintended practical burdens of complying with conditions for relief in the Class Orders.

The changes to the Class Orders include:

Amendments common to listed and unlisted companies [CO 14/1000] and [CO 14/1001]

  • the definition of ‘employee incentive scheme’ has been amended and it has been clarified that an EIS is covered by a Class Order to the extent that the offer made and conduct carried out are in reliance on the relief; 
  • the definition of ‘offer’ has been amended to clarify that the conditions of relief (eg providing an offer document) do not re-enliven merely because the products acquired under the EIS have vested or a right has been exercised;
  • the definition of ‘offer document’ has been amended so that the condition that where a trustee will hold the products, the offer must be accompanied by a copy of the trust deed (or a summary of its terms), only applies where the products will be held by the trustee on an allocated basis and the participants have a right to control any rights and receive any income from the products; and
  • subparagraph 20(e) has been amended to provide that when calculating the percentage of voting shares held by a trustee, products which have been acquired as a result of the offers made in reliance on individual relief instruments must also be counted in addition to those products offered in reliance on the Class Orders;

Additional listed company amendments [CO 14/1000]

  • paragraph 18A has been inserted to clarify that products that are not able to be traded on an eligible financial market must be made for no more than nominal monetary consideration.  This then becomes consistent with RG 49 and the rationale behind the condition in sub-paragraph 21(b) restricting the use of contribution plans to acquire options and incentive rights.  A corresponding change has also been made to sub-paragraph 21(b) to remove the unintended restriction on contribution plans which are used to acquire a product that is able to be traded on an eligible financial market (eg quoted options);
  • subparagraph 21(d) has been amended to clarify that the condition that, where products have been acquired by a trustee using contributions from a participant, the participant has the right to vote and receive income (where applicable) from the products, only applies where the trustee holds the products on an allocated basis;
  • subparagraph 21(e) has been amended so that a body does not have to allow a participant to discontinue participation in a contribution plan to the extent that those contributions are still required to pay for products already issued; and
  • a definition of ‘contribution’ has been inserted to clarify that, for the purpose of a contribution plan, payments in order to exercise options or cause incentive rights to vest, are not considered to be contributions towards the products initially granted under the EIS.  Nominal payments and one-off payments where the products are issued to the employee immediately (or as soon as practicable) are also not contributions although contributions can include payments made before or after the products have been acquired.

See also ASIC media release dated 11 November 2015.


ASX

ASX consults on reverse company takeovers

ASX is seeking feedback on potential amendments to the ASX Listing Rules to address ‘reverse takeovers’ which would impose a shareholder approval requirement under Listing Rule 7.1 where the bidder issues shares in excess of 100% of its existing share capital as consideration for an acquisition by way of takeover or scheme.

ASX has released a consultation paper Reverse Takeovers – Consultation on Shareholder Approval Requirements for Listed Company Mergers (Paper). 

Currently, neither the Corporations Act 2001 (Cth) nor the ASX Listing Rules (Listing Rules) require bidder shareholder approval for a reverse takeover (ie where a bidder acquires a larger target company offering its shares as consideration).  In particular, the ASX Listing Rules contain specific exceptions from the general Listing Rule 7.1 restriction on issues of shares in excess of 15% without shareholder approval for shares issued as consideration for a takeover or scheme regardless of the size of the issue.  Some investor and corporate governance groups have identified a gap in the regulatory framework due to the fact that in a reverse takeover:

  • the bidder shareholders do not have a say in whether the transaction proceeds, even though they are effectively in the position of ‘target’ shareholders; and
  • by contrast, the target shareholders do have a say through their right to accept or reject the offer (in the case of an off-market takeover offer) or to vote on the scheme proposal (in the case of a scheme of arrangement), even though they are effectively in the position of ‘bidder’ shareholders.

Given the widely differing views expressed to ASX on the regulatory framework for reverse takeovers, ASX is seeking formal feedback.  For this purpose, the Paper outlines:

  • the current regulatory framework for reverse takeovers;
  • a consultation option for potential amendments to the Listing Rules which would impose a shareholder approval requirement under Listing Rule 7.1 where the bidder issues shares in excess of 100% of its existing share capital as consideration for an acquisition by way of takeover or scheme; and
  • some of the implications for reverse takeovers in the event of a change to the regulatory framework.

ASX has also emphasised that any proposed changes to the regulatory framework must strike an appropriate balance between:

  • any regulatory benefits (in terms of investor protections) relative to the size and nature of the perceived problem and any additional costs or market inefficiencies that may arise as a result of any change;
  • ensuring listed companies can continue to compete effectively in the market for corporate control; and
  • not unduly interfering with the role of the Board as the primary decision maker in relation to corporate activity

Submissions on the Paper are due by 17 December 2015.


Takeovers Panel

Panel publishes revised guidance note on funding arrangements

The Takeovers Panel’s revised Guidance Note 14 seeks to ensure that there is no confusion following the Mariner decision handed down by the Federal Court earlier this year.

The Takeovers Panel has published its revised Guidance Note 14Funding Arrangements (GN 14) to ensure that GN 14 does not cause confusion following the decision of the Federal Court in Australian Securities and Investments Commission v Mariner Corporation Limited.

During consultation in October, the Panel received 3 submissions all of which supported the changes to GN 14.  See September/October Corporate Advisory Update for further details on the changes.

See also the Panel’s media release dated 26 November 2015.


Panel publishes guidance note on shareholder intention statements

The Takeovers Panel has now published the final version of Guidance Note 23 on shareholder intention statements in the context of a public company control transaction.  The final guidance follows a consultation draft and incorporates a number of submissions made during the recent consultation period.

Following consultation in July, the Takeovers Panel has published Guidance Note 23 Shareholder Intention Statements (GN 23).  

GN 23 provides guidance for bidders, target companies and shareholders where a shareholder makes a statement of their intentions with respect to a control transaction (in particular whether or not they intend to accept or vote in favour of the transaction), with an indication of when the statement may be unacceptable. Shareholders can be held to such statements under ASIC's "truth in takeovers" policy (ASIC Regulatory Guide 25 – Takeovers: false and misleading statements). 

In the article Shareholder intention statements: The Takeovers Panel's proposed new guidance on 15 September 2015, Sarah Turner Neil Pathak and Nirangjan Nagarajah summarised the key points in the consultation version of GN 23 and reflected on some areas where the guidance would be bolstered.  Gilbert + Tobin also made submissions on the proposed guidance in the consultation process consistent with the article. 

The Panel has also published a Public Consultation Response Statement which includes a mark-up of the final version of GN 23 against the consultation version.

The main changes since the consultation version of GN 23 include:

  • paragraph 1 has been amended to clarify that the guidance applies not only takeover bids, but also schemes of arrangement and increases in voting power approved by shareholders under item 7 of section 611 of the Corporations Act 2001 (Cth) (Corporations Act);
  • in paragraph 4, rather than saying that the Panel does not encourage or discourage shareholder intention statements, GN 23 now states that a statement can give rise to concerns depending on how it has been obtained and how it is used, particularly where the subject of the statement, when aggregated with the bidder’s interest, exceeds 20%;
  • paragraph 10(c) now states that a minimum period of time (generally 21 days from the opening of offers) is expected if the shareholder intention statement is qualified by reference to a superior proposal, although it may be shorter if, for example, the statement is made after offers have opened or following a variation;
  • references to materiality have been deleted from paragraphs 8(c) and 11(b).  The Panel agreed with ASIC’s submission that, rather than giving guidance on what level of shareholding should be considered ‘material’, if the bidder or target considers it necessary/desirable to make a shareholder intention statement, then the relevant shareholder’s holding should be considered material;
  • references to materiality have also been deleted from paragraph 11(d) such that if a shareholder intention statement discloses aggregate holdings, the identity and holding of each aggregated shareholder is required, regardless of the size of their shareholding; and
  • paragraph 11(c) has been amended to make it clear that if consent to the making of a shareholder intention statement is not provided with a statement that is made outside of a bidder’s statement or target’s statement, the Panel will look more closely at the statement.

The Panel has declined to provide guidance on whether a shareholder intention statement might give rise to relevant interests or associations in breach of the Corporations Act (see our commentary in our article on 15 September 2015), instead focussing on its concern with whether the statement has an effect that precludes, or might preclude, the opportunity for a competing proposal.


Taxation

Multinational tax avoidance legislation receives Royal Assent

Legislation to combat multinational tax avoidance received Royal Assent, and commenced, on 11 December 2015.

We have previously issued updates on the measures in the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (Act) in our June 2015 Corporate Advisory Update and August 2015 Corporate Advisory Update.

The Act gives effect to a package of measures initially announced in the 2015-16 Federal budget to combat multinational tax avoidance.  In its passage, the Senate proposed two amendments to the Act, being:

  • global entities (with global revenue of $1 billion or more) will be required to prepare general purpose financial statements (rather than special purpose financial statements) from 1 July 2016; and
  • private companies that have or had gross income equal to or exceeding $200 million for an income year must disclose specified tax information to the Australian Taxation Office with effect from the 2013-14 income year

New Managed Investment Trust Bills introduced to Parliament

New Bills to implement a revised regime for Managed Investment Trusts (MITs) has been introduced into Parliament, with a proposed start date for income years commencing on 1 July 2016 (subject to an optional earlier start date for income years commencing on 1 July 2015 for certain eligible MITs).  We will continue to monitor the progress of the Bills.

The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and related Bills were introduced in the House of Representatives on 3 December 2015.  Together, these Bills propose to implement a new regime for MITs as well as make a number of other related amendments.

Broadly, the Bills set out to achieve the following:

  • creating a dedicated opt-in regime for taxation of certain eligible MITs, called Attribution MITs (AMITs). Some of the benefits of the new AMIT regime will include:

- allowing an AMIT to have a deemed ‘fixed trusts’ status for tax law purposes;

- ensuring that the withholding tax provisions (including PAYG withholding) apply appropriately in respect of the amounts attributed to beneficiaries; and

- introducing a specific regime for dealing with ‘unders’ and ‘overs’ (i.e. circumstances where the taxable income calculated in an income year differs from the actual taxable income);

  • revising the definition of a MIT to expand the list of qualifying entities, and increase the start-up concession period to meet the widely held and closely held criteria from 18 months to 2 years;
  • introducing arm’s length rules for MITs (including tax and penalties where income is derived at other than arm’s length rates);
  • repealing the corporate unit trust rules in Division 6B of Part III of the Income Tax Assessment Act 1936 (Cth); and
  • migrating the MIT definitions from the Taxation Administration Act 1953 (Cth) to the Income Tax Assessment Act 1997 (Cth).

On the same date that the Bills were introduced to Parliament, the ATO released Draft Law Guidelines describing how they propose to apply the new law.  The effective dates of the proposed rules as well as the period in which transitional provisions will apply vary. In relation to the proposed AMIT regime, these rules will apply to income years starting on or after 1 July 2016. Eligible MITs may however choose to apply the proposed rules for an income year starting on or after 1 July 2015.


Cases

Demanding a greater shareholding as a condition to continuing company sale negotiations constitutes oppressive conduct: Spence v Rigging Rentals WA Pty Ltd [2015] FCA 1158

In this case, the Federal Court found that an email from 2 shareholders to their fellow shareholder requiring him to agree to a dilution in his shareholding as condition to them continuing negotiations for the sale of the company constituted oppressive conduct in the particular circumstances.  In so finding, the Court provided some useful commentary on the scope of section 232(e) of the Corporations Act 2001 (Cth).

Mr Spence held shares in Rigging Rentals WA Pty Limited (Company) equally with two other shareholders (Other Shareholders).  Over time, the relationship between Mr Spence and the Other Shareholders deteriorated.

Mr Spence argued that a statement by the Other Shareholder in an email on 1 August 2014 that an allotment of additional shares to them (such that Mr Spence’s shareholding would be reduced from 33% to 25%) was a condition to them continuing with negotiations for the sale of the Company, constituted oppressive conduct.

Gilmour J in the Federal Court of Australia held that:

  • the key to the expressions “oppressive”, “unfairly prejudicial” and “unfairly discriminatory” in section 232(e) of the Corporations Act 2001 (Cth) (Act) is a test of commercial unfairness and the test is an objective one, as if the conduct were viewed through the eyes of a commercial bystander;
  • the conduct must be assessed in its commercial context and where, as in this case, the context includes allegations of misconduct by the plaintiff, such alleged misconduct may also be relevant;
  • there is no independent or overriding requirement that it should be just and equitable to grant relief or that the petitioner should come to the court with clean hands; and
  • the Court must assess the conduct in the context of the particular relationship which is in issue.

In finding that the 1 August 2014 email did constitute oppressive conduct, Gilmour J held that:

  • even if allegations that Mr Spence had previously taken value out of the Company by:

​- paying excessive remuneration to the Company’s bookkeeper;

- charging inappropriate expenses to the Company; and

- while purporting to engage in the business of the Company, engaging in the establishment and development of other companies in which he had taken a personal interest to the exclusion of the Company and which were potential competitors of the Company, ​were made out, it would still not have warranted the conduct of the Other Shareholders in sending the 1 August 2014 email;

  • the value of sale potential sale proceeds that Mr Spence was expected to sacrifice by diluting his interest was disproportionate to any value that he may have taken from the Company;
  • the Other Shareholders improperly employed the potential sale of the Company to gain an advantage from Mr Spence for their personal benefit which far outweighed even their own assessments of its worth;
  • what would have been reasonable would have been for the Other Shareholders to allow the sale negotiations to proceed and propose that part of the sale proceeds be held in trust pending particularisation and resolution of the Company’s claims against Mr Spence;
  • the Other Shareholders acted in a way that was commercially unfair and  deliberately sought to use the threat of halting negotiations to pressure Mr Spence to, in effect, waive his right to defend any claims by the Company and deny him the opportunity to realise the value of his shareholding in the Company in the event that the sale negotiations were successful; and
  • the proposed dilution of Mr Spence’s shareholding was unfair and discriminatory and was not justified by the Other Shareholders (particularly as the claims made against Mr Spence were claims of the Company and not the Other Shareholders).

When will a court grant an order to inspect the books of a company?: Engel v National Biodiesel Limited [2015] FCA 1114

This case provides some useful analysis of the Court’s power under section 247A(1) of the Corporations Act 2001 (Cth) to make orders permitting a shareholder to inspect company books.  In particular, the Court considered the meaning of the phrase “books of the company” and the extent to which confidentiality obligations apply in respect of books inspected.

Mr Engel was a shareholder of National Biodiesel Ltd (NBL) and became concerned about a number of transactions entered in to by NBL and its subsidiary at the time.  In order to put him in a position to take steps to protect his investment and to ascertain whether he should commence proceedings as a result of those transactions, Mr Engel sought an order pursuant to section 247A(1) of the Corporations Act 2001 (Cth) (Act) to permit him, the employees of his solicitors and any accountant nominated by him to inspect and take copies of specified books of NBL. 

In granting the inspection order, Markovic J in the Federal Court of Australia:

  • held that the Court can only make orders for inspection if it satisfied that the applicant is acting in good faith and for a proper purpose.  In this regard, Markovic J was satisfied that Mr Engel had a genuine concern about the transactions and that the facts showed that the relevant transactions were largely between related companies with common directors at relevant points in time and appeared to have the effect of moving assets out of NBL.  Further, the primary purpose of Engel seeking inspection was to determine the circumstances surrounding the transactions entered into by NBL and whether he should commence proceedings to protect his investment.  Accordingly, Mr Engel was acting in good faith and for a proper purpose;
  • rejected NBL’s argument that confidential agreements entered into by subsidiaries of NBL, to which NBL was not a party, were not “books of the company” within the scope of section 9 and 247A(1) of the Act.  Markovic J stated the relevant question to be whether the relevant documents belonged to NBL in the sense that they are the property of NBL, with such question being one of fact and not merely a question of possession.  Markovic J also noted that it would be difficult to see a situation where a parent company receives material from a subsidiary for inclusion in board packs where ownership in that material would not pass to the parent and become part of its records;
  • held that Mr Engels’ request to inspect all of the board papers for the relevant period was too broad and should be limited to the transactions about which he was concerned;
  • accepted NBL’s submission that the terms of section 247A do not abrogate legal professional privilege, but held that a list of documents potentially subject to a claim for legal professional privilege and a brief description of each of them should be provided; and
  • noted that while section 247C of the Act prevents third parties authorised to inspect the books of NBL on behalf of Mr Engel from disclosing any information obtained during the inspection  to persons other than ASIC or Mr Engel, there is no such limitation on the disclosure or use of the information by Mr Engel as the applicant.   In this regard, Markovic J agreed with the order proposed by NBL that Mr Engel be prevented from communicating or disclosing information obtained as a result of the inspection or copying of NBL’s books except for the purpose of investigating and determining whether proceedings should be commenced and for prosecuting those proceedings.

Court upholds restraint in a business sale agreement: Richmond v Moore Stephens Adelaide Pty Ltd [2015] SASCFC 147

This case illustrates that Courts will uphold a restraint in a business sale agreement provided that is sufficiently certain in its scope and it goes no further than is reasonable in the circumstances of the relevant business to protect the interest of the business.

Geoffrey Richmond entered into business sale agreement and a service agreement for the sale of his accountancy practice (WKYA Consulting Pty Ltd (WKYA)) to Moore Stephens Adelaide Pty Ltd (Moore Stephens) (Agreements).  The Agreements:

  • provided for the payment of the purchase price over a 4 year period, and for the purchase price to be calculated on the basis of the level of achieved fees over a 3 year period; and
  • contained cascading restraint clauses which prevented Mr Richmond from soliciting the custom of, or dealing with any person with whom he had ‘direct or indirect’ dealings within a 10 kilometre radius of the business for a period of 4 years, 3 years, 2 years and one year.  (Cascading restraint clauses are often used because they can be enforced for a shorter period if a longer period is held to be unreasonable).

Disputes arose concerning the quantum of achieved fees under the Agreements and Mr Richmond contended that the restraint should not be enforced because:

  • Moore Stephens had breached or repudiated the Agreements by failing to pay the whole of the purchase price (which, Mr Richmond argued, justified termination by him); and
  • in any event, the restraint clauses were void for uncertainty and because they constituted an invalid restraint of trade.

In upholding the restraints, the Full Court of the Supreme Court of New South Wales found that:

  • there is no rule of law that a party who has repudiated a contract leading to its termination by the innocent party can never enforce a restraint clause expressed to operate after termination, must be rejected.  Rather, the Court held that whether a restraint clause survives termination must depend on the intention of the parties, determined as a matter of construction of the contract, and on a proper construction of the Agreements, the restraint clauses would not survive termination;
  • in any event, the failure of Moore Stephens to pay the purchase price in full did not give rise to a right of Mr Richmond to terminate the Agreements, and as such, the Agreements (including the restraints) remained in force;
  • the restraints were not too uncertain to be enforceable and the concepts of ‘dealing’ and ‘direct or indirect dealings’ were clear in the context of the Agreements (although the Court noted that further inquiry would be needed to determine whether Mr Richmond had had direct or indirect dealings with a former client); and
  • the restraint period was reasonable to protect the interests of Moore Stephens.  In this regard, the Court found that the reasonableness of the restraints is to be assessed prospectively as at the date of the Agreements, and in this case  pointed to the fact that at least 2 years was needed to build up a relationship with a client and the fact that Mr Richmond was to continue working in the business for at least 3 years after completion of the sale.

What constitutes good faith contractual negotiations?: Keira Holdings v Broadcast Australia [2015] NSWSC 1716

In this case, a company who genuinely, but ultimately unsuccessfully, negotiated the terms of a long term incentive plan with its managing director was held not to be in breach of an express obligation to negotiate in good faith the terms of the plan.   In reaching its decision, the Court reminds us of the principles that apply to a contractual obligation to negotiate in good faith.

In January 2010, Keira Holdings Pty Ltd (Keira) signed an agreement with Broadcast Australia Pty Ltd (Broadcast Australia) to supply the services of Mr Mullen to perform the duties of managing director of Hostworks Group Pty Ltd (which was a wholly owned subsidiary of Broadcast Australia) (Agreement).  The Agreement provided that “[B]oth parties agree to negotiate in good faith towards a long term incentive package which will require board agreement.  This will aim to achieve a total remuneration in line with market rates” (LTIP Clause).

McDougall J in the Supreme Court of New South Wales proceeded on the assumption that the LTIP Clause was enforceable (without expressing a view as to whether or not that assumption was correct) because ultimately it was found that there was no breach of the obligation to negotiate in good faith and that Keira had not demonstrated any loss, either of which was sufficient to dispose of the case.

McDougall J firstly noted that:

  • an obligation to negotiate in good faith requires honesty, and fidelity to the contractual bargain but does not require a party to neglect its own interest, or to prefer the interests of the other party; and
  • where the object to be negotiated is specified, along with the aim that the object is intended to be achieved (to bring Keira’s remuneration in line with market rates), the obligation to negotiate in good faith would require the parties to work honestly toward that object. However, if the parties, having striven in good faith to do so, fail, there is no breach simply because the negotiations fail.

McDougall J then found that there was no breach by Broadcast Australia of the LTIP Clause on the following basis

  • around June 2011, Mr Barclay (CEO of the Broadcast Australia Group) put forward an LTIP proposal of the kind requested by Mr Mullen but which the Broadcast Australia board rejected (for sound and commercial reasons).  Mr Barclay discussed the board rejection with Mr Mullen;
  • at the request of the Broadcast Australia board, Mr Barclay prepared another LTIP proposal and sought to discuss it with Mr Mullen who did not engage in discussions.  Nonetheless, the Broadcast Australia board approved the revised LTIP and this was communicated to Mr Mullen.  Mr Mullen made it clear to Mr Barclay and the Broadcast Australia board that the LTIP proposal was totally unacceptable;
  • at no time before January 2013 did Keira put any LTIP proposal of its own to Broadcast Australia;
  • it was clear from later correspondence that the LTIP worth $1 million that Keira now sought would not have satisfied My Mullen who in January 2013 sought an LTIP worth $6 million; and
  • an independent remuneration consultant reports obtained in late 2008 for the purpose of fixing the salary for the position of managing director of Hostworks gave Broadcast Australia no reason to believe that Keira was being paid below market rates.

In those circumstances, McDougall J found that Broadcast Australia did seek to negotiate in good faith to the extent that it could and the failure of the negotiations to produce the outcome sought by Keira did not show any lack of good faith by Broadcast Australia.

McDougall J also found that expert evidence at trial established that there was no simply no evidence that for any of the years in question, Keira was underpaid by reference to market rates.

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