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18/11/15

Corporate Advisory Update – September/October 2015

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

Foreign investment Bills currently before the Senate

The 3 Bills package in relation to Australia’s foreign investment framework have passed the House of Representatives and are currently before the Senate, with the majority of the Senate Economics Legislation Committee recommending that they be passed.

The package of Bills currently before the Senate consists of:

  • the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (Cth);
  • the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015 (Cth); and
  • the Register of Foreign Ownership of Agricultural Land Bill 2015 (Cth).

Following referral, the Senate Economics Legislation Committee reported on the Bills on 14 October 2015 with the majority recommending that the Bills be passed.  The Senate’s next sitting commences on 9 November 2015.

The following further exposure draft Regulations have also been released, with submissions due by Friday 30 October 2015:

  • Exposure Draft Foreign Acquisitions and Takeovers Regulation 2015 which will replace the existing regulations upon enactment of the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 and contains key provisions such as the definition of agribusiness, definitions and rules around foreign government investors and would also implement other aspects of the Government’s announced modernisation package; and
  • Exposure Draft Foreign Acquisitions and Takeovers Fees Imposition Regulation 2015 which provides for fees for notifiable actions and the exemption certificate included in the Exposure Draft Foreign Acquisitions and Takeovers Regulation 2015, as well as draft sections prescribing a lower fee amount or a method of working out the lower fee amount.

While the Government is also proposing to make rules to the Register of Foreign Ownership of Agricultural Land Bill 2015, it has indicated that these rules will focus on the meaning of agricultural land and given the purpose of the Agricultural Land Register, are unlikely to provide exemptions.


ASIC

ASIC consults on disclosure documents instruments and guidance

ASIC is consulting on a number of proposals to update existing, or provide new, instruments and guidance in relation to a number of aspects relating to disclosure documents. Submissions are due by 27 November 2015.

On 17 September 2015, ASIC released Consultation Paper 239: Disclosure documents: Update to ASIC instruments and guidance (CP 239), which proposes to, among other things:

  • extend the existing Class Order [CO 08/35] Disclosure relief for rights issues to provide disclosure relief for Pro-rata Accelerated Institutional Traditional (or Tradeable) Retail Entitlement Offers (PAITREOs), removing the need to seek case by case relief from ASIC;
  • create 2 legislative instruments dealing with

-  'resetting' the time period for compliance with minimum subscription and quotation requirements in section 723 and 724 of the Corporations Act 2001 (Cth) (Corporations Act); and

-  providing disclosure and on-sale relief for regulatory capital instruments issued by banks (Bank Hybrids);

  • repeal or consolidate and reissue a number of existing Class Orders relating to the fundraising provisions of the Corporations Act, some of which are due to be automatically repealed unless preserved (also known as ‘sunsetting’); and
  • repeal or consolidate and reissue a number of Regulatory Guides relating to the fundraising provisions of the Corporations Act.

Submissions on CP 239 are due by 27 November 2015.


ASIC continues constitution pricing relief for registered managed investment schemes

The new ASIC Corporations (Managed investment product consideration) Instrument 2015/847 continues to provide certainty and flexibility to responsible entities and members of registered managed investment schemes registered prior to 1 October 2013 in relation to the pricing provisions of their constitutions by continuing the substantive effect of [CO 05/26] with some minor amendments.

ASIC has made ASIC Corporations (Managed investment product consideration) Instrument 2015/847 (Instrument) to replace ASIC Class Order [CO 05/26] Constitutional provisions about the consideration to acquire interests before it was due to expire on 1 October 2015.

The Instrument continues the substantive effect of [CO 05/26] with some minor amendments including:

  • allowing the responsible entity to base the consideration to acquire an interest in AQUA market traded and unitised unlisted schemes on the value of scheme property attributable to a particular class less any liabilities attributable to that class that may be met from scheme property divided by the number of interests on issue in that class;
  • modifying language in [CO 05/26] to reflect that used in section 601GA of  the Corporations Act 2001 (Cth);
  • removing the requirement to inform all existing members that they have a right to request a copy of the document that sets out how the responsible entity will exercise its discretion; and
  • for stapled securities, reflecting the approach in ASIC Class Order [CO 13/655] Provisions about the amount of consideration to acquire interests and withdrawal amounts not covered by ASIC Corporations (Managed Investment product consideration) Instrument 2015/847.

ASIC has also indicated that it will shortly be updating Regulatory Guide 134:  Managed investments: Constitutions to replace references to [CO 05/26] with references to the new Instrument.

See media release dated 1 October 2015 and ASIC Corporations (Repeal) Instrument 2015/846.


ASX

ASX consults on the operation of Listing Rule 7.1A

ASX has reported that Listing Rule 7.1A (which allows mid to small cap companies to obtain a 12 month shareholder mandate to issue up to 10% of issued capital in addition to the 15% permitted under Listing Rule 7.1) is operating as intended but that some refinements may make compliance easier for companies.  Submissions on ASX’s proposals are due by 9 November 2015.

ASX’s consultation paper Strengthening Australia’s equity capital markets – ASX Listing Rule 7.1A after three years discusses the operation of Listing Rule 7.1A which was introduced in 2012 to allow mid to small cap companies to obtain a 12 month shareholder mandate to issue up to 10% of issued capital without further shareholder approval, in addition to the 15% permitted under Listing Rule 7.1.

ASX reports that while monitoring of the operation of Listing Rule 7.1A over 2 annual general meeting cycles from its implementation indicates that it has been working as intended (and has provided valuable assistance to small to mid cap companies during a period when uncertainty in equity markets made capital raising challenging), some refinements could improve its operation and make compliance easier for companies. 

Specifically, ASX seeks submissions on:

  • its proposal that compliance with the enhanced disclosure requirements at the time of issue of securities under Listing Rule 7.1A would be facilitated by:

-  updating Appendix 3B to incorporate the disclosures required under Listing Rule 3.10.5A for an issue under Listing Rule 7.1A to consolidate the disclosure requirements at the time of issue into the one place; and

-  producing a new Guidance Note covering Listing Rules 7.1 and 7.1A

  • whether the disclosures required under Listing Rule 7.3A.6(b) about all equity securities issued in the last 12 months for an entity seeking approval under Listing Rule 7.1A in circumstances where such approval has previously been obtained (some of which are duplicative of disclosures required to be made in the Appendix 3B at the time of issue of those securities) are of sufficient value to investors to outweigh the compliance burden on listed entities;
  • its proposal to amend Listing Rule 7.1A.3(b) to extend the period between the date the issue price is agreed for a placement under Listing Rule 7.1A and the date the securities are issued from 5 trading days to 10 trading days; and
  • any other findings in the consultation paper about the current operation of Listing Rule 7.1A.

Submissions on the consultation paper are due by 9 November 2015.


ASX facilitates dual listings by New Zealand listed companies

ASX has amended the ASX Listing Rules to facilitate the dual listing of companies listed or listing on the main board of the New Zealand Exchange.   The amendments reflect the close economic relationship between Australia and New Zealand, and will facilitate dual listings by reducing regulatory costs and compliance burdens.

For further details, see ASX facilitates dual listings by New Zealand listed companies by Rachael Bassil, Kathryn O’Brien and Sean Meehan on 9 September 2015.


Takeovers Panel

Takeovers Panel seeks to clarify guidance on funding arrangements

The proposed revisions to the Takeovers Panel’s guidance on funding arrangements for bids seek to ensure there is no confusion following the recent decision of the Federal Court in Australian Securities and Investments Commission v Mariner Corporation Limited.

The Takeovers Panel has released a Consultation Paper seeking public comment on a revised Guidance Note 14 (GN 14).  GN 14 focuses on the effect on target shareholders and the broader market of a bid being announced or made without funding arrangements for the cash component of the consideration being sufficiently in place. 

The aim of the revisions is 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 [2015] FCA 589, with the Panel clarifying the policy basis for GN 14 as being:

  • the acquisition of control over voting shares must take place in an efficient, competitive and informed market (section 602(a) of the Corporations Act 2001 (Cth) (Act)); and
  • shareholders and directors must be given enough information to enable them to assess the merits of a proposal (section 602(b)(iii) of the Act).

The revisions also update references to ASIC's  Regulatory Guide 9 Takeover bids.


Shareholder intention statements:  The Takeovers Panel’s proposed new guidance

Public submissions on the Takeovers Panel’s consultation draft of a new guidance note on shareholder intention statements in the context of public company takeovers closed on 1 September 2015.  The article below provides a summary of the key points, along with some of our submissions on the proposed guidance.


Financial Inquiry System

Federal Government responds to Financial System Inquiry recommendations

The Government has accepted all but one of the recommendations to improve the efficiency, resilience and fair treatment in Australia’s financial system proposed by the Financial System Inquiry late last year, and has set an agenda of specific measures to be implemented to the end of 2016 and beyond.

Following stakeholder consultation and engagement, the Federal Government has released its response to the recommendations proposed by the Financial System Inquiry to improve the efficiency, resilience and fair treatment in Australia’s financial system in its final report delivered in late 2014.

In summary, the Government has accepted all but one of the Inquiry’s recommendations (being the recommendation to prohibit limited recourse borrowing arrangements by superannuation funds).  A summary of the 5 strategic areas comprising the Government’s response, together with an agenda of specific measures for each area, is set out below.

Resilience measures – to reduce the impact of potential future financial crises by ensuring we are better able to weather them and lessen their cost to taxpayers and the economy.  The specific measures are:

  • By end-2015: Develop legislation to facilitate participation of Australian entities in international derivative markets and better protect client monies;
  • By mid-2016: Consult on measures to ensure financial regulators have the tools they need to manage any future financial crisis;
  • By end-2016: APRA to take additional steps to ensure our banks have unquestionably strong capital ratios; and
  • Beyond 2016: APRA to ensure our banks have appropriate total loss-absorbing capacity and leverage ratios in place.

Superannuation and retirement incomes measures – to improve the efficiency and operation of the superannuation system and in doing so boost retirement incomes.  The specific measures are:

  • By end-2015: Develop legislation to improve governance and transparency in superannuation, progress the Retirement Income Streams Review and task the Productivity Commission to immediately develop and release criteria to assess the efficiency and competitiveness of the superannuation system and to develop alternative models for a formal competitive process for allocating default fund members to products;
  • By end-2016: Develop and introduce legislation to enshrine the objective of the superannuation system and consult on legislation to facilitate trustees of superannuation funds providing pre-selected comprehensive income products for retirement; and
  • Beyond 2016: Implement legislation to introduce director penalties, consult on legislation to improve member engagement consistent with the recommendations in the Inquiry and monitor leverage and risk within the superannuation system.

Innovation measures – to unlock new sources of finance for the wider economy and support competition.  The specific measures are:

  • By end-2015: Consult on legislation to support crowd-sourced equity funding, consult on crowd-sourced debt financing and task the Productivity Commission to review access to and the use of data;
  • By mid-2016: Develop legislation to ban excessive card surcharges and better protect consumers using electronic payment systems, develop legislation to reduce disclosure requirements for issuers of ‘simple’ corporate bonds and establish the Innovation Collaboration Committee;
  • By end-2016: Give legal effect to the Asian Region Funds Passport initiative and consider technology neutrality in financial sector regulation; and
  • Beyond 2016: Facilitate rationalisation of life insurance and managed investment scheme legacy products.

Consumer outcomes measures – to give consumers confidence to participate in the financial system and the confidence that they are being treated fairly.  The specific measures are:

  • By end-2015: Develop measures to address the misalignment of incentives in life insurance;
  • By mid-2016: Develop legislation which provides a professional standards framework for financial advisers and consult on development of accountabilities for issuers and distributors of financial products and ASIC product intervention powers;
  • By end-2016: Develop legislation to give ASIC the power to ban individuals from managing financial firms, consult on strengthening ASIC’s enforcement tools in relation to the financial services and credit licensing regimes. ASIC will review remuneration arrangements in the mortgage broking industry; and
  • Beyond 2016: Consult on and develop legislation to enable innovative disclosure for financial products and to improve the regulation of managed investment schemes. ASIC will review stockbroking remuneration arrangements.

Regulatory system measures – to make regulators more accountable for their performance, more capable and more effective.  The specific measures are:

  • By end-2015: Complete a capability review of ASIC, consult on industry funding arrangements for regulatory activities undertaken by ASIC and appoint new members to and revise the Terms of Reference of the Financial Sector Advisory Council;
  • By mid-2016: Update the Statement of Expectations for APRA, ASIC and the Payments System Board to provide additional guidance about the Government’s expectations for their strategic direction and performance and improve regulator accountability, consider ASIC capability review and, as appropriate, develop legislation to enhance operational capabilities of regulators;
  • By end-2016: Introduce competition into ASIC’s mandate; and
  • Beyond 2016: Commence a review of ASIC’s enforcement regime and task the Productivity Commission to review the state of competition in the financial system.

See also media release dated 20 October 2015.


Other G+T publications

Can you take the best deal for your shareholders? Preparing for a superior offer

In control transactions, detailed provisions dealing with the potential for later receipt of a superior offer are often negotiated at length.  Asset sales, on the other hand, especially if they do not attract ASX Listing Rule 11, are less likely to expressly address that scenario in any detail.  In this article, Sarah Turner, Samer Aljanabi and Kyle Moss consider what those sorts of provisions might look like if they were negotiated in the context of an asset sale agreement.


It’s a ‘risky business’ – navigating indemnities and liability provisions in contracts

Unless you are Tom Cruise, no one wants to get caught with their pants down singing and dancing along to Bob Seger.  In this article, Phil McKiever and Emma McLeod have therefore stripped bare some of the key liability and indemnity provisions which can arise in a contract in case you should find yourself unsupervised and sipping at a glass of Chivas Regal.\


Cases

Honour thy company objects!:  Jensen & Ors v RQYS Marina Ltd & Ors [2015] QCA 153

This case illustrates that the Court will hold the objects of a company limited by guarantee as paramount even where the furtherance of those objects may mean that the company is no longer to pursue them. 

The Royal Queensland Yachting Squadron (an unincorporated association which was later incorporated as a company limited by guarantee, the Royal Queensland Yacht Squadron Ltd (the Squadron)), obtained approval to construct a marina.  In order to protect the assets of the Squadron, the project was to be developed by RQYS Marina Ltd (the Marina Company) which was also a company limited by guarantee.

Under the Marina Company’s Memorandum of Association:

  • its first express object was to “establish and support or to aid in the establishment and support of associations, institutions, trust funds or conveniences calculated to benefit the members of [the Squadron]” (clause III);
  • the “income and property of [the Marina Company]” was to “be applied solely towards the promotion of the objects of [the Marina Company]” (clause IV); and
  • to ensure that the marina project was managed so as not to be adverse to the Squadron in the future, the Flag Officers of the Squadron were to comprise the majority of the directors of the Marina Company.

The relevant facts included

  • following a decision by the directors of the Squadron and the Marina Company to develop a second marina and for tax reasons relevant to the Marina Company, a separate entity (RQYS Nominees Pty Limited (Nominees)) was established to hold the relevant lease for the second marina on trust for the Squadron;
  • the Marina Company transferred a business which it conducted at some nearby repair and maintenance facilities to Nominees; and
  • the future lease of the first marina and the land on which the repair and maintenance facilities was granted to Nominees from 2029.

Certain members of the Marina Company alleged that the directors (and some other officers) of Marina Company had benefited the Squadron in making certain decisions and by allowing the Squadron and Nominees to take advantage of opportunities which were open to the Marina Company.  The Marina Company argued that it and its directors were doing precisely what the Marina Company was established to do, namely benefit the Squadron.  

In interpreting the Marina Company’s Memorandum of Association, Gotterson JA (with Boddice and Flanagan JJ in agreement) in the Supreme Court of Queensland – Court of Appeal held that:

  • the word “calculated” in clause III was apt to qualify the words “establishment and support” which precede it, and the establishment or support of associations, institutions, trusts funds or conveniences must be calculated to benefit the members of the Squadron in order for it to be within the scope of this object;
  • those who were to benefit were the members of the Squadron collectively, and not individually as argued by the appellants; and
  • the provision of support, eg by way of transfer of property to the Squadron, was capable of benefitting the members of the Squadron notwithstanding that the Squadron is the transferee.  The members are benefitted by way of an increase in the assets of Squadron and some may also benefit by actually using the property as members.  The same analysis applies for a transfer of property to an entity associated with the Squadron such as Nominee which exists to benefit the members of the Squadron.

The Court also rejected the appellants’ proposition that, in principle, it can never be in the best interests of a company to put itself in a position where it cannot continue to pursue its objects.  Rather, the Court held that such principle was incompatible with the basic principle that the interest of a company reflect those of its members in light of its corporate objects, and those interests may foreseeably require the company to restructure or transfer its business or operations in order to advance such interests.


A reminder of the importance of specifying the rights attaching to shares:  In the matter of Nadel Investments Pty Limited (in liquidation) [2015] NSWSC 1434

In this case, in circumstances where no terms and conditions were specified on the issue of A and L class shares, the Supreme Court of New South Wales construed the company’s constitutional documents to find that the holders of such shares were entitled to participate equally with ordinary shareholders in the distribution of surplus on a winding up.

The share capital of Nadel Investments Pty Ltd (Nadel) comprised 2 ordinary shares, 2 A class shares and one L class share.  The relevant provisions in the Nadel Memorandum and Articles of Association provided the following:

  • any shares may be issued “with such right of preference whether in respect of dividend or of repayment of capital or both” and “with any special or restricted rights or without any right of voting and generally on such terms and subject to such conditions and provisions as may from time to time be determined in accordance with the articles of association” (clause 5 of the Memorandum);
  • holders of A to L class shares are not entitled to vote, the A to L class shares conferred the right “only to such dividends as the directors from time to time as they think fit determine” and holders of A to L class shares are “entitled to such voting powers and to such dividends and rights on winding-up and otherwise as the directors may at the time of issue of each particular class determine” (clause 5 of the Articles);
  • the directors may allot shares “on such terms and conditions, as they see fit” and “without prejudice to any special rights previously conferred. any share may be issued with such preferred, deferred or other special right….as the company may from time to time by ordinary resolution determine” (clause 6 of the Articles); and
  • on a winding up “the excess [assets] shall be distributed amongst the members in proportion to the capital at the commencement of the winding-up, paid up or deemed to be paid up or which ought to have been paid up on the shares held by them respectively.  But this clause is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions” (clause 120 of the Articles).

The resolution of the directors allotting the A and L class shares did not impose any special rights, privileges or restrictions in respect of those shares. 

In light of the above, the question before the Supreme Court of New South Wales was whether, on a winding up of Nadel, the A and L class shares were entitled to share equally with the ordinary shares in the distribution of surplus, or only the ordinary shares were entitled to a distribution as no right to participate had been expressly conferred on the A to L class shares. 

Brereton J held that:

  • in the context of clause 5 of the Memorandum and clause 6 of the Articles, there was a “general flavour” that special rights (ie respects in which particular classes of shares might differ from ordinary shares) would be specified in a resolution at the time of issue;
  • clause 120 of the Articles set out a prima facie position that surplus would be distributed amongst members in proportion to the capital and an exception that is subject to the rights of holders of shares issued upon special terms and conditions;
  • as no shares were issued upon special terms and conditions, clause 120 of the Articles encompassed all 5 issued shares, not just the ordinary shares; and
  • to find otherwise would mean either that:

-  the A and L class shares were only entitled to a return on the amount paid up, but that would be a special term and condition, and nothing indicated any such terms or conditions were attached to those shares; or

the A and L class shares were entitled to nothing at all such that they were shares without any rights at all (not to vote, receive dividends nor even to be returned paid up capital) which would be a remarkable position that the Court would not embrace unless compelled to do so.


Class actions – a step closer to the US approach to causation:  Caason Investments Pty Ltd v Cao [2015] FCAFC 94 

A group of investor litigants has been permitted by a Full Court of the Federal Court to plead “market-based causation” in proceedings brought to recover losses which the investors claimed to have suffered as a result of misleading or deceptive prospectus materials and financial statements issued in contravention of the Corporations Act 2001 (Cth).


Ambiguity and surrounding circumstances – the ambiguity remains:  Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37

In this case, the High Court has unfortunately not, as perhaps hoped, finally resolved the question of whether ambiguity must first be shown in a contract before a court can refer to evidence of the surrounding circumstances in resolving the interpretation of the contract, or whether surrounding circumstances can effectively be used to both create and resolve an ambiguity (or constructional choice) in a contractual provision.  A High Court decision to resolve this issue is still eagerly awaited. 

The Western Australian Government issued rights of occupancy (which permitted exploration but not mining) over some temporary reserves to Wright Prospecting Pty Limited and Hancock Prospecting Pty Limited (together Hanwright).  In 1970, Mount Bruce Mining Pty Ltd (MBM), Hanwright and Hammersley Iron Pty Limited entered into an agreement (the 1970 Agreement) pursuant to which the temporary reserves were divided between Hanwright and MBM with royalties payable to Hanwright in respect of “ore won by MBM from the MBM area”, where such ore was mined by MBM or “all persons or corporations deriving title through or under” MBM to the MBM area.

The 2 contractual construction questions before the High Court were:

  • the meaning of “the MBM area” (and specifically whether it included the Eastern Range and Channar A areas). The High Court held that:

-  “the MBM area” referred to the area of land fixed by the then existing boundaries of the temporary reserves, as opposed to the rights which MBM acquired from Hanwright;

-  such a construction was held to reflect the natural and ordinary understanding of the language used and was consistent with the commercial circumstances which the 1970 Agreement addressed and the purpose or object of the transaction it was intended to secure; and

-  there was nothing in the text of the 1970 Agreement to suggest that the parties intended that the entitlement of Hanwright to royalties was conditional upon ore being won from the exercise of rights that Hanwright held at the time of the 1970 Agreement (which at the time, did not include the right to mine); and

  • whether the ore mined at Channar A was mined by entities deriving title “through or under” MBM.  The High Court held that “through or under” did not require an “unbroken chain of title” and was broader than succession, assignment or conveyance.  Rather, the Court pointed to the fact that grant of a mining lease to the relevant mining joint venture was conditional on MBM surrendering the relevant sections of its mining lease in concluding that the mining rights exercised by the joint venture were derived “through or under” MBM.

In reaching its decision, the High Court unfortunately did not resolve the question of whether ambiguity must first be shown in a contract before a court can refer to evidence of the surrounding circumstances of the underlying transaction in resolving the interpretation of the contract, or whether surrounding circumstances can effectively be used to both create and resolve an ambiguity (or constructional choice) in a contractual provision.  The Court acknowledged what Bell and Gaegler JJ described as “important question on which intermediate courts of appeal are divided” but did not resolve the question in this case because the parties had agreed that ambiguity existed in the 1970 Agreement.

Interestingly, all members of the High Court emphasised that the reasons for refusing special leave to appeal in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 (which stated that it is essential to identify ambiguity in the language of a contract before the court may have regard to surrounding circumstances) did not have to be relied upon by lower courts in determining that very question.  Kiefel and Keane JJ (with French CJ and Nettle and Gordon JJ agreeing) observed that “statements made in the course of reasons for refusing an application for special leave create no precedent and are binding on no one.”  Similarly, Bell and Gageler JJ stated that it “should go without saying that reasons for refusing special leave to appeal in a civil proceeding are not themselves binding authority”.

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