28/04/2014

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

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

In this issue you will find:

Legislation and proposed legislation

Federal Government consults on taxpayer protection measures for announced but un-enacted tax amendments

The Federal Government is seeking community views on its Exposure Draft Law which seeks to give taxpayers legislated protection where they have self-assessed on the basis of 48 announced but discontinued tax measures.  We will continue to monitor the progress of the protection measures.

After consultation with industry, the Federal Government announced in December 2013 that it would not proceed with 48 of 92 announced tax and superannuation measures which had not been legislated.

The Government has now released an Exposure Draft Law (and Explanatory Material) which seeks to:

  • give effect to the announcement of a legislated protection for taxpayers in relation to the 48 announced but discontinued measures; and
  • ensure that outcomes are preserved in relation to income tax assessments where taxpayers have reasonably and in good faith anticipated the impact of those measures.

The protection measures:

  • effectively place a statutory bar on the Commissioner amending an income tax assessment to the extent that it reflects a taxpayer’s anticipation of the impact of an announcement that meets the specified conditions; and
  • operate to protect the taxpayer from liability for administrative overpayment by treating the taxpayer as being entitled to that amount where a taxpayer’s anticipation of the impact of an announcement would otherwise give rise to such a liability claim and provided that the specified conditions are met.

Submissions on the Exposure Draft Law were due by 22 April 2014.

See the media release dated 25 March 2014.

ASIC

ASIC releases guidance on audit quality

ASIC’s new guidance in Information Sheet INFO 196 - Audit quality: The role of directors and audit committees seeks to assist with the improvement of audit quality by explaining its importance and the various roles and responsibilities of directors, audit committees and auditors, as well as suggesting some practical focus areas for improving audit quality.  As the financial year end approaches for many companies, directors, audit committees and auditors should compare their current practices to ASIC’s new guidance to reduce the risk of ASIC attention.

ASIC has released Information Sheet INFO 196 - Audit quality:  The role of directors and audit committees (INFO 196) to help directors and audit committees develop robust standards, as part of ASIC’s commitment to improve audit quality.

In INFO 196, ASIC explains:

  • the importance of audit quality;
  • the responsibilities of the aduitor;
  • the roles of directors and audit committees;
  • the responsibilities of directors for auditor independnece;
  • who should manage the appointment of auditors and what matters should be considered in setting audit fees; and
  • what directors and audit committees can do to promote audit quality.

INFO 196 also sets out a number of suggestions for directors and audit committees to improve audit quality, including:

  • auditor appointment recommendations and setting of audit fees being managed by non-executive directors;
  • assessing the commitment of, and accountability within, the auditors to audit quality;
  • reviewing resources devoted to the audit process and management support;
  • two-way communication with the auditor on concerns and risk areas;
  • ensuring auditor independence; and
  • reviewing audit firm responses to findings from ASIC audit inspections.

ASIC has indicated that it will monitor execution of any larger audit firms plans to improve audit quality, and their effectiveness.

See also ASIC’s media release dated 17 March 2014.

ASX

Third edition of the Corporate Governance Principles and Recommendations released

The ASX Corporate Governance Council has released the third edition of its Corporate Governance Principles and Recommendations (Principles and Recommendations) which take effect for an entity’s first full financial year commencing on or after 1 July 2014.  Listed entities with a 30 June balance date should now consider whether they can comply with the new Principles and Recommendations for the next financial year and, if necessary, start putting in place any required measures to change their existing practices.

For further discussion on the third edition of the Principles and Recommendations, see the G+T Alert on 31 March 2014.

Changes to the ASX Listing Rules to give effect to the reforms in the Principles and Recommendations are expected to come into effect on 1 July 2014 and will apply for an entity’s first full financial year commencing on or after that date.  ASX will make a separate announcement about the changes to the Listing Rules.

Other bodies

CAMAC releases discussion paper on the establishment and operation of managed investment schemes

CAMAC’s discussion paper on the establishment and operation of managed investment schemes raises a broad range of governance, disclosure and regulatory issues, with a particular emphasis on aligning the regulatory regime of managed investments schemes with that applying to companies, where appropriate.  While the paper is a welcome opportunity to review managed investment scheme regulation, the industry should be prepared for potentially significant changes to, and consequences for, managed investment schemes.  We will continue to monitor the progress of the discussion paper.

Following on from its July 2012 report Managed Investment Schemes which made wide-ranging recommendations relating to the restructuring and winding up of a financially stressed managed investment scheme (MIS), the Corporations and Markets Advisory Committee (CAMAC) has released a discussion paper The establishment and operation of managed investment schemes (Paper).

The Paper deals with a broad range of governance, disclosure and regulatory issues and takes the general view that the regulatory regime for MISs should be aligned with that for companies, unless there are compelling reasons for treating MISs differently.  CAMAC’s key driver is the reduction of unnecessary complexity and undue compliance burdens on industry participants that operate both MISs and companies (including through stapled entities).

Issues raised in the Paper include:

extending the definition of “managed investment scheme” in the Corporations Act 2001 (Cth) (Act) to include arrangements where not all members receive a benefit, and amending the definitions of “member” and “scheme property” to clarify their scope;

  • aligning the MIS registration process with the company registration process, with the retention of the requirement that the constitution comply with the Act but the removal of the 2 week ASIC vetting process;
  • requiring wholesale MISs to be subject to the Act (in the same way that companies with only wholesale investors are);
  • disclosure requirements for an offer of MIS interests;
  • increasing focus on the actual risks of an MIS rather than mechanical compliance checking;
  • abolishing the power of responsible entities to unilaterally amend an MIS constitution, aligning the provisions for calling and conducting scheme meetings with those for company meetings and clarification of the voting exclusion requirements;
  • extending takeovers laws to large unlisted MISs and whether a statutory scheme of arrangement procedure should also be applicable to MISs;
  • extending ASIC’s modification powers to enable it to reduce regulatory requirements in appropriate cases; and
  • assisting responsible entities to manage scheme capital by providing a statutory buy-back procedure similar to that for companies.

Submissions on the Paper are due by 6 June 2014.

House of Representatives Standing Committee on Economics announces inquiry into foreign investment policy in real estate

The House of Representatives Standing Committee on Economics inquiry and report will consider concerns that Australia’s foreign investment policy on residential real estate should be tightened to help stop the Australian real estate market becoming more unaffordable and inaccessible.   We will continue to monitor the progress of the inquiry and report.

The House of Representatives Standing Committee on Economics (Committee) has announced an inquiry into Australia’s foreign investment policy as it relates to real estate.

Under current foreign investment policy, foreign investors are able to seek approval to purchase new dwellings and vacant land for residential development but are generally not allowed to buy established dwellings as investment properties or homes. However, there have been are concerns raised in the wider Australian community that foreign investment in Australian real estate is causing an unaffordable and less accessible real estate market. If you have any queries please do not hesitate to contact our real estate lawyers team.

The Term of Reference ask the Committee to examine:

  • the economic benefits of foreign investment in residential property; 
  • whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers;
  • how Australia's foreign investment framework compares with international experience; and
  • whether the administration of Australia's foreign investment policy relating to residential property can be enhanced.

Submissions are due by 9 May 2014 and the Committee will release its report by 10 October 2014.

See also the Committee’s media release dated 19 March 2014.

Governance Institute of Australia and Sandy Easterbrook release draft guideliens on improving engagement between ASX-listed entities and their institutional investors

New draft guidelines issued by the Governance Institute of Australia and Sandy Easterbrook aim to enhance long-term performance and corporate value by assisting ASX-listed companies and their institutional investors to engage more effectively.  We will continue to monitor the progress of the draft guidelines but both ASX-listed entities and institutional investors should start to familiarise themselves with them and consider whether they may wish to make any changes to their practices to meet best practice standards.

New draft guidelines:  Improving engagement between ASX-listed entities and their institutional investors (Guidelines) released by the Governance Institute of Australia (Institute) and Sandy Easterbrook follow consultation with chairpersons and directors of leading ASX-listed companies and senior executives in the institutional investor sector and are designed to ensure effective engagement between these parties.

The Guidelines are comprised of 17 guidelines divided into the following areas:

  • Disclosure;
  • Proxy voting and proxy advisers;
  • Use of technology;
  • Know the significant parties;
  • Have regular and meaningful engagement;
  • ESG (environmental, social and governance) issues; and
  • Smaller companies.

The Guidelines should be read in conjunction with Improving engagement between ASX-listed entities and their institutional investors:  Background Paper which provides an overview of, and further information in relation to, each of the guidelines.

Submissions on the Guidelines were due by 24 April 2014.

See also the Institute’s media release.

Cases

High Court signals end of Jireh debate and reads "reasonable endeavours" obligation broadly: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7

The High Court decision in this case is of interest in relation to the commercial interpretation of contracts generally and specifically the use and meaning of “reasonable endeavours” or “best endeavours (or efforts)” clauses in contracts (which are generally considered to mean the same).

When will a Court exercise its discretion to invalidate an appointment of administrators? In the matter of Live Board Holdings Limited (Administrators Appointed) [2014] NSWSC 161

The Court refused to declare an appointment of administrators invalid under section 447C of the Corporations Act 2001 (Cth) on the basis of a previous purportedly invalid removal of a director and alleged insufficient grounds to establish that the company was, or was likely to become insolvent.  This case illustrates the Court’s willingness to overlook technical anomalies in exercising its discretion under section 447C where the end result for the company would be the same, and a broad approach in assessing whether there are reasonable grounds to form a view that a company is, or is likely to become, insolvent.

This case involved a challenge to the validity of the appointment of administrators to Live Board Holdings Limited (LBH) on the following grounds:

  • the LBH directors’ meeting to appoint the administrators was not validly convened.  It was alleged that an earlier removal of Mr Koulis as director in a general meeting was invalid with the effect that Mr Koulis (as a then current director of LBH) was not given notice of the directors’ meeting to appoint the administrators; and
  • it was premature for the LBH board to have reasonable grounds to form the view that LBH was, or was likely to become, insolvent.

The administrators applied to the Supreme Court of New South Wales under sections 447A, 447C, 447D and 1322 of the Corporations Act 2001 (Cth) (Act) to resolve any doubt as to the validity of their appointment.

Brereton J firstly noted that:

  • orders under section 447C(2) of the Act are declaratory not curative and that the question is whether the appointment is valid, not whether it should be validated; and
  • where the court is not satisfied as to validity, it may make an order under section 447A which gives the Court an express power to terminate an administration not only if it is satisfied that Part 5.3A of the Act is being abused but also if the administration should end “for some other reason”.  Such powers of the court are sufficient to authorise orders that have the practical effect of suspending the administration pending resolution of a dispute as to whether the appointment is valid.

However, Brereton J then made an order validating the appointment of the administrators under section 447C, finding on the facts that:

  • the resolution to remove Mr Koulis as director was passed unanimously and even if the votes which were disputed were disregarded, the resolution would still have been passed.  As such, the removal of Mr Koulis as director was valid and the subsequent directors’ meeting to appoint administrators was validly convened; and
  • there were reasonable grounds to hold that LBH was, or was likely to become, insolvent because the company was likely to be obliged to repay subscription money received for a share issue made in breach of LBH’s constitution and shareholders agreement (even though court proceedings relating to this had not been finalised).

See the case.

How to inadvertently resign as a director - an ASIC Form 484 can be paramount: Essendon Apartment Development Pty Ltd v Shaw & Ors [2014] VSC 74

A lack of formality in relation to a change of directorship (and associated share transfer) did not persuade the Court to invalidate the actions.  This case illustrates the relatively high standard that will need to be met to displace the assumption in section 1274B(2) of the Corporations Act 2001 (Cth) that a document that purports to have been prepared by ASIC (ie a company extract generated on the basis of a lodged Form 484) is proof of such matters.  Officers should ensure any seemingly informal arrangements are formalised, to reduce the risk of subsequently finding their resignation has been effected.

Mrs Shaw had been appointed as a director and shareholder of Essendon Apartment Developments Pty Ltd (Essendon) by Ms McGuire.  While Ms McGuire held no interest in Essendon, she had been instrumental in the purchase of Essendon and for this reason had developed the power to appoint directors.  There was no value attributed to the share in Essendon and it was always just assumed that it was part and parcel of the directorship.

After Ms McGuire sought to replace Mrs Shaw as director of Essendon, there was some rather confusing events and discussion which resulted in lodgement by Mr Smit of a Form 484 with ASIC recording the resignation of Mrs Shaw and the appointment of Mr Smit, as well as the transfer of the Essendon share from Mrs Shaw to Mr Smit, all effective on 17 May 2012.  Mrs Shaw alleged that her removal, and the appointment of Mr Smit as director, were invalid.

After unravelling the facts, Randall AsJ in the Supreme Court of Victoria found that:

  • Mrs Shaw appointed Mr Smit orally on 14 June 2012 – she was permitted to appoint a director under the replaceable rules adopted by Essendon either as a director or shareholder and while it would normally be expected for a written resolution to evidence such appointment, there is no requirement as to any formality;
  • on 14 June, Mrs Shaw provided Mr Smit with a signed but undated resignation and on the same date or earlier (possibly 17 May 2012), Mrs Shaw also provided Mr Smit with a signed but undated Form 484 recording her resignation and his appointment as director and the transfer of the share to Mr Smit;
  • even if the resignation was not effective forthwith, Mrs Shaw and Mr Smit intended the resignation to be effective upon Mr Smit determining to become a director;
  • by leaving the resignation undated, Mrs Shaw impliedly or tacitly consented to Mr Smit completing the date when appropriate;
  • Mr Smit only became a director of Essendon on 11 July 2012 when he determined that he would accept the directorship (on the basis that a person cannot become a director until they have consented) and lodged the Form 484 with ASIC;
  • in providing a Form 484 in blank, Mrs Shaw tacitly, if not expressly, authorised its completion to record notice of the transfer the share (notwithstanding the fact that a transfer form was never stamped or lodged for registration in the Essendon share register); and
  • the lack of formality in relation to all of the above was not an impediment to giving notice to ASIC by way of a Form 484.

In light of the above and given that the Court was unable to reach a positive view as to when the Form 484 was provided to Mr Smit or the extent of any conditions attaching to the resignation and the completion of the Form 484, Randall AsJ found that:

  • there was not sufficient evidence contrary to what was recorded on the ASIC database to displace the assumption in section 1274B(2) of the Act that in a court proceeding, a document that purports to have been prepared by ASIC which records facts (ie a company extract generated on the basis of the lodged Form 484) is proof of such matters; but that
  • the Court would entertain an application by Mr Smit under section 1322 of the Act to declare that Mrs Shaw’s resignation and Mr Smit’s appointment took effect on 11 July 2012 rather than 17 May 2012.

See the case.

When will appointment of voluntary administrators constitute oppressive conduct? Ubertini v Saeco International Group SPA (No 4) [2014] VSC 47

The Court found that the appointment of voluntary administrators to a company constituted oppressive conduct under section 232 of the Corporations Act 2001 (Cth) in circumstances where it was part of a clear strategy by the controlling shareholder to gain control of the company’s business, to the exclusion of the minority shareholders.  This case provides some useful observations on the operation of section 232, particularly around action by a parent company “of the affairs of” a subsidiary. 

Saeco International Group SpA (Saeco International) had previously purchased 60% of the shares in Saeco Australia Pty Limited (Saeco Australia) (a coffee machine importation company) from Mr Ubertini and Ubertini Investments Pty Ltd (Ubertini Investments), with Mr Ubertini remaining as managing director.  Mr Ubertini later decided to sell his and Ubertini Investments' remaining shares and entered into negotiations with Saeco International. While the negotiations were fruitful at first, the parties in time reached an impasse that eventually led to a falling out, with each party alleging that the other had engaged in conduct that was oppressive under section 232 of the Corporations Act 2001 (Cth) (Act). 

Following commencement of proceedings, Saeco Australia was placed into voluntary administration by a majority vote of the directors nominated by Saeco International (with Mr Ubertini and another director voting against and a third director abstaining).  Saeco Australia subsequently entered into a deed of company arrangement whereby Saeco International (through a subsidiary) acquired the business of Saeco Australia, thereby making the shares of Mr Ubertini and Ubertini Investments worthless.

After reviewing the authorities, Elliott J in the Supreme Court of Victoria made the following useful observations about the operation of section 232:

  • “affairs” in section 232(a) is non-exhaustively defined in section 53 to include “control, business, trading, transactions and dealings…of the body” which includes the power of persons to exercise, or control the exercise of the rights to vote attached to shares in the body;
  • sections 232(d) and (e) should be read separately such that section 232(d) is not confined to “commercial unfairness” like section 232(e);
  • the words “oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member” in section 232(e) are to be viewed as a whole to ascertain whether there has been a degree of commercial unfairness that would justify an order;
  • commercial unfairness must be assessed in the context of the particular relationship in issue which will often involve a balancing exercise between competing considerations, including examination of the conduct of the applicant;
  • the mere fact of irreconcilable differences between the parties or the fact that a member cannot dispose of its shares is not sufficient to establish oppressive conduct; and
  • when considering  the conduct of parent and subsidiary companies, the reference in section 232 to conduct of the company’s “affairs” is not confined to conduct performed by nominee (or common) directors on the board of the other company (although the law on the extent of the meaning of “affairs” in this context is unsettled).

Ultimately Elliott J found, among other things, that:

  • the making of demands by Saeco International and one of its subsidiary companies to put financial pressure on Saeco Australia, together with the strategy to obtain control and ownership of the business of Saeco Australia continuing up to the decision by the Saeco International nominated directors to appoint voluntary administrators to Saeco Australia was clearly oppressive to the affairs of, and commercially unfair to the interests of, Saeco Australia.  The Saeco International nominated directors were actively involved in, and fully aware of, the strategy which was designed to gain outright control of the Saeco Australia business and was concealed from Mr Ubertini and the other independent directors.  This was conduct that was part “of the affairs of” Saeco Australia; and
  • the Saeco International nominated directors owed a duty to Saeco Australia to disclose the harmful intentions of Saeco International and their inaction was also conduct “of the affairs of” Saeco Australia.

Elliott J also found that certain conduct by Mr Ubertini (including withholding payment to Saeco International after its decision to refuse to accept returned stock and his deliberate avoidance of board meetings) was not “without blemish”.  However, Saeco International’s deliberate conduct to destroy Saeco Australia’s ability to conduct its Australian business was so disproportionate and commercially unfair, that Mr Ubertini’s conduct did not result in relief being denied.

Accordingly, the Court refused to order the winding up of Saeco Australia and ordered Saeco International to purchase the shares of Mr Ubertini and Ubertini Investments in Saeco Australia.

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