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
Government consults on proposed crowd sourced equity funding framework for public companies and canvasses proposed reforms for proprietary companies
Following consultation earlier this year and consistent with its expressed commitments, the Federal Government is now consulting on its proposed crowd sourced equity funding framework for public companies as well as ways to reduce compliance costs for, and facilitate capital raising by, proprietary companies.
ASIC moves to recover costs of its investigations
To date, ASIC has rarely exercised its powers to recover the expenses and costs of its investigations from a person who is ultimately found by a court to have breached the law. However, ASIC has revised its approach and will now more frequently make orders for the recovery of its investigation costs and expenses, and has published the factors that it will take into account in making such orders.
ASIC has revised its approach and will now more frequently use its power under section 91 of the Australian Securities and Investments Commission Act 2001 (Cth) to make an order to recover investigation expenses and costs where that investigation has led to a successful prosecution or civil proceeding against a person.
ASIC will consider making an order in each case where the legislative requirements are met. However, ASIC will not usually make an order where the only bases for ASIC exercising its powers are judgments, declaration or orders which are interlocutory, in the nature of asset preservation or travel restraint orders or which are made in proceedings which solely concern legal challenges to the exercise of its powers (such as challenges to information gathering powers).
Factors that ASIC will consider before making an order include:
- the impecuniosity of, and exceptional hardship to, the person;
- the amount recoverable (and how that weighs against the cost of enforcing an order);
- the extent of ASIC's success in the proceedings;
- the likely effect on the consumers or investors who have suffered loss;
- the degree of culpability of the person;
- the degree of cooperation by the person; and
- the scope of the investigation (i.e. the extent to which it was relevant to the proceedings).
ASIC’s new approach applies to investigations commenced after 29 July 2015 as well as some investigations commenced before this date in certain circumstances.
See Information Sheet 204 Recovery of investigation expenses and costs and media release dated 29 July 2015.
ASIC facilitates digital financial services disclosure
ASIC’s new regime allows financial services providers to elect to deliver financial services disclosure documents to clients digitally unless the client opts out. The reforms should result in time and costs savings for financial services providers and make the information available to clients in a more timely, convenient, interactive and easier to understand manner.
ASX to facilitate dual listings by New Zealand companies
Following consultation and feedback, the ASX’s amended proposals to exempt companies listed on the New Zealand Exchange Main Board from the stricter admission requirements for ASX Foreign Exempt Listings, and thus remove the dual compliance burden for New Zealand companies that wish to have a dual listing on the ASX, have been lodged for regulatory approval. It is anticipated that the changes will encourage more dual listings by New Zealand Companies and thus provide greater access by Australian investors to a wider range of well-regulated public companies.
Following consultation and feedback earlier this year on proposed amendments to the ASX Listing Rules to facilitate dual listings by entities with a primary listing on the NZX Main Board (NZ Listed Companies) (see April 2015 G+T CA Update), the ASX has made a number of changes to the rule amendment package which it considers provide further assurance of the quality of entities admitted to listing on the ASX (and which are set out in the ASX's Response to Consultation). The updated rule amendment package has now been lodged for regulatory approval.
Key aspects of the updated rule amendment package include:
- exempting NZ Listed Companies from the much higher profits and net asset tests that apply for ASX Foreign Exempt Listings (and instead applying the lower tests for a standard admission);
- exempting NZ Listed Companies from the shareholder spread requirements;
- requiring that a NZ Listed Company's directors meet an equivalent good fame and character test as under a standard admission;
- requiring that all ASX Foreign Exempt Listings inform the ASX if they have been granted a waiver from all or any part of any listing rule of their home exchange;
- requiring that all ASX Foreign Exempt Listings give the ASX an annual statement (for release to the market) that they continue to comply with the listing rules of their home exchange;
- requiring that all ASX Foreign Exempt Listings request a trading halt or suspension of quotation where the equivalent has occurred under the listing rules of their home exchange; and
- retaining the requirement for foreign companies to be registered under the Corporations Act 2001 (Cth).
ASX has also confirmed that:
- any NZ Listed Company that is currently admitted as an ASX Listing will be able to apply to change its admission category to ASX Foreign Exempt Listing. The process for a change of admission category is expected to be straightforward but will not be automatic. ASX will write to all eligible entities to explain this process;
- an eligible entity will be able to apply for admission as an ASX Foreign Exempt Listing contemporaneously with its admission to the NZX Main Board; and
- while an entity admitted as an ASX Foreign Exempt Listing with a primary listing on the NZX Main Board will not be subject to continuous disclosure obligations under the ASX Listing Rules (as it will not be a “listed disclosing entity”), it will be subject to such obligations under rule 10.1 of the NZX Listing Rules and information provided to the NZX market under that rule must be immediately provided to the ASX.
As one submission pointed out, because securities in an ASX Foreign Exempt Listing are not “ED securities” and an ASX Foreign Exempt Listing is not a “listed disclosing entity”, an entity admitted under the proposed rules will not be in a positon to issues securities, or have its securities offered for sale, on the basis of a cleansing statement under sections 708AA and 708A of the Corporations Act 2001 (Cth) respectively. ASIC has indicated that it is not currently in a position to progress an application for relief for all entities admitted under the proposed rules to have the benefit of sections 708AA and 708A but could consider an individual relief application on its merits.
In connection with this rule amendment package, ASX’s website disclosure in relation to dual listed entities will be updated to include further information about ASX Foreign Exempt Listings, including entities admitted as ASX Foreign Exempt Listings under the new rules.
Further draft legislation on multinational tax avoidance released
Following consultation on exposure draft legislation, Treasury has now released further draft legislation which implements some additional multinational tax integrity measures, including country by country reporting requirements and greater administrative penalties for multinational entities that are found to have entered tax avoidance or profit shifting schemes. We will continue to monitor the progress of the draft legislation.
As part of the May 2015 Federal Budget, the Australian Government announced a suite of measures aimed at combatting Australian income tax avoidance by multinational enterprises (the measures were described as targeting 30 specific large taxpayers). At the time of that announcement, draft legislation was released to combat the use of artificial or contrived arrangements to avoid a taxable presence in Australia by certain large multinational entitles (see June 2015 G+T CA Update).
On 6 August 2015, Treasury released further draft legislation to implement additional multinational tax integrity measures (also announced on Budget Night). These include:
- introduction of new OECD Country-by-Country (CbC) reporting requirements that look to adopt measures proposed in the OECD Base Erosion and Profit Shifting Action Plan 13 (see Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015: Country by country reporting); and
- greater administrative penalties for multinational entities that are found to have entered into tax avoidance or profit shifting schemes (see Tax and Superannuation Laws Amendment (2015 Measures No 4) Bill 2015: Scheme penalties for large companies).
Under the proposed CbC reporting requirements, Australian residents (or non-residents with a permanent establishment (PE) in Australia) with ‘annual global revenue’ exceeding AU$1 billion will be required to provide the Commissioner of Taxation (Commissioner) with a statement in the ‘approved form’ before the end of 1 July 2016.
The draft legislation does not specify the precise content that will be required to be lodged, however it is expected that this this will closely follow the measures proposed in the OECD Action Plan 13, which is expected to consist of:
- a CbC report which contains information on the location of the economic activity undertaken by the multinational group;
- a master file which reports the group’s organisational structure, business operations, financial position and tax position; and
- a local file which reports on the operations and cross-border transactions undertaken by the Australian entity (either a subsidiary or PE) with associates in other countries. While there is an apparent overlap between the proposed CbC reporting rules and the existing transfer pricing documentation requirements to have a Reasonably Arguable Position (RAP) under Subdivision 284-E, it is clear the proposed rules are intended to be separate requirements.
Further detail on the information required to be provided is anticipated to be published by the ATO after enactment of the legislation. It is expected that exemptions may apply to specific classes of entities where the Commissioner has given written notice to that effect (eg entities with little or no cross-border related party transactions, and who would incur unreasonably high compliance costs to comply with these measures).
Increased penalties for multinational tax avoidance
The draft legislation looks to double the penalties imposed on large companies that:
- enter into tax avoidance or profit shifting schemes;
- have 'annual global revenue' exceeding AU$1 billion; and
- do not adopt a tax position that is reasonably arguable.
The maximum administrative penalties applicable will be doubled from 50% of the shortfall amount to 100% of the shortfall amount. Given the materiality of the penalty, as a practical matter we expect that many taxpayers will be forced into having their global tax structure vetted by the ATO. The proposed increase in penalties will apply to tax benefits obtained on or after 1 July 2015, regardless of when the relevant scheme was entered into.
Management of a company remains the domain of the board of directors: Australasian Centre for Corporate Responsibility v Commonwealth Bank of Australia  FCA 785
The Federal Court has affirmed that the board of directors is primarily responsible for management of a company, and shareholders have no right to require a resolution expressing an opinion on that management to be put to a general meeting of the company. As such, the rights of shareholders to control company management are limited to those expressly set out in the company’s constitution or conferred by law.
The Australasian Centre for Corporate Responsibility (ACCR) (representing over 100 shareholders of Commonwealth Bank of Australia (CBA)) gave notice to CBA pursuant to section 249N of the Corporations Act 2001 (Cth) (Act) of the following 3 resolutions that it proposed be moved at the CBA’s 2014 AGM:
- Resolution 1 (preferred resolution) - an ordinary resolution that “in the opinion of shareholders”, it was in the best interests of CBA for the directors to provide a report on certain matters relating to greenhouse gas emissions;
- Resolution 2 (as an alternative to Resolution 1) - an ordinary resolution expressing shareholder concern about the absence of a report described in Resolution 1; and
- Resolution 3 (as an alternative to Resolution 1 and 2) - a special resolution to amend the CBA constitution to require the directors to report annually on certain matters relating to greenhouse gas emissions.
CBA’s notice of meeting for its 2014 AGM included only Resolution 3, together with a recommendation that the shareholders vote against it on the basis that it was not in the best interests of CBA. CBA did not include Resolution 1 or Resolution 2 because it considered that they were “matters within the purview of the Board and management of the Bank” and accordingly were “not valid and capable of being legally effective”.
In finding that CBA was not required to put Resolution 1 or Resolution 2 to the AGM, Davies J in the Federal Court of Australia found that:
- the starting point is the general principle that shareholders in general meeting cannot interfere in the board’s exercise of powers which are exclusively vested in the board;
- this limitation on shareholder power means that if the company’s constitution gives the board the power to manage the company’s business (which the CBA constitution did (as do most typical constitutions)), the directors are exclusively responsible for management and the shareholders cannot control the directors in the exercise of that power or direct the board to exercise that power in a particular way (save for matters that are within the power of the company in general meeting);
- ACCR's submission that a non-binding shareholders' resolution which expresses an opinion does not usurp the powers of the directors should be rejected. In this regard, her Honour rejected ACCR's argument that National Roads & Motorists' Association v Parker (1986) 6 NSWLR 517 was wrongly decided. Her Honour also found that shareholders do not have implied constitutional power to express views on the way in which the business is being managed. In a situation where the CBA constitution vested all powers concerning the business of CBA in the board, the only powers that shareholders had were those which the Act “requires” be exercised by the company in general meeting and none of those powers include a power to pass non-binding advisory resolutions;
- provisions in the Act which allows shareholders to request the company to provide statements in relation to proposed resolutions (section 249P), to ask questions about or comment on the management of a company at its AGM (section 250S), or to consider directors’ reports (section 250R) did not provide any basis for a power for shareholders to express opinions by resolution; and
- as Resolution 1 and Resolution 2 were not referable to any power other than the power of management vested exclusively in the CBA board, it followed that the CBA board was not required to put them to the AGM.
Davies J also rejected ACCR’s argument that the CBA board acted in excess of its powers in recommending that shareholders vote against Resolution 3. Her Honour accepted CBA’s arguments that its power to do so derived from the CBA constitution, as well as the duty of directors to “provide such material as will fully and fairly inform shareholders of the matters to be considered at a meeting to enable them to make a properly informed decision”.
Directors must act collectively in calling a meeting requested by shareholders under section 249D of the Corporations Act 2001 (Cth): Mortimer v Proto Resources & Investments Ltd, in the matter of Proto Resources & Investments Ltd  FCA 654
In this case the Federal Court found that the obligation of directors to call a general meeting at the request of shareholders under section 249D of the Corporations Act 2001 is a collective obligation. As such, a single director or sub-set of directors, acting outside the board of directors, cannot make decisions about whether and how to act on a requisition notice.
Mr Macfalane (one of the defendant directors of Proto Resources & Investments Ltd (Proto)) sent the other Proto directors an email attaching copies of:
- a document requesting that a general meeting be held pursuant to section 249D of the Corporations Act 2001 (Cth) (Act); and
- a notice of general meeting that Mr MacFarlane said would be distributed to shareholder that day.
The agenda in the notice of general meeting set out 14 proposed resolutions, including resolutions that each of the plaintiff directors of Proto be dismissed and that each of the defendant directors be confirmed as directors. The plaintiff directors had not agreed to the general meeting and had not seen the requisition notice before receiving a copy of it with the notice of general meeting.
In agreeing with the plaintiff directors’ contentions that the notice of general meeting was ineffective, Gleeson J in the Federal Court upheld the interpretation of the plaintiff directors that:
- as a matter of the ordinary meaning of section 249D(1), the obligation to convene a meeting falls upon “the directors” collectively and such language can be contrasted with the language in section 249C which allows for “a director” to call a meeting;
- the obligations imposed by section 249D require consideration by all of the directors of any resolutions specified in the request by shareholders to hold a general meeting and it could not be intended that one or more directors acting outside the board of directors would be entitled to make decisions about whether and how to act on a requisition notice; and
- the requirement in s 249D(2)(d) that the request be “given to the company” is consistent with the interpretation that the power to call a general meeting is conferred upon all of the directors and not just one director or a sub-set of directors.
Gleeson J also rejected the defendant directors’ argument that there is a distinction between the obligations imposed on “directors’ in section 249D and a requirement that a meeting be called “on consensus of the company’s board”, on the basis that if it were up to the consensus of all directors, including those subject to dismissal notices, there may be such situations where such meetings would never be called. His Honour found that there is nothing in the Act to support such a contention and Proto’s constitution did not require a consensus of directors (but rather a resolution of the directors). Further, shareholders with at least 50% of the votes of all shareholders who make a request under section 249D have the protection of section 249E which entitles them to call and hold a meeting if the directors do not do so within 21 days after the requisition notice is given to the company.
Gleeson J further noted that the procedure required under section 203D of the Act to give procedural fairness to directors by entitling them to put their case when removal is proposed did not appear to have been followed.
What constitutes reaosnable notice of a directors' meeting?: In the matter of Warwick Keneally as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (Admin Apptd)  NSWSC 937
In this case, 2 hours’ notice of a directors’ meeting to appoint a voluntary administrator was held not to constitute reasonable notice. Whether notice of a directors’ meeting is reasonable will depend on the particular circumstances and the objective urgency but Courts will take a particularly strict approach in circumstances where relations between the directors are strained.
Ms Lam, Ms Tang and Mr Chen were directors and shareholders of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd (Administrator Appointed) (ABMICT). There had been a breakdown in the relationship between the directors which resulted in Ms Tang and Mr Chen offering to buy out Ms Lam (which did not proceed) and approaching Mr Keneally about a possible retainer to investigate alleged misappropriation of company funds by Ms Lam.
At 1.16pm on 10 November 2014, Ms Lam was given notice by text message of a meeting to be held at 3pm that afternoon and such message did not convey any details of the matters to be discussed at the meeting. At the meeting, Mr Keneally was appointed as voluntary administrator to ABMICT pursuant to section 436 of the Corporations Act 2001 (Cth) (Act) and Ms Lam sought relief in respect of that appointment.
The ABMICT constitution required “reasonable written or oral notice” to be given of a directors’ meeting. In finding that notice of less than 2 hours to Ms Lam was not reasonable notice in the circumstances, Black J in the Supreme Court of New South Wales held that:
- any inconvenience to Ms Tang and Mr Chen in having to vary their travel plans to leave Sydney that evening in order to give longer notice did not warrant the very short notice given;
- the lack of urgency was demonstrated by the fact that Ms Tang and Mr Chen took several weeks after first approaching Mr Keneally to determine to appoint an administrator and further, there was no evidence of any immediate financial demands on ABMICT requiring the appointment to occur that day;
- the fact that meetings may have been called in a similar manner in the past was not significant since the notice required for a meeting to appoint an administrator may be more (given the importance of the decision) or less (depending on the urgency) than notice for board meetings in the ordinary course;
- the absence of evidence that Ms Lam suffered prejudice as a result of the short notice was not significant. Such evidence would only have been hypothetical in addressing what Ms Lam would have done if she was given notice;
- Mr Keneally would have known that the notice given to Ms Lam was not reasonable notice, and as such, was not entitled to make an assumption under section 129(1) of the Act that ABMICT’s constitution had been complied with;
- while it was arguable that the lack of reasonable notice was a “procedural” contravention, it resulted in substantial injustice to Ms Lam and as such an order under section 1332(4) of the Act to cure it was not justified. While Ms Tang and Mr Chen were not obliged to give notice of the subject matter of the meeting, Ms Lam would have known that the meeting was likely to be directed to important issues (in circumstances of negotiations to buy her out) and longer notice would have given her time to consider taking an adviser with her; and
- the requirement of reasonable notice of a directors’ meeting is an important aspect of corporate governance and there is a public interest in not permitting a majority of directors to call meetings at unreasonably short notice, in the absence of objective urgency, where the directors and shareholders are at loggerheads.
Court construes the knowledge requirement for insider trading: R v Farris  WASC 251
In this case, the Court considered the knowledge requirement in the insider trading prohibition in section 1043A of the Corporations Act 2001 (Cth), holding that a person may know of information but not appreciate that the information is ‘inside information’, and that section 1043A does not require any causal connection between possession of the inside information and the decision to sell the shares. Once it is established that a person is in possession of inside information, the trading prohibition will apply whether or not the person consciously brings to mind the information and its nature at the time the person makes a decision to trade in shares.
The relevant facts of the case were as follows:
- Mr Farris was a director of Farris Corporation Limited (FCL), Northern Star Resources Ltd (NST) and Investmet Limited (Investmet);
- on 26 November 2012, Mr Farris was present at a meeting at which a possible sell down by Investmet of shares it held in NST at a minimum price of $1.40 per share (Sell Down) (Relevant Information) was discussed;
- Mr Farris had wished to sell some of FCL’s shares in NST some months before 26 November 2012 to meet financial obligations. He had made several applications to the NST chairman to sell the shares before the application was finally approved in the week of 26 November 2012;
- Mr Farris suffered from post-traumatic stress disorder and in the period immediately prior to 26 November 2012, was stressed due to heavy work commitments and associated international travel;
- on 27 November 2012, Mr Farris placed an order to sell 750,000 of FCL’s shares in NST at a target price of $1.50, and such shares were sold on 28 and 29 November 2012 at an average price of $1.5353 ($1,151,480.65 in total); and
- on 30 November 2012, the Sell Down was announced to the market and the opening price for NST shares was $1.37.
Mr Farris pleaded guilty to 2 insider trading charges of procuring another to sell shares in a publicly listed company at a time when he was in possession of information that he knew or ought to have known was price sensitive and not generally available, contrary to section 1043A(1)(d) of the Corporations Act 2001 (Cth) (Act). However, the key issue in these proceedings was the factual basis on which Mr Farris should be sentenced. Mr Farris accepted his guilt on the basis that he ought to have known the character of the Relevant Information rather than that he did know of that character, whereas the prosecution did not accept that Mr Farris did not know the character of the Relevant Information.
In considering the concept of knowledge for the purposes of section 1043A, Hall J in the Supreme Court of Western Australia held that:
- it is important to distinguish between the knowledge required to establish possession and the knowledge of the particular characteristics of the information referred to in section 1043A(1)(b), and it is conceivable that a person may possess (ie know of) information and yet not appreciate that the information is not generally available or that it is price sensitive;
- an offence against section 1043A does not require any causal connection between possession of the information and the decision to sell the shares. The person who commits the offence may have some legitimate reason for wanting to sell the shares and the fact that he is in possession of information which gives him an advantage over others may not be material to his decision. Motive or use are not elements of the offence although they may be relevant to sentence. A person who sells shares in order to unfairly take advantage of inside information is clearly more culpable that a person who has other legitimate and pressing reasons for selling shares;
- the effect of section 1043A is to create a class of persons who, by reason of their possession of inside information, are prohibited from trading and that prohibition will apply whether or not the person consciously brings to mind the information and its nature at the time the person makes a decision to trade in shares. The structure of section 1043A is also consistent with an interpretation that once possession and specific knowledge of the information is established, the prohibition on disposal applies; and
- the reason for the distinction between “knows” and “ought reasonably to know” is not to deal with lapses of memory or failure to recall the true nature of the information possessed but to deal with the situation where a person possesses inside information and fails to appreciate that it is not generally available or price sensitive where the circumstances should have led them to that conclusion.
On the facts, Hall J held that:
- there was no objective evidence that Mr Farris was suffering any episodes of cognitive impairment at any time during the week or 26 November 2012;
- the fact that an application to trade was approved in the week of 26 November 2012 was relevant insofar as it shows that Mr Farris was not seeking to conceal his intention to sell but could not reasonably have been seen as an indication by the NST chairman that there was no other legal impediment to selling;
- while it was not necessary to establish that Mr Farris was consciously aware of the nature of the Relevant Information at the time he placed the order, the significance of the matters discussed at the meeting about the Sell Down, the emails that followed, the short time frame and the number and value of shares sold by FCL all showed that there was no reasonable possibility that he was not consciously aware;
- Mr Farris made a very significant error of judgment at the time he placed the order and the evidence (including the fact that he made no attempt to conceal the sale of shares, obtained written approval to sell, used his usual broker and share trading account and never sought to deny the sale) showed that he very likely failed to appreciate the full wrongfulness of what he was doing;
- Mr Farris did not set out to unfairly take advantage of inside information, but rather gave in to his desire to sell the shares in circumstances where he should not have done so; and
- while the above may reduce his moral culpability, it did not affect the conclusion that he sold the shares at a time when he possessed inside information which he knew was price sensitive and not generally available, and that knowledge was proven beyond reasonable doubt.
Be clear when waiving conditions precedent: Prospect Resources Ltd v Molyneux  NSWCA 171
In this case, the Court held that a letter advising that the relevant conditions precedent had been ‘satisfied’ could not be construed as a waiver of those conditions precedent on the basis that it should be understood as having communicated that no further performance or satisfaction of the conditions precedent was required. Contracting parties should ensure that they use clear and unambiguous language when communicating a waiver of conditions precedent, to reduce the risk of the intended waiver being invalid.
Prospect Resources Ltd (Prospect) entered into a subscription agreement (Subscription Agreement) with a consortium (Consortium) pursuant to which:
- the Consortium’s obligation to subscribe was subject to a number of conditions precedent, including that Prospect “reasonably satisfy” the Consortium that the conditions precedent in a separate Senior Prospecting and Mining Agreement (SPMA) had been “satisfied or waived”; and
- if the conditions precedent in the Subscription Agreement were not satisfied or waived by 30 October 2013, any party had the right to terminate the Subscription Agreement.
On 28 October 2013, Prospect wrote to the Consortium confirming its understanding that all the conditions of the SPMA had been satisfied as of that date (Letter). In fact, not all of those conditions had been satisfied and on 31 October 2013, the Consortium terminated the Subscription Agreement on the basis that the conditions precedent of the SMPA had not been satisfied.
Prospect argued that:
- the Letter amounted to a waiver of any conditions that had not been satisfied (because what the signatories to the Letter must be understood as having communicated was that they required no further performance or satisfaction of the conditions precedent); and
- the Consortium ought reasonably to have been satisfied by the Letter that the conditions precedent in the SPMA had been waived and it was not therefore open to the Consortium to terminate the Subscription Agreement.
Ward JA, with Beazley P and Leeming JA in agreement, in the New South Wales Court of Appeal noted that an absence of an express reference to a waiver does necessarily mean that there has not been a waiver. However, their Honours upheld the finding of the trial judge that the Letter did not constitute a waiver of the conditions precedent because:
- both the Subscription Agreement and the SPMA distinguished between the ‘fulfilment’ or ‘satisfaction’ of the conditions precedent and their waiver;
- the Letter expressly referred to the understanding of Prospect that the conditions precedent had been satisfied and, understood in terms of this unambiguous language, the letter was not capable of constituting a waiver;
- the Letter did not unequivocally communicate a decision to abandon a right to insist on satisfaction of the conditions or an election not to insist on their satisfaction or to treat them as being fulfilled; and
- objectively, the Letter alone was not sufficient to “reasonably satisfy” the Consortium that there had been a waiver of the conditions precedent.
Take care when drafting pre-emptive rights notices: Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd  WASC 242
Joint venturers (or parties to a shareholders’ agreement) should always ensure that a pre-emptive rights notice strictly complies with the terms of the relevant pre-emptive rights clause in the joint venture or shareholders agreement, to reduce the risk of the notice subsequently being found to be invalid. In particular, where a pre-emptive rights clause provides for the inclusion of additional “relevant” terms in the notice, such terms must have a “close” connection to the interest being offered in the notice.
This case concerned a joint venture (Joint Venture) between Santos Offshore Pty Ltd (Santos) and Apache Oil Australia Pty Ltd, Apache East Spar Pty Ltd and Apache Kerasail Pty Ltd (each of which were subsidiaries of Apache Energy Limited (Apache Energy)) (Apache Parties). A joint operating agreement between the parties (JOA) provided that if a party wished to transfer its participation interest to a third party, or if there was a proposed change in control of a party, the other parties would have a right of pre-emption to acquire that party’s interest.
In 2015, Viraciti Energy Pty Ltd entered into an agreement to purchase all of the shares and voting rights in Apache Energy (SPA), which would result in a change of control under the JOA. Accordingly, the Apache Parties each issued a notice (Notice) to Santos advising of the change of control and offering to sell their interest in the Joint Venture on the terms and conditions set out in the Notice. The relevant clauses in the JOA required the Notice to set out the final terms and conditions of the change of control that were “relevant” to the participating interest (clause 12.3(C)) and imposed a right to acquire the interest “for the Cash Value on the equivalent terms and conditions as set out in [the Notice] for cash” (clause 12.3(F)).
In upholding Santos’s argument that 5 of the terms and conditions in the Notice did not comply with the JOA (Challenged Conditions) (such that the Notices (or the Challenged Conditions) were invalid), Pritchard J in the Supreme Court of Western Australia found that:
- given the importance of the identity, financial capacity and reliability of the participants in a joint venture, the purpose of pre-emptive rights clauses is to “ensure that existing participants are empowered to exclude new participants by purchasing the outgoing participant’s interest if they so desire”;
- having regard to this purpose, courts have recognised a need for caution in adopting a construction which would restrict the operation of pre-emptive rights clauses or permit their application to be avoided, and have construed them so as not to render it impossible for a joint venturer to satisfy the requirements of the offer;
- the reference to “relevant” terms in clause 12.3(C) was limited to those which “bear upon, or operate upon, or are otherwise closely connected or related to” the participating interests of the Apache Parties and such construction requires a “close” connection between the terms and those participating interests;
- clause 12.3(F) did not require that the Notice must be modified so as to produce the same legal and commercial outcomes for Santos in relation to the participating interests of the Apache Parties as for Viraciti under the SPA. Rather, Pritchard J preferred the construction that clause 12.3(F) operated only in relation to the determination of an “equivalent” consideration (ie cash) to be paid for the participating interests;
- the primary basis on which Santos’s action succeeded was because the Challenged Conditions were not “relevant to” the participating interests of the Apache Parties or were otherwise inconsistent with clause 12.3 of the JOA; and
- the terms of the JOA required that all of terms and conditions in the Notices must be accepted “without reservations or conditions” to constitute an offer. Accordingly, the invalid conditions in the Notices could not be severed with the result that each of the Notices was wholly invalid.