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25/02/14

Corporate Advisory Update February 2014

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

In this issue you will find:

ASX

ASX defers the start date of 1 January 2014 on some proposed governance-related changes to the ASX Listing Rules and Guidance Note 9

ASX has deferred the planned start date of 1 January 2014 for some of the amendments to the Listing Rules and Guidance Note 9 in order to give it time to consider the 24 submissions received on the changes.  The proposed start date of 1 July 2014 for the remaining proposed amendments at this stage remains unchanged.  We will continue to monitor the proposed amendments and any further announcements in relation to their commencement.

On 16 December 2013, ASX announced that it had received 24 written submissions in response to the ASX consultation paper, Proposed Changes to ASX Listing Rules and Guidance Note 9, Corporate Governance Disclosures released on 16 August 2013 contemporaneously with the issue by ASX Corporate Governance Council (Council) of a consultation paper seeking comments on a proposed third edition of its Corporate Governance Principles and Recommendations (P&R).  For more details on the proposed changes to the P&R, the Listing Rules and Guidance Note 9.

In order to permit the ASX to consider the submissions, it has deferred the planned start date of 1 January 2014 for some of the changes to the Listing Rules and Guidance Note 9.  The deferred proposed changes include:

  • the introduction of a new Listing Rule 3.19B requiring the disclosure of on-market purchases of securities on behalf of employees or directors or their related parties under an employee incentive scheme; and
  • extending the reach of a number of Listing Rules that currently apply to “associates”, to include “related parties”.

See item 1 in ASX Listed Entities Update No 09/13.  The submissions (other than 3 that were made on a confidential basis) are available on the ASX website.


ASX announces intention to introduce straight through processing of listed entity corporate action information

ASX proposes to streamline processing of announcements on key corporate actions from 14 April 2014 (with a 6 month grace period).  The new system should result in quicker dissemination of information for investors, improved workflows and compliance for listed entities and easier implementation and system standardisation for intermediaries.  Company secretaries should be prepared to use this new system once it is available.

Listed entities announce approximately 110,000 corporate actions per year, including dividends, entitlement offers and capital returns.  ASX has announced over the last 2 years that it has been working on a project to introduce straight through processing of listed entity corporate action information.

The system will involve a new mandatory process for listed entities to advise the market of key corporate actions (initially dividends/distributions, interests payments, cash capital returns and security splits/consolidations), by filling in and submitting new Appendices via online forms instead of uploading a PDF document.

The new system will improve the speed and accuracy of company announcements, as well as facilitate compliance with the ASX Listing Rules. Particular benefits of the system include:

  • investors will receive company data more quickly, enabling more informed and timely investment decisions;
  • listed entities will benefit from improved workflows and improved compliance with the ASX Listing Rules through validation. They will also be able to integrate their systems with ASX systems; and
  • intermediaries will benefit from international standard data sets allowing easier implementation and standardisation of systems.

The new information requirements, deadlines and method of submitting the information will be prescribed in the ASX Listing Rules (including updated and new Appendices) and in the ASX policy requirements for use of the electronic lodgement facility and entity details facility (an attachment to the ASX Online agreement, the content of which is set out in an attachment to Guidance Note 20: ASX Online).

Implementation of the new system is proposed for 14 April 2014 following testing and on-line training of listed entities.  ASX has indicated that it will allow a six-month ''grace period'' in which it will encourage but not enforce use of the online forms.

See item 7 in ASX Listed Entities Update No 09/13.


Other bodies

FIRB thresholds remain unchanged for 2014

Foreign investment thresholds for 2014 remain unchanged following annual indexing.

The 2014 foreign investment thresholds for notification under the Foreign Acquisitions and Takeovers Act 1974 (Cth) remain unchanged at:

  • $54 million for developed non-residential commercial real estate;
  • $248 million for most other investment proposals including investments by US persons and NZ persons in prescribed sensitive sectors; and
  • $1,078 million for US persons and NZ persons in non-sensitive sectors.

Certain investments in land and the media sector and direct investments by state-owned enterprises must be notified, regardless of the value of the investment.

See monetary thresholds on the FIRB website.


ATO is considering allowing large companies to use their own auditors for assurance of facts in tax matters

The ATO has revealed details of its proposed program to allow medium-risk companies with turnover of between AUD 100million and AUD 5billion to use their own auditors to assure facts in tax matters in cases where the law is clear.  If implemented, the program will free up considerable resources for the ATO.  We will continue to monitor the progress of the proposed program.

On 16 January 2014, the Australian Taxation Office released a discussion draft detailing a proposed program, the External Compliance Assurance Process (ECAP), which would allow large companies to use their own auditors for assurance of facts in tax matters. Key drivers for the proposed program include increased taxpayer participation and the freeing up of ATO resources.

At this stage, the ATO has proposed that the program be available to taxpayers rated medium-risk with turnover between AUD 100million and AUD 5billion, and that review by a company’s own auditor be limited to factual matters in cases where the law is clear and will not supplant the Commissioner’s determination and application of his view. In the case of an audit or other ATO inquiry concerning an issue of concern, companies would have the option of an ATO review or review by their own auditor.

The ATO has indicated that it is currently in blueprinting stage and may consider a pilot of the program.


Cases

When will a Court grant interlocutory relief to re-appoint a director?: In the matter of Courtesy Real Estate (NSW) Pty Ltd [2013] NSWSC 1666

This case demonstrates the Court’s unwillingness to make an order to reinstate a director on the basis that if the removal is ultimately found to be valid, the order would have overridden the view of the majority of the shareholders in circumstances where it was not ultimately found to be justified.  There is also potential for a reinstated director to veto actions by the Company, which could be detrimental.  Any significant delay by a removed director in seeking orders will also likely dissuade the Court from making an order for re-appointment.

Mr Gillespie was removed as a director of Courtesy Real Estate (NSW) Pty Ltd (Company) by resolution of his co-directors even though a shareholders agreement between the Company’s shareholders stipulated that Mr Gillespie would be a director.  Although Mr Gillespie sought relief under section 233 of the Corporations Act 2001 (Cth), these proceedings concerned Mr Gillespie’s claim for an interlocutory order that he be reinstated as a director.

This issue did not appear to have been litigated in Australia before this case. While Black J found that there was at least a seriously arguable case that the removal of Mr Gillespie contravened the shareholders agreement (and that a seriously arguable case for oppression may be established), his Honour did not consider that the balance of convenience favoured an interlocutory mandatory order that Mr Gillespie be re-instated. Relevant factors included the following:

  • Mr Gillespie was removed months before he commenced proceedings so a mandatory interlocutory injunction would not function to preserve the status quo (which had now become that Mr Gillespie was not a director);
  • Any detriment that Mr Gillespie might suffer from not being a director (eg payment of salary and notice of meetings) can be addressed by appropriate orders of the Court;
  • There was a significant risk that re-instatement could affect the Company detrimentally due to the existing level of antagonism between the directors giving rise to the proceeding. Moreover, if the Court was to find at final hearing that any breach of the shareholders agreement is properly addressed by an order for damages and oppression is not established, then an order for Mr Gillespie’s reinstatement would have overridden the view of the majority of the shareholders in circumstances where neither the shareholders agreement nor the oppression claims justified that;
  • If re-instated, Mr Gillespie would have a right of veto over the payment of dividends (which require an unanimous decision of the directors); and
  • There was evidence that Mr Gillespie had not  attended the Company’s offices for over 5 months in part due to health reasons and there is a real risk of concern given that history in re-appointing him as director.

When will the time for payment be essential?: Liang Zhen Lin v BHW Capital Pty Ltd & Anor [2013] NSWSC 1786

This case illustrates the willingness of the Courts to imply a term that the time for payment is essential in circumstances where the timing was dictated by an imminent risk that the company could suffer considerable financial loss if the money was not received by the stipulated date.  To avoid ambiguity and unintended consequences, contracts should clearly state whether time for payment is essential. An aggrieved party who wishes to retain its termination rights should also take care to ensure that its actions following non-payment do not inadvertently amount to affirmation of the contract.

Mr Liang Zhen (Jally Lin) contracted with BHW Capital Pty Ltd (BHW Capital) to subscribe for 15% of the shares in BHW Capital (Shares) in consideration for a capital injection of $300,000 by Jally Lin by 22 January 2013 (Contract).  The capital injection was to be used by BHW Capital to pay debts in relation to a development opportunity.  On 21 January 2013, Jally Lin paid $180,000 toward a development debt at the direction of BHW Capital but the remaining $120,000 was not paid.  BHW Capital contended that time was of the essence in relation to the payment, purported to terminate the Contract on 19 April 2013 and subsequently sold 5% of the Shares to a third party.

On the question of whether time was of the essence, White J in the Supreme Court of New South Wales found that:

  • despite no express agreement, it was implied that the time for the performance of the payment of $300,000 was essential as this was a commercial contract dictated by the imminent risk that that BHW Capital would lose its development opportunity and forfeit moneys already paid if the full payment was not made by 22 January 2013.  As such, it would have been open to BHW Capital to terminate the Contract because full payment was not made by Jally Lin by 22 January 2013;
  • the fact that BHW Capital did not terminate the Contract but rather sent an email on 16 April 2013 unequivocally calling for the final payment on the final payment (and the signed share transfer form) amounted to an election to affirm the Contract;
  • as the Contract was affirmed, time for payment was no longer essential; and
  • before the Contract could be terminated, a vendor would first need to nominate a reasonable time for completion (and the purchaser fail to complete by that time) and would then need to give a notice to compete making time of the essence.  As neither occurred in this case, the purported termination was ineffective.

Can a deed be binding without the signature of all parties?: Pratap v Permanent Custodians Limited [2013] NSWSC 1918

This case serves as a useful reminder that once a party has signed, sealed and delivered a deed (other than a guarantee), it becomes binding on that party even if the other parties have not yet executed it, except where such failure to execute imposes an additional burden on the other parties.  Parties should consider a contemparous exchange if there is any risk that all parties will not be bound at the same time.

This case arose over a Deed of Settlement in relation to a mortgage (Deed) between Katherine Pratap (Pratap), the lender, the mortgage service provider and the broker. The Deed was signed, sealed and delivered by the first 3 parties on 4 June 2013.  However, the broker only executed the Deed on or about 7 June 2013 at which point Pratap sought to amend a confidentiality clause in the Deed.

Young AJ in the Supreme Court of New South Wales was originally concerned that the Deed may not have become effective and that Pratap had withdrawn her authority to have the Deed properly delivered before it had become perfected by the broker signing it.

However, in ultimately holding that the Deed was effective, Young AJ found that except in the case of guarantees, “once a person has signed, sealed and unconditionally delivered a deed that deed is binding on that person even if there is a party to the deed who has not executed it or delivered it unless the failure of that third party will throw an additional burden on the other parties”.

See the case.


Can you agree to reverse the onus of proof for proving information is not confidential?: Pet Tech Pty Ltd v Batson [2013] NSWSC 1954

While a clause which sought to shift the burden for proving that information is not confidential from the discloser to the recipient  came very close to ousting the jurisdiction of the courts, it was not a substantial fetter on the party to have the Court determine the truth, because the party which bore the onus would be able to discharge that onus.  Any attempt to reverse an onus of proof should be very carefully drafted, to ensure the Court’s jurisdiction is not supplanted.

Mr Batson entered into an Employee Intellectual Property Agreement (EIPA) with Pet Tech Pty Ltd (Pet Tech).  The EIPA contained confidentiality and non-competition clauses including the following: ”I have the burden in any dispute of showing that information is not JobReady Solution’s [Pet Tech’s trading name] confidential information” which sought to shift the onus of proof from Pet Tech to Mr Baston.

Pet Tech purported to terminate Mr Batson’s employment contract for conduct issues.  Mr Batson sued for wrongful dismissal and the proceedings were settled.  Pet Tech then sought an order that Batson be restrained from using confidential information and deliver any such documents back to Pet Tech.

Young AJ noted that there was no reported authority on whether a provision in a contract which purports to shift the onus of proof in civil proceedings will be void as ousting the jurisdiction of the court.  However, Young AJ:

  • referred to Dobbs v National Bank of Australasia in which the High Court highlighted the distinction between negative restrictions upon the right to invoke the court’s jurisdiction (which have always been invalid as being against public policy) and positive provisions giving efficacy to the award of an arbitrator or independent expert where the court would normally adjudicate (which the law does not discourage).  However, his  Honour noted that the current scenario did not fit squarely into either category;
  • noted that it is at least arguable that a contractual provision that places a substantial fetter on the right of recourse to the courts is equally as bad as an express prohibition against going to court; and
  • found that while the clause shifting the onus of proof in relation to confidential information from Pet Tech to Mr Baston came very close to ousting the jurisdiction of the Court (as it virtually means that anything Pet Tech says is confidential must be accepted by the Court unless the contrary is proved), it was not a substantial fetter on the Court determining the truth of the matter because the party who bore the onus (Mr Baston) was still at liberty to discharge it.

The proceedings were ultimately dismissed on the basis that Pet Tech had failed to identify with specificity the confidential information said to have been disclosed and there was insufficient material to show that such information was in Mr Batson’s possession.


Passivity will not save a director of failed corporations from disqualification: Maley and the Australian Securities and Investments Commission [2013] AATA 924

This case serves as an important reminder that board appointments should not be taken lightly - even as a “personal favour”.  Directors should ensure that they are sufficiently abreast of the affairs of their companies and actively involved in their management.  An argument that a director was “not really involved” in management is unlikely to find favour when the company finds itself in strife.

Mr Maley was the director of 5 companies which, after his resignation, were wound up on the grounds of insolvency. This case involved an appeal from a decision by ASIC to disqualify Mr Maley from managing corporations for two years pursuant to section 206F of the Corporations Act 2001 (Cth) which gives a discretion to disqualify if a person has been an officer of at least 2 companies that have failed within the last 7 years.

Liquidators’ reports confirmed that the companies were mismanaged and possible breaches of the Corporations Act were reported, including a failure to maintain adequate books and records and insolvent trading. Mr Maley contended that he only accepted the appointments as a personal favour (in connection with a loan) and the failure to remove him was an oversight.  On this basis, he argued that he was not really involved in the management of the failed companies and that there was insufficient evidence of his involvement to warrant disqualification.

The Administrative Appeals Tribunal found that a disqualification period of 2 years was not excessive. It noted the following in relation to the factors to be considered under section 206F(2):

  • beyond having Mr Maley as a common director, there was little evidence of the companies being related to one another and as such it could not be established that the collapse of the different companies was part of one episode of failure;
  • Mr Maley’s claim that he was not involved in the management of the failed companies did not excuse his behaviour. His conduct as a director was considered culpable even if he was not actively involved in the affairs of the companies as the mismanagement occurred “on his watch”; and
  • it is in the public interest to remove directors with a track record of failure and thus on balance, the public interest favoured Mr Maley’s disqualification.

Can a party cash in an unconditional performance guarantee pending the resolution of a dispute?: Walton Construction Pty Ltd v Pines Living Pty Ltd [2013] ACTSC 237

The unconditional nature of a bank guarantee does not necessarily imply an unconditional entitlement to cash in the guarantee in the absence of an express right in the relevant contract.  Where parties to a contract are in dispute and the contract is silent on the right to call on the security, a party is likely to be prevented from calling on the security even if the guarantee itself is expressed to be unconditional. Contracting parties should ensure that the rights to call on any performance security are clearly stipulated in the contract.

Since early 2013, Walton Construction Pty Ltd (Walton) and Pines Living Pty Ltd (Pines) were involved in a building defects and payment dispute. Pending resolution of the dispute, Pines sought to enforce bank guarantees provided by Walton under the contract between the parties (Contract), which contemplated the provision of the bank guarantees but was silent about when Pines might call on them.  Walton sought an injunction against Pines, submitting that there was an implied contractual promise that Pines would not call on them until the dispute resolution procedure in the Contract had been followed and that recourse to the bank guarantees was only permitted once there had been an agreed or determined entitlement (and not just a claim in good faith).  Conversely Pines submitted that its entitlement arose from the unconditional nature of the bank guarantees themselves and the authorities that had established that, in the absence of a clear negative stipulation, Pines was entitled to call upon the guarantees.

Master Mossop in the Supreme Court of the Australian Capital Territory considered the differing authorities and noted that:

  • it was a matter of construction of contract whether a performance guarantee is provided solely as security or also as a risk allocation device (as to who will be out of pocket pending resolution of a dispute); and
  • whether or not there is power to call upon security when the entitlement is disputed will depend on the subtleties of the particular contractual provisions.

In granting the injunction, Master Mossop found that:

  • the Contract itself did not expressly permit Pines to call upon the guarantee while its entitlement to do so is subject to a genuine dispute;
  • in a case where the contract does not expressly deal with the circumstances in which the guarantee may be called upon, any capacity to have recourse to the security must, if it exists, be implied; and
  • in this situation, the implication of such a term would not be required to give business efficacy to the Contract.

When can a lender form an opinion that a MAC has occurred?: Minumbra Lancewood Pty ltd v AM Lancewood Investment Nominees Pty Limited [2013] NSWSC 1929

This case illustrates the challenges inherent in interpreting MAC clauses given they tend to be heavily negotiated and tailored provisions, with the Court acknowledging that interpretation is likely to be “complicated and case-specific”.  When drafting a MAC clause, particular care should be given to the events which constitute a MAC and the standard of “evidence” required (ranging from a belief of one party that an event may occur, to the event actually occurring).

Minumbra Lancewood Pty Ltd (Minumbra) sought orders preventing AM Lancewood Investment Nominees Pty Limited (Lancewood) from acting upon a notice of default issued under a Loan Agreement in connection with an accommodation village.  The notice of default was issued pursuant to a material adverse change (MAC) clause in the Loan Agreement in which a MAC was defined as:

“….any situation occurs which in the opinion of the Lender gives it grounds to believe that a material and adverse change in the business or financial condition of the Borrower has occurred or that the ability of the Borrower to perform its obligations under this Agreement has been or will be materially or adversely affected or that any other Event of Default is likely to occur”.

In August 2013, following an analysis of Minumbra’s business which highlighted lower occupancy levels and profitability, reliance on short term users and financial underperformance, Lancewood served a formal notice of default on Minumbra relying on the occurrence of a MAC.  Minumbra challenged the validity of the notice of default on the basis that Lancewood had not formed the relevant “opinion” under the Loan Agreement.

In the Supreme Court of New South Wales, Justice Robb found that a MAC had occurred and therefore that the default notice had been validly issued.

Robb J rejected the submission that Lancewood’s opinion had to be not only honest but also formed in good faith.  His Honour emphasised that while considerations of honesty and good faith can overlap, the latter “seems to require that the Lender in forming its opinion must act not only in its own interests but also have regard to the interests of the Borrower”.  Robb J found that Lancewood was entitled to exercise its rights without regard to the 50/50 nature of the investment, and also found no reason to doubt that the opinion had been formed honestly.

Robb J then drew attention to the broad wording of the MAC clause, noting that it required only grounds for believing that a MAC had occurred, not the actual occurrence of the MAC.  Accordingly, it was not necessary for Lancewood’s opinion to be objectively supported by established facts. As long as the opinion was formed honestly and not capriciously, it was effective unless no reasonable person could have formed it.  In Robb J’s view, there was substantial room for legitimate differences of opinion on what the business or financial condition of a particular borrower was.

Finally, on whether Lancewood’s opinion needed to go to Minumbra’s ability to perform its obligations under the agreement, Robb J held that the division of the clause into two limbs connected by the word “or” indicated an intention for the limbs to operate separately from one another. On a proper construction, the first limb was not only concerned with changes affecting the ability of Minumbra to perform its obligations but also changes which would cause Lancewood to wish not to continue to be bound by the existing terms, or to continue on significantly different terms.


The implied duty to co-operate does not extend to being 'nice': Wolfe v Permanent Custodians [2013] VSCA 331

A failure to make extensive efforts to contact a defaulting borrower whose direct debit form had been incorrectly completed was neither unjust, unconscionable or a breach of the implied contractual duty to co-operate.  Specifically, the Court noted that the duty to co-operate is not a general duty to ensure another party obtains an anticipated benefit and does not extend to being “nice”.  Contracting parties should be wary of taking much comfort from the implied contractual duty to co-operate to address their own shortcomings in performing their contractual obligations.

Mr Wolfe defaulted on his mortgage to Permanent Custodians Limited (Permanent), who planned his eviction.  The parties came to an agreement that Permanent would stay the eviction and Mr Wolfe would make repayments according to an agreed payment plan.

A direct debit form that Mr Wolfe had submitted had not been properly completed by him and accordingly had not been processed.  Australian Mortgage Securities Ltd (AMS) (which was responsible for processing the direct debit forms) attempted to contact Mr Wolfe by telephone in relation to the deficiencies in the form, but the two phone numbers they had were disconnected.  AMS did not make any further attempts to contact Mr Wolfe.  The failed payment caused a default on the loan.  Mr Wolfe did not check that the payment had been made and was not aware of the default until he received a written demand to vacate the property.

The Supreme Court of Victoria held that:

  • given Mr Wolfe’s credit history and the ‘last chance’ nature of the arrangement,  terms that permitted Permanent to enforce the judgment for possession upon any subsequent payment default without further notice, whilst onerous,  were not unjust under section 76 of the National Consumer Credit Code 2010;
  • Permanent’s conduct was not unconscionable under s 12CB of the Australian Securities and Investment Commission Act 2001 (Cth). Unconscionable conduct is more than unreasonable or unfair, it is also unethical.  Although “further indulgence may have been the ‘decent’ thing to do”, for Permanent to rely upon its legal rights lacked the requisite ‘moral taint’ and was therefore not unconscionable; and
  • Permanent’s conduct did not breach the implied contractual duty to co-operate.  The scope of the duty to co-operate is defined by what has been promised under the contract.  It is not a general duty to ensure another party obtains an anticipated benefit and does not extend to being “nice”.  The task of completing the form correctly was the responsibility of Mr Wolfe and the co-operation of Permanent was not required for Mr Wolfe to complete the task.

When will a contract be frustrated for illegality?: PT Arutmin Indonesia v PT Thiess Contractors Indonesia [2013] QSC 332

The Supreme Court of Queensland refused to find that changes in the law which affected a company’s ability to engage a contractor or changes to the contractor’s permit which reduced the scope of the services it could supply, amounted to frustration of the contact by supervening illegality.  In particular, the Court pointed to the fact that the company had not taken all possible steps to make the engagement of the contractor legal and there were specific contractual provisions which can be used to address changes to the scope of the services.  This case demonstrates that Courts will take a relatively hard line on claims that a contract has been frustrated by supervening illegality and may be reluctant to find frustration unless all possible steps, and all possible contractual solutions, have first been exhausted.

PT Thiess Contractors Indonesia (Thiess) provided services to a mine operated by PT Arutmin Indonesia (Arutmin) under a contract governed by the law of Queensland (Contract). Changes to Indonesian law obliged Arutmin to engage mining services companies considered ‘local’ or ‘national’ through a tender process.  Other companies could only be subsequently engaged if there were no suitable local or national companies available.

Thiess was not a local or national mining services company.  However, the Indonesian government issued written clarification stating that Arutmin could continue to engage Thiess under the Contract but that any subsequent engagements would require compliance with the new laws.  The Indonesian government also amended Thiess’s mining permit to no longer permit it to carry out coal extraction or processing.  Arutmin then sought to argue that the Contract had been frustrated by reason of supervening illegality.

In rejecting Arutmin’s frustration claim in relation to Thiess not being a local or national company, Jackson J in the Supreme Court of Queensland held that:

  • an obligation on Arutmin under the Contract to obtain and maintain all authorisations required for the project to be lawfully carried on or for the services to be lawfully provided amounted to a promise by Arutmin to act so as to enable Thiess to obtain the right to lawfully provide the services;
  • it was possible under the new laws for Thiess to continue to provide these services if, following the tender process, there were no suitable local or national service providers; and
  • following from the principle that a contract is not frustrated if the state of facts (which causes the alleged frustration) is brought about by the default of the party relying on frustration, Arutmin was required to exhaust the possibility by actually finding an alternative local or national service provider by tender.

Jackson J then referred to a clause in the Contract which provided that if any change to an authorisation necessitates a change to the services to be carried out by Thiess, any additional cost or saving to Thiess was to valued and paid for in accordance with a procedure, in the Contract for varying the services.  On the facts, his Honour found that the change to Thiess’s mining permit to prevent it from supplying coal extraction or processing services constituted a change to an authorisation that necessitated a change to the services and that the omission of coal extraction or processing services would create an additional cost or saving to Thiess.  As the Contract expressly regulated how such a change would be dealt with, Arutmin could not rely on that change as having frustrated the Contract.

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