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26/02/16

Corporate Advisory Update - February 2016

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

Changes to the Fair Work Act and the Productivity Commission final report

The passing of the Federal Government’s Fair Work Amendment Act 2015 has made a number of modifications to the Fair Work Act 2009 in relation to parental leave, greenfields agreements and protected action ballot orders.  The Government has also released the Productivity Commission’s final report into Australia’s workplace relations system.  The Commission’s recommendations to the Government call for substantial changes to current laws, institutions and practices, having the potential to significantly affect Australian workplaces if implemented by the Coalition.

For further information, see Changes to the Fair Work Act and the Productivity Commission final report by Dianne Banks, Kim McGuren, James Pomeroy and Clancy King dated 18 January 2016.


Government consults on crowd-sourced equity funding regulation

The Government has published a draft regulation which provides additional details on some aspects of the proposed crowd-sourced equity funding (CSEF) regime contained in the Bill which was introduced into Parliament late last year.

Following the introduction of the Corporations Amendment (Crowd-sourced Funding) Bill 2015 (Bill) into Parliament late last year, the Government has sought feedback on the draft Corporations Amendment (Crowd-Sourced Funding) Regulation 2015 (Regulation) and the associated Explanatory Statement. The draft Regulation provides additional detail on a range of matters, including:

  • the class of securities that may be offered;
  • the minimum requirements for what a CSEF issuer must include in their offer document;
  • the prescribed checks that intermediaries must undertake before allowing an offer to be made on their platform; and
  • the wording of the mandatory risk warning and retail investor risk acknowledgment that investors must agree to before they may invest in CSEF products.

Submissions on the draft Regulation closed on 29 January 2016 and the Bill has been referred to the Senate Economics Legislation Committee, with the report due on 29 February 2016.  We will continue to monitor the progress of the Bill and Regulation. 

See also the Minister for Small Business and Assistant Treasurer media release and the Treasury media release dated 22 December 2015.


ASX

Transition to T+2 settlement on 7 March 2016

The transition to a trade date plus 2 business days (T+2) settlement cycle, which will be effective from 7 March 2016, will reduce corporate action timetables and provide for faster settlement.

Following consultation last year, ASX has confirmed that transition to T+2 settlement will be implemented effective Monday 7 March 2016.  T+2 settlement is expected to deliver regulatory capital and margin savings for direct users of the settlement system, and provide for faster settlement of transactions for investors.

Transition to T+2 settlement impacts corporate action timetables (as contained in the ASX Listing Rules) including:

  • minimum 4 business days' notice to ASX of a proposed record date (rule 3.20.2) – a reduction from 5 business days;
  • minimum 3 business days' gap between record dates (rule 7.14) – a reduction from 4 business days;
  • minimum 4 business days from security holder approval at a meeting to record date (rule 7.15) – a reduction from 5 business days;
  • minimum 4 business days from provision of disclosure document/product disclosure document/information memorandum to record date (rule 7.17.2) – a reduction from 5 business days;
  • reduction of the ex period from 3 business days to 2 business days and other consequential date changes to the timetables in Appendix 3A, Appendices 3A.1 - 3A.6, Appendix 6A and Appendix 7A; and
  • change in the first settlement date for trades conducted on a deferred settlement basis to the first day of normal trading following the issue date + 2 business days (rule 19.12, various Appendices) - a reduction of one business day from the first day of normal trading following the issue date + 3 business days.

These changes will apply to any corporate action announced with a record date of 9 March 2016 or later.  For corporate actions or quotation of new securities that include a deferred settlement trading period, the changes will apply to issue dates of 4 March 2016 or later. 

The associated changes to the ASX Listing Rules, as outlined in the ASX Consultation Paper – Implementing a T+2 Settlement Cycle for the Cash Market: Draft Rule Amendments will also be effective 7 March 2016. 

The ASX Online Forms for the announcement of certain corporate actions (including dividends) have already been amended to calculate the correct ex period based on the transition date, and the information text associated with certain timetable dates (eg record date) will also be updated on 7 March 2016.

ASX is managing a transition period until the week of 7 March 2016, and any corporate action announced that is impacted by the changes will be checked by ASX Operations and ASX Listings Compliance for compliance with the changes.

See also Listed@ASX Compliance Update dated 18 February 2016.


Taxation

Australia signs multilateral tax information sharing agreement

Australia has signed an agreement for the automatic exchange of country-by-country reports as part of the continuing efforts to tackle multinational tax avoidance.

Australia was one of 31 countries to sign a new multilateral agreement to share tax information on multinational companies in Paris on 27 January 2016.  The agreement will facilitate the exchange of multinationals’ country-by-country reports (which will contain details of multinationals’ international transactions, including the location of their income and taxes paid, as well as their transfer pricing policies) between tax authorities in different jurisdictions. The first exchanges of information will start in 2017-2018 on 2016 information.

The agreement was signed as part of a continuing effort by Treasury to combat multinational tax avoidance (including the passing of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (Cth) which commenced on 11 December 2015, and will give the Australian Taxation Office further scope to ensure companies pay their fair share of tax in Australia.

See the Treasurer’s media release dated 28 January 2016.


Managed Investment Trust Bills before the Senate

New Bills to implement a revised regime for Managed Investment Trusts are before the Senate and have been referred to the Senate Economics Legislation Committee for inquiry and report by 10 March 2016.

The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and related Bills, which together propose to implement a new tax regime for Managed Investment Trusts, as well as make a number of other related amendments, were passed by the House of Representative on 10 February 2016 without amendment.  The Bills are now before the Senate, and have been referred to the Senate Economics Legislation Committee for inquiry and report by 10 March 2016.

See G+T December 2015 Corporate Advisory Update for a summary of the package of Bills.


Bill to provide greater flexibility for small businesses to change their structure

A new Bill has been introduced which aims to provide greater flexibility for small businesses to change their legal structure, by allowing them to defer gains or losses that would otherwise be made from transferring business assets from one entity to another as part of a genuine restructure.  We will continue to monitor the progress of the Bill.

The Tax Laws Amendment (Small Business Restructure Roll-over) Bill 2016 (Bill), which is currently before the Senate, will, if passed, allow small businesses (annual aggregate turnover of less than $2 million) to change their legal structure by transferring assets of their business from one entity to another, without incurring an immediate income tax liability that could potentially arise from such a transfer.

A small business may choose to apply the rollover subject to a number of conditions. Broadly, these include:

  • the CGT asset (including trading stock, revenue assets and depreciating assets) transferred must be an ‘active asset’ pursuant to section 152-40 of the Income Tax Assessment Act 1997 (Cth).  In general terms, a CGT asset is an active asset where it is used or held for use in the course of carrying on a business;                                                                                                           
  • the transaction must not have the effect of materially changing the ultimate economic ownership of the asset. Discretionary trusts that are family trusts are deemed to satisfy this test if all individuals with ultimate economic ownership in the asset, before and after the transfer, belong to the same family group relating to the family trust;
  • the transferor and transferee must be residents of Australia; and
  • the transaction must be part of a ‘genuine restructure’, which is a question of fact that is determined having regard to all facts and circumstances surrounding the restructure.  However, a small business will be taken to satisfy this requirement where for 3 years following the roll-over:
    • there is no change in the ultimate economic ownership of any significant assets of the business (other than trading stock) that were transferred under the transaction;
    • those significant assets continue to be active assets; and
    • there is no significant or material use of those significant assets for private purpose.

While the rollover ensures deferral of potential income tax implications, GST and stamp duty outcomes should be separately considered as part of any transaction.

The Bill, if passed, is proposed to apply to rollovers from 1 July 2016.

See also the Explanatory Memorandum.


Cases

Distinction between eligibility to vote and entitlement to vote explained:  Alexander v Burne [2015] NSWCA 377

The Supreme Court of New South Wales has overturned a decision at first instance to find that in the context of a particular unitholder deed, a special majority decision that required approval of two-thirds of “persons eligible to vote” meant two-thirds of all unitholders, not just those present at the meeting and entitled to vote.  This case is a reminder of the care that should be taken when drafting voting provisions in unitholder and shareholder agreements to ensure that the expressed wording reflects the intention.

Under the BDO Unitholders’ Deed (Deed), approval of the merger of BDO and Grant Thornton required a ‘special majority’, being a vote of two-thirds of “persons eligible to vote in respect of a resolution”.  In addition, a quorum for a meeting required 75% of unitholders to be “present in person or by representative”.

Of the 69 unitholders, 59 were present at the meeting to pass the resolution approving the merger and so a quorum was declared.  Voting on the resolution comprised 44 votes in favour, 3 votes not in favour and 12 abstentions.

The issue for determination was whether a “special majority” required:

  • two-thirds of unitholders present at the meeting and entitled to vote; or
  • two-thirds of all unitholders. 

At trial, Young AJA rejected the argument that the reference to “persons eligible” meant that what was required was a majority of all unitholders (and not just those at the meeting) because all unitholders were eligible to vote.  Rather, Young AJA found that eligibility to vote must be determined in accordance with the Deed and a unitholder who declines to attend the meeting (voluntarily or involuntarily) has submitted to the parts of the Deed which require a quorum and entitle a majority of those who are present and voting to make the decision (see our summary of the decision at first instance in the G+T May 2015 Corporate Advisory Update).

In allowing the appeal, Tobias AJA (with Ward JA and Gleeson JA agreeing) in the New South Wales Supreme Court – Court of Appeal disagreed with Young AJA and found that a ‘special majority’ required two-thirds of all unitholders.  In so finding, the Court agreed with the appellants that:

  • the words “persons eligible to vote” did not evince an intention that the persons eligible to vote were only the persons entitled to vote by reason of their being in attendance at the meeting;
  • in its context, the expression “eligible to vote” directed attention to persons who had the legal right or were qualified to vote at a meeting, regardless of whether they actually exercised that right by attending the meeting or giving a proxy.

The Court also found that:

  • if a “special majority” required two-thirds of persons present and entitled to vote and a quorum required only 52 unitholders (being 75% of all unitholders), this would mean that a “special majority” required only 35 votes (or 49.5% of all unitholders), and it could not have been intended for such important decisions to be determined by a vote of only 50% or less;
  • it was significant that a quorum required 75% of unitholders present in person or by representative (which the parties agreed meant 75% of all unitholders) because the effect was that there would always be more unitholders present at a meeting than is required to pass a special majority vote; and
  • there was a deliberate distinction between the special majority requirement of two-thirds of persons eligible to vote and the separate provision that each unitholder will be entitled to cast one vote at a unitholder meeting, with eligibility directed to legal right or capacity to vote if a unitholder attends a meeting (in person or by proxy) and entitlement to cast a vote requires a unitholder to be present at the meeting.

Federal Court confirms the wide net cast by the termination payments regime:  Discovery Africa Ltd v Nichol [2015] FCA 1497

This case confirms that the termination payments regime in Part 2D.2 of the Corporations Act 2001 (Cth) casts a broad net and requires that shareholders approve all payments or other things given “in connection with” retirement unless a specific exemption is available.  Specifically, the Courts will look beyond any interposing entities and interwoven agreements to determine whether section 200B(1) has been breached.

Mr Nichol and Mr Van Den Bergh were directors of Discovery Africa Ltd (Discovery Africa) and each provided consultancy services to Discovery Africa pursuant to agreements made between Discovery Africa and interposing entities, rather than directly with Mr Nichol and Mr Van Den Bergh.  Mr Nichol and Mr Van Den Bergh were each paid a sum of money by Discovery Africa (Payments) on the same day they retired as directors in the context of a looming boardroom spill, the likely result of which was that they would each be removed from office.

Discovery Africa subsequently sought to claim back the Payments on the basis that they contravened section 200B(1) of the Corporations Act 2001 (Cth) (Act) because they constituted benefits given in connection with Mr Nichol’s and Mr Van Den Bergh’s respective retirements from a managerial of executive office without member approval.  Mr Nichols and Mr Van Den Burgh ran a number of arguments in their defence (some of which were rejected in Renshaw v Queensland Mining Corporation Ltd (2014) 229 FCR 56 (see G+T January 2015 Corporate Advisory Update for a summary of the decision on appeal by the Full Court of the Federal Court)).

In finding that the Payments were made in contravention of section 200B(1), Gilmour J in the Federal Court of Australia held that:

  • the statutory scheme casts a broad net so as to ensure that all payments or other things given in connection with retirement are caught by the requirement for shareholder approval save where there is a specific exemption available;
  • it would be antithetical to the policy objectives of protecting shareholders and creditors from un-approved golden handshakes if these provisions could be avoided by interposing other entities and a chain of interwoven agreements;
  • by using the words “in connection with” in section 200B, Parliament intended to create a broad nexus between the benefit concerned and the cessation of the person’s relationship with the company so as to protect the rights and interest of its shareholders to know of, and approve, the expenditure of the company’s money; and
  • form (in this case, the particular interrelated agreements involved and their contractual legal effect) should not be put above the substance of what occurred, which was that payment was made “in connection” with the retirement from office.

Mr Nichol and Mr Van Den Bergh also tried to argue that member approval had been obtained for the purposes of section 200E because at an AGM, the Discovery Africa members passed a resolution to the effect that for the purposes of section 250R of the Act and for all other purposes, the 30 June 2013 Remuneration Report be adopted.  However, Gilmour J rejected this argument on the basis that neither the notice of meeting nor the explanatory statement set out details of the proposed benefits to Mr Nichol or Mr Van Den Bergh as required under section 200E(2).  They simply referred to the Remuneration Report, which was not provided.

Gilmour J also rejected arguments by Mr Nichols that:

  • Discovery Africa was estopped from claiming the Payment back on the basis that it had represented that he was lawfully entitled to receive the Payment, which Mr Nichols claimed was misleading or deceptive or likely to mislead or deceive; and/or
  • Discovery Africa was required, by an implied term of a deed of release with him to do all things necessary to enable him to have the benefit of the deed of release.

Rather, His Honour found that a breach of section 200B(1) is a strict liability offence and Mr Nichols had no arguable basis to be able to set-off claims for damages against the statutory obligation upon him to immediately repay the Payment.

Finally, Gilmour J rejected an argument by Mr Van Den Bergh that Discovery Africa’s claim against him was a “Claim” pursuant to his deed of release for the purposes of the deed being pleaded as a bar, instead finding that such an argument ignored the effect of sections 199A(1), 199A(2) and 199C of the Act which render void any exemption or indemnification of a person from liability to a company incurred as an officer of the company.


A changed and more risky management style does not necessarily result in unfairness or unreasonableness:  KGD Investments Pty Ltd v Placard Holdings Pty Ltd [2015] VSC 712

The Victorian Supreme Court has found no unfairness or unreasonableness resulted from a proposal to borrow $25 million to fund a return of capital to preferred shareholders, despite the fact that previous management had adopted a less risky strategy with the intention that the return of capital would be paid from earnings rather than borrowings.

KGD Investments Pty Ltd (KGD) owned approximately 24% of the shares in Placard Holdings Pty Ltd (Placard Holdings).  The remaining 76% of shares were owned by external investors and members of Placard Holdings’ senior management team (Investors and Management) and carried preferred rights to receive dividends or other distributions until the Investors and Management had recovered the amount paid for the shares.

The Placard Group CEO proposed to borrow an additional $29 million from Bankwest, of which:

  • $25 million would be used to pay a special dividend, by virtue of which the Investors and Management would recover the balance of the amount paid for their shares, with the rest to be divided amongst all shareholders on a pro rata basis; and
  • the remaining $4 million would be allocated to working capital (Proposal).

KGD opposed the Proposal on the following bases:

  • it would be contrary to the interests of the members of Placard Holdings as a whole and/or oppressive to, unfairly prejudicial to or unfairly discriminatory against KGD in contravention of section 232(d) and 232(e) of the Corporations Act 2001 (Cth) (Act) respectively; and/or
  • it was not fair and reasonable to the Placard Holdings’ shareholders as a whole within the meaning of section 254T(1)(b) of the Act.

It was not disputed in expert evidence that increased borrowings will decrease profitability or affect the liquidity of Placard Holdings to the extent of the increased interest expense, or that debt will increase resulting in higher leverage and reduced equity.  However, Almond J in the Supreme Court of Victoria rejected KGD’s claims on the basis of expert evidence which included the following:

  • the debt was predicted to be repaid due to high revenue forecasts for the next 4 years;
  • the risk that customers would terminate, or not renew, their contracts simply as a result of the additional debt was low;
  • the proposed new Bankwest facility would include more favourable terms such as lower amortisation payments and a lower interest rate;
  • replacing equity with debt is likely to be beneficial to Placard Holdings;
  • after making allowance for permitted dividend distributions, the cash position under the proposed new BankWest facility would be higher than under the status quo; and
  • the Proposal would not have an adverse effect on any future sale of Placard Holdings.

Almond J further held that:

  • there was some permissible lopsidedness introduced into the management of Placard Holdings because the Investors and Management were entitled to a preferential return of capital;
  • just because a changed management style adopts a higher risk strategy with the company becoming more leveraged and susceptible to a significant downturn of business (under the previous CEO, the Placard Group did not have significant borrowings with the intention being that the return of capital would occur progressively though earnings, rather than a lump sum borrowing) does not mean that the Proposal provides grounds for an order under section 233 of the Act, or contravenes section 254T of the Act; and
  • the Proposal, viewed objectively, was commercially justifiable and made due allowance for risk.
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