Insights

04/02/15

Corporate Advisory Update | January 2015

Welcome to the January 2015 update from Gilbert + Tobin's Corporate Advisory team.

In this bumper issue, you will find:

Legislation and proposed legislation

Exposure draft legislation on changes to the taxation of employee share schemes released

The Minister for Small Business has announced the release of Exposure Draft legislation and regulations containing amendments to the taxation arrangements of employee share schemes previously announced in October 2014.  The aim of the proposed law is to support innovative start-up companies in Australia, and to improve the taxation arrangements for employee share schemes to be more internationally competitive.  Submissions on the Exposure Draft legislation and regulations are due by 6 February 2015.  We will continue to monitor the progress of the proposed changes.

For further details of the Exposure Draft legislation and regulations, see G+T Updates in Tax Alert dated 19 January 2015.

Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) now in effect

On 19 December 2014, the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) (Act) (and the Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014 (Cth) came into effect.  The aim of the new legislation is to improve the attractiveness for companies issuing corporate bonds to retail investors while ensuring that effective consumer protections are maintained.  To this end, the Act seeks to streamline the disclosure and liability regimes for “simple corporate bonds”.  The Act also clarifies what will constitute “reasonable steps” for the purpose of the statutory due diligence defence to the criminal liability provisions in sections 1308 and 1309 of the Corporations Act 2001 (Cth) more generally (not just in relation to corporate bonds).

See CA Update - October 2014 for further details about the Act.

“100-member rule” Bill referred for inquiry

The Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014, which seeks to repeal the “100-member rule” to call a general meeting and make other changes to the Corporations Act 2001 (Cth), has been referred to the Senate Economics Legislation Committee for inquiry and report.  We will continue to monitor the progress of the Bill.

The Corporations Legislation Amendment (Deregulatory and Other Measures) Bill 2014 seeks to repeal the “100-member rule” to call a general meeting and make other changes to the Corporations Act 2001(Cth) (see CA Update - November 2014 for further details about the Bill).

The Bill has been referred to the Senate Economics Legislation Committee for inquiry.

Submissions were due by 20 January 2015 and the report is due by 11 February 2015.

Federal Government consults on proposals for regulation of crowd sourced equity funding

Crowd sourced equity funding (CSEF) is receiving increasing attention globally as an alternative form of fundraising for start-up or other small to medium sized businesses. Although it is theoretically available in Australia, it is subject to regulatory barriers including fundraising, licensing and other restrictions under the Corporations Act 2001 (Cth). Consistent with its expressed commitment to improving small businesses’ access to affordable finance, the Federal Government’s discussion paper discusses and seeks public comments on the options available in Australia for CSEF regulation.

In CSEF, a business (the issuer) raises capital by offering small debt or equity interests to large numbers of investors through a crowd funding online platform, which serves as an intermediary between the issuer and the investors.

The Government has released Crowd-sourced Equity Funding Discussion Paper on a potential regulatory framework for CSEF in Australia. The discussion paper seeks public comment on 3 potential CSEF regulatory models:

Treasury seeks to clarify drafting anomalies in key management personnel disclosure requirements

  • the model put forward by the Corporations and Markets Advisory Committee (CAMAC) in areport released in June 2014, namely a separate legislative framework for CSEF to make it easier for CSEF to be used in Australia (see G+T Client Alert on 4 December 2014 for further details of the CAMAC’s model);
  • the implementation of the New Zealand model which came into force in April 2014 which, while broadly similar to the CAMAC model, takes a different approach in a number of key areas, including public company compliance costs, companies eligible to use CSEF, investor limits and certain intermediary requirements; and
  • not regulating CSEF as a specific form of investment, with no change to the current fundraising, licensing and other regimes applicable under the Corporations Act 2001 (Cth).

The Government has not made a decision on its preferred CSEF framework and is not limiting itself to implementing either the CAMAC or the NZ model in full.

Submissions on the report are due by 6 February 2015.

Treasury seeks to clarify drafting anomalies in key management personnel disclosure requirements

Submissions on Treasury’s Exposure Draft regulation to address some drafting anomalies in key management personnel disclosure requirements in remuneration reports contained in the Corporations Regulations 2001 (Cth) (and also streamline reporting requirements) closed on 15 December 2014.  ASIC has also extended the interim relief under Class Order [CO 14/632] Key management personnel equity instrument disclosures until 31 March 2015, pending the commencement of the amendments foreshadowed by the Exposure Draft regulation.

Treasury released an Exposure Draft Corporations Amendment (Remuneration Disclosures) Regulation 2014 (Cth) (Exposure Draft Regulation) in November 2014 which will:

  • address the drafting anomalies in key management personnel disclosure requirements in remuneration reports contained in the Corporations Regulations 2001 (Cth), which were amended by the Corporations and Related Legislation Amendment Regulation 2013 (No. 1) (Cth)) to include prescribed details relating to the remuneration disclosures associated with key management personnel to replace the accounting standard AASB 124-Related Party Disclosures; and
  • streamline reporting requirements.

The proposed amendments include:

  • limiting disclosure of equities that relate to the disclosing entity to reduce the unintended burden of requiring disclosure on all equity holdings;
  • requiring certain remuneration disclosures to be separated into classes of equity instruments in order to increase the usefulness of the information; and
  • clarifying the scope of the disclosures in relation to certain limited recourse loans to ensure that the scope of disclosures is consistent with accounting practices.

Submission on the Exposure Draft Regulation closed on 15 December 2014.

ASIC has also extended Class Order [CO 14/632] Key management personnel equity instrument disclosures for a further interim period of 6 months until 31 March 2015, pending the commencement of the amendments foreshadowed by the Exposure Draft Regulation.

See also ASIC media release dated 1 July 2014 when [CO 14/632] was first issued.


ASIC

ASIC releases findings from 30 June 2014 financial reports and announces areas of focus for 31 December 2014 financial reports

ASIC has identified a wide range of focus areas for 31 December 2014 financial reports of listed entities and other entities of public interest with a wide range of  stakeholders.  Directors, auditors and preparers of financial reports need to take particular care on these issues and consider whether any changes to their reporting and accounting policies and practices are necessary.  Directors should also, where appropriate, challenge and seek professional accounting advice about accounting treatments chosen, particularly where an accounting treatment does not reflect their understanding of the substance of an arrangement.

ASIC has announced its findings from 30 June 2014 financial reportsof 300 listed and other public interest entities.  As part of its review, ASIC contacted 55 entities seeking explanation in relation to 73 matters, the majority of which related to inadequate asset impairment and inappropriate accounting treatments.

ASIC has also announced its areas of focus for 31 December 2014 financial reports of listed entities and other entities of public interest with a large number and wide range of stakeholders.  The 8 key areas of focus are:

  • impairment testing and asset values, with a focus on the recoverability of the carrying amounts of assets, including goodwill, other intangibles and property, plant and equipment, and the reasonableness of cash flows and assumptions
  • amortisation of intangible assets including amortisation periods and methods applied for intangible assets;
  • off-balance sheet arrangement, the accounting for joint arrangements and disclosures relating to structured entities;
  • revenue recognition, including ensuring recognition in accordance with the substance of the underlying transactions;
  • expense deferral including ensuring expenses are only deferred where there is an asset as defined in the accounting standards, it is probable that the future economic benefits will arise, and the requirements of the intangibles accounting standards are met;
  • tax accounting and ensuring that there is a proper understanding of both the tax and accounting treatments, the impact of any recent legislative changes are considered and the recoverability of any tax asset is appropriately reviewed;
  • disclosures regarding sources of estimation uncertainty and significant judgments which should be specific to the assets, liabilities, income and expenses of the entity and including disclosures of key assumptions and a sensitivity analysis; and
  • the impact of new In International Financial Reporting Standard IFRS 15 Revenue from Contracts with Customers which is reflected in the new AASB 15 Revenue from Contracts with Customers(approved by the Australian Accounting Standards Board on 23 December 2014), both of which will be mandatory for reporting periods commencing on or after 1 January 2017).

ASIC tightens fee and cost disclosure requirements for superannuation and managed investment products

ASIC’s new Class Order [CO 14/1252] clarifies fee and cost disclosure requirements for Product Disclosure Statements and periodic statements for superannuation and managed investment products.  Superannuation trustees and responsible entities should familiarise themselves with the new requirements which will apply to all Product Disclosure Statements for superannuation and managed investment products from 1 January 2016.

ASIC has released Class Order [CO 14/1252] Technical modifications to Schedule 10 of the Corporations Regulations following a review of fee disclosure practices.  CO 14/1252 clarifies key fee and cost disclosure requirements for Product Disclosure Statements and periodic statements for superannuation and managed investment products and addresses:

  • disclosure of costs of investing in interposed vehicles;
  • disclosure of indirect costs;
  • removal of doubt that double counting of some costs for superannuation products is not required; and
  • the appropriate application of the consumer advisory warning.

The class order will apply to all Product Disclosure Statements for superannuation and managed investment products from 1 January 2016.  It will also apply to periodic statements that must be given for these products by 1 January 2017 or later.

ASIC has also commenced a review of Regulatory Guide 97 Disclosing fees and costs in PDSs and periodic statements (RG 97) to reflect the effect of the Stronger Super reforms and CO 14/1252.

See ASIC media release dated 12 December 2014.

Australian Council of Superannuation Investors

ACSI releases study of board composition and non-executive director pay

The results of the 13th annual ACSI study of board composition and non-executive director pay demonstrate some positive trends in 2013.  The proportion of women on ASX 200 boards has continued to increase (although the proportions are still low with 20% of all ASX 100 board seats and 12% of all ASX 101-200 board seats held by women).  In addition, average fees for, and the average age of, non-executive directors in ASX 100 companies fell slightly.  Less positively, however, the number of new appointments to ASX 100 boards fell and there are still around 11% of ASX 100 directors (and 19% of ASX 101-200 directors) with no ‘skin in the game’.

The Australian Council of Superannuation Investors (ACSI) has released its 13th annual study of Board Composition and Non-Executive Director Pay into S&P/ASX 200 boards in 2013.  Key finding from the study include:

  • Gender diversity – Diversity on boards continued to steadily improve (although ACSI states that absolute numbers remain unacceptably low), with women accounting for nearly 20% of all ASX 100 board seats and 17.4% of all ASX 100 directors in (up from 18% and 16% in 2012 and 11% and 12% in 2009).  In the ASX 201-200, the proportions were lower (although still increasing), with women holding just over 12% of all board seats and accounting for 11.4% of the director pool (up from 9.9% and 9.6% in 2012);
  • Skin in the game – For the first time, the study included an analysis of directors’ ownership in the companies they govern.  ACSI’s research shows that nearly 11% of ASX 100 directors and 19% of ASX 101-200 directors (predominately non-executive directors) had no shares in the companies they govern;
  • New director appointments – The number of new appointments to ASX 100 boards fell, with 72 board seats filled by 69 directors during the sample period compared to 108 board seats in 2012. Conversely, in the ASX 101-200, the number of new appointments increased from just 50 in 2012 to 61 in 2013, filled by 59 directors.  This included 52 directors in the ASX 100 (12 females) and 46 directors in the ASX 101-200 (6 females) that were new entrants to the director pool.  These appointments were predominantly to non-executive roles, but included 14 executive appointments in the ASX 100 and 13 in the ASX 101-200;
  • Director fees – Average fees for ASX 100 non-executive directors fell slightly to $215,662 compared to $218,434 in 2012 as did non-executive chairperson fees which fell from $481,451 to $477,266.  In the ASX 101-200, average fees continued to increase rising to $138,260 for a non-executive director (up from $134,981 in 2012) and $231,952 for non-executive chairpersons (up from $225,534 in 2012); and
  • Age – For the first time in the history of the ACSI study, the average age of ASX 100 directors fell to 62.1 (down from 62.9 in 2012).

See also media release dated 14 November 2014.

Foreign Investment Review Board

FIRB monetary notification thresholds indexed and higher threshold for US and NZ investors is extended to Korean, Chilean and Japanese investors

The Foreign Investment Review Board has published the new 2015 indexed monetary thresholds for foreign investment proposals requiring notification under the Foreign Acquisitions and Takeovers Act 1975 (Cth).  In addition, the higher threshold for US and NZ non-government investors investing in developed non-residential commercial real estate and non-sensitive sectors has been extended to Korean, Chilean and Japanese investors and will be extended to Chinese investors (likely some time later this year).

The Foreign Investment Review Board (FIRB) has released its indexed monetary thresholds for foreign investment proposals requiring notification under the Foreign Acquisitions and Takeovers Act 1975(Cth), which took effect from 1 January 2015.

In addition, the higher threshold for US and NZ non-government investors investing in developed non-residential commercial real estate and non-sensitive sectors:

  • was extended to Korean and Chilean non-government  investors effective from 12 December 2014 (being the date on which the Korea-Australia Free Trade Agreement came into force);
  • was extended to Japanese non-government investors effective from 15 January 2015 (being the date on which the Japan-Australia Economic Partnership Agreement came into force); and
  • will be extended to Chinese non-government investors following finalisation and formal adoption of the China-Australia Free Trade Agreement (negotiation of which concluded on 17 November 2014) and the making of necessary amendments to the FIRB legislation (see implementation timeline).

The current indexed thresholds are:

  • $55 million for investments in developed non-residential commercial real estate (where the property is not heritage listed);
  • $252 million for most other investment proposals including investments by US, NZ, Korean, Chilean and Japanese non-government investors in prescribed sensitive sectors; and
  • $1,094 million for investment by US, NZ, Korean, Chilean and Japanese non-government investors in developed non–residential commercial real estate and non-sensitive sectors.

Certain investments in land and the media sector by any investor must be notified, regardless of the value of the investment.  In addition, direct investments, all investments in land (other than for diplomatic or consular purposes) and any establishment of a new business by a  foreign government investor must be notified, regardless of the value of the investment.”

See the monetary thresholds published on the FIRB website.

Financial System Inquiry

Financial System Inquiry final report issued

The Financial System Inquiry’s final report (issued on 7 December 2014) makes 44 recommendations to improve the efficiency, resilience and fairness of Australia’s financial system.  The Government is consulting on the recommendations before making any decisions, with submissions due by 31 March 2015.  We will continue to monitor the progress of the report.

The Financial System Inquiry released its final report on 7 December 2014 with the aim of outlining a blue print for the Australian financial system over the next decade.  To this end, the final report makes 44 recommendations to improve the efficiency, resilience and fairness of Australia’s financial system.

The final report focuses on 7 themes.

Generally:

Funding the Australian economy - removing distortions to efficiency; and

Competition - allowing competition and market forces to drive efficiency.

More specifically:

  • Resilience - strengthening the economy by making the financial system more resilient;
  • Lifting the value of the superannuation system and retirement incomes;
  • Innovation – driving economic growth and productivity through policy settings that promote innovation;
  • Consumer outcomes - enhancing confidence and trust by creating an environment in which financial firms treat customers fairly; and
  • Regulatory system - enhancing regulator independence and accountability, and minimising the need for future regulation.

The final report also makes a number of tax observations for consideration by the Tax White Paper.

The Government is consulting on the recommendations before making any decisions.  Submissions are due by 31 March 2015.
See media release dated 7 December 2014.

Cases

No implied qualifications on an employer’s opinion that its employee had engaged in serious misconduct:  Bartlett v Australia and New Zealand Banking Group Limited [2014] NSWSC 1662

In this case, the Supreme Court of New South Wales found that a term in an employment contract which permitted summary termination where, “in the opinion of” the employer, the employee had engaged in serious misconduct required only that the employer formed the opinion (without any implied qualifications on the formation of that opinion) and not proof of the serious misconduct.  Parties to a contract (in particular, an employment contract) should take care when drafting termination rights which are tied to the opinion of a party to express any qualifications on the formation of that opinion as Courts may be reluctant to imply any qualifications.

Mr Bartlett was an executive of the Australia and New Zealand Banking Group Limited (ANZ).  Mr Bartlett’s employment contract (Contract) stated that “ANZ may terminate your employment at any time, without notice, if, in the opinion of ANZ, you engaged in serious misconduct…”.  It was alleged that Mr Bartlett leaked to a journalist a confidential internal email which reflected the concern of ANZ management that its Institutional Property Group was becoming too reliant on loan exposure, and that he also doctored the email to state:  “No more lending. We are closed for business. Do not tell the market or our clients”.

Adamson J in the Supreme Court of New South Wales found that to terminate the Contract pursuant to the relevant clause, ANZ need only prove that it held the opinion that Mr Bartlett was guilty of serious misconduct (and need not prove actual guilt of serious misconduct).  In so finding, Her Honour:

  • held that the words “in the opinion of” are not gratuitous and there is nothing surprising or uncommercial about giving the words their full force and effect having regard to the nature of the Contract and the capacity of Mr Bartlett’s conduct to affect ANZ’s reputation;
  • stated the tests for the implication of a term, namely that:  (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; and (5) it must not contradict any express term of the contract; and
  • rejected Mr Bartlett’s submissions that:
    • there was an implied term in the Contract that the opinion was required to be “correct”;
    • there was an implied term in the Contract that the opinion must be formed in accordance with ANZ’s Performance Policy.  (The Contact expressly provided that (unless expressly stated), policies were not incorporated); and
    • there was an implied term in the Contract that the opinion must be reasonable, formed in good faith, and neither capricious nor arbitrary.  Adamson J found this question more difficult as the question of whether contractual powers and discretions may be limited by good faith and rationality requirements adopted and adapted from public law is not settled.  Nonetheless, Her Honour held that such terms did not meet any of the tests.

Adamson J was ultimately satisfied that the ANZ held the opinion that Mr Bartlett was responsible for sending the doctored email and it was common ground that this amounted to misconduct.

Are vendors subject to an implied term of disclosure in relation to the calculation of EBIT under “earn out’ provisions?:  Barnes v Forty Two International Pty Limited [2014] FCAFC 152  

This appeal from a decision of the Federal Court illustrates that a Court may not readily imply a term to the effect that the vendors will disclose all information which may be relevant to the calculation of EBIT for the purposes of an earn out payment, particularly where there are already detailed provisions in the agreement relating to the provision of, and reporting on, financial information, and where the alleged implied term is open ended and broad in its scope.  Where a purchaser wishes to impose such an obligation, it should ensure that it is included as a clearly and tightly drafted express term in the written agreement. 

Mr Barnes and Mr Hawksley (Barnes and Hawskley) sold their shares in Forty Two International Pty Limited (Forty Two) to BlueFreeway Limited (BlueFreeway), and remained directors after the sale.  The share purchase agreement relating to the sale (SPA) provided for certain earn out payments, specifically, an Additional Payment if the earnings before interest and tax (EBIT) of Forty Two was at least $2.5 million.  Forty Two ultimately reached the EBIT target, but only because of a licence fee of approximately $4.1 million payable to Forty Two under an intellectual property licence.  Barnes and Hawksley deliberately concealed the fact that they (and not a third party as originally represented to BlueFreeway) secured the financing for the licence fee.

This case was an appeal from a decision of Griffiths J on a number of grounds, including the finding that there was an implied term in the SPA that Barnes and Hawksley “would disclose to BlueFreeway all information known to them which might become relevant to the calculation of the Forty Two EBIT 07” (Implied Term).  While it was unnecessary for the Court to address this ground of appeal (given that it had already found that Griffiths J should have dismissed BlueFreeway’s claim for damages as the finding was based on an alternative causation and damages basis that was not pleaded), Beach J did so in case the decision about the alternative causation and damages basis was incorrect.

Beach J rejected Griffiths J’s finding that the Implied Term was necessary to give the SPA “business efficacy” on the following bases:

  • there were already detailed provisions in the SPA dealing with the provision of, and reporting on, financial and accounting information.
  • the fact that Barnes and Hawksley had greater access to information and enjoyed a large degree of independence in running the business explained the existence of the detailed provisions and did not justify the need for the Implied Term - ie there was no “gap”;
  • the Implied Term was concerned with the “calculation” of EBIT and whether the licence fee was a genuine amount.  The underlying financing did not change its genuineness, character or accounting treatment; and
  • the SPA and the transactions contemplated and performed under it were clearly effective without the Implied Term.

Beach J also found that:

  • given the scope and subject matter of the express terms, the Implied Term would not have been so obvious that “it goes without saying”; and
  • the open-ended breadth and scope of the Implied Term made it oppressively broad and unnecessary in light of the express provisions.  On this basis, the Implied Term was neither “so obvious” nor capable of clear expression.

Siopis J agreed with Beach J that in the face of the detailed contractual regime for the provision of financial and accounting information in the SPA, the Implied Term was not necessary to give it business efficacy, and that the Implied Term was in sufficiently vague terms that it was not “so obvious”.

Flick J preferred not to resolve the questions relating to the alleged of the Implied Term, but considered that:

  • whether the express terms of the SPA provided a sufficient reason to bar the implication of any further term may be questioned;
  • there was indeed a “gap” in the information required to be provided by the express terms and the information that would be caught by the Implied Term; and
  • on one view of the facts, it may well have been considered necessary to give “business efficacy” to the SPA to imply a term which precluded one party from engaging in undisclosed conduct which prejudiced the commercial position of the other.

Take care when drafting incentive fee provisions:  Australian Pipeline Ltd v Hastings Funds Management Limited [2014] NSWCA 398

In this case, the New South Wales Court of Appeal took a narrow interpretation of a component of an incentive fee formula which related to the price at which the securities were most recently “traded on ASX”.  The Court found that it did not include takeover acceptances made on the ASTC Settlement Facility (rather than SEATS (the operating platform then used by ASX)) after suspension of the securities following lodgement of compulsory acquisition notices.  The result for the relevant fund manager was a difference of over $10 million in incentive fees. Contracting parties should take care when drafting fee provisions to ensure that they in fact capture what is intended.

Hastings Funds Management Ltd (Hastings) was the responsible entity of three registered managed investment schemes, the units of which were stapled and traded as stapled securities on the ASX.  Following the successful completion of an off-market takeover bid for the stapled securities by APT Pipelines Limited (APT), its subsidiary Australian Pipeline Ltd (Australian Pipeline) replaced Hastings as responsible entity. 

The scheme constitutions provided for the calculation of an incentive fee payable to the Hastings out of the assets of the trust on its replacement as responsible entity. A component of the incentive fee was “the price at which stapled securities were most recently traded on ASX” (with ASX defined as ASX Limited).  A dispute arose between Hastings and Australian Pipeline regarding whether or not “traded on ASX” included acceptances of takeover offers after APT had lodged compulsory acquisition notices and ASX had suspended the stapled securities from trading and before Hastings ceased to be the responsible entity (which would have meant a difference of more than $10 million in the incentive fee). 

The Supreme Court of New South Wales – Court of Appeal held that the term “traded on ASX” did not include post-suspension acceptances by CHESS-sponsored security holders of off-market offers settled through the ASTC Settlement Facility, rather than SEATS (the operating platform then used by ASX).  In so finding, the Court:

  • held that while there is no doubt that the purpose of the incentive fee was to reward the responsible entity, the parties chose how this was to be done and the purpose of the incentive fee did not assist in determining the meaning of “traded on ASX”;
  • rejected the trial judge’s finding that there was a sufficiently related connection between off-market bids and the market platform (as the stapled securities were listed on the ASX) and held that the question is not whether there was a connection between the trades and the market, but whether the trades were on ASX (which it held meant the market operated by ASX);
  • rejected the assertion that express exclusion in the formula of ‘special crossings’ (which were not traded on the SEATS platform) meant that "traded on ASX" must be more than trades on the SEATS platform and that other off-market trades could be caught;
  • held that while it could not be disputed that off-market trading has the capacity to influence the price at which securities are traded on ASX, that does not mean that off-market trades themselves are trades on ASX;
  • held tht the formula for the incentive fee is directed to securities traded on ASX, not securities capable of being so traded; and
  • held that the fact that off-market trades on a CHESS sub-register are required to be settled through the ASTC Settlement Facility does not mean that the trade takes place on ASX - ASTC is a separate entity with a separate licence.

Broad interpretation of a benefit made “in connection with” retirement from office under section 200A of the Corporations Act 2001 (Cth): Renshaw v Queensland Mining Corporation Limited [2014] FCAFC 172

In this case, the Full Court of the Federal Court of Australia affirmed a broad interpretation of when a benefit will be made “in connection with” a person’s retirement from office for the purposes of section 200A of the Corporations Act 2001 (Cth).  The Court stated that Parliament intended to create a broad nexus between the benefit concerned and the cessation of the person’s relationship with the company to enable it to protect the rights and interests of shareholders to know and approve the expenditure of a company’s money.  Executives are reminded of the importance of ensuring that where their termination benefits may not fall squarely within a statutory exception to section 200B, shareholder approval has been obtained (ideally promptly after their appointment) to reduce the risk of subsequently being required to repay them. 

This case was an appeal from a decision of the Federal Court in Queensland Mining Corporation Ltd v Renshaw [2014] FCA 365 (see the CA Update - May 2014 for a summary of the Federal Court decision). 

Mr Renshaw was managing director of Queensland Mining Corporation Limited (QMCL) and both he (and his controlled entity Butmall Pty Ltd) were parties to a Services Agreement with QMCL (Services Agreement). Prior to the expiry of the Services Agreement, Mr Renshaw resigned in accordance with a Settlement Deed (Settlement Deed) which provided that:

  • QMCL terminates the Services Agreement and agrees to pay a “termination sum” upon signing of the Settlement Deed (clause 1.1);
  • Renshaw agrees to resign as managing director of QMCL upon receipt of the termination sum (clause 2.1); and
  • QMCL further agrees to pay Renshaw a “termination benefit” of 2 million QMCL shares in QMCL (or $110,000 if the shares were not issued by a certain date) (clause 2.2).

Perry J in the Federal Court found that each of the payments under the Settlement Deed constituted a “benefit” made “in connection with” the termination of Mr Renshaw’s employment as managing director of QMCL for the purposes of section 200A of the Corporations Act 2001 (Cth) (Act) and were thus made in breach of section 200B without shareholder approval.  On appeal, Mr Renshaw argued that clause 2.2 alone related to Mr Renhaw’s loss of office and the “termination sum” in clause 1.1 simply involved the payment of compensation for QMCL’s early termination of the Services Agreement and was not “in connection with” Mr Renshaw’s resignation.

Rares, Griffiths and Gleeson JJ in the Full Court of the Federal Court of Australia rejected this argument holding that:

  • the purpose of Division 2 of Part 2D.2 of the Act is to “bring transparency to, and shine daylight onto, transactions commonly called “golden handshakes””.  Parliament intended to create a broad nexus between the benefit concerned and the cessation of the person’s relationship with the company to enable it to protect the rights and interests of shareholders to know and approve, the expenditure of a company’s money.  Accordingly, the context of Division 2 informs and suggests a broad construction of the reach of the expression “in connection with”;
  • clause 1.1 of the Settlement Deed expressly made termination of the Services Agreement and payment of the termination sum conditional upon the signing of the Settlement Deed and clause 2.1 recorded Mr Renshaw’s agreement to resign as managing director upon receipt of the termination sum.  In other words, both termination of the Services Agreement and Mr Renshaw’s resignation depended on the payment of the termination sum; and
  • the commercial substance of the conduct that occurred in the signing of the Settlement Deed, the payments and receipts of the termination sum and Mr Renshaw’s simultaneous resignation, as provided in the Settlement Deed, established a sufficient connection between all those events.
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