Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team.
ASIC releases findings from 31 December 2013 financial reports and announces areas of focus for 30 June 2014 financial report.
ASIC has identified a wide range of focus areas for 30 June 2014 financial reports of listed entities and other entities with a wide range of stakeholders. Directors, auditors and preparers of financial reports need to take particular care on these issues and should also consider whether any changes to their reporting and accounting policies and practices are necessary. Directors should also be particularly vigilant and pro-active in reviewing and challenging financial reports.
ASIC has announced its findings from 31 December 2013 financial reports of 135 listed entities and other public interest entities (and also 100 (mainly large) proprietary companies). As part of its review ASIC contacted 23 companies, with key issues looked at including inadequate impairment of assets and inappropriate accounting treatments. While the results of ASIC’s review are incomplete, ASIC’s risk based surveillance led to material changes to 4% of the financial reports previously reviewed for reporting periods ended 30 June 2010 to 30 June 2013, although matters involving 6 companies ended without any changes to their financial reporting.
ASIC has also announced its areas of focus for 30 June 2014 financial reports of listed entities and other entities of public interest with a large number and wide range of stakeholders. The 7 key areas of focus are:
- impairment testing and asset values with a focus on the recoverability of goodwill, other intangibles and property, plant and equipment, including the use of realistic cash flows and assumptions and an appropriate match between the cash flows used and the assets being tested for impairment;
- amortisation of intangible assets including the amortisation periods and methods applied for intangible assets;
- off balance sheet arrangements and new accounting standards AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities and AASB 13 Fair Value Measurement;
- 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 future economic benefit will arise and the requirements of the intangibles accounting standard 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; and
- disclosures regarding sources of estimation and significant judgements in applying accounting policies which should be specific to the assets, liabilities, income and expenses of the entity and inclusion of key assumptions disclosure and a sensitivity analysis.
This year, ASIC has also specifically highlighted the role of directors. It expects directors should:
- challenge, require explanations and seek professional advice in relation to accounting treatments chosen in financial reports, particularly if the treatment does not reflect their understanding of the substance of an arrangement; and
- review the cash flows and assumptions used in the calculations prepared by management, bearing in mind their knowledge of the business, its assets and the future prospects of the business.
Suggestions by ASIC to ensure high quality financial reports include:
- having a culture focused on quality financial reporting and adequate governance arrangements and considering internal accountability and management incentives tied to financial reporting quality;
- applying the accounting standards; and
- ensuring directors have appropriate financial literacy and applying appropriate experience and expertise to financial reporting, including engaging external experts where appropriate.
ASIC has also announced that as part of its surveillance of financial reporting from 1 July 2014, it will publically announce when, following contact from ASIC, a company makes material changes to information previously provided to the market.
ASIC grants interim relief on drafting anomalies for key management personnel equity instrument disclosures
ASIC’s interim relief corrects an inadvertent extension of key management personnel disclosure requirements following the relocation of the requirements from accounting standard AASB 124 Related Party Disclosures to the Corporations Regulations 2001 for financial years starting on or after 1 July 2013. The interim relief applies for financial years ended on or before 30 September 2014, in anticipation of legislative change to correct the drafting anomalies.
ASIC has released Class Order [CO 14/632] Key management personnel equity instrument disclosure to address an inadvertent extension of key management personnel disclosure requirements for financial reports when they were moved from accounting standard AASB 124 Related Party Disclosures to the Corporations Regulations 2001 for financial years starting on or after 1 July 2013.
CO 14/632 narrows the required disclosure about:
- equity instruments held by directors, other key management personnel and their close family members;
- certain transactions involving equity instruments between the disclosing entity and members of key management personnel or their close family members; and
- options or rights over equity instruments held by key management personnel or their close family members,
such that disclosures only need to be about equity instruments in the disclosing entity or its subsidiaries rather than every company they have an investment in. Entities that adopt the relief will need to make the relevant disclosures by class of equity instrument, consistent with AASB 124.
The relief has been granted on an interim basis and applies to reports for financial years ending on or before 30 September 2014. ASIC has indicated that a legislative change will correct the drafting anomalies in the future.
See media release dated 1 July 2014.
Defective substantial shareholder notices found to be unacceptable by the Takovers Panel in Northern Iron Limited  ATP 11
This decision by the Takeovers Panel illustrates the importance of sufficient and timely disclosure in substantial shareholder notices of the identity and interests of shareholders in a position to influence or control a listed entity, ensuring that the market is not misled about ownership and control of shareholders. Ongoing non-disclosure following the issue of a tracing notice may prevent an argument that the non-disclosure was the result of inadvertence or mistake, particularly if there have been repeated further requests for information. As stressed by the Panel, shareholders should seek timely and appropriate professional advice to ensure compliance with the requirements of Chapter 6C in giving substantial holder notices and responding to tracing notices.
In March 2013, Northern Iron Limited (Northern Iron) issued a tracing notice under section 672A of theCorporations Act 2001 (Cth) (Corporations Act) to its largest shareholder, Dalnor Assets Ltd (Dalnor). The tracing notice related to a substantial shareholder notice lodged by Dalnor which did not include all of the information about relevant interests in the shares required under section 672B of the Corporations Act. Dalnor repeatedly failed to provide the information despite several subsequent requests by Northern Iron. Following a further acquisition of shares, Dalnor lodged a notice of change of interests of substantial shareholder on 13 May 2014 (and 9 days later on 22 May 2014, a revised notice of change of interests of substantial shareholder) which disclosed some more details of parties holding a relevant interest in the shares. On 20 May 2014, Dalnor also separately responded to Northern Iron’s request for information required by the original tracing notice, disclosing the information in the revised substantial holding notice (plus some additional information) and advised that it was not aware of any other person who had given it instructions in respect of the shares.
The Takeovers Panel:
- firstly noted that the legislative purpose of Chapter 6C is to ensure that transactions in listed securities occur in an efficient, competitive and informed market and is designed to ensure that people cannot conceal their control of substantial parcels of listed securities from other market participants;
- found no unreasonable delay by Northern Iron in making its application on the basis that the application was brought on by developments (Dalnor wanted to propose a resolution to appoint a nominee director to the Northern Iron board) rather than being merely tactical;
- did not accept Dalnor’s submission that the breaches were “genuinely the result of inadvertence or mistake” and that further proposed disclosure removed the need for a declaration of unacceptable circumstances. There had been a long period of non-disclosure and while there had been a number of iterations of substantial holder notices with increasing disclosure, complete disclosure had still not been made; and
- stressed the importance of obtaining proper professional advice to ensure compliance with the requirements of Chapter 6C in giving substantial holder notices and responding to tracing notices. Dalnor did not appear to have taken advice from an Australian law firm until late in the piece.
In light of the above, the Panel found that:
- the disclosure by Dalnor in its 20 May 2014 letter and 22 May 2014 revised substantial holding notice was deficient because it did not disclose all information required under the tracing and substantial holding notice provisions in the Corporations Act, including the names and addresses of every person who had a relevant interest in the shares and details of any relevant agreement through which the parties that were disclosed had a relevant interest, or provide a copy of relevant documents; and
- Dalnor’s deficient disclosure was unacceptable because the acquisition of control over voting shares in Northern Iron had not taken place in an efficient, competitive and informed market and also the Northern Iron board and shareholders and the market in general had not known, and continue not to know, the identity of the persons that acquired a substantial interest in Northern Iron.
The Panel thus made orders to the effect that Dalnor:
- lodge a new substantial holding notice;
- not be eligible to rely on the “creep” exception in item 9 of section 611 of the Corporations Act until 6 months after the lodgement of the new substantial holding notice; and
- pay ASIC’s costs and part of Northern iron’s costs (reduced on the basis of a “commercial approach” to costs by the Panel).
The Panel declined to impose a general voting restriction on Dalnor on the basis that as there was no currently proposed meeting of the Northern Iron shareholders, there would be at least 28 days (ie the notice period) for the market to digest Dalnor’s corrective disclosure.
By Rachel Launders, Jane Hogan and Sally Randall
Unauthorised and dishonestly obtained termination payments recouped from directors: Invion Ltd v SGB Jones Pty Ltd & Ors  QSC
This case illustrates the importance of ensuring that any board delegations of authority (in this case in relation to the remuneration of executives) are clear and properly made and recorded. The Court rejected assertions that there had been a convention of individual directors effecting changes to directors’ remuneration or that the positions of Managing Director, CEO or CFO carried inherent authority to make such changes, without full board approval, in the absence of formal delegation by the board. Boards should regularly review their delegation arrangements (and if they don’t already have one, consider adopting a delegations manual) to ensure that directors (and other delegates) are clear in relation to what exactly they are authorised to do on behalf of the board.
Mr Jones, Mr Yeates and Mr Greig were directors of Invion Ltd (Invion). The Invion board had agreed to extend the notice period in the directors’ employment contracts to 12 months with a requirement that the directors work out this period. However, after this, the directors unilaterally amended their contracts without the approval or knowledge of the rest of the Invion board to allow resignation at will with a termination payment equal to 12 months’ salary.
Chief Justice de Jersey in the Supreme Court of Queensland rejected the following assertions by the directors that they were authorised to make the variations:
- there was an oral, un-minuted agreement in 2000 that Mr Jones (along with the other founding directors) could alone exercise the authority of the board. De Jersey CJ found that there was a total lack of written evidence of this point and that Mr Jones’ oral evidence was unconvincing and in direct contrast to the evidence of other, more credible, witnesses that matters of remuneration were to be dealt with by the board as a whole. Further, there were numerous board minutes of instances where the board (rather than a single director) authorised employment contracts and the Invion financial reports included statements to the effect that remuneration of directors is dealt with by the board as a whole;
- Mr Yeates had implied authority as Managing Director and CEO to “manage all aspects of [Invion’s] business. De Jersey CJ noted that Mr Yeates’s employment contract specified that financial and staffing issues could only be made as delegated by the board and Mr Yeates could point to no such delegation. There was also no evidence that the board had acquiesced by signing off financial reports as they had not been advised of the variations. Further, the Invion constitution conferred no relevant authority and in fact prevented a director from voting in respect of any contract in which they had a personal interest; and
- Mr Greig had authority to bind Invion to the contracts as CFO. De Jersey CJ found that there was no proper delegation of authority to Mr Greig as CFO to vary contracts and that it should have been clear to him, as an experienced businessman, that decisions of this magnitude would require the approval of the full board.
De Jersey CJ also found that the following conduct by the directors was dishonest:
- failure to inform the board of the variation to their employment contracts when advancing their case for an increase in their performance rights and following the actual amendment of the contracts;
- the means by which they secured the amendments which occurred without reference to the board and amongst themselves which was a “collegial or corporate or complicit endeavour” to avoid the requirement of board approval;
- failure to disclose the variations to the board before their resignation 6 months later, particularly in circumstances where there was doubt surrounding the ongoing solvency of Invion and where the directors themselves were the beneficiaries of a large contingent liability (in excess of $1 million); and
- failure to ensure that the 2011 annual report recorded the “termination benefit” arising from the contractual amendments.
On the basis of the above, de Jersey CJ found that:
- the directors had breached their common law and statutory duties to exercise reasonable care and diligence, act in good faith in the best interests of Invion and not to use their position to gain a personal advantage for themselves or someone else, and Invion was entitled to statutory and equitable compensation; and
- Invion was entitled to restitution for unjust enrichment (in connection with the terminations payments) on the basis that the changes to the employment contracts were ineffective.
Deficient record keeping of an adviser's reasonable basis for providing financial advice may not be fatal but take care: Dennis v Chambers Investment Planners Pty Ltd (Administrators Appointed) (No 3)  FCA 648
This case provides a useful analysis of the contractual and common law duties of financial advisers to exercise reasonable care and skill in providing financial advice and the statutory duty to have a reasonable basis for advice given or recommendations made. While the Court stressed that deficiencies in the written documentation recording the client’s circumstances, goals and objectives, and the reasons for advice or recommendations will not necessarily amount to a breach of duty if the evidence shows that the adviser did in fact have a reasonable basis, more fulsome record keeping would certainly have been useful for the advisers’ defence. Financial advisers should ensure that they keep detailed and complete written records of their clients’ circumstances, goals and objectives, and the reasons for advice given or recommendations made, to reduce the scope for a client to subsequently argue a breach of the adviser's duties.
At the recommendation of Mr Takla of Chambers Investment Planners Pty Ltd (Chambers), Mr Dennis made numerous investments in managed investment schemes and equity investments between 1999 and 2008 that were substantially financed by debt. Following the global financial crisis, Mr Dennis suffered losses and brought proceedings against Chambers and Mr Takla for his loss.
In rejecting Mr Dennis’s claims, Barker J in the Federal Court of Australia found that:
- there was no equitable duty that Chambers would exercise reasonable care and skill and there was no implied term that Chambers provide advice “as to the most suitable financial investments”;
- Chambers had a duty under contract and at common law to exercise reasonable care and skill in providing financial services and advice to Mr Dennis;
- the duty in section 945A and 954B of the Corporations Act 2001 (Cth) emphasises the need to both determine relevant personal circumstances and make “reasonable enquiries” in relation to those personal circumstances. This does not mean that there had to be enquiries made every time a new recommendation or advice was given (as the initial enquiries may still be sufficient); and
- the statutory duty is reflected in the industry rule to “know your client, know your product”, meaning that an adviser should always recommend to a client a financial product that suits their circumstances, goals and objectives, and as such should be in possession of such information, including any changes from time to time.
Much of the debate in this case centred around the apparent deficiencies in Mr Takla’s record-keeping with Barker J noting that:
- while there was widespread industry use of a Fact Find document as a convenient means to acquire the usual information, an adviser needs to get to know a client before recommending a product. It was acknowledged that industry bodies encouraged members to fully document the advice given (if not the reasons for doing so). However, there was no requirement to complete such a document or to record everything in writing. Rather the key question is whether, on the evidence, the adviser had a reasonable basis for giving advice or making a recommendation;
- an incomplete Fact Find or Statement of Advice may not permit an adviser to give considered advice if that is all the adviser has to rely on but information recorded in such written documents can be supplemented by separate consultations (in this case every 6 months or so) and other correspondence between advisers and clients; and
- in this case, Mr Takla had been advising Mr Dennis for a relatively long period and over that time developed a good appreciation of his circumstances and appetite for risk.
In light of the above and after analysing the circumstances of each investment, Barker J found that:
- there was no breach of the common law or contractual duties to exercise reasonable care and skill, nor the statutory duty to have a reasonable basis for providing advice;
- Mr Takla’s representations concerning the appropriateness of the advice and recommendations was not misleading or deceptive or likely to mislead or deceive; and
- despite the fact that there were several errors in finance applications made on behalf of Mr Dennis, these errors were not material and there was no evidence of any relevant person being misled or deceived.