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24/06/14

Corporate Advisory Update | June 2014

Legislation and proposed legislation

New anti-money laundering customer due diligence requirements

New anti-money laundering customer due diligence requirements announced by the Australian Transaction Reports and Analysis Centre (AUSTRAC) are designed to strengthen Australia’s financial system against money laundering and terrorism financing.  These requirements draw on international best practice techniques and endorsed international standards.  Reporting entities should familiarise themselves with the new requirements which came into effect on 1 June 2014 (with some transitional arrangements until 31 December 2015).
 
For further discussion, see the G+T Client Alert issued on 5 June 2014.

ASIC

ASIC releases report on handling of confidential information (briefings and market soundings)

Following a review of market practice, ASIC has released Report 393 Handling of confidential information:  Briefings and unannounced corporate transactions, which contains recommendations about the handling of confidential, market-sensitive information in the context of analyst briefings and unannounced, market-sensitive corporate transactions.  Companies and advisers should familiarise themselves with ASIC’s recommendations to reduce the risk of ASIC enforcement action in relation to their handling of such information.  This issue is particularly topical in light of the $1.2 million fines recently agreed by Newcrest Mining.

For further discussion, see the G+T Client Alert issued on 3 June 2014.

ASIC consults on proposals to facilitate offering of securities by foreign companies

The proposed class order relief and guidance in relation to the fundraising disclosure regime under the Corporations Act 2001 (Cth) will make it easier and more efficient for foreign companies to offer CHESS Depositary Interests (CDIs) over their shares to Australian investors, without the need to apply to ASIC for individual relief.  We will continue to monitor the progress of these proposals.
 
ASIC’s Consultation Paper 220 Fundraising:  Facilitating offers of CHESS Depositary Interests (CP 220) proposes class order relief and guidance to help foreign companies offer CHESS Depositary Interests (CDIs) over their shares to Australian investors.  The proposals aim to clarify how offers of CDIs over foreign shares are regulated under the Corporations Act 2001 (Cth) (Act) and minimise costs for foreign companies, with the result that foreign companies will no longer need to apply to ASIC for individual relief.  The proposals include:

  • confirming that initial offers by foreign companies to investors should be made under a prospectus;
  • clarifying in a class order that foreign companies, and not the depositary nominee that provides the CDIs, are responsible for providing disclosure to retail investors for offers of CDIs;
  •  modifying the Act so that the fundraising disclosure provisions operate effectively for offers of CDIs over shares in foreign companies; and
  •  providing guidance to help foreign companies comply with the fundraising disclosure requirements and to provide effective disclosure to retail investors for offers of CDIs.

Submissions on CP 220 are due by 25 July 2014.

See the media release dated 28 May 2014.

Cases

Unclear drafting may jeopardise payment of a success fee:  Carlow Castle Pty Ltd trading as Greenhill Capital Partners v Aztec Resources Limited [2014] NSWSC 123s

The New South Wales Court of Appeal was persuaded by commercial sense in construing the conditions for payment of a takeover success fee.  The Court rejected an argument that the parties envisaged payment of the success fee even where the target board continually recommended against the takeover (until after a controlling interest was already attained), instead finding that a recommendation after the bidder had already attained a controlling interest was not a recommendation in respect of or connected to the acquisition of the controlling interest.  This case demonstrates the importance of a clearly drafted success fee clause that accurately reflects the parties’ intentions.

Aztec Resources Limited (Aztec) agreed to pay Greenhill Capital Partners (Greenhill) a ‘success fee’ in connection with an anticipated takeover offer or merger proposal from Mt Gibson Iron Limited (Mt Gibson) pursuant to a contract which defined ‘success’ as when “a bidder acquires 50% or more of the shares in [Aztec] pursuant to or after the Initial Offer where the Offer was recommended by a majority of the Aztec board. (that is to say, the bidder formally acquires a controlling interest).”
 
Mt Gibson made a takeover offer for Aztec shares.  The Aztec board initially urged shareholders to reject the offer.  After Mt Gibson attained a controlling interest, the Aztec board recommended acceptance of the offer.  Aztec refused to pay the success fee on the basis that the conditions for payment had not been met.
  
The New South Wales Court of Appeal considered the definition of success (which it commented exhibited a degree of ‘confused thinking’) and:

  • rejected the argument that the success fee was payable if Mt Gibson attained a controlling interest and the Aztec board recommended acceptance of the takeover offer at any time during the offer period.  To suggest that the parties envisaged payment of the success fee where the Aztec board recommended against the takeover and the acquisition occurred anyway, was lacking in commercial sense; and
  • found that the success fee was only payable if the Aztec board recommended the acquisition before Mt Gibson acquired a controlling interest.  On a proper construction, the recommendation was tied to the ‘acquisition’ of the controlling interest as opposed to the ‘offer’.  A recommendation after Mt Gibson had already attained a controlling interest was not a recommendation in respect of or connected to the acquisition of the controlling interest.

The Court also refused to order rectification of the contract to the effect that success would occur when “in respect of an Initial Offer, a bidder achieves a level of acceptance in respect of more than 50% of Aztec ordinary shares and at any time during the offer period for the Initial Offer, the Aztec board recommends acceptance of the offer.”  In this regard, Greenhill failed to:

  • displace, by clear and convincing proof, the assumption that execution of the contract meant that it reflected the true agreement of the parties; and
  •  for this purpose, establish a concurrent or common intention (ie that Greenhill was entitled to the success fee if at any time the Aztec board recommended acceptance of the acquisition) that was not reflected in the contract.

When will a restraint of trade clause in a business sale be reasonable?:  RPR Maintenance Pty Ltd v Marmax Investments Pty Ltd [2014] FCA 409

This case provides a useful summary and analysis of the factors that a court will consider when deciding whether a restraint in a sale of business context  (as opposed to an employment context), where the parties will generally be in a similar bargaining position, will be reasonable.  Restraint clauses in business sale contracts should go no further than is required to protect the relevant party’s legitimate business interests, which will obviously depend on the facts of each particular case.
 
RPR Maintenance Pty Ltd (RPR) was a franchisee of Spanline Weatherstrong Building Systems Pty Ltd (Spanline) for the South Coast territory and entered into a sub-franchise agreement (Sub Franchise Agreement) with Marmax Investments Pty Ltd (Marmax) for the Illawarra territory (an excised portion of the South Coast territory) for a 5 year term.

RPR and Marmax subsequently entered into a Transfer of Business and Loan Agreement (TBLA) under which RPR sold the ‘Spanline Illawarra’ business to Marmax.  The TBLA included mutual restraint obligations on RPR (as vendor) and Marmax (as purchaser)  to ensure that RPR in respect of the Illawarra territory and Marmax in respect of the remaining South Coast territory do not ”during each restraint period…promote, participate in, finance, operate or engage in…or be concerned or interested…in, any of the Restrained Businesses.’  Restrained Business was defined to mean a business or operation ‘similar to’ or ‘competitive with’ or ‘supplying similar products and services to’ the Spanline franchise businesses.  The restraint period was expressed as a series of cascading dates within the range of 10 years down to one year.

Griffiths J in the Federal Court of Australia made the following general findings:

  • there was no general principle that a restraint of trade clause in a sale of business agreement will only be valid where it restrains the vendor and not the purchaser – the intention of RPR here was to protect its franchise business in its reduced South Coast area and not another unrelated business; and
  • although consideration is required for a restrictive promise, it need not involve a monetary payment  - in this case, consideration comprised the transfer of the business and the promises made by RPR to Marmax under the TBLA (including the identical restraints in respect of the Illawarra territory).

In determining that RPR had discharged its onus of establishing the reasonableness of the restraint, Griffiths J found that:

  •  restraint provisions relating to the sale of a business are to be distinguished from those in contracts of employment. As there is an equality of bargaining power, the court can take a more restrained approach in assessing reasonableness in the context of a business sale.  While attention is still given to the interests of the public, the Court generally regards the parties as the best judges of what is reasonable; and
  • the restraint clauses in the TBLA did no more than protect the legitimate business interests (ie exclusive franchising rights in the Illawarra territory for Marmax and exclusive franchising rights in the reduced South Coast territory for RPR).

Griffiths J also found that the restraint was reasonable in terms of:

  • the scope of the restraint - it reasonably referred to RPR’s legitimate business interest in the preservation of its Spanline franchise by preventing Marmax from engaging in similar activities or selling Spanline products in RPR’s exclusive territory; and
  • the geographical territory covered – it was not unreasonable that customers in RPR’s territory but who are in fact closer to Marmax’s premises at Albion Park are not able to use Marmax and must travel to Nowra.  Only 10% of jobs result from a customer physically visiting a showroom and this is in any case an inevitable consequence of an exclusive franchise arrangement that impacts on customer choice.

However, while rejecting Marmax’s argument that the series of cascading restraints indicates that the parties considered that 10 years was too long (and noting that such drafting plainly just anticipates that a Court may reject a longer period as unreasonable), Griffiths J found that an extension beyond 5 years did not protect legitimate business interests as there was no certainty that Spanline would renew its franchise agreement with RPR or enter into a new one with Marmax after that period.

Federal Court applies a liberal construction of its power under section 1322(4)(a) of the Corporations Act 2001 (Cth):  Macquarie Securities (Australia) Limited, in the matter of Macquarie Securities (Australia) Limited [2014] FCA 455

The Federal Court has granted relief under section 1322(4)(a) of the Corporations Act 2001 (Cth) (Act) for a transfer of shares of a company to a controlled entity in circumstances where the parties made an innocent mistake in failing to comply with all of the conditions of their ASIC exemption from section 259C(1). The Court used its power even though section 259C(1) does not prohibit such transactions (but rather renders them void) so there is not a ‘contravention’ of the Act for the purposes of section 1322(4)(a).  This case demonstrates that while parties should take all care to ensure that all conditions of any ASIC exemptions are met, the Court may step in to ‘cure’ a breach where the parties have acted honestly and the other conditions of section 1322(4)(a) are met.

This case relates to shares in Macquarie Group Limited (MGL) which were purchased on-market by Macquarie Securities (Australia) Limited (MSAL) (as broker) and held by Belike Nominees Pty Limited (Belike) (as custodian), pending further transfer pursuant to a MGL dividend reinvestment plan for MGL’s Australian and New Zealand shareholders.  At the time of purchase, MSAL and Belike were wholly-owned subsidiaries and controlled entities of MGL.

ASIC had granted MGL and MSAL a conditional exemption from the operation of section 259C of theCorporations Act 2001 (Cth) (Act)) (which renders void the issue or transfer of shares of a company to an entity it controls except in certain circumstances).  An exemption was never obtained for Belike.  One of the conditions required MGL and MSAL to provide a deed enforceable by ASIC relating to the non-exercise of rights attaching to the shares and the disposal of the shares no longer required to implement the plan.  As the relief was not ultimately required for the original share issue, the deed was never provided.  MGL and MSAL subsequently relied on the relief in relation to a later share purchase.  The parties then sought relief under section 1322(4)(a) of the Act because without it, the share purchase would be void under section 259(C)(1).

  • accepted evidence that the internal legal adviser for the Macquarie Group made an ‘innocent mistake’ in inadvertently omitting to provide the deed to ASIC and had genuinely forgotten that the deed had not been provided;
  •  noted that it was unclear why no application was made to make Belike a party to the original exemption but indicated that an exemption should be obtained if Belike is to act as custodian again in the future; and
  • was persuaded by the fact that without relief, MGL shareholders participating in the plan (and those in the market who may have subsequently purchased shares from them) would be disadvantaged and it would be difficult or impossible to identify the acquirers of the shares and potentially impossible to unwind the transactions as over 6.5 million shares were involved.

Yates J then considered the application of section 1322(4)(a) and found that:

  • while section 1322(4)(a) technically relates to contraventions of the Act and section 259C does not specifically prohibit the issue or transfer of the shares in question (but rather renders the transaction void), previous authorities hold that section 1322 of the Act should be construed liberally and apply in these circumstances;
  • the Macquarie parties acted honesty (as required under section 1322(6)(ii));
  • it was just and equitable that the relief sought be granted (as required under section 1322(6)(iii)); and
  • no substantial injustice has been or is likely to be caused to any person by granting the relief (as required under section 1322(6)(c))

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