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03/06/16

Corporate Advisory Update - May 2016

Legislation and proposed legislation

Government consults on proposals for technology neutrality in the distribution of company meeting communications

The Government has proposed a technology neutral mode of distributing company meeting notices and materials which aims to facilitate innovation and reduce economic and time costs for companies, while maintaining an appropriate level of shareholder engagement.

The Federal Government has released, for public consultation, a Proposals Paper entitled Technology neutrality in distributing company meeting notices and materials (Proposals Paper) which sets out the Government’s proposals for new ‘technology neutral’ methods of distributing company meeting communications.

The Proposals Paper notes that technology neutrality in communications requirements has the potential to enable the provision of data in more usable forms in a more timely manner through lower cost communication channels, and to enable flexibility in the manner in which it is presented that meets user preferences.

The context for the proposals are:

  • currently, all companies must give notice of upcoming meetings (including AGMs and other general meetings) in person or by post, unless a shareholder elects to receive notices electronically or the company has amended its constitution to stipulate an alternative method of notice under section 249J(3)(d) of the Corporations Act 2001 (Cth);
     
  • the current requirements are ‘technology-specific’ and do not reflect the changes in digital communications technologies and content, and result in significant economic and environmental costs in printing and posting notices to shareholders who have not specifically requested to receive them electronically; and
     
  • while general meetings are still an important means for shareholder engagement, it is commonly recognised that there has been reduced engagement over time.

Under the Government’s proposals, a company will be able to meet the requirement to notify members of a meeting (and to make available meeting materials) by using one or more of the following methods:

  • Method A - any universally or near-universally accepted channel as a default method.  This would include mail and mobile phone (SMS) but not yet email, website or mobile apps;
     
  • Method B - an alternative method of communication with the consent of the shareholder.  Consent may be expressed or implied and a company would have implied consent to send a notice by email where the company has the email address on file for the shareholder, or the shareholder has previously contacted the company by email .  Consent could also be deemed via an amendment to the company’s constitution or the company passing a resolution to provide for the use of electronic communications; or
     
  • Method C - an alternative method of communication determined by the company to be effective, unless a member nominates to receive the notice by Method A or Method B.  In determining whether a method is effective, the company should ensure that the communication occurs in a manner that is reliable, timely, persistent, accessible and ensures usability of data; minimises costs for the sender, receiver (and third parties); and meets the preferences of the sender and receiver.

Under the proposals, a company should notify its shareholders which method(s) it wishes to adopt and would only need to give this initial notification once to each shareholder using its existing method of communication with the relevant shareholder.

The Proposals Paper is also seeking feedback on whether it is appropriate to expand the proposals to delivery of notices of all company meetings (ie AGMs, special general meetings, takeover meetings, meetings of members of scheme arrangements), as well as annual reports and other documents.

Submissions on the Proposals Paper are due by 17 June 2016.

See also media release dated 5 May 2016.

Government consults on bankruptcy and insolvency law reform proposal.

The Government’s new proposals paper recognises that to create an environment that enables entrepreneurs to succeed requires a cultural shift in Australia’s current insolvency laws, which  have been criticised for placing too much focus on penalising and stigmatising failures.

The Federal Government has released, for public consultation, a Proposals Paper entitled Improving bankruptcy and insolvency laws proposals paper (Proposals Paper) on possible changes to bankruptcy and insolvency laws as part of its National Innovation and Science Agenda (NISA).  The Proposals Paper outlines the following 3 areas of proposed reforms:

  • reducing the current default bankruptcy period from 3 years to 1 year as the current period may discourage innovation and business start-ups;•
  •  introducing a “safe harbour” for directors from personal liability for insolvent trading while they restructure a business, as concerns over inadvertent breaches of insolvent trading laws are frequently cited as a reason early stage investors and professional directors are reluctant to become involved in a start-up; and
  • making “ipso facto” clauses unenforceable, thereby preventing counterparties from exercising a contractual right to terminate that arises solely from an insolvency, because the operation of these clauses diminishes the value of a business entering insolvency and may reduce the scope for a successful restructure or prevent the sale of a business.

The Proposals Paper seeks views on how to best implement these measures in order to encourage Australians to embrace risk, learn from mistakes, be ambitious and experiment to find solutions.

Submissions on the Proposals Paper were due by 27 May 2016.

See also media release dated 29 April 2016.

Attorney General’s Department recommends reforms to Australia’s AML/CTF laws

A recent report from the Attorney General’s Department makes recommendations which are designed to bolster measures to protect the Australian community and financial system, while not imposing unnecessary costs on regulated businesses.

Following consultation, the Attorney-General’s Department has released a Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations (Report) which sets out 84 recommendations for reform to the existing legal framework.

In summary, the Report proposes measures that:

  • simplify the AML/CTF obligations and use the risk-based approach in a more targeted way to minimise the regulatory burden; and
  • strengthen regulation and better position law enforcement agencies to respond to new and emerging threats, including dynamic terrorism and terrorism financing threats.

See the Report for further details of the recommendations, and see also the media release dated 29 April 2016.


ASIC

ASIC consults on disclosure of quality and quantity of historical financial information

ASIC is consulting on updated guidance which aims to improve the disclosure of historical financial information in prospectuses and assist companies (and their advisers) to better understand their disclosure obligations.

Having observed the operation of Regulatory Guide 228 Prospectuses: Effective disclosure for retail investors (RG 228) in many fundraisings over 2014 and 2015, ASIC has noted continuing issues with the disclosure of historical financial information in prospectuses and is concerned that some prospectuses lodged with ASIC contained poor and incomplete historical financial disclosure.  To address these concerns, ASIC has released Consultation Paper 257 (CP 257) which sets out its proposals to update its guidance in RG 228 to clarify the quality and quantity of historical financial information that it expects to be disclosed in prospectuses.

Key points of clarification include:

  • issuers who own or are acquiring a business should provide audited historical financial information of 2 and a half or 3 years, regardless of the corporate form used previously for the issuer’s business or historical financial reporting requirements;
  • the types of audit opinions that may not be acceptable;
  • appropriate disclosure of asset acquisitions;
  • when financial disclosure is considered “current”;
  • disclosure of cash flow statements; and
  • circumstances where historical financial disclosures may not be necessary.

Submissions on CP 257 are due by 7 July 2016, with the updated RG 228 due by the second half of this year.

See also media release dated 12 May 2016

Streamlined regulatory approvals processes for financial market operators and clearing and settlement facilities

In an effort to reduce red tape and facilitate innovation by enabling industry to bring services and products relating to financial market operators and clearing and settlement facilities to market quickly, the Federal Government has delegated some regulatory powers to ASIC.

The Federal Government has announced that it is improving the process by which financial market operators and clearing and settlement facilities seek regulatory approval for licencing, operating rules and compensation arrangements. 

For this purpose and to bring services and products to market efficiently, the Assistant Treasurer has delegated some of her regulatory powers to authorised officers of ASIC.  According to the Assistant Treasurer, this change will bring Australia into line with international best practice and will place financial markets and clearing and settlement facilities on a more competitive footing with its international counterparts (including the UK and the US).

The delegation is accompanied by Guidelines for the exercise of the powers delegated to ASIC which describe:

  • matters which ASIC should have regard to when exercising the delegated powers (including appropriate timeframes);
     
  • reporting requirements relating to the exercise of the delegated powers;
     
  • the procedure for allowing the Minister to ‘call up’ regulatory matters that the Minister considers appropriate to be exercised by the Minister instead of ASIC; and
     
  • the Minister’s right to vary or revoke the delegation of the Guidelines at any time.

See media release dated 22 April 2016.

ASIC launches new corporate governance resource

ASIC has launched a new corporate governance section on its website, designed to support companies and their officers seeking to understand their corporate governance obligations and improve their practices.

ASIC’s new corporate governance section on its website conveniently includes links to external publications and speeches, as well as its reports, regulatory guides and information sheets on corporate governance-related issues in the one space.  It includes both general information on obligations of company directors and officers as well as information that may be of interest to other governance professionals such as risk and compliance officers.


ASX

ASX proposes changes to admission requirements

ASX has released a consultation paper proposing changes to admission requirements.  The tougher thresholds, if implemented, will impact small-cap IPO candidates and start-ups, as well as those looking to do backdoor listings.

See G+T Alert dated 16 May 2016 by Julie Athanasoff, Adam D'Andreti, Sarah Turner, Lucy Hall and David Naoum for further details.


Foreign investment

FIRB revises tax conditions for foreign investment

The Treasurer’s revised tax conditions are designed to target foreign investments that pose a risk to Australia’s revenue.

Following consultation between Treasury, the ATO and industry, the Federal Treasurer has issued a revised set of tax conditions dated 3 May 2016 which are aimed at foreign investments that pose a risk to Australia’s revenue and make clear the requirements and expectations for investors.

The revised conditions go a long way towards addressing concerns raised by industry with respect to the breadth of the original tax conditions.

FIRB has also released a draft guidance note providing additional information on the revised conditions.

See FIRB website for further details.

FIRB guidance and fee relief for foreign government investors

FIRB has provided welcome clarity on when foreign government investors from the same country will be deemed to be “associates”, as well as fee relief for certain business transactions and acquisitions of developed commercial land by foreign government investors.

The Foreign Investment Review Board (FIRB) has issued a new Guidance Note 23 Foreign Government Investors which seeks to address the December 2015 reforms to the Foreign Acquisitions and Takeovers Act 1975 (Cth) which deem foreign government investors of the same country to be “associates” of each other.  Essentially, FIRB will not take any action where it “is not reasonable” for a foreign government investor to know that one or more other foreign government investors from the same country already hold, or are concurrently acquiring, interests in the target entity.  Circumstances in which it is not reasonable for a foreign investor to know include:

  • where public regulatory disclosures in relation to the target entity do not disclose such holdings; or
  • where such a holding in the target entity is disclosed but is not on its face identifiable as being held by a foreign government investor, and the other foreign government investor is not privy to information that would identify the holding as being held by a foreign government investor.

The revised guidance does not address the issues faced by private equity funds and their investees that may be deemed to be foreign government investors.  Gilbert + Tobin has been working closely with the Australian Venture Capital and Private Equity Association Limited, among others, to secure relief on this front.  In response to these efforts, prior to the dissolution of Parliament last month, we understand that a new policy has been adopted within Treasury to grant fee relief to foreign government investors who request it in certain circumstances, such that a fee of $1,000 will apply to the following transactions by foreign government investors:

business transactions where the transaction is valued at less than $10 million; and

acquisitions of developed commercial land, where the transaction is valued at less than $55 million.

FIRB is planning to issue a new Guidance Note in relation to this fee relief after the upcoming election, but the relief is available now on application.  Although this is a step in the right direction, more work is required to be done to alleviate the operation of the new foreign investment regime on high volume applicants.


Taxation

Australian Federal Budget 2016/17

On 3 May 2016, the Coalition Government released its third federal budget since coming to power in 2013.   

For further details and analysis of the key tax measures, focussing on business taxpayers, see G+T Alert dated 4 May 2016 by Peter Feros, Hanh Chau, Andrew Sharp, Adam Musgrave, Grace Ho, Rianne Chen and Mack Wan.

New managed investment legislation receives Royal Assent

A revised regime for Managed Investment Trusts (MITs) is now in force and will apply from 1 July 2016, with an optional earlier start date for income years commencing on 1 July 2015 for certain eligible MIT).  

The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Act 2016 (Cth), and the associated Acts comprising the new tax regime for Attribution Managed Investment Trusts (AMITs), have now received Royal Assent. 

See November 2015 G+T Corporate Advisory Update for further details of the new regime.

The ATO has also developed Law Companion Guidelines that describe how it will apply the new regime.

Act to encourage innovation and investment in Australian early stage companies receives Royal Assent

Tax incentives to encourage new investment in Australian early stage innovation companies, and improvements to existing venture capital investment rules, are now available.

The Tax Laws Amendment (Tax Incentives for Innovation) Act 2016 (Cth) received Royal Assent on 5 May 2016.

See G+T Updates in Tax dated 24 March 2016 by Peter Feros, Deborah Johns, Andrew Sharp and Mack Wan for details of the tax incentives available under the new Act.


Other G+T publications

Insuring against costly cybercrime: what can you do?

Cybercrime and data breach incidents have the potential to affect all individuals and businesses.  “Cybercrime” can mean both crimes directed at computer technology (such as hacking) and crimes where computers are an integral part of an offence, such as online fraud or identity theft.  Data breaches may be caused by malicious cybercrime, such as theft and hacking, or inadvertent human or technical error.

For further details, see G+T Alert dated 19 April 2016 by Andrew Floro, Asia Lenard, Laura Tomkins and Matthew McGirr.

Blowing the whistle on corporate crime

The Senate has foreshadowed broad-ranging reforms to encourage whistleblowers to come forward and report corporate crime and corruption.  ASIC is also focussed on whistleblowers and is implementing a national project to enhance companies’ reporting culture and improve managerial responses to whistleblowing.  Companies should consider the adequacy and effectiveness of their internal whistleblowing processes, including how disclosure from whistleblowers are managed.

For further details, see G+T Alert dated 5 May 2016 by Steven Glass, Stephanie Wee and Sophie Millett.


Cases

Class actions - have the floodgates just opened?:  Re HIH Insurance Ltd (in liquidation) [2016] NSWSC 482

In a landmark decision of the NSW Supreme Court, Justice Brereton has found that class action plaintiff shareholders may recover losses if they paid more for shares than they would otherwise have paid, where the market is misled into attributing an inflated value to the shares, without having to prove that the plaintiff shareholders themselves relied on the relevant misleading statements or omissions.  The judgment is the first time an Australian court has embraced the US approach of “market-based causation”.

For further details, see G+T Alert dated 28 April 2016 by Colleen Platford, Stuart Brady, Crispian Lynch and Christine Harb.

Make sure your deed execution block matches the method of execution:  Australia and New Zealand Banking Group Limited v Fairfield City Council [2016] NSWSC 668

In this somewhat surprising decision, the Supreme Court of New South Wales has taken a rather literal approach to the formalities of executing a deed.  Contracting parties are reminded that a document may not constitute a deed if the formalities of execution are not met, and that care should be taken to ensure that the execution block matches the method of execution.

In this case, a guarantee (Guarantee) was:

  • expressed to be executed as a deed by Haddadd Property Investments Pty Limited (Company); and
  • stated that the common seal of the Company had been affixed in the presence of, and the sealing had been witnessed by, Mr Elhaddadd (who was the sole director and sole secretary of the Company). 

Mr Elhaddadd signed the Guarantee for the Company but the common seal was not affixed.
 
Emmett AJA in the Supreme Court of New South Wales firstly noted that section 127(3) of the Corporations Act 2001 (Cth) provides that a company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with section 127(1)(c) or section 127(2)(c) (which provide that a proprietary company that has a sole director who is also the sole secretary may execute a document without using a common seal if the document is signed by that director, or with a common seal if the seal is affixed and the affixing of the seal is witnessed by that director).

However, Emmett AJA held that because the Guarantee was expressed to be executed under the common seal of the Company but was in fact executed without the common seal, the Guarantee was executed as a document but not as a deed.  Conversely, Emmett AJA was satisfied with an associated mortgage on which the provision relating to the affixing of the common seal was struck out by hand.
 
Ultimately, the Guarantee was held to be enforceable against the Company on the basis that there is no requirement that a guarantee be executed as a deed, and a guarantee will be enforceable against a guarantor if given for valuable consideration (which was established on the facts of the case).

Continuous disclosure obligations:  Grant-Taylor v Babcock & Brown Limited (in liquidation) [2016] FCAFC 60

This case provides useful guidance on the interpretation of the continuous disclosure provisions of the Corporations Act and the ASX Listing Rules.  While none of the guidance should change the way the continuous disclosure test is applied, it provides some rare judicial insight into how to interpret some of the key expressions used in this area.

During the period 21 February 2008 to 13 March 2009, it was alleged that Babcock & Brown Limited (BBL) paid its final dividends for 2005 to 2007 out of share capital rather than out of profits (contrary to the Corporations Act at the time), did not disclose this reduction of share capital in its financial reports for 2005 to 2007, and became insolvent on 29 November 2008.

The appellants (being 77 shareholders in BBL) alleged that BBL had breached its continuous disclosure obligations by failing to disclose that:

  • BBL’s dividends were paid out of capital rather than profits (the Dividend Information);
  • BBL’s financial statements did not give a true and fair view of BBL’s financial position (the Final Report Information); and
  • BBL had become insolvent on 29 November 2008 (the Insolvency Information).

The key obligation of continuous disclosure set out in section 674(2) of the Corporations Act 2001 (Cth) (Act) provides that a listed entity must disclose information if it has that information, that information is not generally available, and a reasonable person would expect that information to have a material effect on the price or value of the entity’s securities.

The Full Court of the Federal Court held that BBL had not breached its obligations because the Dividend Information had no economic or financial significance, the Final Report Information was economically irrelevant, and the directors were not aware of the Insolvency Information at the time. The Full Court’s decision included some guidance on the interpretation of the continuous disclosure provisions of the Act (sections 674(2), 676 and 677) and the ASX Listing Rules (LRs) (LR 3.1 and 19.12).

The meaning of “information”

The Full Court acknowledged that the word “information” is not defined for the purposes of section 674 and contrasted this with the way “information” is broadly defined for the purposes of insider trading provisions (see section 1042A) to include matters of supposition and matters relating to intention. As a result, the Full Court suggested that “information” for the purposes of section 674 may be given a more restrictive definition. However, the Full Court did acknowledge that LR 3.1 and LR 19.12 (which apply to section 674) define “information” in a similar way to the insider trading provisions, so in practice the difference in drafting will not have any meaningful impact.

The meaning of “expectation of material effect”

The Full Court addressed the question as to the relationship between section 674(2)(c)(ii), section 677 and LR 3.1.  Both section 674(2)(c)(ii) and LR 3.1 essentially deal with the same thing – whether a reasonable person would expect the information to have a material effect on the price or value of the securities. For the purposes of section 674, section 677 clarifies that a reasonable person would expect information to have a material effect on a security’s price or value if the information would, or would be likely to, influence persons who commonly invest in securities. As to whether section 677 also clarifies LR 3.1 in the same way, the Full Court concluded that LR 3.1 should be read to implicitly embrace the elaboration in section 677. This guidance is reassuring, as a superior court has now expressly confirmed what the market already assumed.

(a) Who are “persons who commonly invest in securities”?

The Full Court stated that the phrase “persons who commonly invest in securities” should not be narrowly interpreted to mean a fixed group of investors based upon a common characteristic such as level of sophistication, size of the investment or frequency of the investment, nor should it be narrowly interpreted to mean investors who have previously invested in that kind of security.

(b) When will information be “likely to influence” such persons?

The Full Court concluded that, for information to be defined as “material”, that information must be non-trivial at least. The Full Court said that it is insufficient that the information “may” or “might” influence a decision: the words used are “would” or “would be likely”, and so that is what is required to be shown. Further, the Full Court expressed the view that materiality may also depend upon the probability of the event occurring, the anticipated magnitude of the event, and the accounting treatment of “materiality” if the information is financial in nature.

The meaning of “generally available”

Information will be considered “generally available” if it is readily observable. The Full Court stated that whether information is “readily observable” is a question of fact to be determined objectively and hypothetically (ie it does not matter if no one actually observed the information) and expressed the view that information notified to the ASX or information stated in a financial report becomes generally available. Alternatively, information will also be considered “generally available” if it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information and, since that time, a reasonable period for dissemination has elapsed. The Full Court gave the opinion that this can be understood in the same way as the comparable insider trading provisions, meaning that the information will become generally available if it has been made known to a cross section of the investors who commonly invest in the securities, not just a small sector of them.

If you would like further information please contact Adam D'Andreti, Partner +61 2 9263 4375.

Oppression and diversion of profits and opportunity:  Re B Personal Pty Ltd [2016] VSC 211

This case provides a useful illustration of conduct that constitutes diversion of a company’s opportunity and profits by a director, giving rise to oppression and breach of the director’s statutory and fiduciary duties to the company.  

Brothers Johann and Shane Bilsborough together owned a health and fitness consulting company called B Personal Pty Ltd (B Personal).  B Personal developed an idea for a pedometer-based corporate exercise competition called the Global Corporate Challenge.  Global Corporate Challenge Pty Ltd (GCC) was incorporated to run the challenge event, with the shares being held 45% by B Personal, 45% by Flash Advertising Pty Limited and 10% by A & H Nominees Pty Limited.

As the relationship between the brothers deteriorated, Shane incorporated SB Group International Pty Ltd (SB Group) of which he was the sole shareholder and director.  Johann claimed that payments made by GCC to SB Group purportedly for consultancy services provided by Shane in connection with the challenge, were wrongfully diverted from B Personal.

In finding that conduct by Shane amounted to oppressive conduct under section 232(d) and 232(e) of the Corporations Act 2001 (Cth) (Act), Robson J in the Victorian Supreme Court noted the following:

  • on the evidence, the payments to SB Group under the purported ‘consultancy’ arrangements between GCC and SB Group should not be categorised as remuneration for services but rather arose from the practice of the GCC shareholders raising invoices to effect the agreed split of profits from GCC.  Payments under those invoices absorbed all of the GCC profit and were effectively a dividend.  Such dividends were therefore profits of B Personal which were diverted by Shane to SB Group;
  • even if Shane did perform services for GCC, they were in the line of B Personal’s business and should have been opportunities undertaken on its behalf or otherwise with the consent of its shareholders;
  • any difference in the contribution of the brothers (Shane claimed that the idea for the challenge event was solely his and that he had spent much more time on the challenge than Johann and had also made working capital contributions to GCC) could have been dealt with by the brothers taking a different share of the dividends once they were received by B Personal.  The hostilities between the brothers did not entitle Shane to divert the entirety of the profits from B Personal;
  • in purporting to perform consultancy services for GCC, Shane diverted an opportunity properly within the purview of B Personal (which was always the intended beneficiary of the profits from the challenge) and that diversion of opportunity led to a diversion of profits which were properly to be paid to B Personal;
  • even if any of the payments received by Shane were referable to any kind of remuneration, they were oppressive in being excessive as they absorbed the entirety of B Personal’s profits; and
  • notwithstanding his choice to have limited involvement in the business from 2008, Johann was not aware of, nor acquiesced in, the diversion of payments and opportunities to SB Group.

Robson J also found that diversion of B Personal’s profits to SB Group constituted a breach of Shane’s fiduciary duties and duties under sections 180 to 182 of the Act owed to B Personal.

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