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A summary of cases by our Corporate Advisory team for the month of May.
Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team.
The update provides a summary of key recent legal developments, particularly relevant to in-house counsel.
New foreign investment rules from 1 December 2015
New foreign investment rules came into effect in Australia on 1 December 2015. The basic process (including a 30 day examination period and a 10 day notification period) remains the same, but there are a number of important changes to the way Australia’s foreign investment screening regime works.
For further details, see New foreign investment rules by Deborah Johns dated 8 December 2015.
ChAFTA to come into effect on 20 December 2015
Following an ‘exchange of notes’ in Sydney (confirming the completion of domestic processes in both countries), the free trade agreement between Australia and China (ChAFTA) will come into force on 20 December 2015.
Once ChAFTA comes into effect on 20 December 2015, the following legislation to give effect to it will also come into effect:
Customs Amendment (China-Australia Free Trade Agreement Implementation) Act 2015;
Customs Tariff Amendment (China-Australia Free Trade Agreement Implementation) Act 2015;
Customs (International Obligations) Amendment (China-Australia Free Trade Agreement) Regulation 2015; and
Treasury Legislation Amendment (China-Australia Free Trade Agreement) Regulation 2015.
See also July 2015 Corporate Advisory Update for further details of ChAFTA.
Negotiations for a free trade agreement between Australia and the European Union to commence
Discussions between Australian and European Union officials on the next steps to launching negotiations on a free trade agreement will begin shortly. Submissions from interested stakeholders on potential opportunities and impacts are due by 26 February 2016.
The Australian Prime Minister together with the President of the European Council and the President of the European Commission have agreed in a joint statement on 15 November 2015 to start the process towards a free trade agreement which will:
Australian and European Union officials will now begin bilateral discussions on the next steps to launch negotiations.
As part of this process, the Department of Foreign Affairs and Trade is seeking submissions from interested stakeholders on the potential opportunities and impacts by 26 February 2015.
See also Department of Foreign Affairs and Trade website.
Government releases National Innovation and Science Agenda
The Federal Government has released details of a $1.1 billion reform package focussed on the “National Innovation and Science Agenda”, aimed at boosting innovation and driving an ‘ideas boom’ in Australia.
On 7 December 2015, Prime Minister Malcolm Turnbull announced the $1.1 billion National Innovation and Science Agenda (NISA). With a stated vision of sparking an “ideas boom”, the scheme looks to promote investment in business-based research, development and innovation over the next four years. The 4 key themes are as follows:
A combination of tax incentives and offsets – see Turnbull Government innovation statement - Australian tax changes dated 14 December 2015;
More information on the NISA, including the complete series of fact sheets published by the Government are available on the NISA website.
Crowd-sourced funding Bill introduced into Parliament
The Corporations Amendment (Crowd Sourced Funding) Bill 2015 proposes to introduce a regulatory framework to facilitate crowd sourced funding by small, unlisted public companies. We will continue to monitor the progress of the Bill.
Crowd sourced funding (CSF) is receiving increasing attention globally as an alternative form of fundraising for start-up or other small to medium sized businesses which allow them to raise funds from a large number of investors. 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) (Act).
Following consultation earlier this year, the Corporations Amendment (Crowd Sourced Funding) Bill 2015 (Bill) was introduced into Parliament on 3 December 2015. See G+T Alert on 20 August 2015 for further details on the consultation.
According to the Explanatory Memorandum, the Bill amends the Act to establish a regulatory framework to facilitate CSF by small, unlisted public companies, with the CSF regime to include:
Essentially, an unlisted public company which satisfies the following tests:
Retail clients will also be subject to an investor cap of $10,000 per issuer via a particular intermediary within a 12 month period, and will also have cooling off rights.
The Bill also:
ASIC updates guidance on employee incentive schemes
The amendments to ASIC’s relief and guidance on employee incentive schemes do not reflect any significant change to underlying policy. Rather, they are intended to clarify the scope and operation of the relief and remove certain practical burdens for complying with relief.
ASIC has made some changes to Class Orders [CO 14/1000] Employee Incentive Schemes: Listed Companies and [CO 14/1001] Employee Incentive Schemes: Unlisted Companies (Class Orders) which provide relief to listed and unlisted entities which operate employee incentive schemes (EISs) from certain requirements and restrictions under the Corporations Act 2001 (Cth) (see ASIC Corporations (Amendment) Instrument 2015/943 (Instrument) and the associated explanatory statement). ASIC has also updated Regulatory Guide 49: Employee incentive schemes (RG 49) to provide further guidance.
According to ASIC, there have been no significant changes to the underlying policy but the changes are intended to clarify the intended operation and scope of relief, to ensure that the relief in the Class Orders aligns with the intended policy as outlined in their explanatory statements and also with RG 49, as well as to reduce unnecessary repetition and removal of certain unintended practical burdens of complying with conditions for relief in the Class Orders.
The changes to the Class Orders include:
Amendments common to listed and unlisted companies [CO 14/1000] and [CO 14/1001]
Additional listed company amendments [CO 14/1000]
See also ASIC media release dated 11 November 2015.
ASX consults on reverse company takeovers
ASX is seeking feedback on potential amendments to the ASX Listing Rules to address ‘reverse takeovers’ which would impose a shareholder approval requirement under Listing Rule 7.1 where the bidder issues shares in excess of 100% of its existing share capital as consideration for an acquisition by way of takeover or scheme.
ASX has released a consultation paper Reverse Takeovers – Consultation on Shareholder Approval Requirements for Listed Company Mergers (Paper).
Currently, neither the Corporations Act 2001 (Cth) nor the ASX Listing Rules (Listing Rules) require bidder shareholder approval for a reverse takeover (ie where a bidder acquires a larger target company offering its shares as consideration). In particular, the ASX Listing Rules contain specific exceptions from the general Listing Rule 7.1 restriction on issues of shares in excess of 15% without shareholder approval for shares issued as consideration for a takeover or scheme regardless of the size of the issue. Some investor and corporate governance groups have identified a gap in the regulatory framework due to the fact that in a reverse takeover:
Given the widely differing views expressed to ASX on the regulatory framework for reverse takeovers, ASX is seeking formal feedback. For this purpose, the Paper outlines:
ASX has also emphasised that any proposed changes to the regulatory framework must strike an appropriate balance between:
Submissions on the Paper are due by 17 December 2015.
Panel publishes revised guidance note on funding arrangements
The Takeovers Panel’s revised Guidance Note 14 seeks to ensure that there is no confusion following the Mariner decision handed down by the Federal Court earlier this year.
The Takeovers Panel has published its revised Guidance Note 14Funding Arrangements (GN 14) to ensure that GN 14 does not cause confusion following the decision of the Federal Court in Australian Securities and Investments Commission v Mariner Corporation Limited.
During consultation in October, the Panel received 3 submissions all of which supported the changes to GN 14. See September/October Corporate Advisory Update for further details on the changes.
See also the Panel’s media release dated 26 November 2015.
Panel publishes guidance note on shareholder intention statements
The Takeovers Panel has now published the final version of Guidance Note 23 on shareholder intention statements in the context of a public company control transaction. The final guidance follows a consultation draft and incorporates a number of submissions made during the recent consultation period.
Following consultation in July, the Takeovers Panel has published Guidance Note 23 Shareholder Intention Statements (GN 23).
GN 23 provides guidance for bidders, target companies and shareholders where a shareholder makes a statement of their intentions with respect to a control transaction (in particular whether or not they intend to accept or vote in favour of the transaction), with an indication of when the statement may be unacceptable. Shareholders can be held to such statements under ASIC's "truth in takeovers" policy (ASIC Regulatory Guide 25 – Takeovers: false and misleading statements).
In the article Shareholder intention statements: The Takeovers Panel's proposed new guidance on 15 September 2015, Sarah Turner Neil Pathak and Nirangjan Nagarajah summarised the key points in the consultation version of GN 23 and reflected on some areas where the guidance would be bolstered. Gilbert + Tobin also made submissions on the proposed guidance in the consultation process consistent with the article.
The Panel has also published a Public Consultation Response Statement which includes a mark-up of the final version of GN 23 against the consultation version.
The main changes since the consultation version of GN 23 include:
The Panel has declined to provide guidance on whether a shareholder intention statement might give rise to relevant interests or associations in breach of the Corporations Act (see our commentary in our article on 15 September 2015), instead focussing on its concern with whether the statement has an effect that precludes, or might preclude, the opportunity for a competing proposal.
Multinational tax avoidance legislation receives Royal Assent
Legislation to combat multinational tax avoidance received Royal Assent, and commenced, on 11 December 2015.
We have previously issued updates on the measures in the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (Act) in our June 2015 Corporate Advisory Update and August 2015 Corporate Advisory Update.
The Act gives effect to a package of measures initially announced in the 2015-16 Federal budget to combat multinational tax avoidance. In its passage, the Senate proposed two amendments to the Act, being:
New Managed Investment Trust Bills introduced to Parliament
New Bills to implement a revised regime for Managed Investment Trusts (MITs) has been introduced into Parliament, with a proposed start date for income years commencing on 1 July 2016 (subject to an optional earlier start date for income years commencing on 1 July 2015 for certain eligible MITs). We will continue to monitor the progress of the Bills.
The Tax Laws Amendment (New Tax System for Managed Investment Trusts) Bill 2015 and related Bills were introduced in the House of Representatives on 3 December 2015. Together, these Bills propose to implement a new regime for MITs as well as make a number of other related amendments.
Broadly, the Bills set out to achieve the following:
- allowing an AMIT to have a deemed ‘fixed trusts’ status for tax law purposes;
- ensuring that the withholding tax provisions (including PAYG withholding) apply appropriately in respect of the amounts attributed to beneficiaries; and
- introducing a specific regime for dealing with ‘unders’ and ‘overs’ (i.e. circumstances where the taxable income calculated in an income year differs from the actual taxable income);
On the same date that the Bills were introduced to Parliament, the ATO released Draft Law Guidelines describing how they propose to apply the new law. The effective dates of the proposed rules as well as the period in which transitional provisions will apply vary. In relation to the proposed AMIT regime, these rules will apply to income years starting on or after 1 July 2016. Eligible MITs may however choose to apply the proposed rules for an income year starting on or after 1 July 2015.
Demanding a greater shareholding as a condition to continuing company sale negotiations constitutes oppressive conduct: Spence v Rigging Rentals WA Pty Ltd  FCA 1158
In this case, the Federal Court found that an email from 2 shareholders to their fellow shareholder requiring him to agree to a dilution in his shareholding as condition to them continuing negotiations for the sale of the company constituted oppressive conduct in the particular circumstances. In so finding, the Court provided some useful commentary on the scope of section 232(e) of the Corporations Act 2001 (Cth).
Mr Spence held shares in Rigging Rentals WA Pty Limited (Company) equally with two other shareholders (Other Shareholders). Over time, the relationship between Mr Spence and the Other Shareholders deteriorated.
Mr Spence argued that a statement by the Other Shareholder in an email on 1 August 2014 that an allotment of additional shares to them (such that Mr Spence’s shareholding would be reduced from 33% to 25%) was a condition to them continuing with negotiations for the sale of the Company, constituted oppressive conduct.
Gilmour J in the Federal Court of Australia held that:
In finding that the 1 August 2014 email did constitute oppressive conduct, Gilmour J held that:
- paying excessive remuneration to the Company’s bookkeeper;
- charging inappropriate expenses to the Company; and
- while purporting to engage in the business of the Company, engaging in the establishment and development of other companies in which he had taken a personal interest to the exclusion of the Company and which were potential competitors of the Company, were made out, it would still not have warranted the conduct of the Other Shareholders in sending the 1 August 2014 email;
When will a court grant an order to inspect the books of a company?: Engel v National Biodiesel Limited  FCA 1114
This case provides some useful analysis of the Court’s power under section 247A(1) of the Corporations Act 2001 (Cth) to make orders permitting a shareholder to inspect company books. In particular, the Court considered the meaning of the phrase “books of the company” and the extent to which confidentiality obligations apply in respect of books inspected.
Mr Engel was a shareholder of National Biodiesel Ltd (NBL) and became concerned about a number of transactions entered in to by NBL and its subsidiary at the time. In order to put him in a position to take steps to protect his investment and to ascertain whether he should commence proceedings as a result of those transactions, Mr Engel sought an order pursuant to section 247A(1) of the Corporations Act 2001 (Cth) (Act) to permit him, the employees of his solicitors and any accountant nominated by him to inspect and take copies of specified books of NBL.
In granting the inspection order, Markovic J in the Federal Court of Australia:
Court upholds restraint in a business sale agreement: Richmond v Moore Stephens Adelaide Pty Ltd  SASCFC 147
This case illustrates that Courts will uphold a restraint in a business sale agreement provided that is sufficiently certain in its scope and it goes no further than is reasonable in the circumstances of the relevant business to protect the interest of the business.
Geoffrey Richmond entered into business sale agreement and a service agreement for the sale of his accountancy practice (WKYA Consulting Pty Ltd (WKYA)) to Moore Stephens Adelaide Pty Ltd (Moore Stephens) (Agreements). The Agreements:
Disputes arose concerning the quantum of achieved fees under the Agreements and Mr Richmond contended that the restraint should not be enforced because:
In upholding the restraints, the Full Court of the Supreme Court of New South Wales found that:
What constitutes good faith contractual negotiations?: Keira Holdings v Broadcast Australia  NSWSC 1716
In this case, a company who genuinely, but ultimately unsuccessfully, negotiated the terms of a long term incentive plan with its managing director was held not to be in breach of an express obligation to negotiate in good faith the terms of the plan. In reaching its decision, the Court reminds us of the principles that apply to a contractual obligation to negotiate in good faith.
In January 2010, Keira Holdings Pty Ltd (Keira) signed an agreement with Broadcast Australia Pty Ltd (Broadcast Australia) to supply the services of Mr Mullen to perform the duties of managing director of Hostworks Group Pty Ltd (which was a wholly owned subsidiary of Broadcast Australia) (Agreement). The Agreement provided that “[B]oth parties agree to negotiate in good faith towards a long term incentive package which will require board agreement. This will aim to achieve a total remuneration in line with market rates” (LTIP Clause).
McDougall J in the Supreme Court of New South Wales proceeded on the assumption that the LTIP Clause was enforceable (without expressing a view as to whether or not that assumption was correct) because ultimately it was found that there was no breach of the obligation to negotiate in good faith and that Keira had not demonstrated any loss, either of which was sufficient to dispose of the case.
McDougall J firstly noted that:
McDougall J then found that there was no breach by Broadcast Australia of the LTIP Clause on the following basis
In those circumstances, McDougall J found that Broadcast Australia did seek to negotiate in good faith to the extent that it could and the failure of the negotiations to produce the outcome sought by Keira did not show any lack of good faith by Broadcast Australia.
McDougall J also found that expert evidence at trial established that there was no simply no evidence that for any of the years in question, Keira was underpaid by reference to market rates.