Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team.
In this issue, you will find:
Interim report on the statutory review of the Personal Property Securities Act 2009 (Cth) highlights that it is too complex and particularly impacts small businesses
The recently released Interim Report on the statutory review of the Personal Property Securities Act 2009 (Cth) (PPSA) makes a number of observations about the PPSA. Key observations include that the PPSA is too complex and that more could be done to help small businesses who do not typically have the resources to obtain appropriate advice and on which non-compliance can have a disproportionate effect by virtue of their size. The proposed next step is a public consultation process on the PPSA to identify and discuss potential areas for reform and suggest other opportunities to simplify or clarify its operation.
The Attorney-General and Parliamentary Secretary to the Prime Minster have released the Interim Report of the statutory review of the Personal Property Securities Act 2009 (Cth) (PPSA) (Report) The Report was prepared by Mr Bruce Whittaker who was appointed to address the impact of the PPSA, in particular on how its introduction has impacted small business.
The Report indicates that submissions largely supported the framework of the PPSA, however a number of submissions raised high-level policy questions and technical issues about its operation. The main issues raised were that:
- the PPSA and the Personal Property Securities Register (Register) are too complex; and
- many businesses are still unaware of the PPSA, or do not appreciate the extent to which it can impact on their activities despite the Government’s efforts to raise awareness of both the PPSA and its implications.
These concerns particularly impact small businesses because:
- small businesses typically do not have the resources to obtain proper advice on how to manage the complexities of the PPSA and the Register; and
- failure to satisfy the requirements or follow the provisions of the PPSA can have a disproportionate effect on small businesses by virtue of their size.
The Report does not recommend any specific amendments to the PPSA. It proposes that the next step of the review should be a public consultation process on the PPSA to identify and discuss potential areas for reform and suggest other opportunities to simplify or clarify the operation of the PPSA.
A final report will be delivered to the Government on 30 January 2015 in which it is expected that Mr Whittaker will make recommendations on how to improve the PPSA, including simplification where appropriate.
ASIC publishes first report on corporate finance regulation
ASIC’s report provides companies and their advisers with a better understanding of ASIC’s decision-making in corporate finance regulation, including fundraising transactions, mergers and acquisitions, corporate governance, financial reporting and buy-backs. It is intended that a better understanding of ASICs approach in these areas will assist companies and their advisers with legal and compliance obligations.
ASIC has published the first of a series of reports which will provide greater transparency about the role that ASIC plays in the regulation of corporate finance issues in Australia.
Report 406 ASIC regulation of corporate finance; January to June 2014 provides statistical data, highlights key focus areas, and includes relevant guidance about ASIC's regulation of:
- fundraising transactions;
- mergers and acquisitions;
- corporate governance issues; and
- other corporate finance areas including financial reporting and share buy-backs.
Report 406 also:
- details the approach ASIC takes in these areas, including the types of issues that have prompted ASIC intervention; and
- provides an overview of ASIC’s current policy initiatives in this space and where it expects to undertake further consultation.
For more detailed information on novel relief applications, see ASIC’s other regular reports, the most recent of which is Report 395 Overview of decisions on relief applications (October 2013 to January 2014) which was published in May 2014.
See ASIC’s media release dated 29 August 2014.
Corporate governance reports
Governance Institute of Australia releases new shareholder engagement guidelines
The Governance Institute of Australia’s new shareholder engagement guidelines help clarify, for both companies and institutional investors, appropriate communications and other procedures and processes to ensure the efficacy of engagement, and a genuine understanding, between them. Companies and institutional investors should familiarise themselves with the new guidelines which are intended primarily for ASX 200 companies and institutional investors in respect of their ASX 200 investee companies, but are also promoted as good governance in relation to smaller companies.
The Governance Institute of Australia’s Improving engagement between ASX-listed companies and their institutional investors: Principles and Guidelines (Principles and Guidelines) aim to improve the efficacy of engagement between companies and their institutional investors.
The Principles and Guidelines provide the following 6 Principles of Engagement:
- Principle 1: It is good practice for institutional investors to explain how they vote and engage with companies; for companies to explain how they engage with institutional investors; and for each of them to keep abreast of this information;
- Principle 2: It is good practice for institutional investors and proxy advisers to explain their voting and other governance guidelines; how they apply them to voting; when they can engage; and for companies to keep abreast of this information;
- Principle 3: It is good practice for companies to know their significant institutional investors; for institutional investors to know their significant investee companies; and for companies to know and engage with intermediaries;
- Principle 4: It is good practice for companies and institutional investors to have a regular, efficient and meaningful engagement program;
- Principle 5: It is good practice for companies and institutional investors to incorporate environmental, social and governance issues in engagement; and
- Principle 6: It is good practice for companies and institutional investors to take advantage of technology to facilitate disclosure and engagement.
They also provide:
- a set of practical Guidelines on how to implement each Principle; and
- commentary providing further context and explanation to assist users.
The Principles and Guidelines are intended primarily for ASX 200 companies and institutional investors in respect of their ASX 200 investee companies, but recognise that how each company applies them will depend on its circumstances, size and particular issues. While the Principles and Guidelines recognise that engagement by and with smaller companies is complex, it is promoted as good governance for smaller companies to endeavour to implement them, and for institutional investors to engage with smaller companies that do so.
See also media release dated 28 July 2014.
Australian Institute of Company Directors proposes an honest and reasonable direct defence
The Australian Institute of Company Directors’ proposed honest and reasonable director defence recognises that honest directors acting carefully will sometimes make the wrong decision. The proposed defence, if enacted, will provide an overarching safe harbour for directors who act with integrity and commitment, but who now operate in an increasingly complex and compliance focussed regulatory environment. We will continue to monitor the progress of proposals to enhance the defences available to directors.
According to the Australian Institute of Company Directors (AICD), there are a number of pressures in Australia's corporate operating and regulatory environment (including directors’ concerns about personal liability and the limited nature of the statutory business judgment rule, the risks for directors when companies are approaching insolvency and recent concerns about forward-looking statements). The AICD suggests that a cultural shift in the regulation of directors is necessary to allow directors that act with integrity and commitment to pursue and harness new opportunities, drive performance and create jobs without being overly concerned about potential personal liability.
The AICD’s proposed Honest and Reasonable Director Defence (Proposed Defence) would:
- have broad application to all directors of companies regulated by the Act and would be designed to be an overarching defence that may be used as an alternative, or in addition to, any other specific defences which may be available;
- not alter the primary duties and obligations imposed on directors under the Act or at law generally;
- be available in circumstances where a director, acting in that capacity, acts (or does not act) honestly and with the degree of care and diligence that the director rationally believes to be reasonable in all the circumstances; and
- apply to all contraventions set out in the Act, the Australian Securities and Investments Commission Act 2001 (Cth) or any equivalent grounds of liability in common law or in equity applying to the director in his or her capacity as a director.
What factors show there is a concluded and binding agreement?: Absolute Analogue Inc v Sundance Resources Ltd [No 3]  WASC 283
This case provides some useful insight into the factors a court will consider when determining whether a concluded and binding agreement has arisen, particularly where there have been protracted negotiations. The case also illustrates a reluctance to impute a person with actual or apparent authority to bind a company without board approval merely because it would be reasonable to infer that a decision would not be made by the company without that person’s approval. Ensuring agreements are clearly recorded in writing and properly authorised will reduce the scope for a subsequent claim that the alleged agreement was neither concluded nor binding.
Mr Porter alleged that he made an agreement with Sundance Resources Ltd (Sundance) (through the Sundance Chairman and Mr RankineWilson (the largest shareholder of Sundance and the founding director of Sundance’s corporate advisor)) to:
- appoint Mr Porter as a consultant to provide services as manager of the Mbalam iron ore project (which was acquired by Sundance when it acquired Cam Iron SA); and
- grant him 30 million Sundance options.
Sundance denied that there was any binding agreement to grant options.
Le Miere J in the Supreme Court of Western Australia outlined the key legal principles in relation to formation of contract:
- protracted or imprecise negotiations will often give rise to doubt whether a final agreement has been made;
- the Court must ascertain from the parties’ dealings whether or not they intended to make a concluded agreement, with intention to be tested objectively by reference to what a reasonable person would have concluded; and
- in determining a party’s objective intentions, the Court may look to such factors in relation to a contract of the type alleged as the customary method of forming a contract and whether an informal exchange that is alleged to lead to a contract would accord with the expectation of the parties.
Le Miere J then found that there was no concluded or binding agreement to issue options to Mr Porter on the basis that:
- there were doubts as to the credibility and reliability of Mr Porter’s evidence;
- it was inherently unlikely that a publicly listed company would make an oral agreement to issue options through an informal exchange not evidenced in writing (although noting that a Court may find a contact to have been made if evidence establishes that the parties unequivocally committed themselves by their words or conduct);
- a draft ASX announcement in relation to the acquisition of Cam Iron SA stated that the issue of options to Porter was ‘subject to the required approvals’ which suggested that Sundance believed shareholder approval was necessary or intended to seek shareholder approval (whether it was necessary or not) and was a further indication that there was no unconditional agreement (the announcement as finally issued made no reference to Mr Porter);
- all parties must have known that if an agreement had been made to issue options to Mr Porter then it should have been disclosed yet the notice of meeting to approve the acquisition of Cam Iron SA issued in April 2006 made no mention of the issue of any options to Mr Porter, although it did refer to the grant of options to others; and
- while subsequent evidence suggested that Mr Porter was negotiating for the issue of options, such negotiations never resulted in a concluded binding agreement.
Although a finding was not strictly necessary, Le Miere J also found that Mr RankineWilson did not have actual or apparent authority to enter into an agreement on behalf of Sundance as:
- the scope of the engagement by Sundance of its corporate advisor did not authorise Mr RankineWilson to enter into an agreement on behalf of Sundance to engage Mr Porter or for Sundance to grant options; and
- Mr RankineWilson did not have ostensible or apparent authority to enter into the alleged agreement with Mr Porter. Although references by Sundance to Mr RankineWilson in the course of negotiations and his presence during discussions may reasonably have led Mr Porter to believe that Sundance would not enter into an agreement without Mr RankineWilson’s approval, this did not amount to a representation that Mr RankineWilson was authorised to enter into an agreement without approval by the Sundance directors.
An entitlement to rely on the statutory due execution assumptions does not confer proprietary rights good against third parties: Esperance Cattle Company Pty Ltd v Granite Hill Pty Ltd  WASC 279
A sublessee was entitled to rely on the assumption of due execution under section 129(5) of the Corporations Act 2001 (Cth) in respect of a sublease which appeared to have been signed by the sublessee under section 127, irrespective of the fact that ASIC’s records indicated that the signatory was not in fact a director of the sublessor. However the Court found that while the sublessor was prevented from denying execution of the sublease, the entitlement of the sublessee to rely on due execution did not confer a proprietary right enforceable against a third party who had been validly granted a lease from the registered proprietor. Contracting parties should be aware that the statutory due execution assumptions only apply to regulate the legal relations between the parties to the relevant contract and do not create rights and obligations enforceable against third parties.
Esperance Cattle Company Pty Ltd (Esperance) claimed to be entitled to possession of Young River Station by virtue of a lease granted by Navarac Pty Ltd (Navarac) (the registered proprietor). Granite Hill Pty Ltd (Granite Hill) claimed to be entitled to possession by virtue of a sublease granted by Mammoth Investments Pty Limited (Mammoth) who was the lessee pursuant to a lease granted by Navarac at the time Granite Hill claims that the sublease was executed.
The relevant facts were as follows:
- John Caratti and his mother Mrs Caratti took steps to remove Allen Caratti (John’s brother) as director of the Caratti family companies (and appoint Aaron Caratti in his place);
- Allen Caratti, purporting to still be a director of Mammoth, executed a sublease by Mammoth in favour of Granite Hill (and also simulated the signature of his mother as a director of Mammoth without authority); and
- Esperance then executed another lease with Navarac executed by Mrs Caratti and Aaron Caratti as directors of Navarac.
Martin CJ found that:
- the legislative history suggests that it was the legislature’s intention that the assumption in section 129(5) of the Corporations Act 2001 (Cth) that a document has been duly executed if it appears to have been signed in accordance with section 127 would apply irrespective of whether or not the person who had apparently signed the document was a person who, on the information available to the public from ASIC, was an officer of the company;
- case law in relation to section 129(6) (which for this purpose is substantially similar to section 129(5)) was that the affixation of signatures apparently as office holders of the company was, of itself, sufficient to create the appearance that the document had been executed in accordance with section 127, with the result that the assumptions in section 129(6) would apply unless the person dealing with the company knew or suspected that the assumption was incorrect; and
- on the basis of the above, Granite Hill was entitled to assume that the sublease had been duly executed by Mammoth pursuant to sections 128 and 129(5) of the Act despite the fact that it was evident that it had been signed by Mr Caratti who was neither a director of Mammoth nor a person who appeared to be a director from information available from ASIC.
However, His Honour also found that the statutory assumption only applies to regulate the legal rights and obligations between Granite Hill and Mammoth and did not confer a proprietary right on Granite Hill that was good as against third parties such as Esperance. As such, Esperance was entitled to an order for possession and damages against Granite Hill for trespass.
Finding a ‘fraudulent and dishonest design’ for the purpose of liability of third parties who knowingly assist in a breach of fiduciary duty: Hasler v Singtel Optus Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd  NSWCA 266
There have been inconsistent formulations of the “dishonest and fraudulent design” element of the second limb of Barnes v Addy since the Court of Appeal of Western Australia in Westpac Banking Corporation v Bell Group Ltd (No 3) interpreted the High Court decision in Farah Constructions Pty Ltd v Say-Dee Pty Ltd as lowering the standard of conduct to include all significant breaches of fiduciary duty. In this case, the New South Wales Court of Appeal has provided some welcome clarification on the issue by rejecting the Court of Appeal of Western Australia’s interpretation and preferring a tighter test that dishonesty requires “a transgression of ordinary standards of honest behaviour”.
Mr Curtis and Mr Hasler were employees of an Optus company and Sumo Distribution & Storage Pty Ltd (in liq) (Sumo) (which was owned equally by Mr Hasler, Mr Curtis and each of their wives) provided warehousing services to Optus through the brokering firm Almad Pty Ltd (Almad). Almad charged a 20% premium on the services provided by Sumo. Effectively, Mr Curtis approved the services provided by Sumo to Optus, the price of which he had determined as a shadow director of Sumo. Mr Curtis had also caused Sumo and another related company PJC333 Pty Ltd (Electrosales) to make substantial payments to relatives of certain Optus employees. This case involved claims by 3 Optus companies against Mr Hasler, Mr Curtis, Sumo, Electrosales and Almad in respect of breaches of fiduciary duty and conversion.
The key point of interest in this case was the New South Wales Court of Appeal’s discussion of the second limb of Barnes v Addy LR 9 Ch App 244 which allows the beneficiary of a fiduciary duty to obtain an equitable remedy against a third party who falls short of inducing or procuring, but nevertheless participates in, a breach of fiduciary duty that amounts to a ‘dishonest and fraudulent design’ In considering the proper interpretation of the requirement that the fiduciary’s breach be a ‘dishonest and fraudulent design’ the Court noted that in Westpac Banking Corporation v Bell Group Ltd (No 3)  WASCA 157, the Court of Appeal of Western Australia interpreted the High Court’s decision in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, as lowering the standard of conduct sufficient to constitute a ‘dishonest and fraudulent design’ to include all breaches of fiduciary duty “if the breach of duty is more than a trivial breach and is also too serious to be excusable because the fiduciary has acted honestly, reasonable and ought fairly to be excused”.
In this case, the Court had to consider whether it should depart from the more relaxed test formulated in Bell Group. Whilst it was not strictly necessary to address the issue in order to resolve the appeal, Leeming JA felt that the Court should do so because the issue was recurring, important and leading to inconsistent formulations of the principle in courts across Australia. The High Court had in fact granted special leave to appeal the decision in Bell Group, but the matter settled prior to being listed for hearing. Leeming JA rejected the Court of Appeal of Western Australia’s interpretation of Farah as expanding ‘dishonest and fraudulent design’ to include all significant breaches as ‘plainly wrong’, ‘not well-defined’ and ‘unhistorical’. Instead, his Honour found that dishonesty requires “a transgression of ordinary standards of honest behaviour”.
Barrett, Leeming and Gleeson JJA also rejected the purported reversal of the onus of proof in requiring Optus to prove that they did not provide fully-informed consent to the breach of fiduciary duty. Their Honours iterated that fully-informed consent operates as a defence to a breach of fiduciary duty and proof of an absence of consent is not an element of a knowing assistance claim.