Welcome to the latest update from Gilbert + Tobin's Corporate Advisory team.

In this issue, you will find:

ASIC

ASIC describes its review of unlisted property schemes' disclosure as 'disappointing'

Responsible entities of unlisted property funds should familiarise themselves with the findings ASIC has made following its recent review of disclosure to investors by the unlisted property industry.  In particular, they should ensure that all of the benchmarks in Regulatory Guide 46, Unlisted property schemes: Improving disclosure for retail investors are adequately addressed in a single location on their website and/or in a single stand-alone document available in print or electronic form.

ASIC has described its recent review of disclosure to investors by the unlisted property industry as 'disappointing'.

The review (see media release dated 23 July 2014), which was part of a broader surveillance into the managed investment and superannuation sectors including listed and unlisted property funds, found that unlisted property schemes were failing to adequately disclose against benchmarks put in place in March 2012 in Regulatory Guide 46 Unlisted property schemes: Improving disclosure for retail investors (see also media release dated 28 March 2012) to improve investors’ awareness of the risks of investing in these products.

RG 46 introduced benchmarks which unlisted property schemes are required to address on an ‘if not, why not’ basis, including key issues such as schemes’ gearing policy, interest cover policy, related party transactions and distribution practices.   The findings from the review were that responsible entities either failed to address certain benchmarks or did not provide enough information and also failed to provide the information in a single location either on their website and/or in a single designated document.

As a result of the review, 1 scheme withdrew its Product Disclosure Document and a further 3 entities will be questioned about their disclosure.  ASIC has also indicated that it will be meeting with industry to discuss its concerns and ensure they are addressed.

The review follows Report 398 Fee and cost disclosure: Superannuation and managed investment products which was released on 8 July 2014 (see also ASIC media release dated 8 July 2014).  That report outlines the results of ASIC’s review of how fund managers and super funds disclose fees.  It identified: 

• key areas where inconsistent disclosure of fees and costs occurs, including non-disclosure of fees and costs relating to investment in underlying investment vehicles, incorrectly disclosing fees net of tax and inconsistent disclosure of performance fees;
• ASIC’s view on proper disclosure with regard to the key areas identified; and
• further work that ASIC will undertake to assist industry in meeting its fee and cost disclosure obligations, including industry guidance.

ASIC has indicated that it will shortly be releasing further information on its surveillance of the managed investment and superannuation sectors.

Takeovers Panel

Takeovers Panel issues updated guidance on frustrating action

The Takeover Panel’s updated Guidance Note 12:  Frustrating Action (which follows public consultation on the proposed amendments) recognises that it may not be appropriate for a target to be restricted by the principles of frustrating action where a bid condition has already been breached but the bidder has not, within a reasonable time, disclosed whether it will rely on or waive that breach.  This will be a relevant consideration in assessing whether any frustrating action by a target is unacceptable.

For further detail, see G+T Client Alert on 25 July 2014

Industry Reports

ACSI reports on sustainability

The Australian Council of Superannuation Investors’ recent report on disclosure of environmental, social and governance risks by ASX 200 companies reveals some mixed results.  While almost 40% of companies rated in the top 2 categories of Comprehensive and Detailed, more than 40% of companies still rate in the lowest 2 categories of Basic and No reporting.  Listed companies should pay particular attention to their sustainability reporting requirements during the reporting period.

The Australian Council of Superannuation Investors (ACSI) has released its seventh report, Corporate Reporting in Australia – Disclosure of sustainability risks among S&P/ASX200 companies (Report) which benchmarks the extent to which ASX200 companies report on environmental, social and governance risks as at 31 March 2014 and considers company reporting periods ended during the 2013 calendar year.

Key findings outlined in the Report include:

• 85% of ASX200 companies provide some level of reporting on sustainability factors;
• almost 40% of ASX200 companies were rated in the top 2 categories of Comprehensive and Detailed but over 40% of companies still rate in the two lowest categories of Basic and No reporting;
• larger companies continue to be more proficient sustainability reporters (with 62% of ASX50 companies reporting to a level of Comprehensive) and new entrants to the ASX tend to be disparate in their reporting practices (with reporting levels ranging from No reporting to Comprehensive);
• a company's annual report continues to be the most likely place for a company to provide its sustainability reporting (153 companies), followed by the corporate website (132 companies);
• 75 companies have been reviewed in all 7 of ACSI's research projects and of these, almost 70% report to a level of Comprehensive or Detailed, and there are none rated No reporting; and
• of 8 companies disclosed by ACSI in 2013 as being rated as No reporting for 4 or more consecutive years, 5 of those companies now provide some level of sustainability reporting.

ACSI also encourages all companies to review their responsibilities in preparation for upcoming reporting periods and be aware that new reporting guidance from ASIC and the ASX Corporate Governance Council will have implications for sustainability reporting.

Cases

Disqualification of directors - ignorance is not bliss: Gabay and Anor and Australian Securities and Investments Commission [2014] AATA 425s

In this case, the Administrative Appeals Tribunal upheld ASIC’s 1 year disqualification period for one director (and extended the period to 18 months for another) in circumstances where the directors were not sufficiently involved in the business or management of the companies, such that they failed to prevent the companies from trading while insolvent.  The Tribunal also provided some useful analysis of ASIC’s disqualification power under section 206F of the Corporations Act 2001 (Cth), emphasising that hardship to the company will be no defence where it is in the public interest that a disqualification order be made.  Directors and other officers are reminded of the need to ensure they are adequately involved in, and have a sufficient understanding of, the affairs of their companies to reduce the possibility of orders being made against them in the event that the companies find themselves in financial strife.

This case involved a review of a 1 year disqualification from managing corporations imposed by ASIC under section 206F of the Corporations Act 2001 (Cth) (Act) on Mr Gabay and Mr O’Neill in their capacity as either directors or secretaries within the Beacon group of companies (Beacon Group).  The Administrative Appeals Tribunal noted that:

• the power conferred on ASIC under section 206F is protective and not punitive in character;
• section 206F directs attention to whether disqualification is justified as the consequence of the person’s conduct, whether the disqualification is in the public interest and any other matters considered appropriate;
• inevitable hardship and difficulty that the period of a disqualification may present is not a defence to a disqualification order where the disqualification is necessary to protect the public interest; and
• it is not necessary under section 206F to make a positive finding that there has been a contravention of the Act (although that may be relevant).

The Tribunal affirmed the 1 year disqualification of Mr O’Neil and extended the disqualification of Mr Gabay to 18 months on a number of basis including that:

• on the evidence, Mr Gabay and Mr O’Neil were aware or ought to have been aware of the insolvency of one or more companies in the Beacon Group since at least June 2009 but failed to prevent further trading until the Beacon Group was wound up in January 2010;
• in many respects, the manner in which Mr Gabay and Mr O’Neil conducted themselves in relation to the management business and property of the Beacon Group indicated a serious lack of care and diligence;
• neither Mr Gabay nor Mr O’Neil exercised their powers or discharged their duties with the required degree of care and diligence in relation to familiarising themselves with or keeping accurate financial or other records to record and explain the complex transactions of the Beacon Group; and
• there was a tendency to delegate to such an extent that the directors did not discuss or involve themselves in exercising even the supervisory or oversight roles appropriate to their position as directors so they did not have a sufficient degree of control.

See the case.

Some clarity on the extent of the implied duty to exercise a contractual discretion in good faith:  Caswell v Sony/ATV Music Publishing (Australia) Pty Ltd [2014] NSWSC 841

This case provides some useful clarification of the extent of the implied duty to exercise a contractual discretion in good faith.  The New South Wales Supreme Court emphasised that while a party is required to act honestly and reasonably having regard to its own interests and those of the counterparty, it is not required to exercise its discretion solely in the counterparty’s interests or to subordinate its own interests to those of the counterparty.

Mr Caswell (a professional songwriter) alleged that a musical piece called ‘Christmas in Dixie’ (created in 1982 by American country music and southern rock band Alabama) infringed the copyright of his musical piece ‘On the Inside’ which is the theme song for the Prisoner television series. 

Pembroke J in the New South Wales Supreme Court held that:

• a clause in a publishing contract which required Sony/ATV Music Publishing (Australia) Pty Ltd (Sony) to undertake, at its discretion, to institute and prosecute any necessary action against any person suspected of infringing the copyright in the musical works carried an implied duty to exercise that discretion in good faith;
• the notion of good faith involves both a subjective element of honesty and an objective element of reasonableness.  Sony was required to act honestly and reasonably having regard to its own interests and those of Mr Caswell but was not required to exercise its discretion solely in Mr Caswell’s interests or to subordinate its own interests to those of Mr Caswell; and
• the fact that copyright in ‘Christmas in Dixie’ was owned by Sony’s US parent company did not, without further evidence, support an inference that Sony preferred its own or its shareholder’s interests to those of Mr Caswell.  Sony was entitled to take its own position into account as one of the legitimate factors to be weighed in the balance in considering its legitimate interests.

In addition, Pembroke J rejected the contention that Sony was also subject to some independent good faith obligation that existed outside a contract (although a different result may apply between a fiduciary and a principal).

See the case.