Welcome to the February 2015 update from Gilbert + Tobin’s Corporate Advisory team.
ASIC issues stop order on pre-prospectus publications by Bitcoin Group Limited
ASIC has issued a stop order prohibiting Bitcoin Group Limited from publishing statements concerning its intention to make an initial public offering of its shares on the ASX until it has formally lodged a prospectus. With the rise of social media and powerful online communication tools, there are more ways for a company to efficiently reach and communicate with stakeholders and prospective investors than ever before. The fact that, in these circumstances, the offending statements were published through a mobile communications app is an important reminder that prospective issuers must be cognisant of the advertising and publicity restrictions that apply to all forms of communications and that care must be taken to ensure that all members of an IPO deal team are familiar with, and comply with, these restrictions.
ASX revises Guidance Note 27 on trading policies
On 30 January 2015, the ASX revised its Guidance Note 27 on trading policies in light of market developments since the last update in 2012. Revised Guidance Note 27 makes it clear that the policy objective of trading policies is not only to minimise the risk of actual insider trading and market manipulation, but also to avoid the appearance of insider trading and outlines a number of additional points that ASX recommends be addressed in an ASX-listed entity’s trading policy. ASX-listed entities should consider reassessing their trading policies in light of revised Guidance Note 27 to ascertain whether they adequately cover the ASX’s recommendations and if not, whether there is a sound justification for not doing so (noting that the minimum requirements for a trading policy contained in ASX Listing Rule 12.12 remain unchanged).
ASX publishes new guidance on debt securities
The new ASX guidance on debt securities should facilitate (and clarify the process for) the listing of entities as debt listings rather than equity listings, as well as the quotation of additional debt securities. According to the ASX, a debt listing will bring with it access to one of the world’s largest investment pools, price discovery in a deep and liquid market and the trading platform and clearing and settlement infrastructure of the ASX. In addition, the quotation of debt securities on the ASX will broaden the pool of potential investors to include investment managers whose mandates limit them to investing in listed securities and may also help to attract an exemption from Australian withholding tax and make them more appealing to foreign investors.
The ASX has issued 2 new Guidance Notes relating to debt securities:
Guidance Note 29 on Applying for Admission – ASX Debt Listings – Guidance Note 29 provides guidance to assist entities wishing to apply for admission to the official list of ASX as a debt listing rather than an equity listing and covers:
- the listing process generally;
- timing requirements for the lodgement of listing applications;
- guidance on particular admission requirements;
- guidance on particular Corporations Act 2001 (Cth) requirements; and
- rights of appeal on admission decisions.
Guidance Note 34 Naming Conventions for Debt and Hybrid Securities - Guidance Note 34 assists listed entities that are proposing to issue ASX-quoted debt securities or hybrid securities to understand ASX’s requirements on how such securities should be described in relevant documentation and covers:
- when a security should be described as a “debt security”, “convertible debt” or “hybrid security”;
- which securities can be described as “bonds” or “notes” without any further descriptors;
- which securities can be described as “mortgage debentures” or “debentures” without any further descriptors;
- the additional descriptors required for other securities;
- where the required descriptions should appear; and
- the use of acronyms to describe securities.
ASX has also updated Guidance Note 30 on Applying for Quotation of Additional Securities to provide further guidance on the quotation of additional debt securities (by entities admitted as ASX listings and entities listed as ASX debt listings), as well as further guidance for entities admitted as ASX debt listings that subsequently wish to have equity securities quoted.
Government seeks to strengthen Australia’s foreign investment framework
The Federal Government has announced new measures which will result in increased scrutiny of foreign investment in Australian agricultural land. Firstly, the Foreign Investment Review Board screening threshold for purchases of agricultural land by foreign non-government investors will be reduced, effective from 1 March 2015, from $252 million to $15 million (in aggregate taking into account all agricultural land already held by the investor). Secondly, additional measures to improve the collection of, and reporting on, information about foreign investment in agricultural land will be implemented. The Government is also consulting on a number of matters including reforms to foreign investment in residential real estate, a new penalty regime for breaches of foreign investment rules and the definition of agribusiness (for the purpose of implementing a new screening threshold on agribusiness investments).
The Federal Government has formally announced a reduction in the Foreign Investment Review Board (FIRB) notification threshold for purchases of agricultural land by foreign non-government investors from $252 million to $15 million (in aggregate taking into account all agricultural land already held by the investor). The reduced threshold will be effective from 1 March 2015.
Consistent with free-trade agreement commitments, the reduced threshold will apply to all non-government investors except those from the United States, New Zealand, Chile, Singapore and Thailand. All foreign government investors must continue to notify FIRB of all purchases of agricultural land, regardless of value.
According to the FIRB website, further details will be provided in a revised version of Australia’s Foreign Investment Policy, to be released shortly.
The Government has also announced that:
- it intends to move ahead with the foreign ownership register of agricultural land (initially announced under a previous government) to strengthen reporting requirements and provide a clear picture of foreign investment in Australia’s agricultural sector;
- from 1 July 2015, the Australian Tax Office will start collecting information on all new foreign investment in agricultural land regardless of value and will commence a stock take of existing agricultural land ownership by foreign interests; and
- it will continue to work with state and territory governments so that the ATO register will use land title transfer information.
See media release on 11 February 2015.
In addition, the Government is seeking consultation on:
- increasing compliance and enforcement activities around foreign investment in residential real estate through the creation of a specialised investigative and enforcement area within the ATO;
- introducing new civil penalties and increased criminal penalties for foreign investors and third parties who breach the foreign investment rules;
- introducing an application fee on all foreign investment proposals, based on the type of investment; anD
- a new definition of agribusiness for the purpose of introducing a new $55 million screening threshold for foreign investment in Australian agribusiness.
See media release on 25 February 2015.
An Options Paper - Strengthening Australia's Foreign Investment Framework has been released which seeks feedback from interested stakeholders on the proposed changes to the foreign investment framework outlined above. Submissions on the Options Paper are due by 20 March 2015.
When will a concluded contract arise before formal execution?: Gladstone Area Water Board & Anor v AJ Lucas Operations Pty Ltd  QSC 311
This case serves as a reminder that there may be a concluded contract between contracting parties despite the fact that formalities of execution have not yet been complied with in circumstances where the conduct of the parties indicates an intention to be bound. Specifically in this case, a contract on the terms of a final deed of settlement was held to have been concluded on the basis that there was an acceptance of an offer on the terms of the deed of settlement even though the deed of settlement was never formally executed. Parties need to take care where they only intend to be bound on the exchange of executed counterparts of a deed that they do not engage in conduct which indicates an intention to be bound prior to exchange.
Gladstone Area Water Board and Gladstone Regional Council (Gladstone entities) and AJ Lucas Operations Pty Ltd (AJ Lucas) were parties to a Construction Contract which was terminated by a Deed of Termination between the parties. In addition, the Deed of Termination provided that a list of claims by AJ Lucas against the Gladstone entities arising in connection with the Construction Contract would survive the termination of the Construction Contract and provided a process for the resolution of those claims.
During the course of negotiations to settle the claims, a letter of offer was sent on behalf the Gladstone entities to AJ Lucas which attached a draft deed of settlement. Representatives of the parties and their respective legal advisers then met on two subsequent occasions to negotiate the deed of settlement, and a final deed of settlement between the parties was prepared following those meetings.
The final deed of settlement provided that it was to be executed as a deed and that for AJ Lucas, execution was to be under section 127 of the Corporations Act 2001 (Cth), and for the Gladstone entities (which were governmental corporations), execution was to be by individual officeholders.
The final deed of settlement was faxed to Mr Campbell (chairman of directors and chief executive of AJ Lucas) who signed it and faxed it back to the legal representative of the Gladstone entities. There was a discussion between the parties’ legal representatives about execution by AJ Lucas under section 127 with the arrangement being that the AJ Lucas company secretary would countersign the following Monday. However, the deed of settlement was never formally executed as a deed or under section 127 by AJ Lucas before AJ Lucas sought to resile from the agreement as to the terms reached up to that time (by adding further terms).
In finding that there was a concluded contract between the parties (from which AJ Lucas could not resile), Jackson J in the Supreme Court of Queensland held that:
- the appropriate characterisation of the facts was that the final deed of settlement was sent to Mr Campbell to sign and return as confirmation of acceptance on behalf of AJ Lucas of the agreement made that day. That Mr Campbell would bind AJ Lucas was the very reason that the Gladstone entities had required Mr Campbell to be present at the first meeting in the first place. Further, at the end of the first meeting, the expressed intentions of the parties was that they had reached an agreement which was then to be reduced to a final written form in the later meeting between the parties’ legal representatives;
- Mr Campbell’s action in signing and returning the final deed of settlement with contemporaneous remarks on the fax coversheet of “herewith executed deed” and “original with me: - will send on Monday” was an acceptance of the Gladstone entities’ offer of contract on those terms. There was nothing in the language that suggested that the signed final document was an offer by AJ Lucas to the Gladstone entities for the purposes of acceptance;
- there was no evidence that the parties only intended to be bound on the exchange of executed counterparts of the final deed of settlement as a deed. Nothing was said about an exchange of any counterparts in the original letter of offer. It was open to AJ Lucas by Mr Campbell to accept the original letter of offer and since the offer had been made by email, Mr Campbell could respond accepting the offer by email. Further, the history of prior contracts between the parties did not establish a course of dealing of contracts made only upon the exchange of counterparts or in the form of a deed. In these circumstances, the fact that the Gladstone entities had proffered a draft deed to embody and reflect the offer did not mean that the offer was made on the footing that there would be no binding contract until there was an exchange of counterparts executed in the form of a deed; and
- there was nothing inconsistent with the parties making arrangements for formal exchange the following Monday and the Gladstone entities’ claim that a concluded contract was reached, on the footing that this is a contract within the second class in Masters v Cameron. In other words, the parties intended to make a contract by Mr Campbell signing and returning the final deed of settlement, notwithstanding that it was also intended that the deed of settlement would be executed in counterparts as a deed and those counterparts exchanged. Accordingly, the arrangements for exchange did not have the effect that the parties were not to be bound upon Mr Campbell’s signature and return of the final document.
There was also a question as to the authority of Mr Grayson (the chief executed officer of Gladstone Area Water Board) to conclude a contract on behalf of the Gladstone entities. Jackson J found that an email from the Gladstone entities’ lawyer to the effect that the Gladstone entities were of the view that a binding agreement was reached and were not prepared to entertain a further alteration after the fact (sent after the chief executive officers of the Gladstone entities had signed counterparts) operated as retrospective ratification of Mr Grayson’s authority as agent of the Gladstone entities.
Shareholder activism fails to usurp the power of directors to effect a capital reduction: In the matter of Molopo Energy Limited; Molopo Energy Limited v Keybridge Capital Limited  NSWSC 1864
In this case, the Supreme Court of New South Wales found that the power to effect a capital reduction is vested in the board, with the role of shareholders simply being to approve (or not) the decision of the board. Such power cannot be transferred to shareholders by way of an amendment to the constitution. This case also serves to illustrate the role of shareholder activism in Australia to advance the interests of shareholders, in this case, by means of the power of holders of more than 5% of the votes that may be cast at a meeting to requisition a meeting. It remains to be seen whether or not the related right of at least 100 shareholders to requisition a general meeting will survive following referral of the proposal to abolish it to the Senate Economics Legislation Committee for further consideration.
Keybridge Capital Limited (Keybridge) exercised its power under section 249D of the Corporations Act 2001 (Cth) (Act) as the holder of at least 5% (in this case 5.29%) of the votes that may be cast at a general meeting to issue 2 requests for the holding of a general meeting of Molopo Energy Limited (Molopo).
The first request (First Request) proposed resolutions that:
- the Molopo constitution be amended so that the power to reduce Molopo’s capital could be exercised by Molopo shareholders in general meeting; and
- the share capital of Molopo be reduced by approximately $55 million by the repayment to all holders of fully paid shares of the amount of 21.75 cents per share.
The second request (Second Request) proposed resolutions relating to the removal and appointment of directors of Molopo and stated that such resolutions were only to be considered if the resolutions proposed in the First Request were not passed.
Four of the Molopo directors were concerned that the proposed capital reduction might affect the ability of Molopo to pay its creditors, particularly if pending litigation was determined adversely to Molopo.
In finding that Molopo was not required to convene a meeting for shareholders to vote on the resolutions proposed in the First Request, White J in the Supreme Court of New South Wales found that:
- a company’s power to reduce its capital lies with the directors, with the role of the shareholders being only to “approve” such a decision by the directors;
- it is not the function of shareholders in a general meeting by resolution to “express an opinion as to how a power vested by the constitution of the company in some other body or person ought to be exercised by that other body or person”; (National Roads and Motorists’ Association v Parker(1986) 5 NSWLR 517), and as such, a capital reduction must be one proposed by the directors, and not one which the directors would not be minded to make; and
- in any case, as the proposed capital reduction could not “lawfully be effectuated” because it did not satisfy section 256B(1) of the Act, the directors were not required to call the meeting. There was sufficient evidence (contingent liabilities from the pending litigation) that the reduction “might” materially prejudice the ability of Molopo to pay its creditors which was enough to breach section 256B(1).
However, White J found that the Molopo directors were required to convene a meeting to consider the resolutions in the Second Request, finding firstly that the fact that a resolution is conditional does not in itself make a requisition under section 249D invalid, and further that there was no evidence to suggest that the newly appointed directors would seek to effect a capital reduction in breach of their duties as directors.
When will reasonable endeavours and good faith obligations to negotiate in an MOU be enforeceable?: Baldwin & Anor v Icon Energy Ltd & Anor  QSC 12
This case considers the certainty and enforceability of obligations (often included in preliminary agreements such as binding memoranda of understanding, heads of agreements and term sheets) to use “reasonable endeavours” and to “work in good faith” to negotiate a formal agreement. While the Court in this case recognised that agreements to negotiate have previously been held to be enforceable in certain circumstances (although not yet by the High Court), the promises in this case were unenforceable on the basis that they lacked sufficiently certain content to enable an assessment of whether a party had complied with them. Contracting parties should be mindful of the uncertain effect of such obligations to negotiate in their preliminary agreements, particularly where the key terms of the bargain may not be set out in sufficient certainty.
Pursuant to a Memorandum of Understanding (MOU) between Southern Fairway Investments Pty Ltd (Southern Fairway) and Icon Energy Limited and its wholly owned subsidiary (together referred to asIcon), the parties agreed to negotiate the entry into a gas supply agreement. Relevantly, the MOU provided that:
- the parties would use their reasonable endeavours to negotiate a gas supply agreement (GSA) by a certain date in accordance with a set of “indicative” terms and conditions and specified other key matters to be included in the GSA; and
- each party must work in good faith to progress the GSA in the manner contemplated.
No GSA was concluded and Southern Freeway argued that Icon had failed to negotiate in accordance with the MOU.
McMurdo J in the Supreme Court of Queensland found that:
- the question was whether the agreement to use reasonable endeavours and to work in good faith to negotiate in the MOU imposed obligations which had a sufficiently certain legal content, such that it could be assessed whether a party had failed to negotiate in accordance with the MOU;
- while a case involving the content and certainty of an agreement to negotiate is yet to reach the High Court, the enforceability of such an agreement, in some circumstances, has been accepted in at least 4 intermediate Australian Courts of Appeal;
- there was no existing contractual relationship between the parties to which a standard of reasonableness or good faith could be measured and applied;
- a reasonableness standard is inapt and uncertain in the context of negotiations “about a myriad of commercial interests to be bargained for from a self-interested perspective”;
- while the MOU provided some framework for the negotiations by defining certain matters which were required to be included in the GSA and by specifying the “indicative” terms and conditions, this did not provide the necessary content to the parties’ agreement to negotiate; and
- on the basis of the above, neither the agreement to use reasonable endeavours nor the agreement to work in good faith had sufficiently certain legal content and they were both therefore unenforceable.
Utility of s444GA of the Corporations Act 2001 (Cth) to achieve debt for equity restructures of listed companies confirmed: Nexus Energy Ltd (subject to deed of company arrangement)  NSWSC 1910
This decision confirms the utility of section 444GA of the Corporations Act 2001 (Cth) to achieve debt for equity restructures of listed companies, even where there is a sophisticated counter-attack by shareholders. In instances where the value of the pre-existing equity is nil on a liquidation scenario, majority creditors with loan to own ambitions can put forward a restructure proposal through a deed of company arrangement with a degree of confidence. Although the shareholders’ application was unsuccessful in this case, it may foreshadow increased shareholder opposition to section 444GA applications, which could delay the effectuation of the deed of company arrangement and increase the costs of the restructure.