Welcome to October 2014 update from Gilbert + Tobin's Corporate Advisory team.

In this issue, you will find:

Legislation and proposed legislation

  • Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) receives Royal Assent
  • Changes announced to taxation of employee share schemes

Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) receives Royal Assent

The stated objective of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) (Act) is to improve the attractiveness for companies issuing corporate bonds to retail investors while ensuring that effective consumer protections are maintained.  To this end, the Act seeks to streamline the disclosure and liability regimes for ‘simple corporate bonds’ (as well as clarifying the statutory due diligence defence to the criminal liability provisions in sections 1308 and 1309 of the Corporations Act 2001 (Cth) more generally).  Whether the measures will successfully kick-start the retail debt market remains to be seen.  We will continue to monitor the commencement of the changes which are due to take effect from 11 March 2015 unless proclaimed earlier.

The Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) (Act) received Royal Assent on 11 September 2014 and will take effect from 11 March 2015 unless proclaimed earlier.

The reforms are designed to facilitate increased offerings of corporate bonds to retail investors in Australia by introducing a streamlined disclosure and liability regime for listed entities and their wholly owned subsidiaries which issue ‘simple corporate bonds’ to retail investors.

‘Simple corporate bonds’ include debt securities which satisfy certain conditions including:

  • they must be ‘debentures’ as defined in the Corporations Act 2001 (Cth) (Corporations Act);
  • they must be quoted on a prescribed financial market;
  • their face value must not be greater than AUD1,000;
  • they must meet certain conditions relating to repayment and interest;
  • they must not have a fixed term exceeding 15 years;
  • they must only be redeemable before the end of the fixed term in certain circumstances;
  • they must not be convertible into another class of securities;
  • the debt must not be subordinated to debts to unsecured creditors; and
  • the price payable must be the same for every person who accepts the offer.

Specifically, the Act amends the Corporations Act by:

  • introducing  a 2-part prospectus regime to simplify the disclosure requirements for corporate bond issues (namely, a base prospectus and an offer-specific prospectus), with a $50 million minimum subscription requirement for first offers under a base prospectus ;
  • giving ASIC the power to prevent a particular issuer relying on the regime;
  • to facilitate trading of simple corporate bonds in the wholesale market, allowing simple corporate bonds to be offered in the wholesale market to retail investors using depository interests (which is a beneficial interest in the simple corporate bond), subject to certain conditions; and
  • relieving directors from liability for any misstatement in, or omission from, a simple corporate bonds prospectus unless they are involved in the misleading or deceptive statement or the omission of material.

The Act also clarifies what will constitute ‘reasonable steps’ for the purpose of the statutory due diligence defence to the criminal liability provisions in sections 1308 and 1309 of the Corporations Act.  These changes apply generally and not just in respect of simple corporate bonds.

Exposure draft Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014, which seeks to give effect to the required structure and content of the 2-part prospectus, was released on 21 October 2014 (together with an Explanatory Statement).  Submissions on the draft Regulation are due by 14 November 2014.

Changes announced to taxation of employee share schemes

The Federal Treasury has announced that it will reverse changes to the taxation of employee share schemes introduced by the Rudd Government in 2009.  The apparent intention of the changes is to reverse a trend of innovative Australian businesses moving offshore because of the current tax treatment of employee share schemes.   We will continue to monitor the progress of the proposed reforms.

For further information, see G+T Alert on 15 October 2014.


ASIC facilitates offers of CHESS depository interests

ASIC’s new Regulatory Guide 253 Fundraising: Facilitating offers of CHESS Depository Interests (CDIs) provides guidance about the application of Australian prospectus and financial services licensing requirements in connection with offers of CDIs over securities of a foreign company.  New Class Order [CO 14/827] Offers of CHESS Depository Interests also modifies the Corporations Act 2001 (Cth) to ensure that the law now reflects market practice for disclosure of CDI offerings and confirms that ASIC’s existing disclosure relief applies in respect of CDIs.

For further information, see G+T Alert on 15 October 2014.

Australian company data now available at data.gov.au

The move to data.gov.au follows an increase in demand in 2013-14 for ASIC register information, and allows ASIC to distribute consolidated information in a more efficient and modern way.  The data.gov.au service allows the downloading of a consolidated list of select data for more than 2 million registered Australian companies.

Datasets from ASIC’s companies register are now accessible via the Australian Government’s data.gov.au website. 

Each month, freely available data from ASIC’s companies register will be published to the website and available to download at no cost.  The data made available will be a snapshot of the register at a point in time and includes company names (including current name start dates) , types, registration dates, Australian Company Numbers, Australian Business Numbers and status, with a flag to indicate if data has been modified since the last update.

ASIC also plans to extend the datasets to include freely available information from ASIC’s business names register.
See media release dated 18 September 2014.


ASX updates guidance on waivers and in-principle advice

ASX’s revised Guidance Note 17 further clarifies ASX’s approach to granting waivers and providing in-principle advice in connection with the application of the ASX Listing Rules.  In particular, the inclusion of 3 new standard waivers should ease the burden on entities seeking waivers on the specified applications of the ASX Listing Rules, as they will not need to provide detailed submissions in support of their waiver applications.

ASX has released an updated version of ASX Listing Rules Guidance Note 17 Waivers and In-Principle Advice (together with a summary of the changes), which provides further guidance in:

  • Section 4 (Standard v non-standard waivers) - confirming that ASX will generally grant a standard waiver upon request and without requiring detailed submissions in support of the application;
  • Section 6 (Applications for waivers) - more clearly differentiating between the content ASX expects to be included in an application for a standard waiver versus an application for a non-standard waiver;
  • Section 7 (Reasons for decision) - noting that in case of a standard waiver, the basis for a decision will typically state that the waiver granted is a standard one granted upon request under Guidance Note 17 and nothing more;
  • Section 10 (Appeals from waiver decision) - on the appeal fee payable for appeals to the ASX Tribunal; and
  • Annexure (Standard waiver requests) – adding 3 new standard waivers as follows:
    • waiver from compliance with ASX Listing Rule 7.1 to permit an entity to issue securities pursuant to an underwriting agreement for the entity’s next upcoming dividend or distribution reinvestment plan without obtaining security holder approval, provided that certain conditions are met;
    • waiver from compliance with ASX Listing Rule 14.7 to permit securities to be issued outside of the mandated three month and one month periods where an entity’s securities are suspended from official quotation following the appointment of an administrator, provided that certain conditions are met; and
    • waiver from ASX Listing Rule 14.7 to permit an entity not to comply with a voting exclusion statement in relation to a resolution to ratify an issue or approve a proposed issue of securities for the purposes of the ASX Listing Rules, provided that certain conditions are met.

ASX consults on naming conventions for debt and hybrid securities

ASX’s proposed guidance on naming conventions for debt and hybrid securities should assist retail investors to gain a better understanding of the securities that they are buying and allow them to more easily compare the features of those securities.

The ASX Listing Rules do not currently prescribe the names that may be given to securities issued by ASX-listed entities and ASX has not, to date, provided any guidance. The different names and descriptions used are potentially confusing for retail investors and also make it difficult to compare the different features.

The new consultation paper on proposed new ASX Listing Rules Guidance Note 34, Naming conventions for debt and hybrid securities proposes to introduce naming conventions for debt and hybrid securities quoted on the ASX to assist retail investors to understand what they are buying.

The main points covered include:

  • when should a security be described as a ‘debt security’ and when should it be described as a ‘hybrid security’?;
  • what securities can be described as ‘bonds’ or ’notes’ without any further descriptors?;
  • what securities can be described as ‘mortgage debentures’ or ‘debentures’ without any further descriptors?;
  • the additional descriptors required for other securities;
  • where should the required descriptors appear?; and
  • the use of acronyms to describe securities.

If adopted, the proposed new Guidance Note will apply to securities quoted on the ASX on or after the date the new Guidance Note comes into effect. It will not operate retrospectively in relation to securities already quoted on the ASX prior to that date.

Submissions are due by 31 October 2014.

Industry bodies

CPA Australia reports on health of ASX listed companies

A recent report of preliminary findings issued by CPA Australia paints a rather bleak picture of the Australian economy.  There were more going concern warnings highlighted by independent auditors of ASX listed companies in 2013 than following the global financial crisis in 2009, with almost a third of companies in serious financial strife in 2013.  CPA Australia Chief Executive Alex Malley has described the findings as a sobering reminder of the fragility of the Australian economy and the challenges many businesses face.

CPA Australia has released Audit Reports in Australia 2005 – 2013: Preliminary Findings (Report) which provides a preliminary summary of nearly 16,000 annual reports, representing around 98% of the companies listed on the ASX over the period from 2005 to 2013, focussing on auditor reporting in the most recent period from 2011 to 2013.

The report indicates that there has been a steady increase in going concern “emphasis of matter” paragraphs (which are used by auditors to flag significant uncertainty in a company’s ability to continue in business for the foreseeable future), particularly in the bottom end of the market.  Almost a third of companies were subject to an emphasis of matter warning in 2013, rising from 13% in 2006 and 22% in 2009 following the global financial crisis. 

While the increase was seen most sharply in the mining and energy sectors (where almost 40% of companies were judged at risk in 2013), consumer staples, healthcare, industrials and utilities all experienced an increase in going concern warnings in 2013. The financial services sector appears to have the lowest prevalence of going concerns emphasis of matter paragraphs.

See media release dated 24 September 2014.


Guidance on when a contractual breach will be remedied:  Heugh v Central Petroleum Ltd [No 5] [2014] WASC 311

This case provides useful insight into when a serious breach of a contract will be remedied, in this case in the context of an employment contract which did not specify the manner of remedy.  The Court found that a breach will be remedied where matters are put right for the future, and does not require that all damage, past and future, be removed or nullified.  Mere dissatisfaction with the manner in which the party in breach remedies the breach is not sufficient.  If contracting parties wish to prescribe the manner in which a breach may be remedied, such steps should be clearly set out in the contract.

Mr Heugh was the managing director of Central Petroleum Ltd (Central).  Dissatisfied with the board’s decision to assign parts of his responsibilities to Mr Shortt, Mr Heugh sent two letters to Mr Shortt, the first being a warning letter regarding Mr Shortt’s work performance and the second asking whether he would like to take on the additional responsibilities ordered by the board or if some alternative arrangement might be preferable.

The Central directors then:

  • resolved that Mr Heugh had persisted in attempts to circumvent the assignment of responsibilities and in so doing, had subjected Mr Shortt to unacceptable workplace pressure in contravention of his employment contract and the Central Code of Conduct; and
  • requested Mr Heugh to remedy the breaches including by providing a letter of apology to Mr Shortt in the form of the template provided by Central.

The form of written apology issued by Mr Heugh differed from the Central template.  Central then resolved to remove My Heugh as a director and terminate his employment contract pursuant to clause 14.1 which provided that:
‘The Company may at its reasonable discretion terminate the Employment…

(a) if at any time the Executive:

(iii) commits any serious or persistent breach of any of the provisions contained in this Agreement and the breach is not remedied within 14 days of the receipt of written notice specifying the breach from the Company to the Executive to do so.’

Le Miere J in the Supreme Court of Western Australia found that while there had been a serious breach of Mr Heugh’s employment contract, Central had wrongfully terminated the contract because:

  • while the contract did not specify the manner in which the breach was to be remedied or cured, the proper construction of clause 14.1(a)(iii) was that to remedy a breach means to cure so that matters are put right for the future rather than to obviate or nullify the effect of a breach so that any damage already done is in some way made good;
  • whether or not a breach has been remedied is a question of fact. Where the promisee specifies steps to be taken to remedy the breach, the promisor may remedy the breach even though he fails to comply with those steps.  The promisee cannot limit what might be done to remedy the breach by specifying the steps to be taken to the remedy the breach (ie a form of letter of apology);
  • Mr Heugh’s letter of apology achieved the purpose of healing any hurt to Mr Shortt and repairing damage to their working relationship, and thus remedied the breach; and
  • even if Mr Heugh’s letter did not remedy the breach, Central did not have an unrestrained discretion to terminate, but rather a discretion that was qualified by a requirement that it be ‘reasonable’.  Reasonableness has both an objective element (which looks at the Central board’s reasons for terminating) and an objective element (which looks at Mr Heugh’s position, his history and the circumstances of the breach).  The template apology provided by Central was grovelling and it was unreasonable to expect Mr Hugh to sign it.  His Honour also took into account that Mr Heugh was a long-serving managing director and that Central had no prior complaints about his performance.  On this basis, Le Miere J found that the Central board did not exercise “reasonable discretion” in terminating the employment contract.

See the case.

No implied term of mutual trust and confidence in employment contracts:  Commonwealth Bank of Australia v Barker [2014] HCA 32

The High Court of Australia has unanimously held that under Australian common law, employment contracts do not contain an implied term of mutual trust and confidence, thus providing some useful clarification of previous uncertainty around the existence of such a term, particularly for employers.  The decision is important not only in an employment law context but also as confirming the High Court’s approach to the implication of contractual terms.

Mr Barker was a long serving senior manager with the Commonwealth Bank of Australia (CBA) and was made redundant on 2 March 2009.  Mr Barker commenced proceedings alleging breach of an implied term of mutual trust and confidence in the employment contract.  The Full Court of the Federal Court held that:

  • there was an implied term which required that “the employer will not, without reasonable cause, conduct itself in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee”;
  • such term required CBA, after giving Mr Barker notice of his redundancy, to take positive steps to consult with him about alternative positions within the CBA and give him the opportunity to apply for the positions; and
  • in breach of the implied term, the CBA failed to make any contact with Mr Barker for an unreasonable period of time.

The High Court of Australia unanimously overturned the decision of the Full Court of the Federal Court and found that no such term of mutual trust and confidence was implied into Mr Barker’s employment contract, or employment contracts generally.  The High Court held that:

  • the implication of such a term by the House of Lords in the United Kingdom was not relevant in Australia and it was more appropriate for the implication of such a term to be directed to the legislature;
  • terms implied in law must fall within the limiting criterion of ‘necessity’ and are not to be made lightly – necessity may be defined by reference to what the contract itself implicitly requires and would not be satisfied by merely demonstrating the reasonableness of the implied term;
  • by contrast with the duty to co-operate (which is implied), an implied term of mutual trust and confidence imposes mutual obligations wider than those which are necessary even allowing for the broad considerations which may inform implications in law – the duty to co-operate is directly related to contractual performance, whereas the proposed implied term goes to the maintenance of the relationship; and
  • the implication of a term of mutual trust and confidence into employment contracts does not meet the necessity criterion.

The High Court also emphasised that this decision should not be taken as reflecting upon the question of whether there is a general obligation to act in good faith in the performance of contracts, or the related question of whether contractual powers and discretions may be limited by good faith and rationality requirements analogous to those applicable in the sphere of public law.

See the case.

When will a dividend be mandatory?:  Wambo Coal Pty Ltd v Sumiseki Materials Co Ltd [2014] NSWCA 326

This case illustrates that whether a dividend is mandatory depends on the true construction of the relevant provisions (in this case in the company’s constitution).  Specifically, an entitlement to a percentage of the ‘profit of the company available for dividend purposes’ which applied “despite any provision in this constitution to the contrary” was construed to mean profit undiminished by the applications of discretions of the board under the constitution to declare dividends, capitalise profits, set aside reserves or provisions or carry forward profits.  The case also illustrates that failure to pay a mandatory dividend may amount to oppressive conduct and that equitable rectification (to clarify the dividend rights) is not available for a constitution.  Companies are reminded to exercise care when drafting the terms of mandatory dividend rights.

Sumiseki Materials Co Ltd (Sumiseki) held 25 million B class shares in Wambo Coal Pty Ltd (Wambo).  Article 2.1B of Wambo’s constitution entitled B Class shareholders to receive a dividend in respect of every 6 month period of an amount equal to 25% of the ‘profit of the Company available for dividend purposes’ for that 6 month period based on the Interim Accounts for the period   Article 9 also empowered the directors to declare dividends as ‘in their judgment, the financial position of the company justifies’ (Article 9.1), to capitalise profits (Article 9.2), to set aside out of the profits of the company such reserves or provisions ‘for such purposes as they think fit’ (Article 9.4) and to carry forward so much of the profits remaining ‘as they consider ought not to be distributed as dividends or capitalised’ without transferring those profits to a reserve or provision (Article 9.5). Sumiseki brought proceedings against Wambo in respect of its failure to pay dividends for five 6 month periods.

In finding for Sumiseki, the New South Wales Court of Appeal held that:

  • whether distribution of profits is mandatory (in the sense that no separate decision to declare or pay is required and the company has no right to withhold) depends on the meaning and effect of relevant provision in the relevant constitution according to their true construction; and
  • Article 2.1B provides that the dividend is ‘to be paid’ by a specified date and as such, on a proper construction, the constitution imposes on Wambo an obligation to pay it on each specified date for payment, regardless of any decision that it should be declared or paid.

The Court of Appeal also found that ‘profits available for dividend purposes’ refers to the net profit attributable to members undiminished by any application of the director’s discretionary powers in Article 9 (but subject to such diminution, if any, required by law).  In so finding, the Court noted that:

  • once it is recognised that Article 2.1B displaces the discretion of the directors under Article 9.1, it must likewise be recognised that Article 2.1B also displaces the powers that the directors could exercise under provisions allied with Article 9.1; and
  • effect must be given to the opening words of Article 2.1B: ‘Despite any provision of this constitution to the contrary…’ which requires interpretation of the description ‘available for dividend purposes' in Article 9.1 in a way that is not affected by contrary indications elsewhere in the constitution.

In addition, the Court of Appeal:

  • noted that despite the removal of the statutory rule in section 254T that dividends must not be paid except out of profits, there may remain a general law principle that dividends may only be paid out of profits, given the essential nature of a dividend as a “share of profits”;
  • held that the decision of the Wambo directors not to pay the dividends and in some cases, to rely on contractual restraints as a means of unfairly bolstering the asserted ability of Wambo to deny dividends, was oppressive conduct within section 232 of the Corporations Act 2001 (Cth); and
  • refused to rectify the Wambo constitution to clarify the dividend rights attaching to B class shares, noting that while equity may rectify an instrument that fails to record the true intention of the parties, it is by no means clear that a company’s constitution is an instrument.

See the case.

Extra care needed by directors when acting in transactions involving a position of conflict:  Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251

This case highlights that the fiduciary duty to avoid conflicts of interest in particular will be strictly adhered to, with questions of fairness or unfairness of the relevant transaction being irrelevant.  Directors are reminded of the need to take great care to manage potential risks when involved in transactions in which they are acting as director of more than one company.  In particular, directors should check the rules in the companies’ constitutions around conflict of interest and if there is any concern, disclose their interest and seek approval of the companies’ members.

Mr Rich and Mr West where directors of both Allco Funds Management Limited (AFML) and Record Funds Management Limited (RFML).  AFML owned units in, and was the manager of, a wholesale property fund (Fund) and RFML was the responsible entity.

In December 2006, to address a stamp duty issue, Mr Rich proposed that AFML and RFML enter into a loan agreement (Loan Agreement) under which AFML lent the same value as its units to the Fund, and RFML simultaneously used those funds to redeem AFML’s units.  This resulted in AFML’s beneficial equity interest in the Fund being converted into an unsecured 2 year loan under which the right to receive interest payments would be equal to the distributions which AFML would have received as a unit holder.  Mr Rich and Mr Rutherford executed the Agreement on behalf of AFML and Mr West and Mr Lennox executed the Agreement on behalf of RFML.

In 2007, it became evident that the conversion had had a negative impact on the performance of the Fund and the loan with the fixed repayment date had implications for the unit price.  A Deed of Amendment of the Loan Agreement (Deed of Amendment) (this time executed by Mr West and Mr Rutherford on behalf of  AMFL and by Mr Rich and Mr West on behalf of RFML) essentially removed the repayment date and made the date of the loan repayment entirely at the discretion of RFML (the borrower).

In 2008, following the collapse of the Allco group of companies, the receivers and managers of AFML commenced proceedings.   In finding that AMFL was entitled to elect to have the Loan Agreement, the Deed of Amendment and the redemption of units rescinded ab initio, Justice Hammerschlag in the Supreme Court of New South Wales held that:

  • Mr Rich and Mr West were clearly in a position of conflict with respect to the Deed of Amendment as AFML’s interests (both economic and legal) were clearly not the same as those of RFML.  In so finding, His Honour noted that the fiduciary duty to avoid conflicts of interest is so strictly adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract entered into;
  • unless the constitution otherwise provides, a contract made in breach of the conflict duty will be voidable at the option of the company unless the director makes a full disclosure of the nature of his or her interest to the members of the company who then approve it by ordinary approval;
  • while His Honour accepted that Mr Rich and Mr West believed that what they were doing was permissible, this was not enough. The test for impropriety (for the purposes of Mr Rich and Mr West’s statutory duties under section 181(1) and 181(2) of the Corporations Act 2001 (Cth) to exercise their powers and discharge their duties as directors in good faith in the best interest of AFML and for a proper purpose, and not to improperly use their use their position to gain advantage for someone else) is objective; and
  • measured objectively:
    • no reasonable person in the position of Mr Rich and Mr West could reasonably and rationally have concluded that the Deed of Amendment was in the best interests of AFML.  It was entered into to serve the purposes of the responsible entity as representing the unit holders and the bank;
    • for the same reason, committing AFML to the transaction was not for a proper purpose; and
    • AMFL’s particular economic and legal interests were at the time subordinated to, and indeed sacrificed, in favour of more general interests of the Allco group which were not co-extensive with the interests of AFML.

See the case.

Expertise Area