As many of our clients would be aware, stapled structures involving a flow-through trust and a corporate tax entity have been commonplace in the Australian market for decades.  They are prevalent in the property industry, amongst infrastructure asset operators, in private equity investment structures and any other industry where a passive asset is used in connection with an operating business.

Despite their prevalence and despite having known about them (and in fact explicitly or implicitly approved their use) for decades, the Australian Taxation Office (ATO) has recently publicly announced in Taxpayer Alert TA 2017/1 that it will closely review stapled structures.  Thankfully, widely held real estate investment trusts with third party tenants are safe (at least for the moment).

What changed?

The law on the taxation of trusts has evolved rapidly in the last decade or so, thanks largely to the introduction of a number of structures with special tax characteristics and the limited taxation of non-residents.  However, despite this evolution, they remain some of the most archaic and poorly understand parts of Australian tax law.

It is imperative to understand that none of the concerns being raised by the ATO are new.  Indeed, many of our clients would have been well advised on the application of the tax law, related risks and the potential for differences in views between the regulator and industry.  However, the public alert is concerning as it contemplates increased scrutiny of stapled structures that are commonly used and accepted, it urges increased engagement with the ATO and is seemingly aimed at discouraging the use of such structures.

Perceived abuse

The perceived abuse is that stapled structures are being used to divide an integrated business into two, and thereby avoid tax.

Take the simple example of a farm.  The farm’s business can be divided into a passive property holding business and an active farm operations business.  Put the property holding business into a trust; the farm operations into a company.  The trust charges the company a rent.  The potential tax effects include:

  • The company has gone from tax-paying to being in a tax neutral or loss position.  Taken to an extreme, the rental charge can strip the company of all profits;
  • The trust is able to flow cash through to beneficiaries (particularly non-resident beneficiaries) tax-free or at a lower rate of tax; and
  • Non-resident shareholders of the company may be able to sell the shares in the company for no tax, whereas it could have been subject to tax as an integrated business.

The ATO is also concerned that these structures are being set-up for the primary purpose of satisfying the Managed Investment Trust (MIT) rules (to obtain a lower tax rate for non-residents).  Taking the above example, the property holding business would be held via a MIT.  If the two businesses were operated under a single entity, the business may not be eligible for concessional taxation under the MIT rules.

Targeted structures

The structures that will come under scrutiny will look something similar to this:

with the following key features:

  • Entities are stapled, either in legal form or economically (including, practically, investors would always deal with the entities together);
  • Cross-charge includes interest, royalties and rent;
  • Restructures to move to a stapled structure (these are likely to be particularly frowned upon); and
  • Acquisitions where previous owner/s held as an integrated business (these are likely to be treated with some suspicion).

How significant is the risk?

The risk has not suddenly increased.  The ATO has not only been aware of the prevalence of these structures, it has also been active in examining this issue, particularly in the context of loans within stapled structures.  In our experience, the ATO’s success rate in challenging such arrangements has been low and we are not aware of any that have been taken to court.  Further, clients implementing such structures would have been advised on the risks associated with them.  Although it is unclear where the ATO will ultimately draw the line, it is safe to say that restructures of existing structures or restructures as part of an acquisition are likely to face increased scrutiny.

Other related areas of concern

The ATO has also stated that it will look at the control element of dual trust structures and whether the requirements for MITs are satisfied.

What should you do?

Review your advice  The first step for clients who have implemented stapled trust structures is to dust off the tax advice received and make sure it appropriately covers the tax risks associated with stapled structures and intra-group charges.  If the advice does not do this, it is advisable to have the advice updated.

Consider anti-avoidance rules  In our experience, advice in this area often omits overt consideration of the general anti-avoidance provisions, focussing instead on specific avoidance provisions.  This will be the area which will be most important for the ATO given the yet untested 2013 changes to the anti-avoidance rules which make them easier to apply for the ATO.

Engage  The ATO, as has been its mantra since Chris Jordan became Commissioner, is seeking early and active engagement with taxpayers.  One of the outcomes it will want from the tax alert is to have those seeking to implement stapled structures seek advice from the ATO.  Consider the merits of doing this carefully.

Evaluate  Ideally, the ATO would see a trend to fewer stapled structures being implemented.  As has always been the case, the use of any structure is a matter of weighing up commercial, legal, financial and tax considerations.  The use of stapled structures will be more controversial where there is a restructure (either of an existing structure or a vendor structure) to move to a stapled structure.  Ultimately, good commercial, legal and financial reasons will act as a defence to ATO action.


On 13 February 2017 the Federal Parliament enacted the Privacy Amendment (Notifiable Data Breaches) Act 2017, inserting mandatory data breach notification requirements into the Privacy Act 1988. These provisions will replace the voluntary data breach notification guidelines as currently administered by the Privacy Commissioner and require entities subject to the Privacy Act to notify the Privacy Commissioner and affected individuals if the entity experiences a data breach of a kind covered by the Act. We review the new requirements below.

Data, Content and Privacy

After 6 months of the so-called foreign resident capital gains tax (CGT) withholding tax rules, companies undertaking public market transactions face uncertainty in their obligations in schemes of arrangement and on-market takeovers.  Some tax advisers in the Australian market are understandably taking quite strict interpretations of the rules, but to the detriment of the transaction.

The following is a guide to practically dealing with some, but by no means all, of the uncertainty in these transactions.

What are the foreign resident CGT withholding tax rules?

Since 12 December 2006, foreign residents have been taxable in Australia on capital gains made on  Australian land or indirect interests in Australian land (taxable Australian property (TAP)) (as well as certain income or gains of a revenue character, which are not discussed in this article).

The foreign resident CGT withholding tax rules were enacted on 25 February 2016, with effect for transactions occurring from 1 July 2016.  They were first announced on 14 May 2013 as a strengthening of the non-resident CGT rules.  However, arguably, they hark back to November 2009, when the Australian Taxation Office (ATO) unsuccessfully tried to seize proceeds from TPG’s sale of Myer on account of tax.

What is in a name?

Ironically, the rules do not operate in line with their name.  This creates a few issues in public market transactions.

  • It is not a withholding tax.  There is no statutory obligation to withhold tax from payments of consideration.  Instead, there is an obligation on the buyer to pay the amount determined under the rules to the ATO.  Statutorily, that amount “can also be treated as withholding payments” and the buyer is “discharged from all liability to pay or account for that amount to any entity” other than the ATO.

    Instead of dealing with the relevant issues directly, the Government has dealt with them by beating around the bush.  The problems with this approach are obvious – in the absence of a statutory obligation to withhold, a contractual right must be sought, which is not available in public market transactions; and absolution for the “withholding” does not adequately address the conflict between the requirements of the corporations law and the tax law, especially in the absence of a statutory obligation to withhold.

  • It does not apply to CGT only.  It applies to all income tax, including tax on revenue account (for example, disposals by private equity, disposals of inventory and depreciating assets).
  • It does not apply to foreign residents only.  Provided that there is at least one non-resident, the whole transaction (and not merely the transaction effected by non-residents) is caught by the rules.

    To its credit, the ATO has recognised this is a problem and tried to deal with it through a variation (broadly, a document that applies a variation to the rate of withholding, similar to the PAYG withholding tables employers would be familiar with, except in this case the ATO has used a principle, rather than a specific rate).  However, the variation only deals with the overall amount required to be paid to the ATO; not the withholding of amounts from individual sellers, resulting in the absurd position that a smaller percentage must be withheld from every seller.

    A logical and practical approach is to treat the disposal of each share as a separate transaction, which is a theme adopted throughout the tax law.  Yet, here, the ATO clearly did not see that this interpretation was open, necessitating this principled variation.  We suspect the ATO’s approach arises from the fact that the relevant trigger for the withholding is the reference to there being at least one non-resident, a part of the provisions that would be robbed of operation if the practical approach was to be adopted.

Other issues

  • The rules apply where the asset acquired is TAP.  In the case of shares and units, this requires a tracing through to underlying assets of the entity being acquired.  Even the acquisition of a minority interest of above 10% of an entity triggers the provisions.  So the buyer in a off-market takeovers and minority acquisitions is required to determine the nature of the asset being acquired with imperfect information, and yet faces penalties for failing to withhold correctly.

    In schemes that Gilbert + Tobin has acted on recently, we have seen buyers demanding warranties from company directors as to the whether the shares in the company are TAP.  We have also seen a reluctance on tax advisers to provide definitive advice in this regard, often at critical stages of the scheme process.  Shareholders face the situation where a literal reading of the rules, without such warranties from the company, could mean that tax is withheld from the scheme consideration.

  • The withholding amount is determined by reference to the buyer’s cost base in the asset just after acquisition, not consideration provided.  Cost base can be markedly different to consideration provided.  Certain scrip-for-scrip acquisitions can result in differences between the consideration provided and the cost base for the target shares.  This will not always be ascertainable by the time that the shares or units are acquired.
  • Unconditional off-market takeovers result in a series of acquisitions over time.  Each acquisition triggers the payment obligation if all of the other conditions are satisfied, with just as many payments to the ATO.
  • The provisions do not deal with nominee shareholders.  In such cases, the acquirer should be entitled to rely on the apparent residence of the nominee to determine its withholding obligations.  But there is no mirroring withholding obligation on the nominee.

What to do in schemes

The first thing to do is determine, as best as a buyer can, whether the shares or units that are subject to the scheme are TAP.  Even if this is only an approximation, it will give the buyer a degree of comfort around the risk it is assuming.  In a scheme that has the support of the company, this is obviously a much easier process, with due diligence enabling the ascertainment of the TAP status.

If the shares or units are (or could be) TAP, in the scheme booklet, court orders, shareholder voting resolutions and other related documents (collectively, scheme documents), specific agreement must be sought from shareholders on the following:

  • A declaration that the relevant shareholder is an Australian resident (but watch out for the 6 month validity of such declarations);
  • Alternatively:
    • consent to withhold tax of 10% from the payments otherwise due to them (but do not use words that refer to a statutory obligation to withhold); or
    • withhold a varied amount or rate of tax from those payments.  Shareholders would be given a mechanism with the forms to be returned to the company to specify the varied rate and provide evidence of the approved variations from the ATO.

The scheme documents must approve the different amounts being paid to resident versus non-resident shareholders.

In time, the courts, the Australian Securities and Investments Commission  and the Australian Securities Exchange may require a higher standard of disclosure from companies implementing schemes, specifically confirmation of whether the shares in the company are TAP (such as by inclusion in class rulings).  This may obviate the need for individual shareholder actions in many cases.

What to do in off-market takeovers

Like in schemes, the first thing to do is determine, as best as a buyer can, whether the shares or units that are subject to the scheme are TAP.  However, unlike a scheme, there is unlikely to be co-operation about access to information to form this view.

In the absence of appropriate mechanisms within the corporations law and the tax law, the best that can be done is to seek a ruling from the ATO that either:

  • Varies the payment that must be made down to nil (which potentially means a loss to the revenue, so it is questionable how often the ATO would make such a variation); or
  • Confirms that the shares in the target are not TAP, a determination which must be made with imperfect information, which the ATO may well be willing to do in relatively clear cases (for example, an information technology company which shows no land or buildings on its financial statements).  Alternatively, the ATO certainly could exercise its powers to compel the target to produce relevant information to enable it to make its determination, but this would seem highly unlikely.

There is no doubt that the foreign resident CGT rules are difficult to apply in takeovers.  A literal reading of the provisions is unworkable and a practical approach must be taken.  ATO guidance or amendments to the law would go a long way in this regard.


In May 2015, the Australian Privacy Commissioner, Mr Timothy Pilgrim PSM, had found that Telstra had breached the (Australian Federal) Privacy Act 1988 (the ‘Privacy Act’) by failing to provide Mr Grubb with access to requested metadata relating to his use of Telstra telecommunications services.

Click here to read our review of the decision.

Data, Content and Privacy

The Supreme Court of Victoria has found that Trevor Flugge, the former chairman and director of AWB Limited (AWB), breached his duties as a director by failing to make inquiries and prevent conduct by AWB that contravened United Nation’s sanctions. Even though the Court found that Mr Flugge did not participate in, or did not have any direct knowledge about, the contravening conduct, he may be liable for civil penalties.

The Court dismissed similar allegations against Mr Geary, a former senior executive of AWB.

The proceeding is a reminder for all directors and officers, particularly those associated with companies that have foreign operations, to remain watchful for possible misconduct relating to sanctions or anti-corruption laws. Not knowing of the misconduct will not necessarily provide a defence.  When irregularities are, or should be, suspected, directors have a duty to investigate.  A failure to do so in this case was sufficient to result in a breach of the Corporations Act.

For ASIC, it marks the end of a long, costly saga.

ASIC has been criticised in recent years for failing to pursue and prosecute directors of companies accused of bribing overseas officials. ASIC and the Australian Federal Police have consistently stated that it is continuing to investigate allegations of corporate misconduct, including allegations of bribery and corruption of foreign public officials.  While this decision shows the difficulties faced by any regulator in establishing that senior executives knew, or ought to have known, of wrongdoing, it also shows that persistent regulators such as ASIC can get there in the end.  It highlights the importance of directors being proactive in taking meaningful steps to get to the bottom of potential misconduct as soon as it is suspected.


In the period from 1993 to 2003, AWB had an effective monopoly over the export of Australian grown wheat. One of its largest customers was Iraq. The sale of wheat to Iraq was subject to UN sanctions. The UN established an Oil for Food Program, whereby money from the sale of oil was put into an escrow account. That money, in turn, could be used to buy wheat.

It has been alleged that AWB, at the request of the Iraqi government, inflated the price of wheat, drew additional funds from the UN escrow account and, using those funds, made payments to Iraq. That conduct provided Iraq with foreign currency, in contravention of UN sanctions.

As shown in the timeline below, AWB’s involvement was first uncovered in 2004, when the UN formed an independent committee to investigate misuse of the escrow account. The proceedings against Mr Flugge and Mr Geary were the only ones to proceed to hearing, with ASIC settling the remainder, and the Director of Public Prosecutions declining to bring criminal charges against individuals.



Proceedings against Mr Flugge and Mr Geary

ASIC’s case against Mr Flugge and Mr Geary hinged on three main allegations regarding AWB’s dealings with Iraq.

First, it alleged AWB reached an agreement with Iraq whereby it paid Iraq an ‘inland transportation fee’ (Transport Fee) and compensated itself by inflating the price of wheat and taking additional money (equivalent to the fee) from the UN escrow account. ASIC alleged that conduct was a scam to allow Iraq access to foreign currency.

Secondly, it alleged that AWB agreed to pay Iraq compensation for iron filings found in wheat supplied by AWB, and paid that compensation by inflating the price of wheat, taking additional funds from the escrow account, and paying the compensation to Iraq.

Finally, it alleged that AWB, for a fee, inflated the price of wheat to be purchased by Iraq and used the additional funds it obtained from the escrow account to pay a debt Iraq owed to third party.

ASIC claimed each of these three events contravened UN sanctions.

ASIC alleged Mr Flugge breached his duties as an director of AWB (under sections 180(1) and 181 of the Corporations Act) as he knew about the Transport Fee and failed to stop it from occurring.

ASIC alleged Mr Geary breached his duties as an officer of AWB (under sections 180(1) and 181 of the Corporations Act) as he knew about, or ought to have known about, each of the three events and failed to stop them from occurring. 

Findings of the Victorian Supreme Court

The Court held that Mr Flugge breached his obligations under section 180(1).

The Court considered that Mr Flugge believed the Transport Fee had UN approval. It rejected ASIC’s submission that it was well known within AWB that the Fee was contrary to UN sanctions. However, it held that a reasonable director in Mr Flugge’s position would have made further inquiries.  The Court observed that if facts come to the attention of a director that awake his suspicion something is amiss, or if those facts would have awaken the suspicion of a prudent director  “then the director has a duty to inquire into the matter.  Further, the director is not excused from making his own inquiries by relying on the judgment of others.”

If Mr Flugge had made reasonable inquiries, they would have shown that that the UN had not knowingly approved of the Transport Fee, with all relevant information.  They also would have shown that the AWB was failing to comply with UN resolutions and the exposure of that fact would have severely damaged AWB’s otherwise good reputation.

The Court deferred the question of any penalty to be imposed on Mr Flugge. Indications of the type of penalty he may receive can be drawn from previous penalties imposed on other AWB directors, such as:

  • Mr Lindberg (former managing director) - $100,000 fine and disqualification from managing corporations for almost two years (penalty agreed with ASIC); and
  • Mr Ingleby (former chief financial officer) - $40,000 fine and disqualification from managing corporations for 15 months (penalty agreed with ASIC).

The Court rejected the allegation the Mr Flugge had breached section 181, as a failure to make inquiries was not the exercise of a duty or a power, and there was no evidence Mr Flugge acted with an improper purpose.

The Court held that Mr Geary had not breached section 180(1) or section 181, as he was not aware of key matters relevant to each event, and ASIC had not established that Mr Geary acted other than reasonable and in accordance with his duties.

Implications for directors and officers

While this decision demonstrates the difficulties faced by regulators and prosecutors in establishing knowledge of directors, it is also a timely reminder that directors and officers are not immune from liability because they did not know misconduct was occurring.

With the regulator’s growing focus on international activities of Australian corporations, directors and officers must be alert to facts that should make them suspect something is amiss. Ignorance is no defence. If directors and officers are on notice something might be happening, they must make inquiries and take steps to prevent the relevant conduct.

Litigation and Dispute Resolution

On 15 December 2016, the Australian Securities and Investments Commission (ASIC) released Regulatory Guide 257 Testing fintech products and services without holding an AFS or credit licence (RG 257), which details ASIC’s framework for FinTech businesses to test certain financial services, financial products and credit activities without holding an Australian financial services licence (AFSL) or Australian credit licence (ACL).

Consultation process

In June 2016, ASIC released Consultation Paper 260 Further measures to facilitate innovation in financial services (CP 260). CP 260 proposed options to enable some FinTech businesses to test certain financial services and financial products with relief or variations from some of the conditions and requirements that would otherwise apply to new entrants.

Options included a conditional 6-month regulatory sandbox exemption from the requirement to obtain an AFSL, with conditions including restrictions on financial services (advice and arranging for other persons to deal in a financial product only), restrictions on financial products (listed or quoted Australian securities, simple managed investment schemes and deposit products only) and client exposure limits (no more than 100 retail clients with a maximum exposure limit of AUD10,000 per retail client). CP 260 also proposed developing better guidance on how ASIC assesses knowledge and skills under Option 5 of Regulatory Guide 105 Licensing: organisational competence (RG 105).

Generally, submissions made in relation to CP 260 supported the regulatory sandbox exemption, however submitted that a longer testing period, with broader financial services and financial products, and greater client exposure limits were necessary to truly test the viability of a FinTech business.

RG 257

Following the CP 260 consultation, ASIC has released RG 257 which details the options available to FinTech business looking to test the viability of a business ahead of applying for an AFSL or ACL (as necessary), being:

  1. reliance on existing exemptions under the Corporations Act 2001 (Cth) (Corporations Act) and National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) (eg, authorised representative and credit representative appointments);
  2. applying to ASIC for individual relief from obligations under the Corporations Act or NCCP Act (as necessary); and
  3. new FinTech licensing exemptions provided under ASIC Corporations (Concept Validation Licensing Exemption) Instrument 2016/1175 and ASIC Credit (Concept Validation Licensing Exemption) 2016/1176 (FinTech Exemption Instruments), which apply to certain products and services

The FinTech Exemption Instruments are broader than the exemption proposed under CP 260, including that each provide for a 12-month testing period, with a broader scope of financial services and financial products, the addition of a testing environment for certain consumer credit services, and increased limits on client exposure. However, conditions still apply (summarised below).

Conditions to FinTech Exemption Instruments

Condition Details
Testing business relying on exemption must be an “eligible person”

The testing business must not:

  • be banned from providing financial services or engaging in credit activities;
  • already hold an AFSL or ACL;
  • already be an authorised representative or credit representative of an AFSL or ACL holder; or
  • be a related body corporate of an AFSL or ACL holder.
Testing business must relate to specified financial services, financial products and credit services

The FinTech Exemption Instruments cover the following financial services and credit services only:

Financial services

  • providing financial product advice; and
  • dealing in financial products (other than issuing financial products),

in relation to:

  • listed or quoted Australian securities;
  • simple managed investments schemes (being certain types of registered schemes);
  • deposit products;
  • some types of general insurance products; and
  • payment products issued by authorised deposit-taking institutions.

Credit services

Acting as an intermediary or providing credit assistance in relation to a credit contract that:

  • has a maximum amount of credit of no more than AUD25,000;
  • has a maximum annual cost rate of 24%;
  • is not subject to tailored responsible lending obligations; and 
  • is not a consumer lease.
Testing period


RG 257 states that ASIC considers the 12-month testing period as sufficient time to test the viability of a FinTech business, and that a business relying on a FinTech licensing exemption should plan ahead to manage the impact of the testing period expiring (such as by applying for an AFSL or ACL during the testing period). Note that ASIC proposes to treat an application for extension of the testing period as it would any other application for relief.

Client and exposure limits

Testing businesses relying on the exemptions can provide services to up to 100 retail clients, and only if:

  • the exposure of each retail client to which testing services are provided does not exceed AUD10,000;
  • the amount of credit under a credit contract to which testing services are provided does not exceed AUD25,000; and
  • the sum insured under a general insurance contract in relation to which testing services are provided does not exceed AUD50,000.

Note that, while there are no individual exposure or client limits for wholesale clients, the total maximum exposure of all clients taking part in testing must not exceed AUD5 million.


A testing FinTech business must comply with conditions relating to consumer protection, including disclosing that it does not hold a licence, that the service being provided is being tested under the FinTech Exemption Instruments and some of the normal protections associated with receiving services from a licensee will not apply.

A testing FinTech business must also provide some of the information normally contained in a Financial Services Guide and a Credit Guide (as applicable). Where credit services are provided, the FinTech business must also provide a quote and proposal document, as ordinarily required under the NCCP Act.

Adequate compensation arrangements A testing FinTech business must have professional indemnity (PI) insurance cover with a limit of at least AUD1 million for any one claim and for aggregated claims and run-off cover for a period of at least 12 months.
Dispute resolution A testing FinTech business must implement internal dispute resolution procedures and obtain membership of one or more ASIC approved external dispute resolution (EDR) schemes, with a run-off period of 12 months.


Notification of intention to rely on FinTech Exemption Instruments

A FinTech business wishing to rely on one or both of the FinTech Exemption Instruments must notify ASIC of its intention to do so. Note this is not an application process. Provided the entity satisfies the conditions to the instrument(s) and submits the required deliverables to ASIC, the testing period will begin 14 days after ASIC is notified. The notification to ASIC must include the entity’s website (if available), certified copies of bankruptcy checks and criminal history checks for all directors and controllers, evidence of EDR membership and PI Insurance, and a short description of the entity’s business model.

ASIC is also requesting entities provide a report within two months of the end of their testing period, setting out details of the experience of the testing business during the testing period. ASIC will use this information to review the operation and effectiveness of the exemptions and identify key risks or issues faced by testing businesses.

Potential limitations of FinTech Exemption Instruments

  • The FinTech Exemption Instruments allow for a relatively narrow scope of financial products, particularly as interests in managed investment schemes (other than simple schemes) and unlisted securities are not covered by the exemption. RG 257 notes that ASIC considers some products and services are “not suitable for unlicensed testing without an individual review of all of the circumstances”. Whether this limitation impacts the utility of the regulatory sandbox for FinTech businesses, which (at least during testing) may involve the provision of financial services in relation to interests in a managed investment scheme and unlisted securities, will be of interest.
  • While the 12-month testing period is an advancement on the 6-month period proposed in CP 260, FinTech businesses relying on the exemptions should nevertheless apply for an AFSL or ACL as early as possible during the testing period once there is sufficient certainty around the viability of the business. This is particularly important given ASIC’s assessment of an AFSL application will typically take at least 4 months (see Report 503 Overview of licensing and professional registration applications: January to June 2016).
  • The client and exposure restrictions potentially limit a testing business' ability to properly test scalability and capacity to generate funds necessary to grow the business.

Revised RG 105

In conjunction with RG 257, ASIC has released a revised RG 105, containing more detailed guidance on how ASIC will assess a nominated responsible manager’s knowledge and skills in a heavily automated/digital business. In relation to a small scale, heavily automated business, ASIC may accept as a responsible manager a person who will provide a regular sign-off on the AFSL holder’s processes and systems and the quality of financial services provided. ASIC recognises such person does not need to have day-to-day involvement in the business, but must be available as needed. RG 105 also now contains examples of FinTech businesses in relation to which ASIC may accept a responsible manager nominated under Option 5.

Corporate Advisory, Funds
Our review of the results of the 2016 AGM season indicates that shareholder activism is alive and well in Australia.  
It is a fundamental principle of Australian corporate law that while the day-to-day management of the affairs of a company is the responsibility of the Board of Directors, the Board in turn is accountable to the shareholders of the company.  The Annual General Meeting (AGM) represents the point in time when this principle collides with the practice of shareholder activism.
The term “shareholder activism” is a vague one, but generally refers to the exercise of rights by shareholders in an attempt to influence the strategy, governance or performance of their company.  In simple terms those rights are threefold: shareholders can vote, sell or sue.
The Corporations Act 2001 (Cth) (Act) actually provides very fertile basis for the exercise of all these rights.  The statutory basis for derivative actions has been part of Australian corporate law since 13 March 2000 after it was initially introduced through the Corporate Law Economic Reform Program Act 1999 (Cth), and this, coupled with the growth of litigation funding, has seen the emergence of shareholder class actions as a real threat to under-performing companies.  More recently, we have seen the non-binding vote on executive remuneration under section 250R emerge as a useful, albeit somewhat blunt tool for shareholder activism.
There are also the even longer standing provisions in what is now Part 2G.2 of the Act, among them sections 249D, 249F, 249N and 249P, which can be used to requisition a general meeting, to propose resolutions at a general meeting or provide commentary on resolutions.  Most commonly, one or more of these provisions is employed for the purpose of seeking changes to the Board.  
Following completion of the 2016 AGM season, we decided to undertake research based on announced incidences of shareholder activism involving ASX listed companies.  Our aim was to develop an objective measure of the levels of activism which, anecdotally at least, appear to be on the rise.
The ASX Listing Rules require a listed company to announce that it has received a notice under section 249D, 249F or 249N (or other similar provisions) within two business days of receipt.  During that short period it is common for companies to attempt to enter into discussions with the relevant shareholder (or shareholders) to understand their concerns and to seek to resolve them prior to announcing receipt of a notice.  Consequently, there may be more notices served on companies than were announced to the ASX.
A cursory glance suggests that of the approximately 29 ASX-listed companies to announce receipt of a notice under section 249D, 249F or 249N this year, 11 such notices proceeded to general meeting and of those, only 8 were successful to any degree.  This suggests that the real story of shareholder activism is a bit more subtle.  In at least 11 other cases, the notices were withdrawn, as they were successful in “encouraging” all or some of the affected directors to resign ahead of a meeting being convened or getting their candidate appointed.  Today’s searching and register analytics tools mean improved confidence of outcome and a level of certainty about whether a vote can be won, without a meeting having to be held, and this may be resulting in few Board tussles actually being resolved on the floor of AGMs.
On the whole, it appears that shareholder activists tend to be judicious about their use of formal notices, with the majority being served in the period between the beginning of March and the end of July.  As AGM season looms, shareholders have an opportunity to use the scheduled director re-elections to achieve a similar result.
It is interesting to observe that in October and November 2016, there were 427 director resignations across ASX listed companies.  On a rough count, 47 of those resignations related to directors, mainly of small to mid-cap mining, IT or biotechnology companies, who were noted in their company’s notice of AGM as seeking re-election, then either resigned before or were not re-elected at the AGM.  Many of the directors who resigned before the relevant AGM did so in a time period which indicates they would have been aware of the shareholder proxies received by the company - a case of “jump before you’re pushed”.  The remaining 380 resignations included directors who had chosen not to stand for re-election at their AGM or who were removed as a consequence of a deed of company arrangement.
Shareholder activism – at least the kind that manifests itself in an attempt to spill the Board – is not always easy to predict and the emergence of a “coalition of the willing” among disgruntled shareholders can be sudden.  In our experience, while many listed companies subscribe to the view that takeover defence readiness is a key responsibility of the Board, few are sufficiently prepared to effectively respond to and manage a shareholder revolt or other forms of activism.  
Here are four tips to help you be prepared for an attempt to spill the Board:
  1. Have a draft form of announcement ready to go.  Announcement within two business days can be practically difficult to manage and it is important to ensure that the company is in control of the narrative.  Focus on three key messages which emphasise that the directors and management have a clear and achievable plan to realise shareholder value in the medium term.  
  2. As far as practical, ensure good investor relations.  Be aware of investor sentiment; when you see a signed notice to spill the Board it’s too late to ask a shareholder why they are not more supportive.  Ongoing and timely communication is key to ensuring that shareholders understand the direction that the company is taking and are along for the journey. 
  3. Know your shareholder register.  Review it regularly to determine whether it contains any associated shareholder groups or known shareholder activists.  Know who are buyers and sellers of your company’s stock.  Where possible, it is advisable to engage third parties to conduct searches to ‘look through’ the registered nominee holders to understand who beneficially holds any shares.
  4. Get legal advice early.  If you know that there are shareholder activists who are agitating and threatening to serve notices under the 249D or any other section, get a lawyer on board to help you develop a strategy.  These notices have technical requirements and not every notice is valid under the Act.  There are also some principles governing the conduct of the Board in responding to the notice which need to be observed and which, if not, can actually expose the Board to claims of misuse of position.


*Amy Joseph, Summer Clerk, also contributed to this insight.

Corporate Advisory

A majority of the High Court (French CJ dissenting) today has ruled against Flight Centre, finding that Flight Centre was in fact in competition with airlines for the purpose of the price-fixing provisions of the then Trade Practices Act.  The decision remains relevant for the current cartel provisions under the Competition and Consumer Act, today.  The ruling sets aside the Full Federal Court’s decision of 14 August 2015, and reinstates the trial judge’s decision of 6 December 2013 finding that Flight Centre engaged in attempted price fixing with certain airlines, subject to certain adjustments to reflect the High Court majority’s reasons.

The High Court found that where an agent exercises their own discretion in the pricing of the principal’s goods or services, and where the agent is not obliged to act in the interest of the principal, this may mean that the principal and agent are in competition with each other.  

The decision places into question the viability of dual distribution models (direct and indirect distribution) in a competition law context, which have long been employed by businesses.  Typically, such models have been considered as vertical arrangements, thus arrangements between suppliers and distributors where suppliers also distribute directly to end customers have not raised many competition concerns.  This decision broadens the scope of the relationship between suppliers and distributors to an extent that may see certain aspects of such relationships considered as horizontal in nature.

Despite setting aside the Full Court’s decision, the High Court agreed with the reasoning of the Full Court, in dismissing the trial judge’s characterisation of the market as a market for booking and distribution services, agreeing that this characterisation was an artificial construct (the ACCC’s primary case).   Instead, the High Court focussed on the principal and agent relationship between Flight Centre and the airlines (the ACCC’s secondary case), finding that they were in competition with each other for “the supply of contractual rights to international air carriage to customers” (that is, the market for international airline tickets). 

The High Court has remitted the matter back to the Federal Court for the determination of penalties, ordering each party pay its own costs. 

Need to know:

The key takeaways from the High Court’s decision are:

  • Careful management of dual distribution models is required.  Businesses employing a dual distribution model need to take care to ensure that arrangements with their distributors do not constitute cartel offences, or attempts to commit cartel offences.  In particular, commissions, pricing, supply terms and customer allocations should be examined to ensure such arrangements do not constitute price fixing.
  • Supplier and distributor communications should relate to the terms of supply.  The parties should act in their respective capacities of “supplier” and “distributor” rather than in their capacity as suppliers of goods and services to customers, because in this capacity they may be considered competitors.
  • Principals and agents may be competitors, depending on the degree of discretion of the agent. Where the agent has a significant amount of discretion over the terms of sale of the principal’s goods and services it may be considered to be in competition with the principal, and so prohibited from entering certain arrangements with each other, including in relation to price, capacity, customer and territorial allocations.


First Instance Decision

In 2013 the Federal Court handed down decisions in ACCC v Australian and New Zealand Banking Group Limited [2013] FCA 1206 and ACCC v Flight Centre Limited (No 2) [2013] FCA 1313. Both related to very similar distribution arrangements and both involved allegations by the ACCC that, despite the seemingly vertical nature of the relationship between the parties involved, the parties were relevantly competitors with each other and, as a result, were capable of engaging in price fixing, per se unlawful under Australian competition law. 

However, in these two cases involving broadly similar distribution models, different Federal Court Judges reached irreconcilable conclusions at first instance.  Dowsett J in the ANZ case found no contravention was established because ANZ and mortgage brokers who distributed ANZ mortgages as agents were not relevantly competitors and, therefore, were not capable of engaging in price fixing.  This decision was upheld on appeal to the Full Federal Court and the ACCC did not seek special leave to appeal the decision to the High Court. 

In contrast, Logan J in the Flight Centre case found that Flight Centre and the relevant airlines, whose airfares Flight Centre distributed as their agent, were relevantly competitive and, as a result, that Flight Centre’s conduct did constitute an illegal attempt to engage in price fixing.

We provided a detailed analysis of these irreconcilable decisions entitled “Dual distribution models at a crossroad: where do the ANZ and Flight Centre cases leave us?” available here.

Full Federal Court Decision

Following the first instance decisions, Flight Centre filed an appeal to the Full Federal Court disputing the finding of the Federal Court.

On 14 August 2015, the Full Federal Court, handed down its judgement in the Flight Centre case, finding that there was no separate market for booking and distribution services to consumers and, as a result, Flight Centre and the airlines did not compete in this market.  The Full Court found that the supply of booking and distribution services was an ancillary part of the supply of international passenger air travel, and that Flight Centre, acting as an agent for the airlines, was not a competitor.  However, the Full Court noted that the existence of an agency relationship does not always mean the parties cannot be in competition with one another, an issue which was ventilated on appeal to the High Court by the ACCC, and which has now subsequently been resolved through the High Court’s decision today.

In a separate judgment, the same Federal Court appellate bench also dismissed the ACCC’s appeal against a decision dismissing its allegations that ANZ had fixed prices with a mortgage broker that distributed ANZ home loans, finding that ANZ was not in competition with the mortgage broker.

We provided an update on these two decisions in its publication entitled “Federal Court green lights dual distribution models: wins for Flight Centre and ANZ against ACCC’s price fixing allegations” available here.

Competition and Regulation

On 23 November 2016, the government introduced the Corporations Amendment (Professional Standards of Financial Advisers) Bill 2016 (Bill) to raise the professional standards for financial advisers.

The Bill was introduced as part of the government’s response to the Financial System Inquiry on 20 October 2015, which identified examples of unethical and inappropriate financial advice. 
Currently, the Corporations Act imposes a general obligation on licensees to ensure that representatives are adequately trained and competent to provide financial services.  ASIC’s Regulatory Guide 146 Licensing: Training of financial product advisers (RG 146) sets out the minimum knowledge, skills and education standards for financial advisers including:

  • completing Australian Qualifications Framework level 5 (‘Diploma’ level) course units in relation to providing personal advice on relevant financial products;
  • specialist knowledge requirements about the specific products advised on, and the markets in which they operate; and 
  • generic knowledge requirements, including training on the economic environment, the operation of financial markets and financial products.

Concerns were raised over the consistency of the application of these existing minimum education and training standards across the industry, and the rigour and quality of some training courses.
Key changes
The Bill implements the following requirements for licensees, authorised representatives of licensees, employees of licensees, directors of licensees, and employees or directors of related bodies corporate of licensees, who provide personal advice to retail clients in relation to certain financial products (Providers):

  • from 1 January 2019, all new Providers must hold a degree (or higher or equivalent qualifications), pass an approved exam, and undertake at least a year of work and training (Professional Year) before they can be authorised to provide financial advice; 
  • from 1 January 2019, all Providers must comply with ongoing obligations including meeting the Continuous Professional Development requirements; 
  • from 1 January 2020, all Providers must comply with an industry-wide code of ethics;
  • from 1 January 2021, existing Providers who are registered at any time between 1 January 2016 and 1 January 2019 (Existing Providers) must pass an approved exam; 
  • from 1 January 2024, Existing Providers must meet the degree requirements; and
  • Existing Providers are not required to complete a Professional Year.

The Bill has had its Second Reading moved and is yet to pass the lower house.

Corporate Advisory, Funds