ASIC releases new regulatory guides on takeovers
The Australian Securities and Investments Commission
(ASIC) has released four new regulatory guides
that consolidate and replace ASIC's 17 existing regulatory guides
to takeovers.
The new regulatory guides cover ASIC's updated policies on
takeover bids, substantial holdings, compulsory acquisition and
buyouts. In addition, the regulatory guides are accompanied by 11
new class orders and associated forms.
Background
The aim of the consolidation was to make regulatory guidance
clearer, more certain and more accessible for investors and
companies. The new regulatory guides were borne out of a 2012
consultation paper that proposed a more cogent body of takeovers
policy to reflect ASIC's current views on takeovers.
ASIC Commissioner John Price stated that: 'The update also means
our guidance is more relevant for the market and makes ASIC's
approach to many key M&A issues more transparent'.
New guides
The new regulatory guides are:
- Regulatory Guide 5: Relevant Interests and substantial holding
notices;
- Regulatory Guide 6: Takeovers: Exceptions to the general
prohibition;
- Regulatory Guide 9: Takeover bids; and
- Regulatory Guide 10: Compulsory acquisition and buyouts.
Key changes
Key changes under the new regulatory guides include:
- practical guidance on relevant interests and completing
substantial holding notices;
- changes to ASIC's policy on financiers exercising security
interests under the exception to the general takeovers prohibition
and under what circumstances ASIC may take regulatory action;
- changes to ASIC's policy on what constitutes an underwriting
arrangement;
- the extension of acceptance facilities to all shareholders (not
just institutions) for unconditional bids;
- the broadening of ASIC's policy on joint bids; and
- ASIC's confirmation that a wider 'inducement' test will be
applied over a 'net benefits' test relative to the collateral
benefits prohibition.
More information, including a copy of the regulatory guides, can
be accessed
here.
Personal liability for corporate fault
Background
The Personal Liability for Corporate Fault Reform Act
2012 (Cth) (Reform Act) commenced on 11
December 2012. It aims to harmonise the laws relating to personal
criminal liability for breaches by a corporation (also known as
'derivative liability') by implementing the Council of Australian
Governments' principles on director's liability (COAG
principles). In general, the COAG principles provide that
a director or officer of a company should not be held criminally
responsible for a company's misconduct as a matter of course, and
that personal criminal liability should only be imposed if it is
appropriate and reasonable in the circumstances (eg compelling
public policy concerns, where the director or officer assisted or
encouraged the commission of the offence, or was negligent or
reckless in respect of the corporation's offending).
Importantly, the Reform Act amends personal liability provisions
under the Corporations Act 2001 (Cth)
(Corporations Act), Foreign Acquisitions and
Takeovers Act 1974 (Cth), Health Insurance Act 1973
(Cth) and Insurance Contracts Act 1984 (Cth). In
this Alert, we consider the key implications of these changes for
company directors and officers.
Key changes
Corporations Act
Previously, a company secretary could be held personally
criminally liable for a fault by the corporation regarding
administrative and reporting defects. The Reform Act removes these
provisions and replaces them with civil penalties that are
consistent with the COAG principles. Consequently, secretaries are
liable for a civil penalty of up to $3,000 for a corporation's
contravention of administrative and reporting obligations.
Directors are also liable if the company does not have a secretary.
In addition, directors or secretaries may still be fined a maximum
of $200,000 if the breach materially prejudices the interests of
the company or its members, the company's ability to pay its
creditors, or is a serious breach. However, a director or secretary
may raise a defence if they took reasonable steps to ensure
compliance.
The imposition of a civil penalty reflects the Reform Act's
intention of ensuring that directors and secretaries 'turn their
mind' to the need for their company to comply with the law, but
that criminal sanctions are not imposed where they are not
justified under the COAG principles.
Other changes include removing the criminal penalty for officers
in relation to:
- an officer's involvement in a company's failure to offer
forfeited shares for sale by public auction or advertise such a
sale in the prescribed manner. Only the corporation will be
criminally liable for the failure; and
- a person's reckless or intentional involvement in a breach of
the primary duties of a responsible entity of a managed investment
scheme. However, civil penalties remain applicable to the
person.
The Reform Act also clarifies the offences that retain personal
criminal liability for corporate fault. These apply if a director
or officer was 'dishonestly involved' in the contravention. The
Reform Act makes clear that 'involved' is broadly defined under s
79 of the Corporations Act as:
- aiding, abetting, counselling or procuring the contravention;
or
- inducing (by threats, promises or otherwise) the contravention;
or
- being in any way, by act or omission, directly or indirectly,
knowingly concerned in, or party to the contravention; or
- conspiring with others to effect the contravention.
Penalties applying to corporations that breach the
administrative and reporting provisions are also substantially
increased to a maximum of 60 penalty units or 1 year imprisonment,
or both.
Foreign Acquisitions and Takeovers Act 1974
(Cth)
The Reform Act provides that where an offence is committed by a
corporation, personal criminal liability will only be imposed on an
officer if the officer authorised or permitted the commission of
the offence. This means that officers will no longer be held
automatically criminally liable if the offence is committed by the
corporation. However, specific offences relating to compliance with
the Treasurer's orders about certain acquisitions and arrangements
continue to apply personal criminal liability.
Health Insurance Act 1973 (Cth)
The Reform Act removes the personal criminal liability
provisions relating to officers of a private hospital proprietor
where the proprietor offers, accepts or gives a bribe to a medical
practitioner, midwife or nurse in exchange for enabling patients to
be admitted to the hospital. Under the new provision, officers are
only personally criminally liable if they were directly involved in
the conduct.
However, the personal liability provisions continue to apply to
executive officers of a company where the company engages in
conduct intended to induce a person to request pathology or
diagnostic imaging services from a provider. This is aimed at
deterring inappropriate referrals for pathology and diagnostic
services.
Insurance Contracts Act 1984 (Cth)
The Reform Act repeals the blanket provision that imposed
personal criminal liability for corporate fault for all offences
under the Insurance Contracts Act 1984 (Cth). Instead, a
new provision was inserted that retains personal criminal liability
for corporate fault for specific breaches relating to an insurer's
obligation to comply with ASIC's power to obtain documents, and not
to supply false or misleading information to ASIC. Under these
provisions, a director, employee or agent of an insurer commits an
offence if they permit or authorise the insurer to breach these
obligations.
Comments
These legislative changes reduce the regulatory burden and risk
of personal criminal liability for company directors, executive
officers and managers of corporations. This should give more
clarity to the scope of legal obligations and standard of conduct
expected of directors and officers under the various Acts.
However, while the Reform Act purports to increase certainty and
consistency, it is not wholly consistent in applying the COAG
principles. For example, the major amendment to the Corporations
Act relates only to administrative and reporting defects.
Derivative liability remains and the only significant change is a
switch from criminal to civil penalties. A director or officer
still has the onus of proving reasonable steps. Therefore, it is
questionable whether the legislative intent of the Reform Act has
been fully achieved.
The importance of registration under the PPSA -
Maiden Civil (P&E) Pty Ltd & Ors v Queensland
Excavation Services Pty Ltd [2013] NSWSC 852
Background
The New South Wales Supreme Court recently handed down a
decision relating to the first substantive priority dispute under
the Personal Property Securities Act 2009
(PPSA). Now, an owner of goods who creates a
lease under the PPSA but fails to register their security interest
under the Personal Property Securities Register
(PPSR) will lose those goods to another party who
has perfected their security interest over the same goods.
Additionally, the lessor who fails to register their goods on a
'transitional register' (Northern Territory register) prior to the
registration commencement time will not be afforded the 24-month
temporary perfection.
Summary
In May 2010 Westpac and Esanda financed the lessor, Queensland
Excavation Services Pty Ltd (QES), to purchase
Caterpillars (a wheel loader and two excavators)
(Equipment). QES and its financiers failed to
register their interests in the Equipment on the Northern Territory
register of motor vehicles prior to the commencement of the PPSR.
Shortly after QES leased the Equipment to Maiden Civil (P&E)
Pty Ltd (Maiden), whereby Maiden took possession
of the Equipment and used it in civil construction works in the
Northern Territory.
In March 2012, Maiden entered into a short-term loan agreement
with Fast Financial Solutions Pty Ltd (Fast),
which included a General Security Deed (GSD)
granting a security interest over all of its assets including the
Equipment. Fast then registered their security interest on the
PPSR. Shortly thereafter, Fast became aware of a number of events
of default under the GSD; hence Fast appointed receivers and
managers of 'all of the company's assets', claiming possession of
the Equipment.
Decision
The court found in favour of the receivers. The lease was found
to be a PPS lease, meaning it was a lease of a serial numbered good
for more than 90 days. Following New Zealand and Canadian case law,
the court determined that Maiden as lessee had both a possessory
interest and a proprietary interest in the Equipment, sufficient to
enable them to grant a security interest in the property itself and
not just in the leasehold interest.
As a result, QES as lessor/owner and Fast as holder of the
perfected security interest had a competing interest in the
Equipment. Ordinarily, QES would have had a superior security
interest and attracted temporary perfection under the PPSA.
However, in this instance QES failed to register the security
interest under a 'transitional' register required in the Northern
Territory. QES had also failed to register the security interest on
the PPSR, leaving it with an unperfected security interest in the
Equipment. Consequently, the receivers of Maiden were entitled to
the Equipment, to sell and realise the value in order to satisfy
the debt owing to Fast.
Impact
The case highlights the need for lessors to consider whether
their agreement falls within 'PPS leases' or 'in substance security
interests'. Property owners who lease their goods (and financiers
of those goods) must be vigilant in registering their interests on
the PPSR. It is also prudent for owners to bear in mind that
the grace-period of 24 months for temporary perfection may not
apply if the security interest was registrable on a transitional
register but was not registered before the commencement
date of the PPSR (30 January 2012). Owners may stand to lose their
security interest in the goods for failing to perfect
registration.
The ATO increases its scrutiny of GST recovery in mergers and
acquisitions
The line between tax avoidance and tax planning is increasingly
prominent as the ATO steps up its tax collection and anti-avoidance
activities in an effort to curtail revenue 'leakage'. In this
Alert, we consider the legitimacy of certain transaction structures
that are designed to maximise GST recovery in mergers and
acquisitions involving input taxed financial supplies.
Background
The Australian Goods and Services Tax (GST)
regime in its most basic form involves a supplier of goods or
services charging an additional GST amount (being 10% of the price
of the goods or services) to the purchasers of its products. The
supplier is entitled to claim an 'input tax credit'
(ITC) for the GST amounts that it has outlaid on
goods and services that are utilised in the course of carrying out
its commercial enterprise.
Certain transactions that are integral features of mergers and
acquisitions (eg transfers of shares and units) are 'input taxed
financial supplies' for GST purposes. This means that while there
is no GST payable on the provision, acquisition or disposal of
securities, the purchaser is not permitted to claim ITCs for the
GST expended in the course of acquiring goods and services related
to the M&A transaction (eg accounting advice, legal services,
business valuations). This results in a net GST liability payable
by the acquirer of the securities.
The general rule that ITCs are not creditable on the
acquisitions of goods and services that preceded the 'financial
supply' is subject to a category of acquisitions that are eligible
for 'reduced input tax credits' (RITCs). These
acquisitions are listed in regulation 70-5.02(2) of the A New
Tax System (Goods and Services Tax) Regulations 1999 (Cth) and
include the provision of 'arranging services' by a 'financial
supply facilitator'. Eligibility to claim an RITC results in
recovery of 75% of the GST amount charged on goods and services
acquired in relation to the financial supply.
The alleged scheme
While the ability of an acquirer of securities to claim an RITC
for certain arranging services (eg investment bank services) is
uncontroversial, the fees charged by other providers of services
(eg accountants and lawyers) in connection with the M&A
transaction generally do not give rise to an entitlement to claim
an RITC. The imperative to extend the availability of RITCs to
legal and accounting services has given rise to a particular
transaction structure that has attracted the ATO's scrutiny in
recent times.
The structure in question involves Entity A
(Acquirer) engaging a related entity, Entity B
(Arranger) to provide arranging services to
facilitate the acquisition of shares in the target company. The
Arranger organises various professional services (including
accounting and legal advice) for the Acquirer in relation to the
transaction. The Arranger makes a single collective 'supply' of
professional services to the Acquirer in its role as 'financial
supply facilitator'. The Acquirer then claims an RITC on the supply
of arranging services by the Arranger (Transaction
Structure).
The ATO issued TA 2010/1 outlining its concerns that
arrangements sharing characteristics with the Transaction Structure
potentially contravened the anti-avoidance provisions contained in
Division 165 of A New Tax System (Goods and Services Tax) Act
1999 (Cth). The ATO has also now expanded powers under the
Promoter Penalty Regime to prosecute persons who promote tax
exploitation schemes or who implement schemes in a manner that
fails to accord with relevant ATO product rulings.
Implications
TA 2010/1 indicates that the Commissioner will consider the
substance of the relationship between an Acquirer and Arranger when
determining whether the 'sole or dominant purpose' of an Arranger's
involvement in a Transaction Structure is to derive a 'GST
benefit', thus contravening the anti-avoidance provisions.
Nevertheless, the provision of arranging services by a related
entity may enable businesses to claim RITCs (increasing net GST
recovery) for services that would not otherwise be creditable
provided (among other things) that the:
- arrangement has commercial substance (eg the Arranger is
remunerated on commercial terms);
- Arranger plays a meaningful role in engaging service providers
(eg the Arranger oversees and monitors service delivery); and
- Arranger routinely provides arranging services to the Acquirer
and/or unrelated entities.
Comment
Businesses considering implementing an arrangement that is
identical or similar to the Transaction Structure described in this
Alert should be adequately informed about the risk of contravening
anti-avoidance provisions and carefully assess whether there are
genuine commercial imperatives underpinning the arrangement. It may
be advisable to obtain a private ruling from the ATO regarding a
proposed transaction structure. Businesses should also consider
whether engaging an unrelated party to provide a bundled
supply of 'arranging services' would yield similar commercial
benefits to those provided by the Transaction Structure.
For further information regarding seeking a private ruling or
structuring your transaction to maximise GST recovery, please
contact Michael Kohn, Andrew Cromb or Lesley Naik.
Too many bytes of the apple: unfair contract terms under
Australian Consumer Law
The nation's top watchdog, the Australian Competition and
Consumer Commission (ACCC), has instituted
proceedings in the Federal Court of Australia against ByteCard Pty
Ltd (ByteCard) for unfair terms in their standard
form contracts. The ACCC argues that certain terms in these
contracts breach the Competition and Consumer Act 2010
(Cth) (Act). This case is significant for all commercial clients
who use standard contracts.
Background
ByteCard trades as Netspeed Internet Communications and is an
Internet Service Provider whose services include domain
registration and web design. This proceeding is the first case
based solely on allegations of breaches of the unfair contract
provisions of the Act. In effect, it will be a test case for the
ACCC in enforcing the new Act.
The unfair terms test
The Act provides a 3 step test in determining
whether a term of a consumer contract is regarded as
unfair.
The court will consider whether the term:
- causes a significant imbalance in the parties' rights
and obligations arising under the contract;
- is not reasonably necessary to protect the
legitimate interests of the party who would be advantaged
by the term; and
- causes detriment (whether financial or
otherwise) to a party if it were to be applied or relied on.
The court must be satisfied that all three elements of this test
have been proven, and will have regard to the transparency of the
term and to the contract as a whole.
If the test is satisfied, the court may hold that the term is
void and the contract is treated as if the unfair
term never existed.
ByteCard's standard contract
According to the ACCC, the unfair terms of ByteCard's standard
terms and conditions contract include terms that:
allow ByteCard to unilaterally vary the price without providing
the consumer with a right to terminate the contract;
require the consumer to indemnify ByteCard in any circumstances,
even where there has not been a breach and where the
liability, loss or damage may have been caused by ByteCard's
breach; and
allow ByteCard at any time to unilaterally terminate the
contract without providing cause or reason.
The corporate sector is looking to this proceeding with great
anticipation, and the case has been brought forward on the Federal
Court's list. It commenced on Thursday 13 June
2013.
The National Disability Insurance Scheme Act 2013 - An
Overview
The National Disability Insurance Scheme Act
2013 (Cth) (Act) was passed through
federal parliament with several amendments on 21 March 2013.
The purpose of the Act is to give effect to Australia's
obligations as a party to the United Nations Convention on the
Rights of Persons with Disabilities and to support the
independence and social and economic participation of Australians
with a disability.
What does the Act do?
The Act provides for the National Disability Insurance Scheme
(NDIS), which has been renamed DisabilityCare
Australia. It also establishes the NDIS Launch Transition Agency
(Agency), which will implement the scheme from 1
July 2013 in the Barwon region of Victoria, South Australia,
Tasmania and the Hunter Valley in New South Wales. The Agency will
also be responsible for faciliting innovation and best practice in
the disability sector as well as increasing awareness of disability
in the community.
What is the function of the NDIS?
When fully implemented, the NDIS will adopt a nationally
consistent approach in the provision of:
- referral services and activities for people with
disabilities;
- funding for individuals or entities to enable them to assist
people with disabilities to participate in economic and
social life; and
- individual plans under which reasonable and necessary supports
will be funded for scheme participants.
The operation of the scheme is supported by administrative
provisions in the Act, which will include provisions relating to
children, nominees, confidentiality, the review of decisions and
the treatment of compensation.
To participate in the scheme, a potential participant must meet
various requirements regarding age, place of residence and either
disability or early intervention.
How will it be funded?
The provision of support under the NDIS will not replace
existing entitlements to compensation. The Act enables the Agency
to conduct legal proceedings on behalf of persons with disabilities
and to recover costs funded by the NDIS prior to a compensation
claim being settled.
The NDIS will take an insurance-based approach, informed by
actuarial analysis, to the funding and provision of support.
It is estimated that the first stage of the scheme will have a
cost to the commonwealth of $1 billion over a four year period.
Team member profile
Carolyn Falcone, Partner, Corporate &
Commercial
Carolyn is the newest Partner in our Corporate & Commercial
team, having been promoted to the partnership on 1 July 2013.
Carolyn advises on a wide range of
telecommunications projects including managed network services and
network rollouts.
She also advises our corporate and
commercial clients on various matters including commercial
contracts, capital raising, financial services, structuring and
restructuring, trade practices, energy and resources transactions,
trusts and companies, corporate governance and fundraising.
Carolyn also has in depth experience in
the financial services industry and advises clients in all areas of
commercial lending, including syndicated and construction
loans.