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The Corporations Act 2001 (Cth) (Act) has been amended with effect from 28 June 2010 by the Corporations Amendment (Corporate Reporting Reform) Act 2010 (Corporate Reporting Reform Act).
Significant changes to the Act arising from the Corporate Reporting Reform Act will affect financial reporting as at the year ended 30 June 2010 and the payment of dividends.
Until 28 June 2010, section 254T of the Act required a company to satisfy a profits test before declaring a dividend. Among other changes (summarised later in this article), the new reforms implement a balance sheet solvency test in place of the profits test, which affects the circumstances in which a company can pay a dividend.
With the AGM season in full swing, companies should review their constitutions and consider whether they require amendment to address rules providing for payment of dividends from profits only.
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National Interest Considerations
A new set of "national interest considerations" have been included in the Policy, which will be used by FIRB in determining whether a foreign investment proposal (Proposal) should be rejected on the basis that it is "contrary to the national interest".
FIRB will now have regard to the following five factors when considering a Proposal:
• National security: The extent to which investments affect Australia's ability to protect its strategic and security interests.
• Competition: FIRB favours diversity of ownership within Australian industries and sectors to promote healthy competition.
• Other Australian Government Policies (including tax): The impact of a Proposal on Australian tax revenues.
• Impact on the economy and the community: The impact on the Proposal on the general economy.
• Character of the investor: The extent to which the investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision.
"Foreign Governments and their Related Entities" and "Direct Investment"
The Policy provides that "foreign governments and their related entities" need only apply to FIRB where a Proposal is considered to be a "direct investment".
A definition of "direct investment" has now been included in the Policy. "Direct investment" is defined as an investment that "has the objective of establishing a lasting interest in, and a strategic long-term relationship with, the target enterprise." The definition covers investments of 10% or more (previously, foreign governments and their agencies were required to notify FIRB before making any investment in Australia, irrespective of size), however, FIRB notes that the definition includes investments that provide the investor with influence or control over the target investment, regardless of whether the investment is above or below 10%.
The Policy also includes a definition of "foreign governments and their related entities". The definition includes:
• a body politic of a foreign country;
• companies or other entities in which foreign governments, their agencies or related entities have more than a 15% interest (the previous framework did not specify a threshold, but it was FIRB policy that a "government investor" included a company or other entity in which a foreign government); and
• companies or entities that are otherwise controlled by foreign governments, their agencies or related entities.
Mining Tenements
The Policy specifically provides that foreign persons are required to apply for FIRB approval to buy mineral rights, mining leases, mining tenements or production licences involving “Australian urban land” (provided other conditions are met). The Policy adopts a broad interpretation of “Australian urban land” and provides that it includes “all seabed within Australia’s Exclusive Economic Zone”. On this basis, the Policy may require investors to obtain approval for Proposals involving offshore operations.
Media Sector
The Policy has also been slightly modified as it relates to notification of foreign investments relating to the media sector. Foreign persons are now required to notify FIRB and obtain approval for investments of 5% or more in the media sector, regardless of the value of the investment. The Policy previously required notification of all investments in the media sector.
The definition of "media sector" has been amended slightly and is now limited to "daily newspapers, television and radio (including internet sites that broadcast or represent these forms of media)".
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The recent New South Wales Supreme Court decision of Justice White in Buzzle v Apple provides guidance to companies in relation to shadow directorships.
The concept of a shadow director arises from the definition of "director" under section 9 of the Corporations Act 2001 (Act). A person is a director if, although not validly appointed as a director, they act in the position of a director, or the directors of the company or body are accustomed to acting in accordance with that person’s instructions or wishes. This broad definition has often led creditors and like third parties to fear being classified as a director in the eyes of the law. This fear is not without warrant as a shadow director owes the same statutory duties to a company, and is equally liable for breaching those duties, as a validly appointed director. Until the recent Buzzle decision, there has been limited case law regarding what conduct might constitute shadow directorship.
The facts of this case and the importance of the decision are outlined below.
Facts of the Buzzle v Apple Case
Buzzle Operations Pty Ltd (Buzzle) was formed in the middle of 2000 from a merger of six Apple Computer Australia Pty Ltd (Apple) product retailers. Apple was given a charge over Buzzle's assets and imposed due diligence and management obligations on Buzzle for Apple's continued support. In November 2000, Buzzle became insolvent and later incurred additional debts of $18 million to Apple and other creditors. Apple appointed receivers in March 2001 after which Buzzle's liquidators brought proceedings against Apple.
The liquidators contended that Apple and its financial director:
• were shadow directors of Buzzle because Buzzle's directors were accustomed to acting in accordance with their instructions or wishes;
• breached their duty as shadow directors to prevent Buzzle from incurring debt while insolvent; and
• should compensate Buzzle for the debts incurred while it was insolvent.
Apple was found not to be a shadow director as it was merely imposing the conditions of the commercial dealings it had with Buzzle, rather than actually controlling the directors.
Key Features of Shadow Directorship
The following key features of shadow directorship can be extracted from Justice White's decision:
• Both individuals and companies can be held to be shadow directors.
• There must be a casual connection between the instructions of the alleged shadow director and the director's acts to satisfy the definition of "director" under section 9 of the Act.
• Shadow directorship can arise, notwithstanding that the shadow director does not influence the whole field of the company's corporate activity. If the company's directors are accustomed to acting in accordance with the instructions or wishes of a third party, this can be sufficient evidence of shadow directorship.
• Only the governing majority of the board need to be accustomed to acting in accordance with the instructions or wishes of the third party for that third party to be a shadow director.
• The "instructions" of a shadow director can be distinguished from a third party who imposes legitimate commercial conditions on a company. A third party is not simply a shadow director because they have commercial dealings with a company and are able to successfully procure compliance with certain contractural terms for their continued support of the company over an extended period. It must be shown that the directors of a company do not exercise any discretion or judgement of their own.
Relevance
The Buzzle v Apple decision is an important guide to the specific type of conduct a creditor, investor and supplier can engage in, without being held to be a shadow director.
The recent downturn in the world economy has led many companies to enter into arrangements with third parties for financial support and to avoid liquidation or receivership. The Buzzle v Apple decision provides that such arrangements will not automatically deem such supporting third parties to be shadow directors.
Parties in a position of influence over a company need to ensure that any recommendations or commercial contractual conditions:
• are not intended to "direct" the company; and
• are subject to the discretion and judgement of the board of directors.
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The principal reforms implemented by the Corporate Reporting Reform Act relate to:
• payment of dividends;
• changing a company's year-end date;
• parent entity financial statements;
• annual directors' reports; and
• companies limited by guarantee.
A company must now satisfy a 3-step balance sheet solvency test before paying a dividend.
In respect of dividends declared on and from 28 June 2010, section 254T of the Act requires a company to satisfy the following 3-step test before paying the dividend:
• the company's assets must exceed its liabilities immediately before the dividend is declared and the excess must be sufficient for the payment of the dividend (Step 1); and
• the payment of the dividend must be fair and reasonable to the company's shareholders as a whole (Step 2); and
• the payment of the dividend must not materially prejudice the company's ability to pay its creditors (Step 3).
The solvency test replaces the old profits test, which provided that a company could only pay a dividend out of profits of the company.
In determining whether Step 1 is satisfied, assets and liabilities are to be calculated in accordance with accounting standards in force at the relevant time (even if the standard does not otherwise apply to the financial year of some or all of the companies concerned). If an entity is not required to prepare audited financial statements, it would assess Step 1 based on the written financial records that section 286 of the Act requires it to keep.
For the purposes of Step 3, the payment of a dividend would materially prejudice a company's ability to pay its creditors if the company would become insolvent as a result of the payment.
In addition to the above steps, there is the general requirement that a company must ensure it does not trade whilst insolvent.
Notwithstanding the dividend provisions of a company's constitution, every company will need to ensure that it satisfies the new 3-step test under section 254T of the Act before paying a dividend.
Changing a Company's Year-End Date
Provided a company's past 5 financial years have each been of at least 12 months' duration, a company is now able to change its year-end date without having to apply to the Australian Securities and Investments Commission (ASIC). The change to the subsequent financial year must be made in good faith in the best interests of the company and, once complete, must be notified to ASIC.
Parent Entity Financial Statements
Where consolidated financial statements are required, a parent entity is no longer required to prepare financial statements in addition to those consolidated financial statements. Rather, the parent entity's summarised financial information must be disclosed in the notes to the consolidated financial statements. On 26 July 2010, ASIC issued Class Order 10/654 (effective from 29 July 2010) to allow companies, registered schemes and disclosing entities that present consolidated financial statements to include parent entity financial statements as part of their financial report under Chapter 2M of the Act. The Corporations Regulations prescribe the additional summary parent entity financial information that must be included in the notes to the consolidated financial statements.
Annual Directors' Reports
All listed entities (including listed managed investment schemes) will now have to comply with section 299A of the Act, which requires a listed entity's annual directors' report to report on the entity's operations, financial condition and business strategies and prospects for future financial years. Previously, only listed companies had to comply with section 299A.
Companies Limited by Guarantee
A new 3-tiered reporting framework reduces the regulatory burden on companies limited by guarantee (which are often not-for-profit organisations) in certain cases. The new reporting framework imposes varying reporting obligations depending on the annual revenue and deductible gift recipient status of a company limited by guarantee. In some circumstances, a company limited by guarantee will now be able to elect to have its financial statements reviewed rather than audited or in limited circumstances may be exempt from the reporting and auditing requirements altogether.
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AT A GLANCE
ASIC fees for commonly lodged documents and late lodgement fees have increased from 1 July 2010. Refer to ASIC Information Sheet 30 to check the fees payable in respect of documents lodged with ASIC, such as prospectuses, annual reporting documents and Forms 309 and 312 relating to registrable and registered charges.
As from 1 June 2010:
• Appendix 5B: Section 4 of the quarterly cashflow report lodged by mining exploration entities (Mining Explorers)now has additional lines. Mining Explorers are now required to include an estimate of the cash outflows for the following quarter for production and administration.
• Listing Rule 4.10 - investment entity annual reporting: An investment entity now has to include a list of its investments as at its balance date in its annual report, rather than as at a date of no more than 6 weeks before the date the annual report is sent to shareholders (which is the date to which the other information required under Listing Rule 4.10 must be current).
• Listing Rule 10.17: Listing Rule 10.17 has been amended to clarify that, in calculating the total amount of directors' fees payable for the purpose of Listing Rule 10.17, superannuation contributions made by a listed entity for the benefit of non-executive directors and fees that a non-executive director agrees to sacrifice on a pre-tax basis, are included.
Update on Chapter 11 of the ASX Listing Rules
ASX looks carefully at listed companies whose current activities may be regarded as a change in nature or scale compared to their previous activities. Where a change in nature or scale is likely to occur, a company is required to comply with Chapter 11 of the ASX Listing Rules (Listing Rules). If you would like to discuss possible changes to your company's activities and whether they may be likely to trigger Chapter 11 of the Listing Rules, please call us. We are experienced in liaising with ASX to determine whether your company may be required to re-comply with Chapters 1 and 2 of the Listing Rules as a result of a change in nature or scale.
Listing Rule 7.2 (exception 15) and Listing Rule 10.12 (exception 8) have each been amended to take into account the changes made in 2009 to ASIC Class Order relief governing the maximum value of shares or units that can be offered under a securities purchase plan (SPP) without a disclosure document (namely to increase the limit from $5,000 to $15,000 per shareholder/unitholder). The Listing Rules have been amended so that the maximum value of securities that can be offered under an SPP to each shareholder or unitholder now mirror that provided by the ASIC relief. An issue to an underwriter of an SPP will still be excluded from the scope of Listing Rule 7.2 (exception 15).
Appendix 7A of the Listing Rules now includes new paragraph 10 to prescribe a timetable to be followed for SPPs. The record date for an SPP must be the business day immediately preceding the day on which the SPP is announced.
ASIC has advised that a listed company may accept proxy votes for general meetings that are lodged by electronic means without amending its constitution to expressly permit electronic lodgement.
The proposed Resources Super Profits Tax announced by the Federal Government on 2 May 2010 has been replaced by the Minerals Resources Rent Tax (MRRT). Among the many changes proposed under the MRRT, mining companies whose resource profits do not exceed $50 million will not be subject to the 30% MRRT. In addition, base metals projects will not be subject to the MRRT, with the tax only applying to coal and iron ore projects. It is currently intended that the MRRT will commence on 1 July 2012.
If you would like any further information in relation to the topics in this newsletter, please contact one of our partners whose contact details are available on our website, www.steinpag.com.au.
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