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ASIC's propose guidance will include the following recommendations in realtion to prospectuses:
Investment overview
An ‘investment overview’ should:
- be the first substantive section of a prospectus;
- highlight and provide a meaningful summary of information key to a retail investor’s investment decision; and
- provide balanced disclosure of benefits and risks.
The investment overview should address the following issues:
The issuer's business model:
- Outline the strategy and plans of the company (i.e. how your company proposes to make money, generate income and capital growth for investors or otherwise achieve its objectives).
- Emphasise the stage of development of the company and the industry it will operate in.
- Highlight the key dependencies the company will rely on to achieve its objectives (i.e. material contracts).
Key investment risks:
- These must be specific and tailored to the company and its business model.
- Organise risks in descending order of impact and likelihood.
Financial information:
This section should include NPAT, EPS and gearing ratios, or, where your company has no operating history a current balance sheet should be included.
Directors and key personnel & related party transactions:
A prospectus should include details of each director’s and key person’s qualifications and expertise as well as any affiliations the director may have that may affect his or her independence.
The offer and use of funds:
Prospectuses should also include key terms and conditions of the offer, and details on how capital raised through the offer will be used.
Photographs
Photographs should only be included in a prospectus after the investment overview and then only where they are relevant to the issuer’s business or the offer and do not misrepresent the nature, stage or scale of the business.
Previous disciplinary action
Specific disclosure should be made on previous disciplinary action against directors and key managers, such as, criminal convictions, declarations under s1317E, personal bankruptcies, disqualifications or disciplinary action within Australia or overseas that are less than 10 years old and whether they have been an officer of a company that became insolvent while they were an officer or within 12 months afterwards.
The majority of information required to be included in the new investment overview section would previously have been incorporated elsewhere in the prospectus and as a result of including this information up front it will not need to be repeated later in the prospectus.
The proposed guide is also relevant to other types of disclosure documents, such as, bidder’s statements, scheme booklets and transaction specific prospectuses.
ASIC is expecting to publish a revised regulatory guide containing this guidance by December 2011, however, in the meantime ASIC has advised it will have reference to the draft regulatory guide in assessing whether a prospectus satisfies the Corporations Act disclosure requirements. Steinepreis Paganin has been the first law firm to adopt the new guidelines in its recent IPO prospectuses.
Further details of the new regulatory guide will be provided once it has been finalised.
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Background to the Sons of Gwalia decision
In 2004, Margaretic purchased shares in Sons of Gwalia Ltd shortly before the company went into voluntary administration. As a result of the voluntary administration, Margaretic commenced action against the company, claiming that Sons of Gwalia had breached its continuous disclosure requirements and that the company's conduct had been misleading or deceptive. The High Court held 6:1 that Margaretic was claiming not as a member of Sons of Gwalia Ltd under section 563A of the Act, but as a contingent creditor whose rights to compensation equalled those of unsecured creditors in the event of a winding up.
The High Court's decision in Sons of Gwalia meant that Margaretic was classified as a creditor, giving him participatory rights in liquidation and the power and opportunity to decide the future of the company in voluntary administration.
Purpose of the Amendment Act
The Amendment Act, which received royal assent on 17 December 2010, amends section 563A of the Act in a manner consistent with legislative intent, namely, that claims made against a company by a person in their capacity as a member should rank below claims made by non-members. The amendments reinstate and refine the law in relation to members' claims, to the pre-Sons of Gwalia position.
The previous section 563A of the Act ranks claims made against a company by a person in their capacity as a member of that company (whether by way of dividends, profits or otherwise) below claims made by persons who are not members of the company. By contrast, the amended section 563A provides that the payment of a subordinate claim will be postponed until all other claims are satisfied, with the term "subordinate claim" being defined in two contexts:
• part (a) situations embodying the current section 563A; and
• part (b) situations, such as those which occurred in the Sons of Gwalia case.
The amended provisions ensure that "any other claim that arises from a person buying, holding, selling or otherwise dealing in shares in the company" will rank after all other claims against a company. It is this part of the new law that will ensure a greater degree of control is executed over claims against insolvent companies by their shareholders.
What were the ramifications of the Sons of Gwalia decision?
The most significant ramification of the Sons of Gwalia decision was the ability for some shareholders in instances of corporate misconduct to have an equal opportunity to claim debts from an insolvent company as unsecured creditors. This had the potential to further reduce the return to unsecured creditors in insolvency.
Another implication of the decision was that it could impact on a lender’s willingness to lend to a corporation, or result in more burdensome terms and conditions (effectively as a result of lenders increasing their risk premiums). This could in turn lead to heightened costs and increased restrictions on the supply of credit to companies, which may stifle transactions between lenders and borrowers and inhibit corporate activities. Such problems are likely to be limited to the collapse of listed public companies only. Where it occurs elsewhere, the impact is likely to be less detrimental due to the smaller number of shareholders being involved in litigation.
What is the effect of the Amendment Act?
The Amendment Act reverses the ramifications of the Sons of Gwalia decision by including the following sections in the Act:
• Section 563(A)(1): All claims (including claims of non-shareholders) in relation to the buying, selling, holding or otherwise dealing with shares are to be postponed until all other creditors' claims are satisfied;
• Section 600H(1)(a): There will be no right of a member to receive a copy of reports, notice or statements to creditors unless the request is made in writing;
• Section 600H(1)(b): There will be no right for persons bringing claims regarding shareholdings to vote as creditors in a winding up or voluntary administration, unless they receive permission from the court; and
• Section 247E: All restrictions on a shareholder’s capacity to recover damages against a company based on how they acquired shares or whether they still hold the shares are to be removed, therefore eroding the common law rule which restricts a shareholder’s ability to claim damages based on those two factors.
The Amendment Act does not act retrospectively and it is expected that additional compliance costs for those bringing subordinated claims and financial impact will be minimal.
Key benefits
The changes to the Act encompass a wider range of circumstances of claims against a company upon its insolvency. While the Amendment Act preserves the current law in section 563A(2)(a), it includes new subsection 2(b) in order to clarify the legal position of shareholders of a company upon its winding up. The Amendment Act provides that the claims of any person buying, holding, selling or otherwise dealing in shares of the company are to be postponed until all other claims against the company are satisfied.
The Amendment Act will act to prevent a narrow interpretation of section 563A of the Act and will ensure that the section is inapplicable to shareholders who declare their capacity is one of a creditor and not a member in instances of corporate misconduct resulting in loss or damage.
Conclusion
The changes are favourable to corporations as the risk already associated with advancing finance to corporations was previously increased by the possibility for shareholders to rank equally with unsecured creditors upon liquidation. In turn, this could have hindered a decision to grant finance as the likely return to unsecured creditors in insolvency is already very low. The changes reinforce the general rule that shareholders rank last in a winding up and this may be a positive for corporations when lenders assess the advantages and disadvantages of granting finance. In this way, the transactions between lenders and borrowers are promoted, in turn stimulating the economy and healthy competition.
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The changes cover the following areas:
• Diversity: Under the Principles, companies will be encouraged to establish and disclose a diversity policy. This policy should consider management’s values and attitudes towards diversity within a company. This provides an opportunity for strategies and approaches to maintaining diversity in the workplace to be implemented and for goals to be set. The policy should also define some measurable objectives which can be presented in Annual Reports alongside statistics reflecting the proportion of women in the organisation as a whole, in senior management positions and as board members.
• Remuneration: The Principles will be amended to be more proscriptive as to the composition of remuneration committees. The proposed changes recommend that remuneration committees comprise at least 3 members, a majority of whom should be independent directors, and that a remuneration committee should also be chaired by an independent director. It will be a new requirement of the Listing Rules that companies in the S&P/ASX 300 index have a remuneration committee comprising solely of non-executive directors.
• Shareholder communications: The Principles will be amended to provide additional shareholder communication recommendations in relation to shareholder briefings. The Principles will recommend that advance notice be given whenever possible of shareholder briefings. Notice and the briefings may contain results announcements and other information about the company’s current position and operations. Companies will be encouraged to make effective use of electronic communication technology, such as online video and audio feeds in order to increase the accessibility of the briefings to shareholders.
• Securities trading: Trading Policies will now be regulated under Listing Rule 12 instead of recommendation 3.2 of the Principles. All listed companies will be required to disclose their trading policy. The policy must include details of restrictions on management’s trading activities, including specified “closed periods” during which management is prohibited from trading except in “exceptional circumstances” approved by written permission. These circumstances must also be defined in the policy. The ASX has not sought to define these terms, leaving it to each company to tailor its policy to its own needs. The general standard for closed periods is expected to be the period between close of books and the release of reports relating to that period. The changes were largely designed to address trading at these times. Trading policies should also clearly define exceptional circumstances and the process for obtaining written permission to trade during these times.
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Australian urban land is widely defined as being land in Australia that is not Australian rural land. Section 12A of the Act sets out the definition of an “interest in Australian urban land”. Relevantly to mining tenements, this includes an interest that:
• is a lease or licence that provides the right to occupy Australian urban land, and the term of the tenement is likely to exceed five years; or
• the right involves an interest in an arrangement involving the sharing of profits or income from the use of or dealings in Australian urban land.
The first type of interest can apply to mining tenements, while the second type can capture farm-in agreements and joint venture arrangements in respect of mining tenements.
FIRB has advised that whether a mining tenement provides a right to occupy Australian urban land will depend on the legislation that governs the mining tenement and the rights that are attached to the mining tenement under that legislation. We understand that FIRB is in the process of considering each type of mining tenement in each Australian State and Territory to reach a view as to which mining tenements provide a right to occupy (with a term that is likely to exceed five years, including extensions) and are therefore an interest in Australian urban land.
Where a mining tenement only gives rights of access, being short of a right to occupy, or has a term that is not likely to exceed five years (including extensions) the mining tenement will not be an interest in Australian urban land (unless it falls within some other trigger under the Act).
This obviously means it may be necessary to consult with FIRB to determine whether a mining tenement constitutes an interest in Australian urban land, particularly where the mining tenements merely grant prospecting or exploration rights.
Even if an Australian mining tenement satisfies the test of being an interest in Australian urban land under Section 12A of the Act, Regulation 3 of the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) provides exceptions to Section 12A of the Act. Of particular relevance to mining tenements, an exception exists for an interest in non vacant, non-residential commercial land with a maximum value of less than $50 million (unless on the National Heritage Register, in which case the maximum value is $5 million, or unless a US investor is acquiring the interest, in which case a maximum value of $1,005 million applies from 1 January 2011).
FIRB has advised that, in line with the Policy, an operational mine is considered non vacant, non-residential commercial land. If a mining tenement with an operational mine has a value less than the above thresholds, it will not be an interest in Australian urban land under the Act.
Where an acquisition involves a number of mining tenements, some of which may be considered interests in Australian urban land, and some may not, or where a mining tenement includes a historic mine that has ceased operations, FIRB has advised that it will make a case by case assessment.
We therefore generally recommend that where an acquisition of an interest in an Australian mining tenement is proposed, an initial discussion is held with FIRB to ensure that a notification is provided, if required, under the Act.
FIRB has advised that where an acquisition of an interest in a mining tenement does not strictly fall within the definition of an acquisition of an interest in Australian urban land, a formal notification (using the relevant application form) should not be given. However, an information notification can still be provided. Where an informal notification is given, the legislated timeframes under the Act do not apply, although FIRB will seek to provide a response within 6 weeks of notification, consistent with the legislated timeframe for a formal notification.
Foreign persons should also be aware that an acquisition of an interest in an Australian urban land is defined in Section 12A of the Act to include the acquisition of an interest in a share of an Australian urban land corporation.
As such, a proposed acquisition of shares in an Australian urban land corporation must also be notified under Section 26A of the Act (unless an exemption applies).
A corporation is an Australia urban land corporation where:
• if the corporation is not a holding corporation, the value of its eligible land assets exceeds 50% of the value of its total assets; or
• if the corporation is a holding corporation, the sum of the values of the eligible land assets of the corporation and of each of its subsidiaries exceeds 50% of the sum of the values of the total assets of the corporation and of each of its subsidiaries.
As a result of the above definition, a company that has an interest in Australian mining tenements will be classed as an Australian urban land corporation where:
• those mining tenements constitute an interest in Australian urban land; and
• the value of its interests in Australian urban land exceeds the above thresholds.
• If this is the case, a foreign person will need to notify FIRB to acquire shares in the company (unless an exemption applies).
The above is a brief summary of the application of the Act to mining tenements. Foreign persons should bear in mind that other sections of the Act may apply to impose notification requirements.
The above is a general overview and is not intended to be legal advice. We recommend that clients seek advice on their particular circumstances to ensure the requirements of the Act are satisfied.
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On 13 December 2010 legislative reform relating to accessing an entity’s shareholder register became effective.
It is an offence to use information obtained from a shareholder register for an improper purpose, or, disclose the information obtained from a shareholder register knowing it is likely to be used for an improper purpose.
A person wishing to obtain a copy of an entity’s share register will need to state each purpose for which access is sought as well as whether the information will be disclosed to a third party. In addition, regulations provide for the ability of an entity to refuse to provide access where the purpose is for:
• soliciting a donation from a shareholder;
• gathering information about the personal wealth of a shareholder;
• stockbrokers soliciting clients; and
• making unsolicited offers to purchase financial products (other than for the purpose of takeover).
An entity has seven days to comply with the request or deny access.
A three-tiered fee structure also applies depending on the number of shareholders:
• 0 to 5,000 shareholders – $250;
• 5,001 to 20,000 shareholders – $250 plus $0.05 per shareholder in excess of 5,000; and
• more than 20,000 shareholders – $1,000 plus $0.01 per shareholder in excess of 20,000.
Automatic spill motions - directors of listed companies
At each annual general meeting of a listed company a resolution that the remuneration report be adopted must be put to the shareholders. However, such a resolution is advisory only and does not bind the directors or the company.
On 20 December 2010 the Federal Government released a draft Bill which provides, amongst other things, that directors of listed companies would face automatic spill motions should that entity’s remuneration report receive votes against of 25% or more in two consecutive years.
If the requirement for the spill motion was activated, it would be considered as part of the business of the second annual general meeting.
The spill motion would be required to be passed by a simple majority (i.e. more than 50%).
If passed the entity would be required to call a further meeting, within 90 days, at which all board positions (other than the managing director) would be vacated and shareholders would vote on whether to re-appoint the existing board.
However, the further meeting would not be required if the entire board resigned and was replaced before the further meeting was due to be held.
It is proposed to commence the new requirements on 1 July 2011, however, given the voting threshold has to be reached on two consecutive votes the earliest a company would be required to consider a “spill” motion would be in the AGM for 2012 usually held in November (assuming a financial year end of 30 June).
Further details of the rules will be provided once the terms of the draft legislation have been finalised and a commencement date has been confirmed.
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On 30 March 2011, the Australian Securities and Investments Commission (ASIC) released a revised regulatory guide which gives guidance for public companies on the application of the Corporations Act to various aspects of related party transactions to assist with better governance for related party transactions and to raise standards of corporate disclosure in the market.
Public companies must, subject to certain exceptions, obtain shareholder approval to give a financial benefit to a related party. A common exception utilised by companies is where the transaction with the related party is on arm’s length terms.
ASIC advises that, as a minimum, entities should take into account all of the following factors when assessing whether the arm’s length exception applies:
• how the terms of the overall transaction compare with any comparable transactions between parties dealing on an arm’s length basis in similar circumstances (entities should seek to establish the contractual terms that prevail in the open market for similar transactions between unrelated parties and common sense and commercial prudence should be applied and expert guidance may be required);
• the nature and content of the bargaining process, including whether the entity followed robust protocols to ensure that conflicts of interest were appropriately managed in negotiating and structuring the transaction (e.g. the involvement of professional advisers);
• the impact of the transaction on the entity (including on the financial position and performance of the company and the entity's ability to pursue its business plan) and non-associated members;
• any other options available to the entity; and
• any expert advice received by the entity on the transaction, however, directors relying on such advice will need to make their own independent assessment of the information or advice as the advice will not replace careful judgement by directors.
If, after taking into account all of the above factors, it is not clear that the transaction falls within the arm's length exception (or any other exception in Chapter 2E), member approval should be sought.
The regulatory guide also provides guidance on:
• voting restrictions for directors at directors meetings (for any matter in which a director has an interest not just a related party transaction) and for related parties at shareholder meetings where shareholder approval is sought for the related party transaction;
• the disclosure required in notices of meeting seeking approval of a related party transaction and when it may be relevant to include a valuation from an independent expert in the notice of meeting in addition to circumstances where it is already required (i.e. ASX LR 10.1 relating to acquisition/disposal of substantial assets from related parties and Item 7 of Section 611 of the Corporations Act for change of control transactions); and
• disclosure of existing related party arrangements in all disclosure documents (e.g. prospectuses, scheme booklets, takeover documents), specific risks associated with the related party transaction and the policies and procedures in place concerning entry into these transactions and how compliance with those policies and procedures is monitored.
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ASIC has recently succeeded in a prosecution of a company secretary for failing to lodge financial reports on time.
Mr Bancroft, the company secretary of ASX-listed Arasor International Limited, was charged following the company’s failure to lodge its 2009 financial report within the required time.
Mr Bancroft pleaded guilty in the Melbourne Magistrates’ Court to a charge brought by ASIC. Mr Bancroft was placed on a good behaviour bond for six months and ordered to pay court costs of $167.50.
Arasor International Limited also pleaded guilty to, and was convicted of, charges related to failing to hold an annual general meeting, failing to lodge half-yearly and annual reports with ASIC, and failing to provide reports to members.
ASIC’s investigation found that Arasor International Limited failed to:
• hold an annual general meeting during the 2009 calendar and within five months of the end of its 2008 financial year;
• lodge its half-yearly financial report with ASIC within 75 days of the end of its 2009 half year;
• provide its financial report, directors’ report and auditor’s report to its members within four months of the end of its 2009 financial year; and
• lodge its annual report with ASIC within three months of the end of its 2009 financial year.
The company has since lodged the required reports with ASIC.
The case is a timely reminder that company secretaries can be liable for a failure to lodge financial reports within the timeframes required by the Corporations Act. While there is scope for ASIC, on application, to authorise late lodgements, this is typically only available in exceptional circumstances (for instance, where the Company has gone into administration).
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From 1 January 2011, the Trade Practices Act 1974 (Cth) (TPA) has been renamed the Competition and Consumer Act 2010 (Cth) (CCA), with many sections being moved and receiving new numbering. For transactions that occurred up to 31 December 2010, the TPA will continue to apply.
Schedule 2 to the newly named CCA sets out the Australian Consumer Law (ACL), a new, national regime for fair trading and consumer protection. The following parts of the old TPA have been repealed and re-incorporated into the (with some modifications):
• Part IVA (“Unconscionable conduct”), which was formerly covered by sections 51AA – 51AC of the TPA, is now dealt with in sections 20, 21 and 22 of the ACL;
• Part V (“Consumer protection”), now appears in various places throughout the ACL. For example, the well known section 52 of the TPA is now section 18 of the ACL, while the former section 53 now appears at section 29 of the ACL.
• Part VA (“Liability of manufacturers and importers for defective goods”) is now addressed in Chapter 3 of the ACL; and
• Part VC (“Offences”) is now addressed in Chapter 4 of the ACL.
All States and Territories have enacted legislation repealing their respective fair trading legislation and adopting the national competition and consumer law regime. For transactions that occurred up to 31 December 2010, the previous State or Territory consumer laws will continue to apply.
As a consequence, all businesses should immediately review current agreements and their standard form contracts to ensure they are both compliant and refer to the correct legislative provisions.
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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