Friday, 13 December 2013

Strength in numbers – consolidation in the non profit sector

The non profit sector has seen substantial change in recent years, particularly with increasing demands in respect to the quantity and nature of the services to be delivered.  Add to this a constantly evolving regulatory and taxation environment, challenges of funding, capacity constraints and an increasing cost base and it is not hard to see why many non profit service providers are considering opportunities to consolidate or collaborate with other providers in their sector.

The benefits of consolidation or collaboration may seem clear, including potential savings in administrative costs, greater geographical reach or a broader suite of deliverables, as well as improved access to funding.  Increased size may also generate greater influence within the relevant sector, especially in respect to policy determinations.  Ultimately, the key driver in deliberations should be about performance improvement.

Irrespective of the anticipated benefits, typically this is by no means an easy decision to make or implement and senior management needs to be alert to the range of issues which may arise by adopting this approach.  Substantial preparation needs to be undertaken to ensure the outcomes sought are clearly identified, as are the possible alternatives to achieving these outcomes and their relative costs and benefits.

If consolidation or cooperation is considered to be the preferred option, then further analysis needs to be undertaken to identify organisations in the sector with which this might be feasible to produce the desired outcomes. 

Key considerations in this process include:
  • Governance and risk management: It is important to understand the legal, tax and governance structures of the other organisation and to consider what legal or structural obstacles will need to be overcome as part of the process.  There may also be implications for the decision about what might be the best legal arrangement to implement – be that an MOU, a sharing of resources, a joint venture or a full merger.
  • Branding and identity:  These arrangements can often impact the brands and identities of the respective organisations.  Consideration needs to be given to the use or otherwise of the respective brands, how risk to the brand will be handled and, if new brands are to be created, how costs and ownership rights are to be allocated.
  • Engagement and communication: The repercussions of consolidation or closer cooperation also ought to be understood from the perspective of other key stakeholders such as employees, funders, clients, supporters and regulators.   The arrangements will require clear lines of communication and effective messaging to ensure that these internal and external relationships are effectively maintained.
  • Resource management:  Where there is to be a sharing or pooling of staff it is critically important that staff have clarity about the course of action and what is expected of them.  Similarly, the potential ramifications to the culture of the respective organisations have to be properly understood and managed.  Change can generate uncertainty for employees and gaining and maintaining their trust, acceptance and enthusiasm for the process can be the difference between success and failure.

However, whilst consolidation or closer cooperation may bring a myriad of issues, typically none of these are insurmountable provided that appropriate planning and preparation are undertaken at an early stage.  Usually, this process is significantly aided through the engagement of appropriately qualified and experienced advisers to work with senior management to establish the most suitable pathway and mechanisms to achieve the desired outcomes.

As Special Counsel at McCullough Robertson, Swain advises clients on corporate governance, international and non profit matters.

Thursday, 5 December 2013

Corruption Perceptions Index released – warning to Australian companies entering new markets

Transparency International has released its 2013 Corruption Perceptions Index (CPI), which is becoming a global benchmark for measuring perceived levels of public sector corruption in 177 countries.  For companies considering setting up operations in new jurisdictions, or undertaking cross-border M&A activities, the CPI provides a snapshot of the corruption risk posed in a particular country.

The CPI uses data from reputable independent institutions, specialising in governance and business climate analysis, who conducted international surveys with businesses and in-country experts over a 24 month period.

Countries are ranked on a scale from 0 (perceived to be highly corrupt) to 100 (perceived to be very clean).  Only a small number of countries rank on the CPI as ‘very clean’, while more than two-thirds of the 177 countries featured scored less than 50.  The index confirms that corruption remains prevalent at all levels of government, from issuing local permits to the enforcement of laws and regulations in a majority of countries worldwide.

Australia emerged as one of the year’s ‘decliners’, with its ranking falling from 85 to 81 this year, which could be attributed to the prosecution of Reserve Bank of Australia subsidiaries, Securency International and Note Printing Australia, for foreign bribery, and corruption in the NSW State Government with the recent findings of the NSW Independent Commission Against Corruption into the affairs of the Obeid family.

It is also worth noting the results of some of our trading partner countries in the Asia-Pacific region:
  • Papua New Guinea was ranked 144th, with a score of 25 (consistent with its 2012 ranking)
  • Indonesia was ranked 114th, with a score of 32 (consistent with its 2012 ranking)
  • Laos was ranked 140th with its score improving from 21 to 26.
  • Vietnam was ranked 116th with a score of 31 (consistent with its 2012 ranking).

Despite some improvement, corruption in the Asia-Pacific region remains an on-going issue which should not be overlooked.

As discussed in a previous post, corruption affecting corporate Australia is on the rise.  Australian companies looking to set up operations in new countries or seeking to grow organically through cross-border M&A transactions must be aware of the corruption risks posed, particularly in countries which appear in shades of red on this year’s CPI heat-map.

Conducting anti-corruption due diligence in cross-border M&A transactions is imperative, as systemic bribery and corrupt conduct can significantly affect the value of a target company or asset.  It is equally important to undertake an anti-corruption risk assessment before entering a new country to determine appropriate controls that should be put in place to minimise the risk of corruption.

With the regulatory environment ever increasing, Australian companies should focus on developing and embedding an effective anti-corruption compliance program tailored to the risks faced when operating in high-risk countries.  For some practical insights into the key elements of a compliance program, please refer to our previous post.

Tiffany is a Senior Associate at McCullough Robertson

Friday, 25 October 2013

Queensland complies with COAG on criminal liability of directors

The final draft of the Directors’ Liability Reform Amendment Bill 2012 (Qld) (Bill) has eased concerns the State had been recalcitrant in its corporate law reform obligations, agreed as part of the National Partnership Agreement to Deliver a Seamless National Economy.  The agreement, consented to by the Commonwealth and all State and Territories on 7 December 2010, intended to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers for corporate fault.

At the time, the Council of Australian Governments (COAG), agreed that personal criminal liability for officers was generally inappropriate, except in certain circumstances.  According to agreed principles, a directors’ personal criminal liability for the misconduct of a corporation should be confined to situations where:
  • there are compelling public policy reasons for doing so (such as the potential for significant public harm caused by the corporate offence)
  • liability of the corporation is not likely on its own to sufficiently promote compliance, and
  • it is reasonable in all the circumstances for the director to be liable considering:
    • clarity of corporate obligations
    • the director’s capacity to influence the conduct of the corporation, and
    • the steps that a reasonable director might take to assure corporate compliance.

The guidelines to the agreed principles also specified that reversing the onus of proof should only occur if supported by rigorous and transparent analysis.

Queensland Developments

While New South Wales in particular was quick to implement the COAG recommendations, the Queensland Bill was initially far less effective in achieving compliance with the COAG principles and guidelines.  The Australian Institute of Company Directors (AICD) estimated that if the legislation passed as originally formulated, there would still be in excess of 100 instances where directors or officers remain criminally liable for a corporation’s fault unless their lack of involvement in the contravention was established.

After further consultation with the AICD, the Queensland Attorney-General made numerous modifications to the Bill which was passed on 17 October 2013 (for implementation on 1 November 2013).  The modifications are based upon the Government’s decision that:
  • director’s liability provisions should generally not be included in state legislation
  • any case for an exemption to allow a director’s liability provision would need to be appropriately justified, and 
  • any exception made would not reverse the onus of proof.

The 103 pages of amendments to the original Bill mean that from 1 November, executive officers will only be liable for corporate offences if the prosecution proves that they:
  • did not take all reasonable steps to ensure the corporation not engage in conduct constituting on offence, or
  • authorised or permitted the corporation’s conduct constituting the offence, or
  • were, directly or indirectly, knowingly concerned in the corporation’s conduct.

While the liability provision applicable in any piece of legislation should be reviewed carefully, the changes implemented by this the new approach should be welcome.

A widely published corporate and commercial lawyer, Paul is a Consultant to McCullough Robertson on Corporate Advisory issues.

Friday, 4 October 2013

Corporate Australia not immune to corruption

Corruption affecting Corporate Australia is on the rise.  This week, reports surfaced about alleged widespread bribery and corruption at one of Australia’s largest companies. Allegations of improper conduct by two subsidiaries of the Reserve Bank of Australia (RBA) that were previously charged in Australia’s first ever prosecution of foreign bribery laws in 2011 were also reported.

It has been alleged that an ASX 100 company, paid a $42 million kickback to Iraqi officials in order to secure a $750 million oil pipeline contract.  The Australian Federal Police are conducting an ongoing investigation into a matter that was voluntarily reported by the company.

Two RBA subsidiaries were prosecuted for foreign bribery in 2011 for alleged payments made to government officials in Indonesia, Malaysia and Vietnam between 1999 and 2005 to secure banknote contracts.  However, further allegations of attempts to do business with Iraqi officials were reported this week.

The message for Corporate Australia is clear - companies operating in high-risk countries and sectors must take accountability and ensure appropriate measures are put in place to prevent, detect and respond to all forms of bribery and corruption.  A commitment to the issue at board level is essential to driving and embedding a culture of compliance.

Bribery of foreign public officials is strictly prohibited under the Australian Criminal Code Act 1995 (Cth). Australia is under international pressure to increase enforcement of its foreign bribery laws following a review of its implementation of the OECD’s Anti-bribery Convention in October 2012, no Australian company is immune to an investigation.

Companies should consider the following key practical elements when developing an effective anti-bribery and corruption compliance program, proportionate to the risk faced, ensuring it goes beyond a mere ‘paper-policy’:

  • recognised commitment from the board and senior management
  • undertaking ongoing risk assessments
  • performing risk-based due diligence on third parties and agents, joint venture partners and when conducting M&A activity
  • raising awareness of anti-bribery and corruption issues through risk-based training and communication, and
  • monitoring and reviewing of policies and procedures regularly to ensure their effectiveness.

The consequences of bribery and corruption are detrimental to any company’s business.  Even mere allegations can lead to significant reputational damage and a fall in a company’s share price.  Prosecution can result in significant fines and jail sentences for individuals.

Tiffany is a Senior Associate at McCullough Robertson

Wednesday, 25 September 2013

Directors entitled to defence cost coverage under D&O insurance

Company directors and officers can take some comfort that the Australian courts have recognised their entitlement to access insurance cover for defence costs in the event of a claim under Directors and Officers Liability (D&O) insurance policies. 

The Chairman’s Red Book (page 67) made reference to the New Zealand judgment in Bridgecorp which held that a charge could be brought by plaintiffs in class action proceedings to preserve the funds available under D&O insurance for their potential benefit.  The application of such a charge would deny the defendant directors and executives access to insurance cover for defence costs incurred in defending the class action proceedings.  This judgment was overturned on appeal with the NZ Court of Appeal recognising the two distinct limbs of cover applicable under D&O policies - being defence costs cover and the legal liability cover for damages, judgments or settlements.

These cases were relevant to directors and officers in Australia because the same legislative provisions applicable in New Zealand, to enable a charge to be imposed on the proceeds of an insurance policy, are applicable in New South Wales, Tasmania and the ACT.

On 11 July 2013, the NSW Court of Appeal considered the opportunity for class action plaintiffs to bring a charge over the proceeds of D&O insurance policies held by directors and executives of the now collapsed Great Southern Group.  Beneficially, the Court drew a clear distinction between the two separate covers under D&O insurance policies and recognised the importance of directors and officers accessing defence costs under D&O policies.

The Court did not entirely rule out the possibility for a charge to be imposed over the proceeds of a D&O policy.  However, it noted that any award of damages against a director or officer covered under a D&O policy would necessarily follow the incurring of defence costs to which a director or officer was entitled to cover in priority to the proceeds subject to a charge.  The Court also recognised that a director’s entitlement to insurance cover to mount a vigorous defence to legal proceedings, and potentially reduce or eliminate any ultimate award of damages against the director, was equally advantageous for insurers who advanced the defence costs coverage.

While this most recent judgment has provided clarity on the issue of directors and officers entitlement to defence costs under D&O policies, it has also highlighted the necessity for directors and officers to be aware of potential ‘internal’ competition to the limited amount of cover available under these policies.

D&O policies rarely contain a priority of payment or preservation provision to ensure cover is always available for directors and officers.  This is especially critical if the D&O policy also affords cover to the corporate entity, as well as the directors and officers, which is often the case.  Similarly, the D&O coverage may ‘compete’ for or be tied to a limit of liability which is also applicable to professional indemnity, crime or other classes of insurance.

For these reasons, directors and officers should investigate and have a clear understanding of the cover, placement and structure of their D&O insurance policy.

Diana is a Senior Associate at McCullough Robertson

Friday, 13 September 2013

Are back door listings the easier alternative?

In considering potential avenues for achieving a listing on a stock exchange, a concept that is commonly promoted is that of a ‘back door listing’.  This is particularly so given that the number of initial public offerings (IPOs), or ‘front door listings’, has declined significantly and companies are seeking alternatives for taking the next step to become a publicly listed company.

A back door listing can take a number of forms, but typically involves a listed entity (that has often wound down its operations and is subject to a suspension of trading in its securities) acquiring an unlisted entity or its assets and in exchange issuing shares in the listed entity to the vendors.  The shareholders in the unlisted entity will usually control the listed entity following completion of the back door listing.

Back door listings are often promoted as a cheaper and quicker route to achieve a listing.  This is not necessarily the case and, for a listing on ASX, the requirements set out in Chapter 11 of the Listing Rules can result in costs and timing pressures that may be greater than those experienced for an IPO.  At the discretion of the ASX, this may include having to obtain shareholder approval and, potentially, having to re-satisfy the admission requirements (e.g. by requiring a prospectus), becoming a ‘de facto IPO’. 

Some of the key advantages and disadvantages are highlighted in the attached tables.

Although a back door listing may be appropriate in some circumstances, the process should be treated with care, appropriate due diligence on the listed entity should be conducted, and the board and owners of the unlisted entity should consider whether an IPO may be the better way to achieve a listing.

Friday, 23 August 2013

Update to ASX Corporate Governance Principles and Recommendations – overhaul of approach or maintaining the status quo?

On 16 August 2013, as has been anticipated, the ASX Corporate Governance Council (CGC) released a consultation paper for a draft third edition of its Corporate Governance Principles and Recommendations (Principles and Recommendations).  This was released together with a separate consultation paper on Proposed Changes to ASX Listing Rules and Guidance Note 9, to supplement the proposed new Principles and Recommendations.

Although there have been some amendments to the second edition of the Principles and Recommendations (e.g. in relation to diversity initiatives), the draft third edition represents the first comprehensive review of the Principles and Recommendations since 2007 and, importantly, represents the first major redraft of key Australian corporate governance principles since the GFC.

The impact of the GFC is clearly seen in the new draft Principles and Recommendations, with an overarching focus by CGC on risk management and the importance of the board of directors having a greater degree of involvement and oversight in the adoption and implementation of corporate governance policies and procedures.  There is also a focus on encouraging the availability of corporate governance materials on a company’s website, rather than as a prescriptive requirement for the annual report.

The eight key principles enshrined in the Principles and Recommendations, together with the ‘if not, why not’ approach to reporting on corporate governance practices, have been retained in the draft third edition.  The overarching approach to corporate governance issues is therefore unlikely to alter.  However, the amendments to certain key principles and the approach to disclosure of corporate governance practices have received detailed attention, and it is worth reviewing the respective consultation papers to get a feel for these changes.

Some of the key proposed and/or interesting changes are:

To the Corporate Governance Principles and Recommendations:

  • A new recommendation 1.2(a) requiring a listed entity to undertake appropriate checks for an incoming director and to provide shareholders with all material information relevant to that person’s appointment.  This will act to supplement the relatively new admission requirement that a listed entity must show each director or proposed director is of ‘good fame and character’.
  • The diversity-related recommendations have been moved from principle 3 to principle 1 (relating to laying foundations for management and oversight), as CGC considers that the previous location of these recommendations resulted in confusion.  This is to be supplemented with a requirement that an entity report on the proportion of female employees in the whole organisation, in senior executive positions and on the board of directors.
  • More extensive guidance in relation to the ‘independence’ of directors has been included, to specifically include close family ties and service on the board for more than 9 years as indicators that a director may not be independent. 
  • Wording has been included in principle 3 on the importance of an entity promoting decision-making that creates ‘long-term value’ for security holders.  Combined with a new recommendation 7.3, relating to a listed entity disclosing how it has regard to environmental and social sustainability risks, there is a clear focus by the CGC on a move towards integrated financial reporting, as has recently been a focus of ASIC (see our comments in the blog dated 2 July 2013).
  • Principle 4 has been updated to provide for ‘formal and rigorous’ processes for financial reporting (which we expect is derived from recent cases such as the Centro decision). 
  • In relation to remuneration, CGC has provided a new recommendation for implementation of a ‘clawback policy’, which sets out when an entity may clawback performance-based remuneration for its senior executives (e.g. if there is a material misstatement of financial results).  This reflects relatively recent legislation proposed by the Australian Government.  The approach by CGC, that this is a matter best dealt with through an ‘if not, why not’ regime, rather than specifically through legislation, seems sensible – particularly in light of the complexities that have been faced by listed entities through the advent of the ‘two-strikes’ rule and other remuneration-related provisions of the Corporations Act.

To the ASX Listing Rules and Guidance Note 9:

  • Listing Rule 4.10.3 is to be amended to give greater flexibility for listed entities to make their corporate governance disclosures either in the annual report or on their website, and to make clear that an entity should disclose if it has not followed a recommendation for any part of the reporting period.  There is also an added requirement for an entity to state that the corporate governance statement has been approved by the board of directors, to ensure it receives appropriate focus at board level.
  • Perhaps the most significant change from an administrative viewpoint, is the proposed introduction of a new ASX form (Appendix 4G) to be completed and lodged with ASX each year (at the same time as the annual report).  This is intended to provide a key to assist investors and other stakeholders in locating an entity’s various corporate governance disclosures, recognising the flexibility being given by the amendments so that an entity’s corporate governance statements may not be in a single location on the company’s website or dealt with exclusively in the company’s annual report.  ASX has also indicated its hope that the Appendix 4G will act as a verification tool and reduce concerns in relation to standardised boilerplate documents.  We question whether the new Appendix 4G will achieve this outcome or simply become an additional administrative burden for entities during an already busy reporting period.
  • Although not directly governance-related, ASX is proposing to introduce a new Listing Rule 3.19B requiring specific disclosure of on-market purchases of securities (i.e. through a trustee structure) on behalf of employees, directors or their related parties within 5 business days.  ASX has indicated that, although it does not consider security holder approval is required, it is appropriate for disclosure to be made to the market, for such transactions.
  • Additional guidance has also been provided to highlight how the Principles and Recommendations apply differently to externally managed listed entities.

The majority of the changes are intended to become effective on 1 July 2014, with some of the amendments to the ASX Listing Rules to come in earlier (on 1 January 2014).  ASX and the CGC have asked for comments by 15 November 2013.  We will be collating any responses received from our clients on the consultation papers and considering appropriate submissions to make to ASX and CGC.  We will also continue to monitor and comment on the developments in this area, which will result in a revised Chapter 4 of The Chairman’s Red Book in due course. 

Wednesday, 7 August 2013

UK Corporate Governance Reform Proposals and the Implications for Australia

Recently, the UK Business Secretary, Dr Vince Cable, launched a policy paper entitled Making companies more accountable to shareholders and the public containing some radical law reform proposals with major implications for corporate governance.  As corporate law developments in the UK often influence Australian law reform, it is worth considering some of the more dramatic proposals.

The role of British banks in the GFC and the consequential impacts upon public finances and the economy in the UK provided the setting and motivation for the release of the paper.  In particular, it drew on the considerations and recommendations set out in the final and major report of the Parliamentary Commission on Banking Standards (PCB) entitled Changing banking for good.

That report criticised the lack of regulatory body action against those who had presided over substantial failures within banks and found the existing regime provided an imbalance of incentives (i.e. permission to undertake aggressive risks but without sufficient accountability mechanisms to act as a counterbalance).  Further, it identified a combination of collective decision-making, complex decision-making structures and extensive delegation which made it difficult to hold particular senior banking officials responsible for even the most widespread and flagrant failures. Two measures in particular recommended that:
  • all key responsibilities within a bank be assigned to a specific, senior individual who, regardless of any delegation or sharing of tasks, would remain legally responsible (Senior Persons Regime), and
  • the Commission proposed the creation of a new criminal offence of reckless misconduct in the management of a bank which was subsequently supported by the Industry Secretary .  This offence would apply to those covered by the proposed Senior Persons Regime.  Regardless of the degree of difficulty in obtaining a conviction, such a specific regime would galvanise the attention of those who lead a bank which is over-leveraging its assets; creating high risk, complex products; or departing from reasonable standards of asset allocation.  The criminal offence proposal is accompanied by a recommendation that civil recovery action can be taken against those convicted of reckless management of a bank.  To increase the prospect of directors being personally liable for the consequences of fraudulent or wrongful trading (a term of potentially wide import) liquidators will have the right to sell or assign fraudulent or wrongful trading actions.
Other proposals put forward by Secretary Cable include:
  • a regime to identify beneficial ownership of company shares to effectively identify the ultimate controllers of shares and companies
  • limits on the use of bearer shares, and
  • new directors’ duties and wider powers for the Court to assess directors’ duties.
The paper proposes some specific reforms for the banking and finance sectors and others of general applicability to directors.

Secretary Cable supported the PCB's recommendations that directors of a bank be subject to a duty to prioritise the safety and stability of the bank over the interests of shareholders.  Further, it is proposed to widen the powers of the Court to disqualify directors by allowing a much more extensive range of matters to be considered including the scale of the loss and the impact on wider society.  This would require directors to balance a wider range of stakeholder interests when making decisions and keeping matters under review.  When combined with the Senior Persons' Regime, these proposals, if adopted, have significant implications for corporate governance, including the recruitment process and criteria for appointing senior executives of banks and members of boards.

As history shows, radical regulatory reform proposals often follow dramatic crashes.  This is entirely understandable, as is the desire of a government to respond to failures of market forces which result in, as has recently been the case, the public assumption of private debts and losses.  The Senior Persons Regime appears to be capable of eliminating some of the enforcement complexities and failures of the existing regime, but the wider director duty proposals may, upon closer scrutiny, be more problematic than practical.

For example, if the board in effect has to have regard to the national interest, how in practical terms, can it distill a decision from a wide range of possibly competing factors.  Equally, if there is a duty to advance safety and stability over other considerations, would it imply that all directors have to have extremely high, possibly actuarial, levels of financial literacy?  Without these, how would one be able to assess the potential impacts of complex instruments and algorithmically generated portfolios.

The proposals, which are open for public consideration, will be watched carefully for any signals they may send to Australian law reformers.

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.

Tuesday, 2 July 2013

Integrated financial reporting and key issues arising from ASIC’s new Regulatory Guide 247

The concept of integrated financial reporting has received greater attention from ASIC recently.  It is a process that involves a listed entity reporting on a wider set of ‘non-financial’ matters to the more usual financial disclosures included in the annual report (e.g. a company’s ‘social’ and ‘relationship’ capital).

Developments in this area have included the recent release of ASIC Regulatory Guide 247: Effective disclosure in an operating and financial review (RG 247), aimed at improving disclosure in the annual reports of listed entities via the operating and financial review (OFR).

The changes have been introduced to bring Australia in line with international accounting standards and are aimed at creating a ‘level playing field’ for companies that are proactive in their disclosure obligations with those that may be less transparent.  In doing so, it is hoped that investors will ultimately benefit.

ASIC has stated that its aim with RG 247 is to lift the standard of disclosure by:
  • promoting better communication of useful and meaningful information to shareholders, and
  • assisting directors to understand the requirements for an OFR (which is a requirement derived from section 299A Corporations Act).
ASIC has taken a generally sensible approach to RG 247, having taken on submissions provided during the consultation process.  ASIC has provided reasonable examples and, importantly, has clarified that OFRs are not intended to include ‘prospectus level’ disclosure. 

RG 247 emphasises the need for directors to take into account and include statements in the OFR on a company’s future prospects.  This has been done in an attempt to alleviate concerns that traditional financial reporting promotes short-term analyst reports, rather than setting a long-term strategy.  This has, understandably, raised concerns that an increased level of disclosure may provide more material to be reviewed against the “misleading and deceptive” statement provisions of the Corporations Act.

As with all public disclosure statements, we recommend that a verification process is undertaken as a means of limiting the risk that an incorrect disclosure is made (in the OFR or otherwise) and, of course, forward looking statements must be founded on a reasonable basis.

Unlike many other jurisdictions, such as the United States, there is no ’safe harbour’ defence against claims for forward looking statements which are ultimately found to be incorrect (e.g. where those statements are made in good faith).  As the potential liability regime has been extended via ASIC guidance, rather than through a legislative process, many directors are likely to approach the OFR disclosure obligations with caution, particularly in the absence of a safe harbour defence.

Care should be taken with use of section 299A(3) Corporations Act, which provides an exemption from disclosing information about business strategies and prospects for future years if disclosure of that information is likely to result in ’unreasonable prejudice‘ to the entity.  ASIC has previously interpreted such provisions sparingly and in RG 247 recommends that directors document their reasons ahead of publication if they are seeking to rely on this exemption.

RG 247 should also stand as a warning from ASIC on its intention to scrutinise the use of non-standard financial reporting to mask problems or show the company’s financial situation in a more favourable light.

An OFR is not required to be audited.  However, as it is part of the annual report, the auditor may draw out any inconsistencies.  ASIC has also indicated that it will undertake an active surveillance campaign for annual reports.  Companies should engage with their auditors early as to any additional scope of work that may be required.

Additional time should also be allowed for management and boards to prepare, review and settle the OFR and future financial prospects commentary.

For a full copy of RG 247, click here.

Friday, 14 June 2013

Will your email trails sink you in court?

Electronic communication, especially email, has grown exponentially and made a major contribution to business efficiency.  It has also changed behaviours, most notably through people being able to instantly issue instructions, converse and negotiate without the formalities of traditional written correspondence or face to face meetings.  Accompanying these changes has been a tendency for unguarded comment to be included in emails creating a permanent record of the person’s state of mind.  Frequently, and regrettably, these can incriminate the sender or the organisation they represent.  Emails of this nature can be referred to as VIPERS because they are viral, instantaneous, permanent, extraterritorial, regrettable and self-harming and are increasingly having a decisive effect in major cases. Such was the case in Norcast S.├ír.L v Bradken Limited (No2) [2013] FCA 235.

In this case the plantiff, Norcast succeeded in recovering damages amounting to US$22.4 million representing the difference in price it received upon the sale of a subsidiary, NWS, and that which it would have received had the sale price not been reduced as a result of a bid rigging arrangement.  The original purchaser a Castle Harlan entity (CH) paid US$190 million and, immediately following settlement of the sale, sold NWS to a subsidiary of the defendant, Bradken for US$212.4 million.  It was found that the original and ultimate purchasers had entered into an arrangement whereby CH would bid and Bradken would not.

There are many interesting legal questions raised by this case which is subject to appeal, however the impact of extensive email correspondence between the parties is arguably the one which attracts the most interest.  The first point to be made is when a court is having to decide whether an arrangement has been made the intentions of the parties are crucial. Emails, a few of which are considered below, provided the Court with strong evidence from which to infer what the initial and ultimate purchasers were respectively thinking.

For example, the Judge infers from email correspondence in the early stages of the sale process: “For a company not interested in buying NWS, that was a lot of activity in one day directed to that end - the acquisition of NWS.”  Later, when Bradken asserted that it was considering the value of NWS with a view to making a direct bid Gordon J observes: “The form and content of the various communications are consistent only with an arrangement whereby CH would bid, and Bradken would not bid, for NWS…”

On another occasion, W, a Bradken employee emailed, P, an employee of CH a few days after CH had submitted its letter of intent to purchase NWS. In his Honour’s view, this was because W “could no longer stand the suspense” and wanted to know if there was any news or feedback on the bid.  His Honour’s view was that W “was not enquiring about the weather” and went on to reject W’s assertions that he was not aware that CH was actually making a bid of US$190 million.  These assertions were, he found, contrary to contemporary documentary record, in particular, contemporary emails.

It can be said in defence of emails that, in the circumstances of this case, they facilitated the negotiation of a complex international transaction involving a significant number of participants.  As is common, negotiations were fast moving, at times requiring swift responses to changing circumstances.  Electronic communication enabled this to happen efficiently.  However, it also created a rich transcript from which the court inferred the intentions of the parties from time to time notwithstanding evidence to the contrary from some very distinguished business people and organisations.

It was once said that the nature of an 'arrangement' is such that evidence of its existence will be hard to find as it may be arrived at as easily as by a wink or a nod.  Electronic communication, emails especially, may have changed all of that.

Peter is a Professor of Business Law, Executive Dean of the QUT Business School and a Consultant to McCullough Robertson on Corporate Advisory issues.

Friday, 31 May 2013

Assessing criminal liability of directors – the State application of COAG guidelines

Extensive reform of Commonwealth and State legislation conducted over the past 3 years has not achieved any consistency on the matter of personal criminal liability of company directors.  Both NSW and Queensland have audited, reviewed and introduced amendments to relevant legislation, but with differing results – leaving directors and officers of corporations in Queensland with continued cause for concern about potential criminal liability.

This is despite all State and Territories, along with the Commonwealth, signing up to the National Partnership Agreement to Deliver a Seamless National Economy, on 7 December 2010.  The partnership agreement aimed to achieve a nationally consistent approach to the imposition of personal criminal liability for directors and other corporate officers for corporate fault.

At the time, the Council of Australian Governments (COAG), agreed to a set of six principles, along with detailed guidelines.  The principles indicated that personal criminal liability for officers was generally considered inappropriate, except in certain circumstances. 

According to these principles, personal criminal liability on a director for the misconduct of a corporation should be confined to situations where:
  • there are compelling public policy reasons for doing so (such as the potential for significant public harm caused by the particular corporate offence)
  • liability of the corporation is not likely on its own to sufficiently promote compliance, and
  • it is reasonable in all the circumstances for the director to be liable considering:
    • clarity of corporate obligations
    • the director’s capacity to influence the conduct of the corporation, and
    • the steps that a reasonable director might take to assure corporate compliance.

The principles further indicated that liability should occur where the director or officer encouraged or assisted in the offence or was negligent or reckless in relation to the corporation’s offending.  The guidelines specified that reversing the onus of proof should only occur if supported by rigorous and transparent analysis.

Results of the review

In New South Wales, the Miscellaneous Acts Amendment (Directors' Liability) Act No. 2 2011 (NSW) and the Miscellaneous Acts Amendment (Directors' Liability) Act 2012 (NSW) have resulted in the number of provisions imposing personal liability on company directors in NSW legislation being reduced from more than 1,000 to about 150.  NSW now only retains six statutes which require directors or officers to establish that they have not been involved in the contravention which may result in criminal conviction (reversing the onus of proof).

By contrast, the Directors’ Liability Reform Amendment Bill 2012 (Qld) is far less effective in achieving compliance with the COAG principles and guidelines.  The Australian Institute of Company Directors, in response to the Queensland Bill, estimated that after the legislation was passed there would still be in excess of 100 instances where directors or officers would remain criminally liable for a corporation’s fault unless they established their lack of involvement in the contravention.

Clearly, further reform in Queensland is required to address the ongoing situation of company directors and officers being potentially criminal liable in circumstances where their own culpability need not be established by regulatory authorities.

We will keep you posted as changes to Queensland state legislation progress.

A widely published corporate and commercial lawyer, Paul is a Consultant to McCullough Robertson on Corporate Advisory issues.

Thursday, 2 May 2013

Continuous disclosure changes

Proposed changes

In October 2012, ASX released a package of proposed changes to the guidance for interpretation of continuous disclosure provisions in the Listing Rules.  Central to the amendments was a substantial expansion and revision of Guidance Note 8, previously updated in June 2005.

The key changes proposed included:

  • a comprehensive update to Guidance Note 8
  • the creation of a new ‘Abridged Guide’ for directors
  • clarification that 'immediately', rather than meaning 'instantaneously', should be interpreted as 'promptly and without delay'
  • further guidance on the use of trading halts
  • additional specific disclosure requirements in Chapter 3 Listing Rules – e.g. the material terms of any employment, services or consultancy contract for a CEO, director or other related party, and
  • further guidance on the Listing Rule 3.1A exception, including moving the reasonable person test to the third and final test in that rule – this change is reflected in the revised flowchart below and attached, replacing the version on page 20 of The Chairman's Red Book
    Click to view larger

    End of consultation process and effective date for changes

    The consultation process has now been completed and updated versions of Guidance Note 8, the Abridged Guide and other related amendments to the ASX listing rules were released on 13 March 2013.

    The revised version of Guidance Note 8 is scheduled to be published and come into effect on 1 May 2013.

    Wednesday, 1 May 2013

    Directors' duties

    Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of public company directors is to guide and grow business, observing the duties described below.

    Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

    As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

    An ability to fulfill these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

    In simple terms, being a custodian of other people's money is a duty of the highest order and occasionally directors lose sight of this.

    Summary of key duties

    Directors must:
    • act in good faith in the best interests of the company
    • act for a proper purpose
    • act with care and diligence
    • not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
    • avoid conflicts of interest, and
    • prevent insolvent trading.

    Directors' duties have evolved over time. These are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

    As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

    A brief overview of each duty is set out in the the Chairman's Red Book. Click here to request a copy.