Foreign investment decisions lack consistency

Two controversial decisions were made regarding foreign investment in the lead up to the holidays – one was highly publicised by Treasurer Joe Hockey, including through a televised press conference.  The other was announced quietly via an emailed media release to a selected audience.

You may have missed the announcement on 11 December that China’s state-owned Yanzhou Coal Mining Company doesn’t need to cut its stake in local unit Yancoal Australia Ltd to below 70% and instead can move to 100% ownership.

By contrast the decision that “Australia’s national interest” will be protected by rejecting Archer Daniels Midland Company’s (ADM) proposed acquisition of GrainCorp Limited was highly publicised.

It could be assumed that public perception rather than issues of competition was the significant factor in the Treasurer’s decision.  The Graincorp acquisition had already obtained ACCC approval (indicating competition concerns were not determining factors), while the Yanzhou decision basically overturns restrictions on ownership and conditions set by the Foreign Investment Review Board (FIRB) four years ago.

The Government has continued to express its encouragement of foreign investment, but the GrainCorp decision is hard to understand in that context.  Interestingly, the issue of food security was not mentioned as a factor, while it was one of the main focuses of the recent Senate enquiry into foreign investment in the agribusiness sector.

In explaining his decision, the Treasurer referred to concerns expressed by grain growers in eastern Australia that the proposed acquisition by ADM could reduce competition, while acknowledging that a “more competitive network” is currently emerging.  The Government’s significant consideration was the “high level of concern from stakeholders and the broader community.”  It is unclear who these other stakeholders are but Hockey went on to say: “I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally.  This would not be in our national interest.”

The Yanzhou decision raised a difficult problem for the Government.  In allowing this acquisition, there is a risk that the Government is seen as weak by not enforcing its own conditions.  The perception that foreign investors are dictating terms to the government could also undermine public support for the foreign investment regime and ongoing foreign investment more generally.  However, as the Treasurer points out, since the original conditions were imposed on Yanzhou, significant challenges have emerged for the Australian coal industry – changing the nature of play completely.

Changing circumstances require revision and flexible decision making.  In the case of the Yancoal takeover, it is now not so clear that allowing 100% holding is contrary to the national interest.

It will be interesting to observe the Government’s position evolve in 2014.

Media release: Foreign investment application: Archer Daniels Midland Company’s proposed acquisition of GrainCorp Limited
Media release: Foreign investment decision

Duncan Bedford
Duncan is a Partner at McCullough Robertson and an expert in business and transaction structuring and taxation.

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.

Swain Roberts

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

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 McLean

Tiffany is a Senior Associate at McCullough Robertson

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.

Professor Paul von Nessen

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

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 McLean

Tiffany is a Senior Associate at McCullough Robertson

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 Masen

Diana is a Senior Associate at McCullough Robertson

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.