enterprise may 2014 | 1

In Profile: Steve Conner | 4

MAY 2014 ISSUE 12

Takeover options | 10

Queensland property law in review | 8

REFORM OF THE FOFA REFORMS

enterprise may 2014 | 3

Welcome to Enterprise, our quarterly online magazine for business owners and entrepreneurs, bringing you insights into the latest commercial and legal developments.

In this edition we feature an interview with Steve Conner, Director of Planning and Priority Development Areas (Department of State Development, Infrastructure and Planning), about how the State Assessment and Referral Agency is working in practice.

Managing partner Sean McMahon welcomes our new Capital Markets team lead by partner Wayne Penning and takes a look at what lies ahead in 2014. We also feature:

• the highly-anticipated Future of Financial Advice (FOFA) reforms

• an evaluation of the most common takeover structures and associated regulatory issues

• proposed amendments to the corporations legislative regime

• the shake up of the Franchising Code• the long overdue review of Queensland’s

property laws.

We hope you enjoy the latest edition of Enterprise, and we look forward to your comments and feedback

.

Best regardsLangton ClarkePartner, Corporate Advisory and Agribusiness

From the editor

From the editor | 2

What lies ahead in 2014? | 3

In Profile: Steve Conner | 4

FEATURE: Reform of the FOFA reforms | 6

Updated corporate governance principles and recommendations | 7

Queensland property law in review | 8

Dividends and disclosing entities—removing the red tape | 9

Takeover options | 10

Is the end of the 100 member rule in sight? | 11

News & views | 12

contents

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Sean McMahon Managing Partner

What lies ahead in 2014?

with the difference. The interstate migration numbers dropped significantly post-GFC and this was compounded by the Queensland floods in 2011/2012. However, signs indicate the trend might resume which is good news for the property industry and the Queensland economy in general.

In addition, while the Newman Government has been criticised for some of the legislation it has introduced recently, they deserve credit for their changes to the Property Agents and Motor Dealers Act (PAMDA). These changes will make compliance with laws surrounding the purchase and sale of real estate much simpler and more economical by removing unnecessary red-tape and draconian penalties for non-disclosure. Special counsel Adam Geldard reports on the latest developments at page 8 of this edition of Enterprise.

I hope 2014 has started well for you, and we look forward to working with you throughout the year.

This is our first edition of Enterprise for 2014 and our first since welcoming Wayne Penning and his Capital Markets team to McMahon Clarke. We are very excited to have Wayne and his team on board and to add his skill set to our client offering.

Wayne has worked in leading international law firms in Sydney, Brisbane and Hong Kong. He brings debt and equity capital market skills to the firm which complement our funds management and corporate capabilities exceptionally well. Wayne’s skills are particularly valuable for our clients looking to raise additional capital to grow their business or list their business on a stock exchange. Please click here for further details of the capability and experience of our Capital Markets team.

With the first quarter of 2014 already over, this is a good opportunity to report on where we see things heading for the rest of the year.

In Queensland, property has always been a key driver of our economy. The residential property sector in the southern states is certainly very strong, as evidenced by auction clearance rates and strong price growth.

A significant amount of buying is reported to be coming from Asian investors. While that influence might not be as strong in Queensland just yet, we expect it ultimately will be or at least feed ‘interstate migration’ where southern buyers have traditionally looked to ‘trade’ the market, relocate to Queensland and top up their super

enterprise may 2014 | 54 |

IN PROFILE

ML: How would you assess SARA’s effectiveness after 10 months of operation, and how is it rating against its stated KPIs?

SC: SARA hit the ground running and is reasonably effective overall, but there is always scope for improvement. We are monitoring SARA’s performance against a range of KPIs and will report on these later this year after the first 12 months of operation.

To date we’ve received good reports about key indicators around reducing information requests and processing times. SARA is also performing well above expectations in terms of the percentage of planning and environment appeals relative to applications.

Also, customer satisfaction is one of SARA’s key KPIs and a state-wide survey of stakeholders is scheduled for the next few months with a report expected around August this year.

ML: Are there any modifications or improvements planned?

SC: Continuous improvement is a key theme for SARA and we expect to implement a range of improvements over the next few years.

A lot of work is being done behind the scenes with relevant agencies around a fast track framework for some types of applications. This streamlined process will be implemented in several phases with the first tranche expected around August this year. This will be accompanied by a new fee regime, including some discounted fees.

Following feedback from industry we are also undertaking a comprehensive review of regulatory triggers so that they’re clearer and less ambiguous. Associated with this review is our work to “plug the gaps” in the now consolidated geographic information system (GIS).

Also, there is ongoing refinement and clarification of SARA’s main policy document, the State Development Assessment Provisions (SDAP).

For the longer-term, our aspiration is for a leaner and more streamlined SARA. We recognise that SARA is a reform initiative and we can’t be complacent.

SC: SARA is designed to work with DSDIP as the key decision maker in the state’s assessment of development applications, and technical advice is sought from other relevant state agencies (ie technical agencies). Previously, each state agency or department was responsible for its own decisions.

SARA is administered by DSDIP on a regional basis so that an application is processed close to where it was generated, making SARA much more accessible. This on the ground approach is a key feature of the SARA business model.

ML: How is SARA intended to benefit the development and construction industries?

SC: SARA offers a range of benefits, including:

• better co-ordination between state departments and agencies

• greater certainty and consistency of approach • more “reasonable” decision making• improving the development application

culture within state agencies (eg issuing less information requests and more reasonable conditions throughout the application process).

ML: Can you give an example of a project that has been through the SARA approval process which highlights some of the benefits?

SC: There is a range of examples where SARA has reconciled extensive negotiations with technical agencies before finalising conditions. SARA is expected to exercise “reasonableness” and there are numerous examples where applicants have ended up with less onerous conditions and requirements.

On other occasions, in striving for a stronger customer service culture, SARA has accelerated decision making and prioritised applications in response to the commercial needs of applicants.

One of SARA’s key performance indicators is to develop a stronger culture of pre-lodgement meetings so that applicants are more clearly informed about requirements. This helps to reduce the need for information requests which has been an industry concern. We have a growing track record of these meetings, which DSDIP helps co-ordinate, being taken up by industry.

Steve Conner Executive Director of Development AssessmentDepartment of State Development, Infrastructure and Planning

A key component of the Queensland Government’s planning reform was the introduction of the State Assessment and Referral Agency (SARA) which is administered by the Department of State Development, Infrastructure and Planning (DSDIP). Partner Mark Lyons chats to the Executive Director of Development Assessment Steve Conner, about the role and future of SARA which recently received the Planning Institute of Australia’s Improving Planning Processes and Practices Award.ML: How is SARA designed to work?

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REFORM OF THE FOFA REFORMS

MEASURE AS IT WAS... AS IT IS... AS IT WILL BE...

Conflicted remuneration (such as commission)

Advisers could be paid a commission by product providers

Commissions are currently banned

General advice will be exempted from the ban on conflicted remuneration

Best interest obligation

Advisers not bound to act in client’s best interest

Advisers bound to offer advice in client’s best interest, including ‘catch all’ requirement to take any other step reasonably regarded as being in the client’s best interest

Removal of ‘catch all’ provision

Scaled advice (ie advice limited in scope)

Limited scope advice allowed

Confusion as to compliance obligations of advisers when giving limited scope advice but also acting in client’s ‘best interest’

Advisers and clients can agree on the subject matter of advice

Ongoing service Advisers not obliged to set out ongoing fees payable by client

Advisers must provide annual fee statements. Clients need to opt-in every two years to continuing receiving service

The opt-in requirement will be removed as will annual fee disclosure requirements for pre 1 July 2013 clients

Langton Clarke Partner, Corporate Advisory and Agribusiness

The introduction of the highly-anticipated Future of Financial Advice (FOFA) reforms has generated as much animated discussion as the proposed wind-back of some of the changes. Here partner Langton Clarke looks at the upcoming reforms.

Andrew Williams Associate, Capital Markets

Updated corporate governance principles and recommendations

Entities listed on the ASX are required to benchmark their corporate governance practices against the recommendations released from time to time by the ASX Corporate Governance Council.

On 27 March 2014, the latest version of the Council’s recommendations was released. They apply to a listed entity’s full financial year commencing on or after 1 July 2014.

This edition – the third for the Council – is significant because it is the first substantial update since the global financial crisis. The substance of some of the new recommendations is only addressed in commentary in the second edition (for example, that there are written contracts for appointment of directors). Other recommendations are appearing for the first time – for example, that background checks are to be conducted on directors prior to their appointment, and disclosure of exposure to sustainability risks.

In his foreword to the new edition, the Council’s chair Alan Cameron cites the considerable international corporate focus on corporate governance practices in light of events leading up to and during the global financial crisis and that the third edition changes reflect global developments in corporate governance.

The flexibility of ‘if not, why not?’ disclosure has been retained, so if a listed entity does not conform to the Council’s recommendations, then it must disclose that fact and the reasons why.

Please click here for the current version of the Council’s recommendations.

enterprise may 2014 | 7

The Federal Coalition is delivering on a pre-election promise to change the FOFA laws, which only became mandatory on 1 July 2013 (following a 12 month transition period). Putting aside the changes – or their merits – for the moment, it would be worth an admission ticket alone to the cage fight that is ensuing! On one side of the debate is the financial planning sector and the product issuers with whom the relationship has been close for many years. On the other, are the industry superannuation funds, purportedly represented by Industry Super Australia.

A well-worn battle ground in this war of words is the proposed changes to the ‘best interests’ obligation under FOFA. McMahon Clarke has always held the view that the relationship between adviser and client is of such a nature that an obligation to act in the best interests of the client existed already. Nevertheless, Parliament sought to put the matter beyond doubt and enshrined a ‘best interest’ obligation in the legislation.

But, let’s return to the changes proper. The table to the left sets out what was, is, and will be under FOFA – Mark II.

There are some other changes also proposed. Advocates for the changes, including the Federal Government, state they will improve and enhance access and quality of advice to consumers whilst reducing compliance costs imposed on the financial services sector. However, that sector and consumers alike will need to wait as the amending law has been referred to the Finance and Public Administration Legislation Committee for inquiry and report by 16 June 2014.

“A well-worn battle ground in this war of words is the proposed changes to the ‘best interests’ obligation under FOFA.”

enterprise may 2014 | 9

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Adam GeldardSpecial Counsel Real Estate

Queensland property law in review

Many have welcomed the new Property Occupations Legislation as heralding a new era for property transactions in Queensland. Special counsel Adam Geldard outlines the key changes which are aimed at reducing red tape, simplifying the contract formation process and reducing incidences of contract termination.

Background

Having been introduced into the Queensland Parliament last November, the following Bills were passed on 6 May 2014 and aim to cut through the red tape imposed on property agents, motor dealers, auctioneers and commercial agents:

• Property Occupations Bill • Motor Dealer and Chattel Auctioneers Bill • Debt Collectors (Field Agents and Collection

Agents) Bill • Agents Financial Administration Bill.

The four Bills split and replace the Property Agents and Motor Dealers Act (PAMDA) and are expected to commence later this year. Of particular interest is the Property Occupations Bill.

For property developers and real estate agents, PAMDA had become increasingly difficult to use, imposing a web of regulatory requirements which did not necessarily address the policy problems the Government was originally intending to resolve.

Key changes

The Property Occupations Bill is most relevant to the property industry. Whilst the changes are broad ranging, some of the key changes will be:

• The existing warning statements and information sheets (currently attached to contracts for the sale of property) will be replaced with a much simpler prescribed statement to be included within the sale contract.

Dividends and disclosing entities —removing the red tape

Improving the efficiency and reducing the compliance costs of Australia’s corporate regulatory environment are the driving force behind proposed amendments to the corporations legislative regime.

Elliott StummLaw Clerk Corporate Advisory

(or pay) a dividend to reduce its share capital when the dividend is declared or paid and the reduction in share capital is an ‘equal reduction’ (ie where all ordinary shareholders participate).

Where a company pays a dividend from a source other than profits, the details of the source as well as the board policy for determining the amount and source of dividends will need to be included in the annual directors’ report. This is considered to be an important integrity measure, and is not expected to impose a net increase in company compliance costs as shareholder approval will not be required for distributions of this nature.

The reporting requirements of disclosing entities

Although seemingly directed towards listed companies, the Corporations Act currently extends to unlisted companies that are ‘disclosing entities’ (essentially a company with at least 100 shareholders). This means that unlisted disclosing entities must include in their annual directors’ report a remuneration report for the key management personnel, set out in a separate and clearly identified section. As unlisted disclosing entities are not required to hold an annual general meeting, put their remuneration report to shareholders or be subject to the ‘two-strikes’ test, the preparation of a remuneration report is not as relevant as it is for listed entities. The Bill therefore proposes to remove the requirement that unlisted disclosing entities prepare a remuneration report, which in turn reduces compliance costs.

Submissions close on 16 May 2014 and we will update you on further developments.

Law clerk Elliott Stumm welcomes the draft Corporations Legislation Amendment (Deregulatory and Other Measures) Bill which evidences a willingness of the Federal Treasury to cut unnecessary red tape, and outlines the proposed amendments to the dividend payment test and the reporting requirements of disclosing entities.

Also in this edition of Enterprise (page 11) Brit Ibanez reviews the proposed removal of the obligation to hold a general meeting on the request of 100 shareholders.

The test for payment of dividends

Currently, the Corporations Act employs a “net assets test” which requires that:

• a company’s assets must exceed its liabilities by an amount sufficient to allow for payment of the dividend immediately before a dividend is declared

• the payment of the dividend must be considered fair and reasonable to the company’s shareholders as a whole, and must not materially prejudice the company’s ability to pay its creditors.

A company’s assets and liabilities are calculated in accordance with accounting standards, even if the company is not otherwise required to comply with them. The test is also criticised as being an ineffective measure of company solvency.

With this in mind, the proposed amendment will enable a company to declare a dividend where the directors reasonably believe the company will, immediately after the dividend is declared, be solvent. If a dividend is to be paid without being declared, then the solvency of the company must be considered prior to and immediately after the payment of the dividend.

Additionally, the Bill proposes to better enable a company to reduce its share capital by declaring or paying a dividend. Currently, the payment of distributions from sources other than profit is restricted by the operation of the capital maintenance provisions. The proposed amendment will enable a company to declare

• A failure to comply with the new prescribed statement requirement will not entitle a buyer to terminate the sale contract but will constitute an offence (punishable by a maximum of 200 penalty points).

• The requirement for lawyers’ certificates will be removed.

• Property developers and their employees need not be licensed estate agents.

• The maximum commission payable for residential and rural property transactions will be deregulated.

• The appointment of real estate agents will be made more flexible with regard to the paperwork required and some of the terms of the appointment.

The property industry in general should embrace these changes, and we will work with our clients to ensure a smooth transition.

enterprise may 2014 | 1110 |

Wayne PenningPartner Capital Markets

Laura SteeleLawyer Capital Markets

Scheme of arrangement

• An acquisition of shares under a scheme of arrangement approved by the target shareholders and the court.

• A successful scheme needs the approval of 75 percent by value and 50 percent by number of each class of shareholders present and voting at a scheme meeting. In contrast, under a takeover bid, the holders of at least 90 percent of shares must accept the bid before the outstanding minorities can be compulsorily acquired.

• Generally used for ‘friendly’ acquisitions due to the positive obligations on the target company to hold meetings and issue notices to shareholders.

• A scheme is an ‘all or nothing’ proposition (ie the bidder either gets 100 percent of the target or nothing).

• Schemes offer greater flexibility to achieve a number of different ends in the one transaction which makes them suitable for complex mergers.

Reverse takeovers

Reverse takeovers are also commonly used by unlisted companies to access a listing on a securities exchange. It typically involves an existing listed company acquiring all of the issued shares in a private company in exchange for shares in the listed company being issued to target shareholders.

Recently, Bulletproof Networks (a cloud computing company) opted to list on the ASX via a reverse takeover of mining company Spencer Resources (now Bulletproof Group Limited (ASX: BPF)), rather than through an initial public offering (IPO). We have advised various companies on reverse takeovers.

Reverse takeovers will generally require:

• shareholder approval under the Listing Rules if the listed company’s placement capacity is likely to be exceeded as a result of the issue of shares to target shareholders

• shareholder approval under the Listing Rules as the transaction is likely to trigger a significant change in the nature and/or scale of activities

• re-compliance with the exchange’s admission requirements

• if, as a result of the listed company issuing shares to target shareholders, any person would exceed 20 percent voting power in the listed company, shareholder approval under the Act (which requires an independent expert’s report to be issued).

Other regulatory issues

Depending on which takeover option is proposed, other regulatory issues may be relevant, including:

• whether shareholder approval is required under Listing Rules for related party transactions (eg the issue of shares to a related party)

• if the listed company is issuing shares to the target company shareholders as consideration for the acquisition, whether the listed company’s placement capacity under the Listing Rules is likely to be exceeded and whether any target shareholder is likely to obtain 20 percent or more voting power in the listed company (triggering a requirement for shareholder approval)

• the possibility the target will need to prepare an independent expert’s report (eg where there are common directors in the bidder and target)

• where the bidder has acquired (or agreed to acquire) target shares in the four months before the bid, the Act requires that the consideration offered must equal or exceed the consideration given (or agreed to be given) for target shares during the four months before the date of the bid.

Conclusion

When planning a takeover you should carefully consider which structure is the most appropriate and what implications the takeover will have in terms of requirements under the Act and the Listing Rules. A thorough consideration of which takeover alternative is suitable to your transaction and the regulatory approvals required is crucial to ensuring the success of any takeover.

Is the end of the 100 member rule in sight?

Companies with a large and diverse shareholder base have long called for the repeal of the rule allowing 100 members of a company to require the company to hold a general meeting of members. As special Counsel Brit Ibanez explains, the Federal Government has released a draft bill that does just that by amending the Corporations Act.

The cost to companies of running such meetings can be extensive – room hire, transcription services, sending notices, manning telephones and responding to questions and queries about the meeting all mount up.

When the meeting is called by a relatively small number of members, then it is often to push a specific agenda that has little relevance or interest for the remaining shareholder body. There are other mechanisms for shareholders to request information or that certain resolutions are put to the annual general meeting.

On 10 April 2014, the Federal Government released the Corporations Legislation Amendment (Deregulatory and Other Measures) Bill which removes the requirement for a company to hold a general meeting on the request of 100 members. The rule allowing members that hold five percent of the votes to demand the company hold a meeting will remain. This is a useful and appropriate threshold for members to meet when agitating for a general meeting. In some companies, 100 members will hold nowhere near five percent of the vote.

The exposure draft of the Bill is open for consultation until 16 May 2014. We are keen to obtain feedback from our readers as to whether this is a good move or will it further dampen the ability of shareholders to have a reasonable say in the running of their company?

In this edition of Enterprise (page 9) you’ll also find an article by Law clerk Elliott Stumm on other changes proposed by the Bill.

Brit IbanezSpecial Counsel Corporate and Litigation

Takeover options

In this article capital markets partner Wayne Penning and lawyer Laura Steele evaluate the most common takeover structures and highlight important regulatory issues (particularly for listed companies) when planning and executing a takeover.

An introduction to takeovers

The Corporations Act (Act) generally prohibits a person from acquiring more than 20 percent voting power in a company except by certain approved means (ie takeover exceptions). Some of the most commonly used exceptions include off-market takeover bids, on-market takeover bids and schemes of arrangement.

The following summarises takeover structure options and ‘high level’ features and key advantages and disadvantages of each.

Off-market takeover bid

• A bidder makes separate but identical offers to all shareholders of the target to acquire all of their shares.

• Often made conditional upon the satisfaction of certain conditions (eg that the bidder reaches a minimum level of acceptances and that all regulatory approvals are obtained).

• Consideration other than cash can be used in exchange for the shares (eg shares in the bidder).

On-market takeover bid

• Quoted securities are acquired through an exchange like ASX. A bidder authorises its appointed broker to make an offer on the exchange to acquire all of the shares in the relevant class.

• The offer must be unconditional so all regulatory approvals must generally be obtained prior to announcement.

• Only cash can be offered as consideration for the shares.

• This process is likely to be shorter due to shorter lodgement periods and quicker time for processing payments to accepting shareholders.

NEWS & VIEWSNEW CAPITAL MARKETS TEAMWe are delighted to announce that Wayne Penning has joined McMahon Clarke as a partner to head the firm’s Capital Markets team focusing on equity and debt raisings, private equity, and capital management strategies. We also welcome associate Andrew Williams and lawyer Laura Steele to our Capital Markets team. Wayne, together with partner Langton Clarke (head of Corporate Advisory) will spearhead the firm’s corporate and commercial practice and will work closely with the firm’s Real Estate and Funds Management teams.

Wayne and his team are well recognised throughout the corporate community and offer strategic and detailed knowledge of the heightened regulatory, compliance and structural challenges in today’s marketplace. This is an important asset to our clients moving forward. The addition of Wayne and his team complements our well recognised corporate and commercial platform

FOREIGN INVESTMENT REVIEW BOARD 2013 ANNUAL REPORTThe Foreign Investment Review Board recently issued its 2013 annual report. Please click here for a summary of the report’s main points and a comparison with the 2012 data.

FRANCHISING SHAKE UPWith the Australian government recently announcing major changes to the Franchising Code of Conduct and the Competition and Consumer Act, franchisors need to make changes and review their franchise agreements. Please click here for an outline of the key draft amendments by corporate advisory lawyer Rodney Yu who warns that franchisors will face penalties for non compliance.

62 Charlotte St Brisbane Q 4000 GPO Box 1279 Brisbane Q 4001 

T 07 3831 8999  F 07 3831 1121 www.mcmahonclarke.com

Wayne PenningPartner

Laura SteeleLawyer

Andrew WilliamsAssociate