On 18 September 2017, the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Act 2017 (Cth) (Treasury Laws Amendment Act) received Royal Assent.  The Treasury Laws Amendment Act creates major changes to Australia’s insolvency law regime by introducing:

• a “safe harbour” for company directors to avoid contravening the insolvent trading provision in the Corporations Act 2001 (Corporations Act); and
• provisions making “ipso facto” clauses unenforceable while a company is undergoing specified restructuring or other arrangements aimed at avoiding being wound-up in insolvency.

The new safe harbour provisions came into effect on 19 September 2017 and the changes to the ipso facto laws are expected to come into effect on 30 June 2018.

Background to the Treasury Laws Amendment Act

Australia has had very strict laws aimed at preventing companies from trading while insolvent.  Section 588G of the Corporations Act imposes a statutory duty on company directors to prevent insolvent trading, making the directors personally liable for debts that are incurred and imposing civil and criminal penalties.  In addition, ipso facto clauses (i.e. those that allow one party to terminate or modify a contract on the occurrence of a specified event, such as an insolvency related event) can adversely impact the ability of a company suffering financial difficulties from restructuring, selling assets or trading out of those financial difficulties.

It is hoped that the new provisions will:

• reduce the number of premature formal insolvency processes;
• encourage more early stage investors and professional directors to become involved in start-up companies by reducing the stigma associated with being involved with an insolvent company; and
• give Australian companies facing financial difficulties a better chance of being restructured or turned around (with a view to preserving value for creditors and shareholders). 

Safe Harbour

The Treasury Laws Amendment Act introduces a new section 588GA into the Corporations Act which provides that the civil insolvent trading provisions of section 588G(2) of the Corporations Act do not apply to a person and a debt (i.e. creates a “safe harbour”) if, after the person starts to suspect that the relevant company may become (or already is) insolvent, that person starts developing a course of action that is reasonably likely to lead to a better outcome for the company (Improvement Action) and the debt is incurred in connection with that Improvement Action.  

Key points relating to the operation of the safe harbour are as follows:

• The safe harbour period starts to apply from the time the person starts developing the Improvement Action (including any decision-making period relating to that Improvement Action and any period required to obtain initial advice). 
• The Improvement Action must be taken within a reasonable period for the safe harbour to remain in place, and the safe harbour applies until the director or company stops taking the Improvement Action, the Improvement Action stops being reasonably likely to lead to a better outcome for the company or the company goes into administration or liquidation.
• The Treasury Laws Amendment Act includes a non-exhaustive list of factors that may be considered relevant when determining whether any Improvement Action is reasonably likely to lead to a better outcome for the relevant company.  For example, whether the person/director has:
• kept him/herself informed about the company’s financial position;
• taken appropriate steps to prevent misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts
• taken appropriate steps to ensure the company is maintaining appropriate financial records;
• obtained advice from appropriately qualified advisers who were sufficiently informed; or
• developed or implemented a plan to restructure the company to improve its financial position. 
• During the safe harbour period, directors must continue to comply with their other duties under the Corporations Act and (if applicable) the company and its officers must also continue to comply with the continuous disclosure obligations under the Corporations Act and the ASX Listing Rules.

The safe harbour will be unavailable in certain circumstances, such as where the company has not been paying its employees, complying with its tax reporting obligations, or if a person seeking to rely on the safe harbour fails to substantially comply with obligations to assist an administrator, liquidator or controller that is later appointed under a formal insolvency process.  

Stay on enforcing ipso facto clauses

The amendments in the Treasury Laws Amendment Act provide for a stay against the enforcement of rights that amend or terminate an agreement to which a company is a party in the following circumstances:

• because of the company entering into a compromise or arrangement under Part 5.1 of the Corporations Act (where the scheme is for the purpose of avoiding insolvent liquidation);
• where a receiver or managing controller is appointed over all or substantially all of the property of the company under Part 5.2 of the Corporations Act; or
• where the company is placed into voluntary administration under Part 5.3A of the Corporations Act. 

Key points relating to the operation of the stay are below:

• The “stay period” (generally) begins and ends at the following times:
• In the case of a compromise or arrangement under Part 5.1 of the Corporations Act (scheme), the stay period starts when the scheme is publicly announced and ends on the later of:
• if the company fails to make the scheme application within 3 months after the announcement, at the end of that 3 month period;
• when the scheme application is withdrawn or dismissed by the court; or
• when the scheme ends, unless this occurs because the company is to be wound up (in which case the stay period ends when the company’s affairs have been fully wound up). 
• In the case of receivership or appointment of a managing controller, the stay period starts when the receiver or managing controller is appointed and ends when the receiver’s or managing controller’s control ends.
• In the case of a voluntary administration, the stay period starts when the company enters into administration and ends when:
• the administration ends; or
• the company’s affairs have been fully wound up, 

whichever is the later.

• The right to amend or terminate an agreement under an ipso facto provision will also continue to be unenforceable indefinitely after the end of the stay period, where the reason for enforcing the relevant amendment or termination right relates to the company having been under one of the specified forms of restructuring arrangements referred to above or because of its financial position before the end of the stay period or in certain other prescribed circumstances (including where the reasons are in substance contrary to the stay provisions).
• The stay does not apply to agreements made after the commencement of one of the specified forms of external administration referred to above.
• The provisions do not (generally) impose a stay or prohibit the exercise of a right for any other reason (e.g. termination for a failure by the company to make required payments or perform some other obligation under the relevant contract).
• While a stay is in force, the relevant contractual counterparty or creditor of the company will not be required to provide additional credit or new advances to the company.
• The new stay rules will only apply to contracts, agreements or arrangements entered into after the commencement date of the stay provisions.  

Author:  Samantha Khoo

If you have any queries about this article, please contact Samantha Khoo (Senior Associate - skhoo@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierralegal.com.au).

Sierra Legal would like to congratulate Bingo Industries Limited (ASX: BIN) on its entry into the Victoria waste management market through the acquisition of Konstruct Recycling, Resource Recovery Victoria and AAZ Recycling.

Sierra Legal assisted Bingo with all legal aspects of the transaction, including:

·         Legal due diligence;

·         Drafting and negotiating transaction documents; and

·         Assistance with completing the transactions.

The combined deal consideration across the 3 acquisitions was approximately $38 million.

For further information, please contact Craig Sanford, Michael Jeffery or Jenny Lau.

Corporate/Commercial Lawyer

4-8 years PQE (Associate or Senior Associate)

• Melbourne
• Unique and flexible work environment
• Relaxed, close-knit and supportive team
• Broad range of corporate and commercial work

Are you tired of working in a typical “ivory tower” law firm?  Do you want to be part of a dynamic and growing team with genuine flexibility around work location and hours? 

Sierra Legal is a boutique legal practice that was formed almost 8 years ago.  Our current clients, to name a few, include Atrum Coal, Aussie Farmers, BP, Chubb, Harris Capital, Hisense, Medibank, Bingo Industries, Simoco and Sodexo.

We have offices in Melbourne and Brisbane, but when our lawyers are not out seeing clients, they are often working from home offices and communicating regularly with each other online.  All our lawyers have come from large firms (Middletons/K&L Gates, McCullough Robertson, King Wood Mallesons and Clyde & Co) and share a common desire to practise law in a far more flexible workplace environment, but still being part of a friendly, supportive team that does interesting, high quality legal work. 

We are looking for a talented Melbourne based corporate/commercial lawyer to join our growing team at Associate or Senior Associate level, to work on a broad range of complex and interesting M&A, corporate and commercial matters. 

You will be working within a close-knit team of experienced commercial lawyers in some or all of the following areas:

• Mergers and acquisitions
• IPOs, reverse listings and public company takeovers
• Capital raisings and debt restructuring
• Commercial agreements
• General corporate legal advice

We are seeking candidates who possess an outstanding analytical mind, strong interpersonal and communication skills, excellent drafting skills, attention to detail, personal integrity, self-motivation and the ability to work as part of a close-knit team. 

If you would like to be considered for this exciting and unique role, please email your CV in confidence to careers@sierralegal.com.au

We are pleased to announce the promotion of Jenny Lau as a Special Counsel of Sierra Legal. Jenny joined Sierra Legal in 2011. She was one of the first employees of the business and has been instrumental in its growth and development.  

A new form of crowd-sourced capital raising for small, unlisted public companies is now a possibility with legislation to amend the Corporations Act passing through Australian Federal Parliament.

In late 2016, the Australian Federal Government introduced into parliament, the Corporations Amendment (Crowd-sourced Funding) Bill 2016 (Cth) (the CSF Bill). The CSF Bill will amend the Corporations Act, and will establish a regime for equity crowd-sourced funding for certain ‘eligible’ Australian companies (the CSF Regime). The CSF Bill recently passed through both the Australian Federal House of Representatives and the Australian Senate, and will now be presented to the Governor-General for assent.

The CSF Bill is intended to remove the regulatory barriers to equity crowd-sourced funding and to therefore make available a new funding source for business in Australia. It also introduces to all Australians a form of investment that has previously only been available to sophisticated investors.

The CSF Regime

The key features of the CSF Regime are as follows:

Eligible Offers

An offer of securities under the CSF Regime will need to satisfy the following key criteria:

• the company making the offer will only be able to offer to issue its own securities;
• the company will need to be an eligible CSF company at the time when the offer is made (see below);
• the securities will need to be of a class specified in the regulations (which are yet to be finalised);
• the maximum amount to be raised by the new offer can be no more than $5 million (after deducting all amounts raised by the company during the previous 12 months through other offers under the CSF Regime, small scale “personal offers” under section 708(1) of the Corporations Act and exempt offers made through financial services licensees under section 708(10) of the Corporations Act); and
• the funds sought to be raised by the offer will not be able to be used, to any extent, by the company or a related party of the company, to invest in securities or interests in other entities or schemes.

Eligible CSF Company

A company will be an eligible CSF company if all of the following conditions are satisfied in relation to the company at the relevant time:

• the company is a public company limited by shares;
• the company’s principal place of business is in Australia;
• a majority of the company’s directors (not counting alternate directors) ordinarily reside in Australia;
• the company complies with the assets and turnover test, that is: (a) the value of the consolidated gross assets of the company, and of all its related parties is less than $25 million; and (b) the consolidated annual revenue of the company, and of all its related parties, is less than $25 million;
• neither the company, nor any related party of the company, is a listed corporation; and
• neither the company, nor any related party of the company, has a substantial purpose of investing in securities or interests in other entities or schemes.

Making Offers

A key feature of the CSF Regime is the establishment of separate and less onerous disclosure requirements for capital being raised under the CSF Regime. Therefore, the existing Pt 6D.2 (Disclosure to investors about securities) and Pt 6D.3 (Prohibitions, liabilities and remedies) of the Corporations Act will not apply to this form of capital raising.

An offer under the CSF Regime will need to be made via an offer document that will need to comply with the requirements set out in the CSF Bill and the new regulations.

An offer of a company’s securities under the CSF Regime will only be able to be made on a platform operated by a single crowd-sourced funding intermediary (CSF intermediary) and all applications made in response to the offer, and all application money in respect of such applications, will need to be sent or paid (as applicable) to the CSF intermediary and be dealt with by the CSF intermediary as specified by the CSF Regime.

CSF intermediaries will need to hold an Australian Financial Services Licence that specifically authorises crowd-sourced funding activities and the CSF Regime will impose additional obligations on CSF intermediaries (including obligations to have carried-out appropriate checks on the company seeking to raise capital).

Corporate Governance

As noted above, only unlisted public companies will be eligible to be CSF companies. Proprietary companies seeking to access the CSF Regime will need to convert to an unlisted public company.

Given the additional compliance costs that small companies need to incur after converting from a proprietary company to a public company, this aspect of the CSF Regime has attracted the greatest criticism.

In order to alleviate some of the concerns, the CSF Bill provides that a company that is registered as, or that converts to, a public company limited by shares after the commencement of the CSF Regime may be eligible for corporate governance and reporting concessions for a period of 5 years. The concessions include:

• an exemption from needing to hold an Annual General Meeting (AGM) under the usual rules;
• the option to only provide financial reports to shareholders online; and
• the company not being required to appoint an auditor or have audited financial reports until more than $1 million has been raised from CSF offers.

Retail Investor Protection

The CSF Regime also includes certain protections for retail investors including:

• retail investors will only be able to invest up to $10,000 per company; and
• retail investors may withdraw an application for securities under the CSF Regime within 5 business days after the application is made, giving retail investors a chance to reconsider their investment decision.

Final Comments

Despite the regulatory compliance concessions in the CSF Bill, the Senate Economics Legislation Committee Report that was concluded in February 2017 notes that the CSF Bill still fails to address the needs of start-ups and small businesses, most of which are proprietary companies. Their view is that the Government should go back to the drawing board, consult with industry and come back with a framework that is suitable for both private and public companies.

Despite these views, the CSF Bill has now passed through Federal Parliament and the key operative provisions of the CSF Bill will commence on the earlier of a day to be fixed by Proclamation, or 6 months after the day of assent.

We will keep you updated in relation to the commencement of the CSF Regime and the introduction of any regulations that may impact the operation of the CSF Regime.

In the meantime, if you have any questions on this article or crowd-sourced equity funding, please do not hesitate to contact Troy Mossley (Senior Associate - tmossley@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierracorp.com.au).

Here are 10 key things that have led to ASIC requiring replacement prospectuses to be issued. This is based on personal experience in being involved in 4 recent IPOs/reverse listings on the ASX, and from a review of some replacement prospectuses that were issued last year.

1. More detailed disclosure of key risks in the Chairman’s letter

ASIC required a summary of certain key risks that were specific to the relevant offer to be included in the Chairman’s letter section of a prospectus. This was required notwithstanding that the risks had already been disclosed elsewhere in the prospectus.

2. More detailed disclosure around valuations/estimates

ASIC required more detailed disclosure around the basis or justification for valuations or estimates included in prospectuses where those valuations or estimates were made by directors or management (rather than independent third parties).

3. More detailed explanations relating to financial matters

In a number of prospectuses, additional disclosure was required on the level of debt owed by relevant companies, and to further explain issues relating to bad and doubtful debts, proposed debt forgiveness mechanisms and the remaining useful life of key assets.

4. More disclosure in relation to intellectual property

Further information and disclosures were required in relation to the status of intellectual property rights/assets used by the company issuing the prospectus. In at least one case where the issuer had no registered intellectual property rights, ASIC also required this fact to be disclosed.

5. Inadequate historical financial information

A number of replacement prospectuses needed to be issued last year due to the initial inclusion of inadequate historical financial information (particularly where the issuer was proposing to acquire operating companies or businesses in conjunction with the issuer’s capital raising). In May 2016, ASIC released Consultation Paper 257, which contains ASIC’s current views relating to the disclosure of historical financial information.

6. Inclusion of audited, amalgamated accounts for the last 2.5 to 3 years

In a number of instances where the issuer was a newly incorporated Australian public company that was incorporated to acquire an operating group of companies via a restructure, ASIC required the details of the audited, amalgamated accounts for the last 2.5 to 3 years for the post-restructure group to be prepared and included in the relevant prospectus.

7. Disclosure of directorships with companies in voluntary administration

In a recent replacement prospectus, ASIC required the disclosure of a director’s former directorships with companies that had gone into voluntary administration.

8. Inclusion of references where there was no independent expert or market report

ASIC required the inclusion of a list of reference sources for certain technical statements made in a prospectus relating to a medical product (where the relevant prospectus did not contain an independent expert or market report). The references were added in the main body of the replacement prospectus after each relevant statement, and a list of reference sources also needed to be included in a separate section towards the end of the replacement prospectus.

9. More detailed “Use of Funds” information

The “Use of Funds” details in prospectuses are heavily scrutinised by ASIC. ASIC will often require more detailed information on how the relevant issuer intends to use funds to achieve its future strategies and how these strategies will be impacted if less than the maximum amount is raised under the relevant prospectus.

10. More detailed information about regulatory environment

ASIC has required the inclusion of more detailed information of an issuer’s present and future products and how applicable licensing and other regulatory requirements could impact on future revenue and strategies.

It is very common for ASIC to pick up issues during the exposure period, even with the most well drafted and comprehensive prospectuses. However, keeping in touch with the areas that ASIC is focusing on (and following the guidance included in the numerous Regulatory Guides that ASIC has released) will reduce the chances of additional disclosure being required.

Author: Samantha Khoo, Senior Associate, Sierra Legal Pty Ltd.

If you have any queries about this article or in relation to prospectuses in general, please contact Samantha Khoo (Senior Associate - skhoo@sierralegal.com.au), Michael Jeffery (Director – mjeffery@sierralegal.com.au) or Craig Sanford (Director – csanford@sierralegal.com.au).

Troy Mossley, a lawyer specialising in mergers & acquisitions, joint ventures, shareholder arrangements, capital raisings, private equity investments, due diligence, and general corporate and commercial advice, joined Sierra Legal's team of advisers.

Sierra Legal would like to congratulate Faster Enterprises Ltd (FE8) on being admitted to the official list of the ASX.  The listing follows a corporate restructure and the close of offers under a prospectus resulting in FE8 raising over $5 million.

Sierra Legal assisted FE8 with all legal aspects of the transaction including:

• The corporate structure of various companies, trusts and properties;
• The preparation of the capital raising prospectus; and
• Obtaining all necessary ASX approvals.

FE8 shares commenced trading on the ASX on Monday, 21 November 2016.

For further information, please contact Craig Sanford, Michael Jeffery or Jenny Lau.

Following on from the recent appointment of Sierra Legal to the Medibank legal panel, we are incredibly proud to announce that Sierra Legal has also been appointed to the legal panel of BP Australia.

Sierra Legal was selected as just one of a few firms in Australia that will be advising BP on corporate and commercial matters.

For further information, please contact Craig Sanford (Director) or Michael Jeffery (Director).

We are extremely pleased to announce that Sierra Legal has been appointed to the panel of legal advisers to Medibank.

Medibank joins Sierra’s growing client base of large national and multi-national organisations (including Australian Unity, Hisense, Pact Group and Simoco) that seek counsel from our exceptional legal team in relation to a broad range of corporate and commercial matters, recognising the unique value we add.

We are very excited by this opportunity to build a long and mutually beneficial relationship with Medibank.

We are pleased to announced that Samantha Khoo has recently been promoted to Senior Associate.  Sam has been with Sierra Legal for the past 2 and a half years and is admitted as a solicitor in Queensland, Australia as well as in England & Wales.

Congratulations Sam!

Sierra Legal would like to congratulate Voltage IP on receiving confirmation that it will be re-admitted to official quotation on the ASX.  The relisting follows the successful acquisition of KLE Products and the close of offers under a prospectus resulting in VIP raising over $3.5 million.

Sierra Legal assisted VIP with all legal aspects of the transaction, including:

• the acquisition of KLE Products;
• shareholder meetings to obtain the necessary approvals;
• the preparation of the capital raising prospectus; and
• obtaining all necessary ASX approvals (including re-compliance with Chapters 1 and 2 of the ASX Listing Rules).

The ASX has announced that trading in VIP shares will recommence on Tuesday, 2 February 2016.

For further information, please contact Craig Sanford (Director) or Michael Jeffery (Director).

We are pleased to announce the promotion of Mike Jeffery as a Principal of Sierra Legal.  Mike joined Sierra Legal in 2011.  He was the first employee of the business and has been instrumental in its growth and development.

Sierra Legal has been advising Frontier Capital Group (formerly known as Precious Metal Resources) in relation to the acquisition of CK Graphic (a Malaysian digital visual communication company) and a contemporaneous $4 million capital raising.  The transaction (which constituted a back-door listing) required FCG to re-comply with Chapters 1 and 2 of the ASX Listing Rules.  On 31 March 2015, is was announced that the shares in FCG will be re-admitted to the official list of the ASX on 7 April 2015.

Sierra Legal is celebrating its 5th anniversary this March! We would like to thank our clients, staff, family and friends for their ongoing support.  We look forward to continuing to deliver exceptional work for many more years!

For those of you out there with aspirations of raising capital in Australia, here is a timely reminder of the restrictions imposed by the Corporations Act relating to the promotion of security offers (ASIC Media Release 15-025).

The Corporations Act states that it is an offence to:

• advertise security offers; or
• publish statements referring to security offers (or that may induce people to apply for securities),

before the relevant disclosure document (e.g. a prospectus) has been lodged with ASIC.  There are also rules that apply after the lodgement of the relevant disclosure document… but the rules that apply before lodgement are far more restrictive.

ASIC has reported that Bitcoin Group (a Melbourne based Bitcoin miner) recently used the social media application “Wechat” to seek expressions of interest from potential investors in relation to its proposed IPO on the ASX.  ASIC has issued a stop order preventing Bitcoin Group from publishing any statements about its IPO until it lodges a disclosure document with ASIC.

Sierra Legal advised JAG Capital in its acquisition of the All Heads Services business, a long-standing and successful cylinder head reconditioning business located in Victoria, Australia.

Sierra Legal successfully negotiated relief from ASIC from the managed investment scheme licensing and registration requirements to allow Avia Aircraft to establish an aircraft time sharing scheme in Australia.

Sierra Legal advised Ebony Iron and its shareholders on the sale of all the issued shares in Ebony Iron to Strategic Minerals Plc, a company listed on AIM in the UK.

Sierra Legal is pleased to announce that Michael Jeffery has been promoted to the position of Senior Associate.

Jenny Lau, an adviser with extensive experience in mergers and acquisitions, divestments, private equity investments and general commercial and corporate advice, joined Sierra Legal’s team of senior advisers.

Sierra Legal recently advised Ebony Iron on 2 private capital raisings to fund acquisitions and project development and expansion, and also acted for the company in its successful acquisition of Southern Minerals Group, a company with iron ore interests in New Mexico, USA

Sierra Legal has successfully advised a leading Australian packaging group on various acquisitions by the company, together with a range of supply agreements with key customers.

Sierra Legal advised CM Basin Coal on the establishment of a strategic joint venture between the company and Hudson Resources Ltd, in relation to thermal coal opportunities in the Clarence-Moreton Basin in Queensland, Australia.

Craig Sanford was appointed as a non-executive director of ComGroup Australia and Sierra Legal was appointed to provide general corporate and commercial legal services to the company.