Migration Law

Corporate governance

Corporate governance refers to system, rules, customs, policies and procedures by which a company is governed by its stakeholders (directors, officers, managers, employees and shareholders).  It also deals with the rights and obligations of those stakeholders as against one another as well as the company itself.

From a lawyer’s perspective, it is important to have good corporate governance because it helps to reduce conflict between stakeholders and minimise legal risks for the company.  But there are commercial reasons, too, as to why it is a good idea to take corporate governance seriously.

Recent studies have shown that companies with good corporate governance practices tended to outperform those with poor corporate governance in terms of share price performance (business valuation), operating performance (profitability) and sales growth (revenue).  This was certainly the case for the ASX-listed companies which were the subject of those studies, and there is no reason to think that the same will not apply to smaller, unlisted companies.

For medium to large-sized companies in particular, we believe that each company should have the following elements:

• A tailored Constitution and Shareholders Agreement;
• Qualified and experienced Board of Directors who meet regularly;
• Deeds of Indemnity, Insurance and Access between the company and its directors;
• Written roles, duties and responsibilities for each directors, manager and employee;
• Written Board recruitment and evaluation process;
• Agendas and Minutes of Meetings;
• Corporate Registers (including Directors’ Register, Conflicts of Interest Register, Complaints Register, Shareholder Register, etc)
  • Corporate vision, mission and values;
  • Business Plan (including annual and monthly budgets) and Corporate Strategy;
  • Regular financial and operational management reporting;
  • Documented risk management strategy;
  • Employment Agreements and Position Descriptions for all staff;
  • Documented policies and procedures (eg. Code of Conduct, HR policies, IT policies, etc).

Winthrop Mason Lawyers can assist you by:

• Conducting an evaluation of your company’s corporate governance practices;
• Drafting or reviewing your company’s Constitution and Shareholders Agreement;
• Drafting your company’s initial Minutes of Meeting, Shareholder Register, Share Certificates and other governance documentation;
• Developing a Risk Management Strategy for your company;
• Setting up Corporate Registers (including Directors’ Register, Conflicts of Interest Register, Complaints Register, Shareholder Register, etc);
• Drafting your Deeds of Indemnity, Insurance & Access for directors and officers;
• Advising on the rights and obligations of the company and internal stakeholders (directors, officers, managers, employees and shareholders);
• Drafting Employment Agreements, Independent Contractors Agreements and the like;
• Drafting internal policies and procedures for your company (eg. Recruitment Policy, Induction Policy, Privacy Policy, Code of Conduct, Anti-Discrimination Policy, WH&S Policy, IT Usage Policy, Performance Management Policy, Training Policy, Conflict of Interest Policy, etc),

We are happy to perform any of this work for an agreed fixed fee.  For a no-obligation initial consultation, go ahead and give us a call.

Share buy-backs

Share buy-backs occur where a company decides to buy back some of its shares from existing shareholders.

The effect of a share buy-back is to reduce the number of shares outstanding which in turn can make the remaining shares more valuable, particularly where the shares are being purchased below their intrinsic value.

Types of share buy-backs

There are five basic types of buy-back schemes:

• Equal access – where all shareholders are offered to buy back the same percentage of their existing shareholdings;

• On-market – where a publicly listed company buys back shares on-market via the stock exchange;

• Employee share scheme – where the company offers to buy back the shares of its employees or salaried directors;

• Selective buy-back – where the offer to buy-back shares are only made to selected shareholders in the company;

• Minimum holding – where a publicly listed company offers to buy unmarketable parcels of shares (formerly known as “odd lots”) from shareholders.

Different buy-back procedures apply depending on the type of buy-back arrangement involved.

The 10/12 limit

Even under the different types of buy-back schemes, there are different procedures still depending on whether or not the “10/12 limit” under the Corporations Act 2001 (Cth) is exceeded.  The 10/12 limit will be exceeded where the buy-back involves more than 10% of the smallest number of shares of the company in the last 12 months.

There are more stringent requirements imposed on companies whose share buy-back scheme exceeds the 10/12 limit.

The buy-back procedures

Depending on the type of buy-back scheme involved, and whether or not the 10/12 limit will be exceeded, the procedure to be followed will include a relevant selection of the following:

• Pass an ordinary resolution at a Board meeting in all instances;
• Pass an ordinary resolution at a shareholders meeting (for employee share schemes, on-market and equal access schemes where the 10/12 limit is exceeded under each scheme);
• Pass a special resolution for all selective buy-back schemes (regardless of whether 10/12 limit is exceeded);
• Lodge offer documents with ASIC (for all equal access and selective buy-back schemes);
• Provide 14 days’ notice to ASIC (for all types except minimum holding where it is not required);
• Lodge ASIC Form 484 Change to company details in all instances;
• Lodge ASIC Form 280 Notification of share buy-back details (for employee share schemes and on-market schemes where the 10/12 limit is exceeded, and for all equal access and selective buy-back schemes);
• Lodge ASIC Form 281 Notice of intention to carry out a share buy-back (for employee share schemes where the 10/12 limit is not exceeded).
• Disclose relevant information when the offer is made (for equal access and selective buy-back);
• Shareholders must be given reasonable time to consider the offer in all instances;
• Buy-back must be commenced within a reasonable time of the notice being lodged with ASIC;
• Shares are cancelled from the share register in all instances;

 Winthrop Mason Lawyers can assist you by:

• Advising on the appropriate share buy-back scheme for your particular company;
• Advising on whether or not the 10/12 limit will be exceeded;
• Advising directors and management on their obligations in share buy-back arrangements;
• Advising on the specific share buy-back procedure to be followed;
• Drafting the letter of offer and share buy-back agreement for shareholders;
• Drafting all the corporate governance documentation to facilitate the capital reduction (including agendas and minutes of meeting, shareholder notices, resolutions, etc);
• Preparing the formal notifications for ASIC and other related documentation.

Share buy-back procedures can be quite a tricky area of the Corporations Act, and there are penalties involved in non-compliance with those procedures.  For a no-obligation initial consultation, go ahead and give us a call.

The Big Oxmox advised her not to do so, because there were thousands of bad Commas, wild Question Marks and devious Semikoli, but the Little Blind Text didn’t listen.

Debt finance

Debt finance is simply borrowing from a bank or other lending institution.  It is often perceived as an attractive alternative to equity fundraising because it allows the existing shareholders to retain ownership and control of the company.

Another key advantage of debt financing is that the obligations attached to the money are limited to making principal and interest payments, whereas a company remains subject to an equity investor’s claim indefinitely until their share is sold or re-purchased by the company.

There are many ways in which debt financing can be structured, depending on the amount to be borrowed, the company’s ability to service the debt, and period over which the funds will be borrowed by the company.  There may also be taxation considerations that will need to be taken into account.

The debt may also be secured or unsecured, although it is usually for the latter for companies.  The most commonly known form of security provided by companies was the “fixed and floating charge” over its assets (including cash, stock and accounts receivables).  Note, however, that under the (fairly) new Personal Property Securities Act 2009 (Cth), the concept of a “fixed and floating charge” ceases to exist and has effectively been replaced by a “general security agreement” which is simply described as a “ security interest over a company’s all present and after-acquired property”.

It is important for corporate borrowers to keep in mind that there is no such thing as a standard loan agreement – that is, the terms of a loan agreement can and should be re-negotiated whenever the circumstances justify it in order to better protect its legal and economic interest.  Lenders who adopt strict and mindless adherence to their terms should be avoided if possible, particularly as their “standard” terms would usually be drafted in such a way as to heavily stack the legal odds in their favour, and allow them to initiate enforcement action even in minor or technical breaches.

Winthrop Mason Lawyers can assist you by:

• Advising on an appropriate financing structure for your company;
• Reviewing the standards loan terms and advising on potential risk areas;
• Ensuring that there are no unfair contract terms included in the loan agreement;
• Negotiating terms and conditions to minimise legal and financial risks; and
• Proposing alternative arrangements with the lender to reduce compliance burdens.

For a no-obligation initial consultation, go ahead and give us a call.

Directors’ and officers’ liability

Company directors and officers have considerable power over a company because their individual actions and decisions can bind the company as a whole.  The law, however, imposes obligations on those persons to ensure that their power is exercised appropriately.

In Australia, directors’ and officers’ obligations are to be found in statute law (mostly the Corporations Act 2001 (Cth)), common law (judge-made law) and the company’s own Constitution.  For the purposes of this article, it will suffice to confine our discussion to the former.

Under the Corporations Act 2001 (Cth), a broad range of obligations are imposed on the directors and officers of a company, including:

• Duty to act with care and diligence;
• Duty to act in good faith in the best interests of the company;
• Duty to exercise their powers for a proper purpose;
• Duty not to improperly use their position to gain an advantage for themselves or someone else;
  • Duty not to improperly use their position to cause detriment to the company;
  • Duty not to improperly use information, obtained because of their position, to gain an advantage for themselves or someone else;
  • Duty not to improperly use information, obtained because of their position, to cause detriment to the company.
  • Duty to ensure that the company has a registered office in Australia at all times, and to notify ASIC of a change in its registered office within 28 days;
  • Duty to notify ASIC of a change in its principal place of business within 28 days;
  • Duty to notify ASIC of a change in its share capital structure or shareholder details;
  • Duty not to trade while the company is insolvent (ie. where the company is unable to pay its debts when they are due);
  • Duty to keep properly informed about the financial position of the company.

This is not intended to be an exhaustive list.

Note that an “officer” includes any person who may not be a director, but who:

• Who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the company;
• Who has the capacity to affect significantly the company’s financial standing; or
• In accordance with whose instructions or wishes the directors of the company are accustomed to act (excluding a professional adviser such as a lawyer or accountant).

There are civil and criminal penalties imposed if a director or officer contravenes their statutory obligations, such as a $200,000 fine for each contravention, disqualification from managing a company, and even imprisonment.

Winthrop Mason Lawyers can assist you by:

• Advising on the responsibilities of directors and officers in your company;
• Advising on whether or not a particular circumstance amounts to a contravention;
• Advising on appropriate strategies to minimise the risk of a contravention;
• Drafting internal policies and procedures designed to ensure good corporate governance;
• Negotiating with ASIC on your behalf in the event of a possible contravention.

For a no-obligation initial consultation, go ahead and give us a call.

Capital raising

A company wanting to raise capital can really do so in only one of two ways:  borrow money, or seek equity from shareholders.  This is sounds quite simple enough.  But it is how the company borrows money and how it raises equity capital that presents a multitude of options and varying degrees of legal complexity that needs careful examination.

Methods of capital raising

Capital can be borrowed from creditors in many different ways, including:

• Borrowing money from a bank or other lending institution (bilateral loans);
• Borrowing money from several banks or lending institutions (syndicated loans);
• Issuing corporate bonds or notes (such as senior and subordinated bonds);
• Issuing convertible bonds and warrants (debts with an option to convert to equity);
• Issuing commercial paper (short-term corporate debt);
• Issuing income securities (where the company is not obliged to repay the face value of the security).

For more information on debt financing, please see “Debt finance”. (link)

Equity capital can be raised from shareholders in the following ways:

• “Initial public offerings” (IPOs) of new shares to members of the public, or selected groups;
• “Private placements” of new shares to sophisticated or institutional investors;
• “Rights issues” to existing shareholders on pro rata basis;
• “Share purchase plan” offered to existing shareholders on a discounted basis;
• “Dividend reinvestment plan” offering shares to existing shareholders instead of dividends.

Type of company

There are different rules in Australia for raising non-bank capital depending on the type of company (public vs private), the number and types of investors to be involved, and how much money is proposed to be raised:

• A private company (being a proprietary company with no more than 50 non-employee shareholders) can raise money from existing shareholders and employees, or from a subsidiary entity.  It may only raise funds from the general public in those limited circumstances where the law does not require a disclosure document to be issued (discussed further below).

• An unlisted public company (being a company that may have more than 50 non-employee shareholders) may raise money from the general public by issuing debt or equity securities on the condition that it issues the appropriate disclosure document to prospective investors.

• Listed public company (being a company listed on a stock exchange or other prescribed financial market) may raise money from the general public by issuing debt or equity securities on the condition that it issues the appropriate disclosure document to prospective investors.

Disclosure documents

There are four categories of disclosure documents:  a prospectus, a short-form prospectus, an offer information statement and a profile statement (going from the most comprehensive to the least comprehensive in terms of legally mandated content):

• A “Prospectus” is the standard disclosure document, and is the most comprehensive of all the disclosure document types.  It is required to contain all information that investors and their professional advisers would need in order to make an informed assessment of the rights and liabilities attaching to the securities, as well as the assets, liabilities, financial position and performance, profits and losses, and prospects of the issuer.

• A “Short-Form Prospectus”, as the name suggests, is an abridged version of a standard “Prospectus”.  The shortened version is possible because the issuer is able to discharge its disclosure obligations simply by referring prospective investors to documents it has already lodged with ASIC, and informing them of their right to obtain a copy of those documents.

• An “Offer Information Statement” does not need to disclose as much information as a Prospectus.  However, an issuer can only use this document where the amount of capital being raised is $10M or less in total – that is, including moneys raised from earlier fundraising.  It is also required to include a copy of audited financial statements that are less than 6 months old.

• A “Profile Statement” has very limited disclosure requirements, such as the nature if the security, the risks involved and the amounts payable. It may only be used, however, upon ASIC’s approval and, to date, the regulator has not given its approval to anyone.

When disclosure documents not required

There are only a few exceptions to the general rule that a company wishing to raise funds must issue an appropriate disclosure document.  These include the following:

• Existing owners – where the offer is being made to existing holders of the security;

• Small scale offerings – where the offer is made to no more than 20 people in the last 12 months, and raising no more than $20 million;

• Offers to professional investors – such as investment advisers, superannuation funds, life insurance companies, friendly societies and any person controlling at least $10 million for the purpose of investing in securities;

• Offers to sophisticated investors – people who are presumed not to need disclosure because of their considerable financial capacity, experience or wholesale status (eg. at least $250,000 annual gross income in the last two years, or net assets of at least $2.5 million).

• Offers relating to takeovers (as other disclosure regimes already apply).

Winthrop Mason Lawyers can assist you by:

• Advising whether or not your company is entitled to raise capital from the public;
• Advising on the required disclosure document for your capital raising purposes;
• Advising on an appropriate capital raising structure (eg. equity, debentures, convertible notes, etc);
• Assisting with initial public offers, unlisted public offers, secondary raisings and private placements;
• Assisting in the preparation of a prospectus, short-form prospectus, offer information statement or profile statement;
• Undertaking all the necessary legal due diligence (including chairing the Due Diligence Committee);
• Preparing or reviewing all the necessary agreements (eg. underwriting agreement) and other documentation (eg. notices and minutes for meetings of directors and shareholders);
• Preparing the listing application with ASX, and complying with ASX & ASIC’s requirements;
• Assisting to list on the Australian Small Scale Offerings Board (ASSOB);
• Applying for an exemption with ASIC from complying with disclosure requirements;
• Liaising with ASIC on your behalf in the event of an actual or possible non-compliance.

Capital raising activities are closely scrutinized by the regulators so timely advice on your options and obligations is a must before making any decision.  For a no-obligation initial consultation, go ahead and give us a call.

Shareholders’ rights and obligations

Shareholders are the owners of the company.  However, they may not necessarily have control over the day-to-day operation of that company, especially if they are not also directors or officers.  This separation of ownership and control creates a potential conflict of interest which can leave shareholders particularly vulnerable in certain circumstances.

It is important, therefore, that shareholders are well aware of their rights and obligations as owners, and what steps they will need to take in order to ensure that their interests are adequately protected at all times.

Under the Corporations Act 2001 (Cth), the shareholders’ rights include:

• Right to appoint and terminate the company’s directors;
• Right to attend the annual general meetings;
• Right to vote at general (shareholder) meetings;
• Right to appoint proxies as representatives at meetings;
• Right to demand a poll, as opposed to a show of hands, when voting on a resolution;
• Right to receive reports and access the statutory books of the company;
• Right to receive dividends when they are declared;
• Right to a distribution of net proceeds if the company is liquidated.

In addition, shareholders have a right to expect that directors and officers will properly discharge their functions for the benefit of the company as a whole (ie. for the benefit of all shareholders).

The remedies available to shareholders under the Act include an “oppression” remedy, injunction, winding up order, a “statutory derivate action”, as well as their own personal rights against the company.

While there are specific rights and remedies set out under the Corporations Act 2001 (Cth), as well as under a company’s Constitution, it is typically necessary for shareholders to also enter into a Shareholders Agreement (or a Partnership Agreement).  Every business is different, so such an agreement will ensure that issues of particular importance to the individual shareholders are properly addressed.

A Shareholders Agreement will generally set out in a lot more detail the rights and obligations of each shareholder, as well as the funding, structure, management and future direction of the company.  For instance, they can specifically cover the following:

• The initial and ongoing capital contribution of each shareholder;
• The formal roles to be undertaken by each shareholder (eg. director and management structure);
• The obligation to provide loans to the company (dates, times, amounts, etc.);
• The situations in which shareholder, as opposed to director, approval will be required;
• The voting rights of each shareholder and director;
• The percentage of votes required for majority decisions;
• The procedure for resolving any “deadlocks” on resolutions;
• The manner in which each person will be remunerated by the company (salaries, bonuses, etc);
• The dividend policy or retention of profits;
• The manner in which banking, accounting and auditing functions will be undertaken;
• The nature of the business to be conducted by the company;
• The future strategic direction of the company;
• The capital structure of the company (loan vs shareholders’ equity);
• The process for exiting a business partner (voluntarily or involuntarily);
• The procedure to be followed when buying, selling or transferring exiting shares;
• The procedure to be followed when issuing new shares (which can dilute existing shareholdings);
• The obligation to buy/sell shares upon the occurrence of certain events (eg. insolvency, disability, death or retirement of a shareholder);
• The method for valuing the business and/or its assets;
• The process for resolving any disputes between shareholders;
• The circumstances which will trigger the termination of the agreement.

Winthrop Mason Lawyers can assist you by:

• Reviewing the business arrangements to identify potential stakeholder issues;
• Advising on your legal rights as a shareholder of a company;
• Preparing a Shareholders Agreement and/or Partnership Agreement;
• Reviewing the company’s Constitution and other corporate governance documents;
• Negotiating with the directors and officers of a company on your behalf;
• Advising on strategies to ensure that your interests are adequately protected;
• Assist with business succession planning; [link]
• Draft Buy-Sell Agreements, Put & Call Option Agreements or Management Buy-Out Agreements;
• Commencing legal proceedings on your behalf, if necessary.

If you do not have a Shareholders Agreement or Partnership Agreement, you should speak to a lawyer about it today.  If you leave it till “later”, it will generally be too late.  For a no-obligation initial consultation, go ahead and give us a call.

Corporate restructuring

Corporate restructuring is the process of significantly re-designing one or more components of an organisation – such as its structure, operations, staffing or equity/debt position – in order to achieve a specific strategic objective.

The motivation to restructure can arise from a whole range of reasons, such as to deal with the arrival of a significant investor, make the company more competitive in its industry, help the company survive adverse market conditions, position the company for a new strategic direction, or comply with a government or regulatory mandate.

The basic types of corporate restructuring are:

• Takeovers. This is where another party is attempting to acquire all, or a significant portion, of the company for the purpose of assuming management control.  The party seeking to take over may be external (eg. leveraged buy-out, hostile take-overs and friendly take-overs), or internal (eg. management buy-outs and buy-ins).

• Mergers.  This is where the company is seeking to consolidate with another company on the premise that the consolidated entity will be stronger, more profitable or otherwise has greater prospects of success than the two companies operating on their own.  The merger may be “horizontal” (two companies competing in the same market), “vertical” (one company is a supplier and other a retailer within the same industry) or “conglomerate” (the companies are in unrelated businesses).

• Acquisitions.  This is where the company is seeking to enhance its current position by acquiring another company for strategic purposes, such as to instantly increase revenue, market share or customer base, lower its overall costs due to economies of scale, better manage its tax position, expand into new geographies, or to acquire valuable intellectual property, new technology or business know-how.

• Divestments. This is where the company is seeking to dispose of significant businesses or assets in order to generate substantial capital, increase its profitability, unlock hidden value, facilitate a change in business direction, eliminate a conflict of interest or simply to comply with regulatory mandates.  The divestment can take the form of “spin offs”, “split offs”, “split ups”, or “equity carve outs”.

• Recapitalisations.  This is where the company is seeking to change its overall debt/equity structure for the purpose of reducing financial risk, lowering its cost of capital, increasing liquidity, or otherwise improving shareholder value.  The company may seek to borrow more money, use available capital to reduce its debt obligations, obtain more capital from existing shareholders, or issue shares to new shareholders.

For further information on mergers and acquisitions, you should go to “Mergers and acquisitions”. [link]

For further information on divestments, you should go to “Transferring a business” and “Selling a business”. [link]

Winthrop Mason Lawyers can assist you by:

• Advising on strategies for take-overs, mergers, acquisitions, divestments, recapitalisations and other corporate restructuring arrangements;
• Undertaking legal due diligence on target or merger companies;
• Negotiating the sale, acquisition or divestment of any significant assets;
• Minimising exposure to legal, regulatory, taxation and financial risks;
• Overseeing asset sales, staff redundancies, cost-cutting and other restructuring programs;
• Advising on legal issues arising from debt consolidation, cash flow management, etc;
• Ring-fencing of selected assets and liabilities for selected purposes;
• Advising on strategies to minimise taxation and restructuring costs;
• Advising on good corporate governance practices;
• Liaising with regulators and other government agencies as necessary.

Corporate restructuring is a highly complex area, and it is strongly advisable to seek legal advice prior to making any decisions.  For a no-obligation initial consultation, go ahead and give us a call.

Mergers and acquisitions

Mergers and acquisitions refer to corporate activity involving the legal and economic combination of two companies.  In practice, the distinction between the two often becomes blurred as they both ultimately lead to the same economic outcome.

There does, however, still remain a technical difference between the two in the eyes of the law:

• A merger is where the company is seeking to consolidate with another company to create a single entity.  It is usually undertaken on the premise that the consolidated entity will be stronger, more profitable or otherwise has greater prospects of success than the two companies operating on their own.  The merger may be “horizontal” (two companies competing in the same market), “vertical” (one company is a supplier and other a retailer within the same industry) or “conglomerate” (the companies are in unrelated businesses).

• An acquisition is where the company acquires another company, and establishes itself as its new owner (ie. the two companies continue to exist as separate legal entities).  The motivation behind an acquisition is usually for strategic purposes, such as to instantly increase revenue, market share or customer base, lower its overall costs due to economies of scale, better manage its tax position, expand into new geographies, or to acquire valuable intellectual property, new technology or business know-how.

Many enterprises tend to get too carried away with the thrill and excitement of an impending merger or acquisition, at the expense of soundly basing decisions on whether or not a particular deal makes legal and economic sense in the first place.  And it seems the larger the enterprise, the more susceptible it is to managerial hubris.  Independent professional guidance is therefore necessary to help navigate you through this complicated and potentially high risk process, but also to provide an impartial sounding-board.

Assuming the deal does make legal and economic sense, management also needs to understand that signing the deal is only the beginning.  The real work starts after the deal is signed – that is, through business integration activities aimed at realising the expected synergies from the merger or acquisition. The amount of time, effort and money involved in integration always seems to grossly underestimated, so companies need to be realistic, disciplined and methodical during both planning and execution.

Winthrop Mason Lawyers can assist you by:

• Advising on strategies for an economically viable merger or acquisition;
• Undertaking legal due diligence on target or merger companies;
• Negotiating the sale, acquisition or divestment of any significant assets;
• Minimising exposure to legal, regulatory, taxation and financial risks;
• Overseeing asset sales, staff redundancies, cost-cutting and other restructuring programs;
• Advising on legal issues arising from debt consolidation, cash flow management, etc;
• Ring-fencing of selected assets and liabilities for selected purposes;
• Advising on strategies to minimise taxation and restructuring costs;
• Advising on good corporate governance practices;
• Liaising with regulators and other government agencies as necessary.

Mergers and acquisitions is a highly complex area, and it is strongly advisable to seek legal advice in the pre-transaction phase.  For a no-obligation initial consultation, go ahead and give us a call.

Financial reporting obligations

Directors and managers need to be well aware of their company’s financial reporting obligations under the Corporations Act 2001 under threat of significant regulatory sanctions for non-compliance.  Different types of companies have different obligations, with smaller and simpler companies having less onerous obligations than larger and more complicated ones.

Small proprietary companies

Most companies in Australia would fall under the legal category of a “small proprietary company”.

A “small proprietary company” is one which two or more of the following situations apply:  (1) it has revenue of under $25 million; (2) it has consolidated gross assets of less than $12.5 million; (3) it has fewer than 50 employees at the end of the financial year.

These companies generally do not need to prepare or send financial statements to ASIC (except if they are controlled by a foreign entity).

Nevertheless, all companies – not just small proprietary companies – have a legal obligation to keep proper financial records to allow them to keep track of their operational performance, financial position and borrowing capacity.  ASIC has indicated that the sorts of financial records they would expect to be maintained by any company are:

1.   Financial Statements – Profit & Loss accounts, Balance Sheets Depreciation Schedules, and Taxation Returns (eg. income tax, group tax, superannuation, fringe benefits tax, business activity statements and all supporting documents).

2.   General Ledger
3.   General Journal
4.   Asset Register
5.   Computer Back-up Discs

6.   Cash Records – Cash Receipts Journal, Bank Deposit Books, Cash Payments Journal, Cheque Butts and Petty Cash Books

7.   Bank Account Statements, Bank Reconciliations and Bank Loan Documents
8.   Sales/Debtor Records – Sales Journal, Debtors Ledger, List of Debtors, Invoices & Statements issued, and Delivery Dockets

9.   Work in Progress Records
10.  Job/Customer Files
11.  Stock Listings
12. Creditors Records – Invoices & Statements Received & Paid, Creditors Ledger, and Unpaid Invoices

13. All Correspondence, Annual Returns and ASIC forms
14. Wages Records and Superannuation Records
15. Registers – Shareholders, Options, Debenture Holders, Prescribed Interests, Charges, and Unclaimed Property

16. Minutes of Meetings of Directors and/or Members
17. Deeds (where applicable) – Trust, Debentures, Contracts & Agreements, and Inter-company transactions, including guarantees.

Large proprietary companies

A “large proprietary company” is basically any proprietary company that does not fit within the legal description of a “small proprietary company”.

Large proprietary companies are required by law to prepare financial reports, arrange for them to be audited and lodge them with ASIC within four (4) months after the end of their financial year.

Financial reports consist of a statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows, notes, directors’ declaration, directors’ report and the auditor’s report.

These companies are also required to maintain proper financial records (see “Small proprietary companies”, above).

Public companies (unlisted)

An unlisted “public company” is any company that is allowed to have an unlimited number of shareholders for the purposes of raising capital from the public, but is not otherwise listed on a stock exchange.

It includes a public company limited by guarantee (not-for-profit entities), public company limited by shares (for-profit entities), unlimited public company and no liability public company (mining companies).

Unlisted public companies are required by law to prepare financial reports, arrange for them to be audited and lodge them with ASIC within four (4) months after the end of their financial year.  This is in addition to their general obligation to maintain proper financial records (see “Small proprietary companies”, above).

Public companies (listed) 

A listed “public company” is basically any company whose shares are publicly traded on the ASX or some other prescribed financial market (such as Chi-X, NSX or APX).

Listed public companies are required by law to prepare financial reports, arrange for them to be audited and lodge them with ASX within three (3) months after the end of their financial year.  The reports must also be sent to shareholders by the earlier of 4 months after the year-end or 21 days before the next annual general meeting.

They are also required to submit audited half-yearly reports within 75 days of the half-year end.  However, the half-yearly reports are not required to be sent to shareholders.

These reporting obligations are in addition to their general obligation to maintain proper financial records (see “Small proprietary companies”, above).

Winthrop Mason Lawyers can assist you by:

• Advising whether or not your company is complying with its financial reporting obligations;
• Advising whether or not your company is maintaining proper financial records;
• Assist your accountants to ensure that financial reports contain all the required disclosures;
• Facilitate a change from one company structure to another, if necessary;
• Advising on good corporate governance practices;
• Liaising with ASIC on your behalf in the event of an actual or possible non-compliance.

For a no-obligation initial consultation, go ahead and give us a call.

Migration Law

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The main advantages of floating a company are:

• Founder and other early investors can realise the value of their private holdings;
• Easier access to new capital to fund future growth, expansion and acquisitions;
• Greater prestige and profile associated with a publicly listed company;
• Share option incentives can be granted to senior management and employees;
• Become a more attractive investment for institutional and professional investors;
• Directors’ personal guarantees are not normally required to borrow money.

The main disadvantages of floating a company are:

• Significant costs of floating a company, as well as ongoing compliance costs;
• Onerous legal and regulatory requirements for publicly listed companies;
• Greater risks and legal obligations imposed on directors and offers of the company;
• Greater degree of scrutiny over the company by shareholders, analysts, regulators, etc;
• May become vulnerable to share price market fluctuations (eg. loan covenants);
• Regular dealing with numerous investors and analysts can distract management.

Eligibility requirements

In order to be eligible to list on the ASX, the ASX Listing Rules provide that the company:

• Must be public company, not proprietary company or some other business structure;
• Must satisfy either the “profit test” or the “assets test” (see further below);
• Must have an adequate shareholder spread (see further below); and
• Must satisfy certain constitutional and corporate governance requirements.

The “profit test” will be satisfied if:

• The company is a going concern, or the successor of a going concern;
• Main business activity is the same as it was during the last 3 financial years;
• Audited financial statements are provided for the last 3 financial years;
• Aggregated gross profit of at least $1 million over the last 3 financial years;
• Consolidated gross profit of more than $400,000 over the last 12 months;
• Directors provide a statement regarding ability to continue earning a profit.

The “assets test” will be satisfied if the company has:

• Either net tangible assets of at least $3M, or minimum market capitalisation of $10M;
• Less than 50% of its tangible assets as cash (or assets readily convertible to cash), or if not, then the company must have commitments to spend half on business objectives;
• Minimum $1.5 million in working capital;
• Financial statements and audit report.

The required shareholder spread will be satisfied if the company has:

• Minimum 400 shareholders holding at least $2,000 worth of shares;
• Minimum 350 shareholders holding at least $2,000 worth of shares, if at least 25% are held by the public (ie. unrelated parties); or
• Minimum 300 shareholders holding at least $2,000 worth of shares, if at least 50% are held by the public.

The listing process

The process involved in listing a company will typically involve the following:

• Board and management must pass appropriate company resolutions to prepare for IPO;
• Assemble a float team comprising financial advisers, underwriters, lawyers, accountants, share registrar, public relations consultants and other professional advisers;
• Review the existing corporate structure, board composition, corporate governance and share capital structure to be compliant with ASX Listing Rules and market expectations;
• Set a dividend policy and dividend reinvestment plan;
• Prepare a draft prospectus to be issued prospective investors compliant with requirements of Corporations Act 2001 (Cth);
• Establish a Due Diligence Committee to oversee compliance of the draft prospectus’ contents;
• Engage an underwriter to advise on an appropriate offer price for the shares;
• Engage brokers to help market the sale to their clients and investors in general;
• Lodge the finalised prospectus with ASIC for an exposure period of 7 days;
• Commence marketing the float to the public, whether directly or through intermediaries;
• Apply to ASX for quotation of its shares and pay the prescribed listing fees;
• Comply with conditions imposed by ASX under its conditional listing approval;
• Apply to ASX to participate in Clearing House Electronic Subregister System (CHESS);
• Comply with all of ASX Listing Rules, including continuous disclosure obligations.

How much will it cost to float a company?

The estimated total cost involved in listing will vary from company to company, but as a general rule of thumb, you can expect a company to pay roughly 10% of the funds raised towards flotation costs for floats under $50 million, or roughly 5% of the funds raised for floats for floats over $50 million.

Underwriting and broking fees alone can range anywhere between 2% and 8% of the total funds raised.

Estimated timeframe

The timeframe for listing a company will depend on a number of factors, including the size of the company, amount of the capital to be raised, the nature and complexity of the business operations, and so on.   It can vary anywhere between 3 months (simple float) to 2 years (extremely complicated), but in most cases it will usually be somewhere between 6 to 12 months.

Winthrop Mason Lawyers can assist you by:

• Advising on necessary changes to the existing corporate structure, corporate governance and capital structure;
• Revising the company’s Constitution and Board policy and procedures;
• Advising on rights, obligations and risks for directors and offers in listed entities;
• Preparing the necessary corporate governance documentation (eg. agendas, notices of meeting, Board minutes of meeting, shareholder notices, shareholder resolutions, etc);
• Assisting in the drafting of the Prospectus or Information Memorandum;
• Undertaking all the necessary legal due diligence investigations;
• Participating in the Due Diligence Committee review of the Prospectus;
• Reviewing all marketing and promotional materials to ensure proper legal compliance;
• Drafting the relevant contracts and other legal documentation with all stakeholders;
• Preparing the application and notifications for ASIC and ASX, and other documents;
• Liaising with ASIC and ASX in relation to conditions of conditional listing approval;
• Advising on continuous disclosure obligations under ASX Listing Rules.

The transition from a private company to a publicly listed company is a significant one, and will come at a considerable cost to any business in terms of both time and money. Early advice during the pre-IPO stage is essential to make the process as efficient as possible.  For a no-obligation initial consultation, go ahead and give us a call.

Insolvency

Corporate insolvency occurs when a company is unable to pay its debts as and when they fall due.  When a company becomes insolvent, or experiences financial difficulty, directors and officers need to be particularly careful in order to avoid incurring personal liability.

When is a company insolvent?

In practice, it is often difficult to determine whether a company is simply experiencing short-term liquidity problems or insolvency.  There are a lot issues to consider besides the amount of money it has in its bank account.  ASIC’s Information Sheet 42 offers the following useful list of signs that might indicate that your company is at risk of insolvency:

• increasing debt (liabilities greater than assets);
• problems selling stock or collecting debts;
• unrecoverable loans to associated parties;
• creditors unpaid outside usual terms;
• solicitors’ letters, demands, summonses, judgements or warrants issued against you;
• suppliers placing your company on cash-on-delivery (COD) terms;
• issuing post-dated cheques or dishonouring cheques;
• special arrangements with selected creditors;
• payments to creditors of rounded sums that are not reconcilable to specific invoices;
• overdraft limit reached or defaults on loan or interest payments;
• problems obtaining finance;
• change of bank, lender or increased monitoring/involvement by financier;
• inability to raise funds from shareholders;
• overdue taxes and superannuation liabilities;
• board disputes and director resignations, or loss of management personnel;
• increased level of complaints or queries raised with suppliers; or
• an expectation that the ‘next’ big job/sale/contract will save the company.

Options for an insolvent company

Once it is determined that a company is in fact insolvent, there are a number of options available:

• Restructuring (eg. asset sale, staff redundancies, close product lines, mergers, etc.)
• Refinancing the company’s debts (eg. new lender, lower interest rates, longer term, etc.);
• Recapitalising the company through equity funding;
• Appointment of a voluntary administrator; or
• Appointment of a liquidator.

External administration

The most common forms of external administration when a company is insolvent are:

• Voluntary administration.  A voluntary administrator takes control of the company to either ensure its survival or at least administer its affairs to maximise the return for creditors.  If it is not possible to save the company, then the administrator will recommend liquidation.

• Receivership.  A receiver is appointed by a secured creditor to protect and liquidate the secured asset in order to pay the outstanding loan obligation (note that this form of external administration is outside the hands of the company as it is driven by the secure creditor);

• Liquidation.  This is where a liquidator is appointed in order to sell off all of the company’s assets, pay out its liabilities and then wind the company up.  It may be initiated by the court, by the creditors or by the shareholders of the company.

Implications of insolvency

Some of the implications for the various stakeholders are outlined below:

• For directors.  Directors lose their powers during administration or liquidation, and are obliged to fully cooperate.  They may become personally liable if a company trades while insolvent, or if they enter into a transaction to deliberately aimed at avoiding paying employee entitlements.

• For creditors.  Secured creditors will generally be unaffected, but unsecured creditors will need to have their claim ranked in a statutory priority order with other unsecured creditors. Creditors may be asked to enter into a Deed of Company Arrangement during a voluntary administration.

• For employees. Employees with unpaid entitlements (such as wages, superannuation, annual leave, sick leave, long service leave and other benefits) will be treated as creditors, and may rank in priority over other unsecured creditors.

• For shareholders.  Shareholders’ claims will generally be subordinate to the claim of employees and creditors.  They are precluded from selling or transferring their shares while the company is in administration or liquidation.

Winthrop Mason Lawyers can assist you by:

• Advising on a range of possible options for restructure, refinance or recapitalisation;
• Advising directors and officers on their legal obligations during corporate insolvency;
• Advising on priorities of creditors, employees and shareholders’ claims;
• Advising on bankruptcy and alternative options under Pt IX and Pt X of Corporations Act 2001;
• Drafting, reviewing or negotiating formal documentation (eg. Deed of Company Arrangement with creditors, Business Sale Agreements, Loan Agreements, etc);
• Investigating corporate fraud and performing asset tracing
• Enforcing or defending the rights of creditors, employees and other stakeholders;
• Commencing legal proceedings on behalf of the company (eg. debt recovery);
• Commencing recovery action for unfair preferences, uncommercial transactions, insolvent trading, loan accounts and breaches of directors’ duties;
• Advising generally in relation to insolvency, administration, receivership and liquidation.

Directors and officers can become personally liable if appropriate steps are not taken in relation to an insolvent company.  You must therefore seek independent legal advice immediately if you believe that your company might be in financial trouble.  For a no-obligation initial consultation, go ahead and give us a call.

De-registering a company

Deregistration of a company with ASIC marks the final step in closing down the company.  In legal terms, the company “dies” or ceases to exist as an entity once it is deregistered. 

You will be able to deregister a company if all of the following criteria are satisfied:

• All of the shareholders must agree to the deregistration;
• The company is no longer carrying on a business;
• The company’s assets are worth less than $1,000 at the time of application;
• The company has no outstanding debts or other liabilities (including employees’);
• The company is not involved as a party in any legal proceedings; and
• The company has paid all fees and penalties payable to ASIC.

Where the company also holds an Australian Financial Services Licence (AFSL) and/or an Australian Credit Licence (ACL), it will be necessary to cancel those licences first before applying for deregistration.

Once the above has been satisfied, you will need to submit a Form 6010 Application for voluntary deregistration of a company with ASIC and pay the applicable fee (which is only $37 at the time of writing).

The consequences of deregistration are that:

• The law will no longer recognise the company as being in existence;
• All company assets (except for those held on trust) will vest in ASIC;
• All trust assets will vest in the Commonwealth, represented by ASIC;
• The former directors of the company will no longer be able to control its assets;
• Any legal proceedings for or against the company will cease to be continued (at least insofar as that company is concerned).

Note that for larger (solvent) companies with more substantial assets or which have outstanding affairs to be finalised, it will be more appropriate to go through the voluntary winding up process instead of the simplified deregistration process.  This will typically involve

• The orderly winding-up of the company’s affairs;
• The appointment of a liquidator to liquidate the company’s assets;
• The ceasing or sale of the company’s business operations ;
• The payment of all debts and other liabilities, if any); and
• The distribution of any surplus assets among the shareholders.

Winthrop Mason Lawyers can assist you by:

• Advising you on whether your company is eligible for the simplified voluntary deregistration process;
• Preparing all the corporate governance documentation to facilitate the deregistration process (including agendas and minutes of meeting, shareholder notices, resolutions, etc);
• Advising you on the specific implications of deregistration for your company and its stakeholders;
• Preparing and submit the formal deregistration application with ASIC.
• Notifying parties to any litigation and other stakeholders about the deregistration.

There are significant penalties involved in inappropriately deregistering a company.  We can make the deregistration process quick and simple for your company, as well as fully compliant with the requirements of the Corporations Act.  For a no-obligation initial consultation, go ahead and give us a call.