COMPANIES AND SECURITIES LAW 77947 Week 6 1 WEEK 6 TOPIC Corporate Funding Corporate Funding Fundraising Rules Dividends Debentures Personal Property Security Rules 2 DISTINCTION BETWEEN SHARE CAPITAL AND LOAN CAPITAL Two sources of funds: ￠ Loan capital – company borrows funds: Various forms, such as bank loans, short terms loans, leases, trade creditors Can also include debentures, a type of security Lender is repaid “interest” plus principal Interest is usually tax deductible ￠ Share capital – company issues shares See last week Shareholder is paid dividends, which are usually not tax deductible Rare to return capital: capital reduction, share buyback, liquidation 3 WEEK 6 TOPIC Corporate Funding Corporate Funding Fundraising Rules Dividends Debentures Personal Property Security Rules 4 FUNDRAISING – CH 6D PROVISIONS ￠ Aims of the Ch 6D Provisions ￠ To balance the need for investor protection with an efficient and credible capital market ￠ This requires Disclosure ￠ When is Disclosure Necessary Public companies – Ch 6D Proprietary companies – note s 113(3) 5 WHEN IS DISCLOSURE NEEDED ￠ General rule: offering securities for issue or sale ￠ ASIC v Maxwell (LHW 7.25) ￠ Exceptions: see Table 7.3 Small scale offerings: 20 persons & $2m Sophisticated investors: large offers, or wealthy, experienced or professional investors Senior managers Existing security holders Rights issues 6 PROCEDURAL REQUIREMENTS AND TYPES OF DISCLOSURE DOCUMENTS q Types of Disclosure Documents – Table 7.2 § A prospectus (full disclosure document) § A short form prospectus § A profile statement with ASIC approval § An offer information statement when money raised is $10 million or less q Procedure: Table 7.1 § Prepare document § Lodge with ASIC: see LHW 7.90 § Offer securities, enclosing correct document § Lodge supplementary document or return money § Hold application money until received § Issue or transfer securities 7 CONTENTS OF DISCLOSURE DOCUMENTS ￠ Prospectuses ￠ Requires more information than other documents ￠ Must be worded and presented in a “clear, concise and effective” manner ￠ Must include information required by general disclosure test: see LHW 7.105, 7.110 (on forecasts) ￠ Meet specific disclosure requirements: see LHW 7.120 Alternative disclosure requirements are provided for listed companies: LHW 7.115 ￠ Not be misleading and deceptive ￠ Other documents: ￠ Short form prospectus: LHW 7.125 ￠ Profile statement: LHW 7.130 ￠ Offer information statement: LHW 7.135 8 OTHER RELEVANT RULES ￠ Restrictions on issue of shares: there are particular rules if the disclosure document requires for a minimum number of securities to be subscribed, or if it states that the securities will be listed. ￠ Disclosure document must also specify an expiration date ￠ Fundraising provisions generally apply to issues of securities. In some instances, it will apply to secondary trading: sales by controller, sales amounting to an indirect issue, securities hawking ￠ There are prohibitions on the advertising of securities issues: LHW 7.175 9 IMPORTANT PROHIBITION IN CH 6D PROVISIONS ￠ Misstatements or Omissions Prohibition – s 728(1) Criminal liability – s 728(3) ￠ Compensation Loss and damage suffered resulting from contravention of s 728(1) – s 729 See LHW table 7.5 10 CROWD SOURCED EQUITY FUNDING – LHW 7.210 TO 7.220 ￠ A new framework to facilitate crowd-sourced funding by small unlisted companies has been introduced. ￠ Replaces rules dealing with disclosure documents in relation to crowd-sourced funding offers ￠ Sets out eligibility requirements for a company that wishes to make an offer under the regime ￠ Regulates such offers and intermediaries, including rules dealing with defective disclosure and intermediaries 11 WEEK 6 TOPIC Corporate Funding Corporate Funding Fundraising Rules Dividends Debentures Personal Property Security Rules 12 DIVIDENDS What is a dividend ￠ Return of investment to shareholders ￠ Usually paid out of profits (but see net solvency test) ￠ Can be interim or final 13 WHO DECIDES WHETHER TO PAY DIVIDENDS AND DIVIDEND RIGHTS ￠ Governed by constitution or replaceable rules ￠ In the replaceable rules directors control amount, time and method of payment – s 254U(1) ￠ Shareholders cannot force a profitable company to pay dividends ￠ Failure to pay dividends may be oppressive/unfair conduct – s 232 Sanford v Sanford Courier Services ￠ Shares in a public company presumed to have the same dividend rights unless the constitution says otherwise s 254W(1) 14 BALANCE SHEET SOLVENCY TEST A company may pay dividends if its assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend: s 254T(1)(a) Assets and liabilities for purposes of the s 254T(1)(a) balance sheet solvency test are calculated in accordance with accounting standards in force at the relevant time: s254T(2). But: Payment of the dividend must be fair and reasonable to the company’s shareholders as a whole: s 254T(1)(b) Payment of the dividend must not materially prejudice the company’s ability to pay its creditors: s 254T(c) 15 IMPROPER DIVIDEND PAYMENTS ￠ Contravention of s 256B – unauthorised reduction of capital LHW 10.35 ￠ Directors may contravene s 588G s 588G(1A) deemed incurring debt ￠ Breach of fiduciary or statutory duties – prejudice interests of creditors Hilton International v Hilton ASIC v Loiterton ￠ Creditors may apply for a s. 1324 injunction to stop contravention of s 254T 16 WEEK 6 TOPIC Corporate Funding Corporate Funding Fundraising Rules Dividends Debentures Personal Property Security Rules 17 WHAT IS A DEBENTURE ￠ Company has power to issue debentures and give security for loans – s 124(1) ￠ Debenture – Undertaking to repay as a debt, money deposited or lent to a company – s 9 ￠ Debenture may be secured by a security interest over property or it may be unsecured ￠ Description of debentures: see table 11.1 Mortgage debenture Debenture Unsecured note or unsecured deposit note ￠ Convertible debenture or note 18 RULES RELATING TO DEBENTURES ￠ Debenture = securities: s 727 applies. That is, issue of debentures is covered by fundraising provisions ￠ Company enter into a trust deed and appoint an eligible trustee for debenture holders – s 283AA: LHW 11.40 S 283AB requires the trust deed to provide that certain rights are held on trust for debenture holders S 283AC specifies who may be the trustee ￠ Borrower’s and guarantors duties: Duties are provided under 283BB – 283BF Requirement to keep a register of debenture holders Duties of guarantor: 283CB and 283CC Trustee’s duties: 283DA ￠ Various rights are available to debenture holders E.g., 283EA power of 10% or more to call a meeting of debenture holders 19 WEEK 6 TOPIC Corporate Funding Corporate Funding Fundraising Rules Dividends Debentures Personal Property Security Rules 20 PERSONAL PROPERTY SECURITIES ￠ The law regarding borrowing on security of personal property underwent major reforms in 2012 with the enactment of the Personal Property Security Act 2009, a single national law to govern such security ￠ What is personal property ￠ What happens to real property Fixtures 21 SECURITY INTEREST ￠ Section 12(1): A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property). ￠ Examples in section 12(2): fixed charges, floating charges, chattel mortgages, retention of title arrangements, hire purchase, lease of goods. 22 PPSA ￠ The PPSA Introduces new terms to replace traditional terms such as charges. ￠ A fixed charge is now a non-circulating security interest and floating charge is circulating security interest. Purchase money security interest: retention of title clauses ￠ Grantor is the person borrowing money (example the company). ￠ Secured party is the entity taking security over assets (example the bank) ￠ Security agreement is the document by which a security interest is created. The terms of the security agreement will set out the circumstances that constitute a default of a circulating security interest example the non payment of principal or interest when specified in the contract. 23 ATTACHMENT AND PERFECTION ￠ A security interest must attach to personal property E.g., non real estate assets of company such as plant and machinery, before the security can be enforced. This property is called collateral. ￠ Attachment can take place when the grantor signs the security agreement. ￠ Signing a security agreement gives the grantor enforceable rights against the collateral. ￠ Perfection can take place when registering an interest in the collateral. It can also take place by taking possession of the personal property. Perfection gives priority over competing security interests in the same collateral. 24 REGISTRATION ￠ The Act has created a Register of Personal Property Securities. ￠ Registration involves lodging a financial statement that contains prescribed data on the PPS Register. Not necessary to lodge the actual security agreement. ￠ Registration commences from the moment the description of the collateral becomes available for search on the PPS Register and it is called registration time. ￠ If a company goes into liquidation, voluntary administration, or executes a deed of company arrangement, a PPSA security vests in the company if it was not perfected (registered) within twenty days after it came into force. ￠ “Came into force” normally means when it was signed by the company borrowing the money 25 PPSA – OTHER TOPICS ￠ Vesting if not registered within time: If the security interest vests in another body then the originally secured party loses the right to enforce their security interest and the originally secured party (the lender) will become an unsecured creditor if, for example, the company goes into liquidation. ￠ Invalidation of security interests: Voidable antecedent transactions: Will be discussed in Week 12 Security interests in favour of officers 26 PPSA PROBLEM AREAS ￠ Some types of “traditional” but informal security arrangements will now need to be more structured (e.g. oral security agreements, retention of title arrangements). ￠ Status of fixtures (is it a fixture ; attached, then detached, then reattached items ) ￠ Failed attempts to perfect a transitional security interest – possible loss of priority. ￠ Integrity of migrated data. ￠ Lack of co-operation from secured parties. 27 WEEK 6 TOPIC Corporate Funding Corporate Funding Fundraising Rules Dividends Debentures Personal Property Security Rules 28
