Facts

The parties were shareholders of Sydney Superyacht Marina Pty Ltd (SM).  The parties fell into dispute which ultimately led to a mediation.  At the conclusion of the mediation the parties entered into a Heads of Agreement prepared by the mediator.  The Heads of Agreement provided for the purchase of one party’s shares by the other.  Following the mediation and as contemplated by the Heads of Agreement, the parties attempted to agree upon a more formal document to give effect to the Heads of Agreement.  However, before that agreement was reached, the buyer of the shares withdrew from negotiations apparently due to a shortage of funds to effect the purchase contemplated in the Heads of Agreement.   The selling party commenced proceedings seeking, inter alia, a declaration that a binding sale agreement existed, an order for specific performance and damages.

The Heads of Agreement

In addition to the terms relating to the sale of the shares, the Heads of Agreement contained the following key term:

“Without affecting the binding nature of these Heads of Agreement, the parties [are] within 7 days to execute a formal document or documents as agreed between their respective solicitors to carry out and express in more formal terms and additional terms these Heads of Agreement…”

 The decision

The court considered the use of the words “Without affecting the binding nature of this agreement…”, decisive.  The Court found that by using these words the parties intended to be bound immediately despite the fact the Heads of Agreement specifically referred to the execution of a formal contract.

The Buyer argued that a number of clauses of the Heads of Agreement were uncertain, including a clause requiring the transfer of a portion of the Marina by the seller but without identifying the precise area.  The Buyer argued that as a result of that uncertainty, the Heads of Agreement was void.  In rejecting that argument, the court referred to the general rule that where a promise permits performance in a number of ways and does not state which party has the right to elect, the promisor has the right to elect which of the methods of performance they will choose.

A case also relevant to the existing use rights question is that entitled Iris Diversified Property P/L V Randwick City Council [2011] LEC 1038, in which the Land & Environment Court determined that the relocation of a bottle shop from a ground floor location inside a hotel to a basement level within the same land constituted a “change in use” and not (as submitted by the applicant) simply a reasonable modification of use permitted by the existing development consent.

 “[Investors are] aggressively seeking control of businesses without paying a premium for other investors’ shares” – Greg Medcraft, chairman of ASIC (as reported in the AFR on 11 July 2012).[1]

Mr Medcraft raised these concerns in relation to the so called “creep exception” to the acquisition prohibition in s 606(1) of the Corporations Act.

This note briefly explains the acquisition prohibition and the creep exception.

Acquisition Prohibition

Section 606(1) prohibits a person from acquiring voting shares in a company in the following circumstances:

1. the company in which the securities are acquired is a listed company or an unlisted company with more than 50 members;
2. the acquisition is by way of a transaction in relation to securities entered into by or on behalf of the person; and
3. because of the transaction referred to in the previous paragraph, that person or someone else’s voting power increases:
1. from 20% or below to more than 20%; or
2. from a starting point that is between 20% and 90%.

Creep Exception

There are a number of exceptions to the acquisition prohibition.

One of these exceptions is the so called “creep exception” contained at item 9 of s 611, which provides that the following acquisitions are exempt:

 “An acquisition by a person if:

1. throughout the 6 months before the acquisition that person, or any other person, has had voting power in the company of at least 19%; and

2. as a result of the acquisition, none of the persons referred to in paragraph (a) would have voting power in the company more than 3 percentage points higher than they had 6 months before the acquisition.”

Therefore, generally, before making any acquisition, the acquirer would need to:

1. determine whether it and its associates held at least 19% of the voting power in the company for the entire period starting 6 months prior to the proposed acquisition and ending the date of the acquisition; and
2. determine (i) its aggregate voting power and the voting power of its associates, 6 months prior to the proposed acquisition; and (ii) whether the acquisition will result in their aggregate voting power being more than 3% higher than their aggregate voting power 6 months prior to the proposed acquisition.

In regard to the second requirement, a proposed acquisition of securities on 1 January would require the acquirer to look back at the voting power of the acquirer and its associates on 1 July of the previous year as the starting point, and so on.

The six month periods are therefore daily, rolling six month periods, with a determination required to be made each time an acquisition is proposed.

The following notes are accurate at the time of posting. However, FIRB legislation and guidelines are detailed, and legal advice must be sought where they may be relevant in any particular case.

Generally

The general policy is that a foreigner cannot acquire a whole or part interest in an Australian established dwelling without FIRB approval.

Exemptions that do not require FIRB application for approval

1. The foreigner holds a permanent residency visa.
2. The foreigner buys the dwelling jointly with a spouse (husband or wife) who is an Australian citizen.
3. The foreigner buys a new dwelling (or dwellings) from a developer, if the developer has pre-approval to sell the dwelling (or dwellings) to foreigners.
4. The foreigner acquires an interest in a time share scheme which does not permit the foreigner (and any of the foreigner’s associates) more than 4 weeks occupation of the dwelling per year.
5. The foreigner acquires an interest in the dwelling by will or by operation of law (for example, a court order requiring the transfer of property in a divorce settlement).

Applications that FIRB may approve

1. A proposal by a temporary resident to purchase one established dwelling to use as its residence in Australia is usually approved subject to a condition that the temporary resident sells the dwelling when it ceases to occupy the dwelling as its residence.
2. A proposal by a foreign-owned company to acquire an established dwelling for the housing of its Australian-based staff is usually approved subject to the condition that the company undertakes to sell or rent the dwelling if it is expected to remain vacant for six months or more.
3. A proposal for redevelopment of an existing dwelling (that is, to demolish an existing dwelling and build new dwellings) is normally approved subject to the conditions that:
1. the proposal promises an increase in the housing stock, that is, an increase in the number of dwellings;
2. the existing residence is not rented out before demolition and redevelopment; and
3. the existing dwelling is demolished and construction of the new dwellings have substantially commenced within 24 months after acquisition.
4. A redevelopment proposal which does not increase the number of dwellings may be approved where it can be shown that the existing dwelling is at the end of its economic life (that is, derelict or uninhabitable), and constructing a new dwelling will therefore effectively increase the housing stock. To demonstrate that the existing dwelling is uninhabitable and must be demolished, a valuation of the existing dwelling by a licensed valuer and a builder’s report is generally required. Photographs and other forms of evidence may also be required. Approval of the proposal would also be subject to the conditions that:
1. the existing dwelling is not rented out before demolition and redevelopment; and
2. the existing dwelling is demolished and construction of the new dwelling is substantially commenced within 24 months after its acquisition.

When an Australian company is regarded as a foreigner

An Australian company is regarded as a foreigner if one of its shareholders (who is a foreigner) controls 15% of the company or if 2 or more shareholders (who are foreigners) in aggregate control more than 40% of the company. “Control” means that a person holds actual control or holds rights which, if exercised, would give actual control to the person.

When foreigner is a lender only

FIRB approval is not required if an Australian citizen or permanent resident purchases an established dwelling even if the purchase is 100% funded by a foreigner and/or the purchaser’s financier requires loan security (eg personal guarantees) from a foreigner.

Security Interest

Section 12(1) of the PPSA introduces the concept of a “security interest”, which is a cornerstone of the new regime:

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).

Section 12(2) of the PPSA provides a number of examples of a security interest including:

• A conditional sale agreement (including an agreement to sell subject to retention of title).²
• A provision of personal property on a consignment basis.³
• A lease of personal property.⁴

These examples are instances where title to personal property is retained by one party (“A Co”) despite possession of the personal property passing to another party (“B Co”).

Position Pre-PPSA

Previously, if A Co were to provide personal property pursuant to a reservation of title clause or consignment to B Co or lease personal property to B Co and B Co was subsequently placed into liquidation, A Co would be entitled to approach the liquidator and retake the personal property in question and have that personal property excluded from the pool of property available to the unsecured creditors. The priority afforded to A Co was based on the Nemo Dat rule which meant that B Co’s liquidator could not achieve better title to the personal property than B Co itself.

The approach of the PPSA

The introduction of the PPSA practically rendered irrelevant A Co’s title to the personal property in a dispute with B Co’s liquidator. If A Co wants to preserve its priority to the personal property under the PPSA it will now be required to register its security interest on the Personal Property Security Register (“PPSR”).

Generally, the priority between the holders of registered security interests is established by the order in which the security interests are recorded on the PPSR. Sales of personal property pursuant to a reservation of title clause, consignments of personal property or leases of personal property give rise to what is now known as a Purchase Money Security Interest (“PMSI”) which, if registered within the time periods stipulated in the PPSA, will give the PMSI holder a priority over the holders of prior registered non-PMSI security interests.

NZ Experience

The PPSA was based heavily on the equivalent legislation passed in New Zealand in 1999. New Zealand has developed a body of case law around its PPSA which would, according to most commentators, be persuasive on Australian courts when they apply the PPSA.

In the case of Graham v Portacom New Zealand Ltd,⁵ Portacom was in the business of leasing portable buildings and entered into a lease with NDG Pine Ltd in respect of a number of portable buildings for an indefinite period. NDG had a debenture facility with a bank and provided the bank with a security in the form of an all assets charge (previously known as a fixed and floating charge) which the bank registered on the New Zealand PPSR. Portacom failed to register its security interest in the portable buildings New Zealand PPSR. NDG fell into default under its obligations under its facility with the bank and as a consequence the bank appointed a receiver to take possession of the property of NDG, including the leased portable buildings owned by Portacom. The court held that Portacom’s failure to register its security interest resulted in it losing its rights to the portable buildings which, in turn, resulted in the assets becoming available to the bank (through its receiver). The case of Waller v New Zealand Bloodstock Ltd,⁶ based on similar facts to Portacom, affirmed the position in Portacom.

Transition to the PPSR

In order to allow for a smooth transition into the new system, the PPSA allows for a 2 year period starting from the commencement date (30 January 2012) within which to register all security interests that were in existence immediately prior to the commencement date (“Transitional Security Interests”) on the PPSR. During the transition period, all Transitional Security Interests will be considered to be temporarily protected until they are permanently protected by registration on the PPSR. It is important to note that the temporary protections will only be afforded to Transitional Security Interests and not to security interests created after the commencement date.

Action Item

Clients who supply stock on reservation of title or on a consignment basis or clients who provide personal property on lease terms must review their customer documents for PPSA compliance and consider the utility ofregistering their security interest on the PPSR.

Morgan Lewis is currently assisting clients with their PPSA risk and compliance issues.

On the 1st March 2012, Morgan Lewis and sgfleet, sponsored the 2012 Jeans for Genes Golf Day lunch at Concord Golf Club. Thank you to everyone who attended and for your generous contributions. Together, we raised over $73,000 for the Children’s Medical Research Institute.

A big thank you to our Hole Sponsors:

We would also like to thank the following for their contributions to the event:

• Assoc. Professor Tracy Bryan, Head of the Cell Biology Unit, CMRI
• Burcher Property Group/City Properties
• City Freeholds
• Construction Assignments
• Drink Works
• Golfclubs.com.au
• Grant Thornton Australia
• Hannas
• JLAB Group
• Katzy’s Food Factory
• Moody & Doyle
• Outback Steakhouse
• Robert Lipman & Associates
• Single Origin Pty Ltd
• Taylors Wines
• The CMRI Vaucluse/Double Bay Committee
• Vince Sorrenti
• Wispa - Provided the marketing design for this event

We’d like to thank all our clients, staff and business associates for their support, and the role they have played in helping us reach this milestone.

When Mark Morgan and Les Lewis joined together in 1996, they set out in response to the demand for a boutique commercial practice, which offered a highly personalised service.

Today, we are proud of the fact that Morgan Lewis is widely recognised as the commercial law firm people turn to for excellence in:

• corporate and commercial law, mergers and acquisitions;
• property and development; and
• commercial litigation.

While we focus on delivering technical excellence and continue to invest in our people and capabilities, we recognise that it’s the close relationships we have with our clients, and our desire to understand our clients’ unique commercial objectives, that sets us apart.

Looking ahead to the next 15 years, we are committed to improving our business and strengthening our relationships.