Elevate Legal Newsletter 3rd Edition

Greetings, and welcome to the 3^rd Elevate Legal newsletter. 

New Year seems like an eternity ago and we’re hurtling towards the end of Q1.  Bring on Easter already!

Launching our new service, IPO Ready

We’re excited to announce our new IPO Ready service for companies planning an IPO, trade sale or external investment. 

We help growing companies prepare for an investment or exit event, with lower cost, higher quality and less stress. 

More details at www.ipoready.com.au

What’s keeping us busy

Here’s some projects we’ve worked on with our clients over the last few months. 

If you’re looking for similar solutions please get in touch.

• Helping more growing companies scale up by bringing on new co-founders, with new shareholder agreements, funding agreements, employment and consulting contracts, and intellectual property assignments.
• (And, on the flipside, helping some clients work through the process of having founders leave the company, including what happens to their shareholding – this can often be a challenging period for a small company.)
• Capital raising and investments – helping several clients who are raising capital from new and existing investors.
• Advising several clients on large contracts with offshore customers – software licensing in Singapore, consulting in Hong Kong, software and product development in Germany, sales agency contract in Canada, and SaaS contracts with customers in the USA.
• Migrating more clients’ share registers – including staff equity to an online system at www.registrydirect.com.au – a subscription based service which replaces manual spreadsheets and paper share certificates. 

Client spotlight

Each newsletter we’ll profile one of our clients doing amazing things. 

This edition, we’re pleased to introduce Envirostream Australia.

Envirostream was created in 2017 to develop safe and innovative management solutions for one of the biggest emerging challenges for the Australian waste stream – batteries. 

In 2018 Envirostream opened Australia’s first – and currently only – lithium battery recycling plant at New Gisborne, north of Melbourne, where it recycled 240,000 kilograms of batteries last year.

Envirostream is helping to solve an important environmental issue, while capturing a large business opportunity.  Australia has the lowest battery recycling rate of any OECD country at less than 5% despite rapid consumer shifts to portable battery-powered devices and equipment (and electric vehicles).  Currently about 3,500 tonnes of lithium batteries enter the waste stream in Australia each year.  A 2016 report for the Federal Government forecasts this to increase to a staggering 137,000 tonnes by 2036.

Before the Envirostream facility opened, most lithium batteries were sent overseas for recycling.  That option is closing down, with China refusing to take Australia’s waste.  Landfill is not a sustainable solution – Victoria’s Government has banned e-waste and batteries from going to landfill from July 2019 – creating a big opportunity for early movers like Envirostream with inhouse R&D and local recycling facilities. 

Elevate Legal is proud to be working with Managing Director Andrew Mackenzie and the team at Envirostream Australia

Legal briefing

‘Small’ Pty Ltd Companies are about to get Larger

Late last year the Federal Government announced proposals to change the rules about what sorts of private companies (i.e. whose name ends in ‘Pty Ltd) must prepare and lodge annual financial reports.  The proposals have now been put into draft regulations. 

Under the Corporations Act 2001, “large” proprietary companies must lodge an annual financial report, a director’s report and an auditor’s report with the Australian Securities and Investments Commission (ASIC).  “Small” proprietary companies don’t have to prepare or lodge audited accounts (unless required by ASIC, or 5% of their members, or other regulation, for instance if the company holds an Australian Financial Services Licence).

The proposed changes are to double the thresholds for what is a “large” company. 

There are three tests, which apply to the company plus any entity it controls.  A company will be a large company if it meets any two of these tests for a financial year: 

The changes are proposed to commence on 1 July 2019 and apply to the financial years beginning on or after 1 July 2019.

New ASX Corporate Governance Principles and Recommendations

Introduction

In February 2019 the ASX released the 4^th edition of its Corporate Governance Principles.  Each year ASX listed companies must report publicly whether they comply with these principles, on an “if not, why not” basis.  The latest version applies to financial years starting from 1 January 2020 (although the ASX likes early compliance so many companies will choose to report against them for FY19). 

What’s changed?

The eight core governance principles are largely the same.  There are now 35 recommendations (up from 29) with notable changes being made to Principle 3 – which was “Act ethically and responsibly” and is now “Instil a culture of acting lawfully, ethically and responsibly”.

Revised or new recommendations for Principle 3 include that companies should:

• articulate and disclose their ‘values’ (3.1);
• disclose material breaches of codes of conduct to the board or a board committee (3.2);
• have and disclose a whistle-blower policy with material breaches to be reported to the board or a board committee (3.3); and
• have and disclose an anti-bribery policy with material breaches to be reported to the board or a board committee (3.4).

The new guidelines also continue to increase the focus on environmental and social risks.  The commentary to revised recommendation 7.4 (“a listed entity should disclose whether it has any material exposure to environmental or social risks and, if does, how it manages or intends to manage those risks”), now asks entities that believe that they do not have any material exposure to environmental or social risks to “consider carefully their basis for that belief and to benchmark their disclosures in this regard against those made their peers”.  (Which perhaps could be paraphrased as “Really? Are you sure you’re not an outlier?”)

The Principles now also encourage (rather than require) listed entities with material exposure to climate change risk to consider implementing the recommendations of the Task Force on Climate-Related Financial Disclosures. 

The Principles have introduced a hard-coded target of 30% female directors applied to the ASX 300 (revised Recommendation 1.5).

On corporate reporting, new recommendation 4.3 requires entities to disclose their process for verifying the integrity of any periodic corporate report released to the market that is not audited or reviewed by an external auditor (for instance, quarterly cashflow and activities reports).

The revised Principles also contain a range of other changes including:

• Generally, requiring policies to be disclosed in full, not in summary form;
• Amending commentary under indicators of directors’ ‘independence’ (Recommendation 2.3) to broaden personal ties to ‘family, friendship or other social or business connections’;
• Increasing expectations on director professional development and induction processes (Recommendation 2.6);
• Requiring all material ASX announcements to be sent to directors promptly after they have been made (new Recommendation 5.2);
• Specifying that all substantive resolutions at a meeting of security holders should be decided by a poll rather than a show of hands (new Recommendation 6.4); and
• Amending commentary on remuneration (Recommendation 8.1) to reference the need for listed entities to ensure that incentives encourage senior executives to pursue the growth and success of the entity without rewarding conduct that is contrary to the entity’s values or risk appetite, and to consider the implications for its reputation and standing in the community if it is seen to pay excessive remuneration.

The ASX Principles & Recommendations are available at the ASX website – https://www.asx.com.au/regulation/corporate-governance-council.htm

Tougher Penalties for Corporate Misconduct

In February 2019 the Federal Parliament passed laws to significantly increase penalties and prison terms for corporate and financial sector misconduct, and to create some new penalties.  This is not a surprise in the political climate after the Hayne Royal Commission into the banking and financial services sector.

One important change is a new civil penalty for Australian Financial Services Licensees for failing to provide their financial services ‘fairly, efficiently and honestly’ in accordance with section 912A of the Corporations Act.  It will be interesting to see how concepts like fairly and efficiently are applied by the regulators – and interpreted by the Courts – in any enforcement action. 

Other notable changes are:

• tripling the maximum prison terms for serious criminal offences, from 5 to 15 years;
• substantially increasing the maximum fines for breaches of civil penalty provisions to:
  • for individuals, the greater of $1.05 million per contravention or 3 times the benefit derived from the conduct;
  • for companies, the greater of $10.5 million per contravention (up from $1 million), 3 times the benefit derived from the conduct or 10 percent of the annual turnover of the corporation (to a potential maximum of $525 million per contravention);
• extending the civil penalties regime to general obligations imposed on AFSL holders, including to act efficiently, honestly and fairly (as noted above) and to report serious breaches; and
• introducing disgorgement remedies in civil penalty proceedings brought by ASIC to prevent the unjust enrichment of those found to have engaged in misconduct.

New Whistleblowing Laws

In February 2019 the Federal Parliament also passed a new whistleblower protection law.  The new laws come into force on 1 July 2019.

The key points are:

• Public companies and proprietary companies that are trustees of a superannuation entity must have a whistleblower policy from 1 January 2020. A large proprietary company must have a whistleblower policy from 1 January 2021 (assuming financial year ends on 30 June 2020). Failure to do so is an offence.
• The policy must include information about:
  • the protections available to whistleblowers;
  • how (and to whom) they can make disclosures;
  • how the company will support whistleblowers and protect them from detriment;
  • how the company will investigate disclosures that qualify for protection;
  • how the company will ensure fair treatment of staff who are mentioned in disclosures that qualify for protection, or to whom such disclosures relate; and
  • how the policy is to be made available to all officers and employees of the company.
• Company officers and senior managers will be ‘eligible recipients’ of protected disclosures, as will auditors and actuaries of the company or its related bodies, and anyone specifically nominated by the company. Those people should receive training to ensure they know what to do when receiving a whistleblower disclosure.

Note, the Labour Party has flagged further changes to these laws if it wins Government at the May election, including introducing a rewards scheme for whistleblowers and creating a central whistleblower protection authority.  Stay tuned for more developments mid year. 

New guidelines for software firms claiming R&D tax rebate

In 2018 there was well publicised confusion and concern among technology firms, especially software developers, about how the Federal Government was interpreting the rules for claiming the R&D tax incentive. 

In February 2019 the Government released new guidelines explaining how the rules will be applied to software activities.

Eligible core R&D activities are defined as experimental activities conducted for the purpose of generating new knowledge, where the outcome of experiments cannot be known or worked out based on existing knowledge before the experiments are performed.

R&D expenditure or notional deductions must also exceed $20,000 to qualify unless undertaken with a Research Service Provider or a Cooperative Research Centre.

In the Government’s accompanying Guide to Common Errors, potentially expensive errors in claiming include:

• Claiming for whole projects, not individual activities;
• Assuming that activities are automatically eligible because they follow a software development lifecycle;
• Failing to identify a specific technical knowledge gap;
• Claiming for activities related to the development of internal administration software; and
• Not keeping contemporaneous documentation.

The Guidelines and Guide to Common Errors are available at: https://www.business.gov.au/assistance/research-and-development-tax-incentive/guidance-and-information/sector-guidance/software-development.

Diversions we’re enjoying

I’d like to share some great books I enjoyed reading at the beach this past summer.

I started off with some non-fiction: Beautiful Country Burn Again by Ben Fountain is a deep dive into the 2016 election of President Trump; how it happened and what it means for the US (and perhaps democracy in general).  Fountain argues that the US is facing its third existential crisis, after the Civil War and then the Great Depression.  It’s hard to see the incumbent filling the shoes of Lincoln or FDR.  Strong echoes of Hunter S. Thompson’s Fear and Loathing: On the Campaign Trail ’72.   

Then for some light relief I enjoyed Billion Dollar Whale by Tom Wright and Bradley Hope, an expose of the $5 billion fraud against the Malaysian Government.  Criminal charges have recently been filed against Goldman Sachs in Malaysia, and the main figure in the scandal is in hiding, apparently in China – so the story is not over yet.   

As relaxation kicked in I turned to some fiction; first, French Exit by Patrick deWitt, a quirky, original novel about a widow, her son and their cat (and a few others) in Paris.  Then, I thoroughly enjoyed two local novels: Bridge of Clay by Markus Zusak – a beautiful, sad, moving, distinctly Australian saga about a family of 5 brothers – and Boy Swallows Universe by Trent Dalton – also about two brothers growing up in, ahem, challenging circumstances (read it and you’ll see); a great read and (my pick) destined for the big screen.   

Hope you had some good summer reading also.

Finally, footy is almost back.  Can’t wait. 

Go Tigers!