Is a trustee company an ultimate holding company for the purposes of the Corporations Act?

A company is an ultimate holding company if it has a subsidiary but is itself not a subsidiary i.e. it is the top company in a group of companies.

The Corporations Act provides that a company, let’s call this company “S”, will be a subsidiary of another company, let’s call this one “H”, if H:

• controls the composition of the board of S
• is able to cast, or control the casting of, the majority of votes able to be cast at a general meeting of S, or
• holds more than one half of the issued share capital of S.

S would also be considered a subsidiary of H if S was a subsidiary of another company that was a subsidiary of H.

On its face, where a trustee company holds 100% of the shares in another company, and the trustee company itself is not a subsidiary of another company, a trustee company meets this test and is an ultimate holding company.

However, section 48 of the Corporations Act says that this is not the case. Section 48(2) provides that any shares held, or power exercisable, by a company in a fiduciary capacity (e.g. as a trustee or nominee) are not treated as being held or exercisable by it for the purposes of determining if a company is a subsidiary of it.

This question often arises in the context of determining whether a newly incorporated company with a sole shareholder that is a trustee company has an ultimate holding company. The answer is it does not.

Section 48 also has the effect that a trustee company is not a a holding company for the purpose of financial assistance approvals, saving a number of resolutions and ASIC notifications that might otherwise be required if it were.

WB

This post is current at the date of publication. It is general in nature, does not constitute legal advice and should not be relied upon as legal advice. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this post.

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Talking heads (of agreement): binding or not?

The NSW Court of Appeal (AMA Group Limited v ASSK Investments Pty Limited [2021] NSWCA 45) has unanimously upheld an appeal by a publicly listed company of a Supreme Court of NSW decision concerning the interpretation of a ‘binding’ heads of agreement (HOA).

In 2019, the company executed a ‘binding’ HOA to acquire a smash repair business. As is common, the HOA contained various terms indicating that, while the HOA was binding, the deal would only complete if the buyer was satisfied with its due diligence inquires and certain conditions precedent were satisfied. The relevant terms are extracted as follows:

‘The parties agree to enter into Business Sale Agreements subject to the terms and conditions set out in this Heads of Agreement’

‘Subject to [the buyer carrying out comprehensive due diligence] … the transaction will be recorded in a Business Sale Agreement’.

‘[conditions precedent include] … all necessary third party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval)’.

Following execution of the HOA, the buyer’s Board formed the view that the deal ‘in its current form’ did not meet its requirements and gave notice terminating the HOA on the basis that the board approval condition precedent had not been satisfied.  In other words, exactly the commercial outcome most sellers would have expected if, for whatever reason, the buyer was not satisfied with its due diligence.

First instance decision

Somewhat surprisingly, the seller successfully sought an order for specific performance of the HOA. The primary judge did not consider that approval of the buyer board was a condition precedent to performance of the HOA, even though the HOA expressly referred to it as a ‘condition precedent’. In his view, the HOA was ‘…far more than an agreement for the provision of information coupled with an option in … [the buyer’s] favour’ and that to the extent that buyer board approval was ‘… a condition precedent to anything, it is to the entry into Business Sale Agreements, not the sale transaction to which the HOA seeks to secure’.

The appeal

On appeal, the Court of Appeal unanimously found that the primary judge erred in his construction of the HOA and that buyer board approval was a condition precedent to the buyer’s obligation to enter into the long form sale agreements. When considering the HOA language as a whole, they reasoned that the parties’ objective intention must have been that the business sale not take place unless the buyer’s board approved the purchase. This was inherent in that comprehensive due diligence had not been carried out at the time of entry into the HOA and the condition precedent would have no meaning unless interpreted in this way.

Arguably the most interesting aspect of the judgment is the discussion around whether the withholding of buyer Board approval needed to be exercised honestly and bona fide, or objectively reasonably as well. While it was ultimately not necessary for the court to reach a concluded view, it is a reminder that such a right is not absolute or unfettered and depends at least on good faith, and in some cases reasonableness too.

Thoughts

It seems extraordinary to us that this matter found itself before the courts. It would be highly unusual for a heads of agreement of this nature not to include a right for the buyer to terminate if it is not satisfied with its due diligence inquiries.

What is unusual and may have led to some of the confusion in this case is referring to the heads of agreement as a ‘binding’ heads of agreement. Usually, a heads of agreement is structured so that it is not binding in relation to the ultimate commercial terms of the transaction, but binding in relation to matters such as exclusivity periods, access to due diligence materials and confidentiality.

Our suggestion would be to speak with an experienced M&A lawyer before signing any heads of agreement – you’ll find our details below 😊 – and to think carefully about how the document is laid out and gather the terms that are intended to bind the parties from the outset into a clearly labelled ‘binding terms’ section. If commercial terms of the ultimate transaction, such as conditions precedent, have been pre-agreed by the parties at heads of agreement stage but are not intended to be binding unless and until transaction documents are signed, be sure to expressly say that. Laying it all out neatly and clearly at initial engagement stage makes for a clean parting of ways if a deal doesn’t eventuate.

WB

The split ends of split execution

A volatile history

A company can validly execute a counterpart of a document under s 127(1) of the Corporations Act (Act). But the situation isn’t so clear where a company requires multiple signatories to bind it, and those signatories ‘split’ their signatures over separate documents. The practical effect of this has been to slow down and sometimes significantly delay deals because of the requirement that a party’s signatories physically meet for signing or that the original document travel between them for separate signing.

What’s with this ambiguity around ‘split executions’ and what is the position now?

The legislation

Under sections 127(1) and 129(5) of the Act a person may assume a document has been validly executed by a company where it appears to have been signed by two of its directors or a director and any company secretary. For a proprietary company that has a sole director who is also the sole company secretary, just that director’s signature is sufficient.

Counterparts

Where different parties sign separate but identical copies of a document, the document is said to be signed in ‘counterpart’. This usually happens when the parties to the document are in different places and unable to physically sign the same document. While strictly not necessary, it is usual and prudent to evidence the parties’ agreement to accept execution by exchange of counterparts by including a specific clause in the document.

Split execution

’Split execution’ refers to a situation where multiple individuals for a single party execute separate copies of a contract, for example where two directors of a company each sign separate copies of it. Historically there was doubt as to the enforceability of split executions, with most lawyers insisting on multiple signatories for a single party executing a single, static document.

When Covid-19 hit in early 2020 legislators introduced temporary measures explicitly confirming the enforceability of split executions by providing that a person signing under section 127(1) may sign a copy or counterpart of a document. These temporary measures expired on 21 March. And unfortunately debate on a Bill that would otherwise have had the effect of extending the temporary measures beyond 21 March has been adjourned until 3 August 2021. As such, the law has reverted back to its pre-Covid-19 position, i.e. once again we have doubt as to whether split execution satisfies the requirements of s127(1).

So, for the time being, companies should avoid signing by split execution. This is frustrating given the progress that was made on this front in 2020, we just hope that legislators follow through with the long overdue reforms.

WB

This post is current at the date of publication. It is general in nature, does not constitute legal advice and should not be relied upon as legal advice. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this post.