AT THE FOREFRONT A collection of insights for General Counsel
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Published May 2019 PAGE 2
Contents A US state of mind: the end of conciliatory financial regulation in Australia 4 Why now is the time to revisit your organisation’s compliance culture 6 Pre-empting M&A pitfalls: three early stage issues for GCs 8 The ever wider reach of competition and consumer laws 10 Harnessing your data assets: opportunities and threats for Australian companies 12 Human rights as an ethical framework for corporate governance 14 From ‘bricks and mortar’ to ‘bricks and clicks’: six key PropTech considerations 16 Tax policy in an era of disruption: where to from here? 18 Ten predictions for class actions in 2019 20 Australia’s workplace reform debate heats up 22 Setting your IP strategy: key ownership and enforcement questions 24 Trends in Australian loan markets and the role of alternative lenders 26 The implications of the recent Rocky Hill decision for major development 28 How to choose the best contractual strategy for the construction of major projects 30 So far, so good? Considering the success of Australia’s safe harbour reforms 32 Attracting capital from financial investors in the current climate 34 Preserving arbitral integrity: UK Supreme Court to hear Deepwater Horizon appeal 36 A transformational impact: the Papua LNG Project Gas Agreement 38 Key contacts
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A US state of mind: the end of conciliatory financial regulation in Australia Mark Wilks, Head of Commercial Litigation
We have witnessed the end of conciliatory financial regulation in Australia. Following criticism in the recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, ASIC has reinvented its enforcement function as one which looks remarkably similar to the aggressive posture favoured for decades by the US Securities and Exchange Commission (SEC). As a result, prosecutions will be more frequent, penalties have multiplied and companies will no longer avoid admissions of guilt by striking settlement deals with the regulator.
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In his final report on the Royal Commission, Commissioner Kenneth Hayne recommended that ASIC assess every suspected contravention for whether the penalty should be determined by a court. Many had criticised the regulator for treating litigation as a last resort. ASIC blamed this policy in part on a lack of funding to conduct court proceedings, while the courts themselves have observed that the penalties able to be imposed were ‘inadequate’ by ‘an order of magnitude’.1 Now, however, these barriers have been substantially overcome. In April’s Federal Budget, the Commonwealth Government allocated $404.8 million over four years for ASIC to implement a more aggressive enforcement strategy. In March, legislation was amended to dramatically increase civil penalties, which can now reach $525 million for a corporation.2 Further, civil penalties are now available in respect of a greater number of contraventions.
ASIC v Westpac Banking Corporation (No 3) [2018] FCA 1701 Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth); Corporations Act 2001 (Cth) section 1317G (4)(c)(ii)
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AT THE FOREFRONT A collection of insights for General Counsel
“Why not litigate?”
What’s next?
Now properly funded and empowered (and a little chastened), ASIC has released an update on its implementation of Royal Commission recommendations, in which its Chairman James Shipton declared ASIC’s new mantra to be “why not litigate?”.
ASIC once sought to educate and persuade regulated entities to comply with the law, and reserved severe punishment for the most egregious cases. But education and persuasion are effective only when regulated entities perceive that there is a consequence for failing to comply. ASIC’s educative function has been undermined by its inability or reluctance to impose penalties.
The SEC, of course, has been doing this for decades with its dedicated Division of Enforcement. As outlined in its update, ASIC will this year follow the lead of the US and establish an Office of Enforcement aimed at ‘deterrence, public denunciation and punishment of wrongdoing by way of litigation’. This new Office has substantially adopted the five principles that guide the SEC’s enforcement division. Where the SEC seeks remedies that will ‘most effectively further [its] enforcement goals’, which has always meant litigation, ASIC will now focus on what it calls the ‘clear benefits of a… court-based outcome’. ASIC will still offer enforceable undertakings but is likely to adopt Commissioner Hayne’s recommendation to require an admission of wrongdoing. Again, this is routine for the SEC, and is critical if ASIC is to position itself as a regulator to be feared, not appeased.
In this sense, ASIC’s new punitive approach does not see it abandoning its role as persuader. To the contrary, a more forceful regulator will signal its capacity to impose penalties and dissuade regulated entities from conduct deserving of punishment. By this, we may see ASIC close one of the remaining gaps with the SEC – that is in respect of the target of its enforcement activity. ASIC has an outsize focus on small businesses and, as the Royal Commission found, an ambivalence toward prosecuting financial advisors. On the other hand, more than one-fifth of the SEC’s work is focussed on investment advice, and a quarter relates to securities offerings. If ASIC can convince its smaller regulatory targets to comply merely because it is possessed of more punitive powers, it will likely focus its enforcement efforts on the ‘big end of town’. In the remarkably short time since the Royal Commission, we have seen ASIC follow the lead of its US counterpart, the SEC. Australian corporates and their boards need to urgently prepare for a world in which their US counterparts have existed for decades – one where the corporate regulator needs to be respected, and feared.
In the remarkably short time since the Royal Commission, we have seen ASIC follow the lead of its US counterpart, the SEC.
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Why now is the time to revisit your organisation’s compliance culture Abigail Gill, Partner
Now more than ever, there is an imperative for companies to seek to create a strong compliance culture. But it is equally important to ensure robust mechanisms are in place to identify any cracks early – both before they spread throughout the organisation, and before frustrated insiders decide that the only way they can secure action is to go outside the organisation.
After several years of consultations, committee hearings and draft proposals, the long foreshadowed reforms to Australia’s private sector whistleblower regime – the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 (Cth) (Whistleblower Act) – were finally passed on 19 February 2019. The Whistleblower Act will harmonise current Federal private sector whistleblower laws, expand the existing protections and remedies for whistleblowers and create a whistleblower regime for tax-related misconduct and contraventions. These reforms will impose a significant compliance burden, and we think there is an insufficient appreciation of the challenges affected organisations have to address. For example: • Those who receive and investigate reports of misconduct which may trigger whistleblower protections under the Whistleblower Act (‘protected disclosures’) should review current processes for handling information given the limited permitted grounds for disclosure for the purposes of an investigation. In this context, it is important to consider the very broad range of matters which may be the subject of a protected disclosure under the Whistleblower Act.
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AT THE FOREFRONT A collection of insights for General Counsel
• Additional training will be required for ‘eligible recipients’ (company officers, senior managers, auditors and actuaries, or others authorised to receive protected disclosures) so they can identify a whistleblower report and know what to do if they receive one.
The commencement of the new whistleblower requirements is an opportune time for organisations to consider holistically how they encourage people to speak up, how they respond when issues are raised and how they maintain confidence in these processes after an allegation is substantiated.
• There is some difficulty in scoping the detail that will be required to satisfy the whistleblower policy obligation. ASIC has indicated draft guidance will be issued, preceded by a consultation process. Corporations will face significant penalties if they get this aspect wrong in practice. • Organisations that operate in multiple jurisdictions should consider whether a ‘one size fits all’ approach is truly appropriate, given there are differences between the whistleblower protection regimes across key jurisdictions such as the UK, EU and US. Most provisions take effect on 1 July 2019, although the requirement for public companies and ‘large proprietary companies’1 to have mandatory whistleblower policies, with mandatory content, applies from 1 January 2020. In practice, many companies will not delay introducing a policy to ensure that from 1 July, those within their organisation understand their obligations to protect whistleblower confidentiality and ensure whistleblowers are not victimised.
In this heightened environment of identifying and informing on wrongdoing, there will be significant penalties for corporations (and individuals) arising from contraventions of the legislation.
The amendments will apply to disclosures made from 1 July, but this could concern conduct that occurred before then. Some parts of the Whistleblower Act (including matters relating to compensation and remedies) will also apply retrospectively to disclosures made prior to commencement, so long as the disclosure could have been protected had the Whistleblower Act been in force at the time. In this heightened environment of identifying and informing on wrongdoing, there will be significant penalties for corporations (and individuals) arising from contraventions of the legislation. As importantly, an entity’s ability to maintain stakeholder confidence is considerably enhanced by pinpointing and resolving internal control weaknesses before this information becomes public.
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A large proprietary company is currently defined in the Corporations Act 2001 (Cth) s 45A(3) as a proprietary company that satisfies at least two of the following in the financial year: (a) consolidated revenue $25 million or more; (b) gross assets of $12.5 million or more; (c) the company and any entities it controls have 50 or more employees. However, draft regulations were introduced for consideration in 2018 (Corporations Amendment (Proprietary Company Thresholds) Regulations 2018), which would double those thresholds, meaning that fewer proprietary companies would be subject to these obligations.
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Pre-empting M&A pitfalls: three early stage issues for GCs Sandy Mak, Head of Corporate
An M&A transaction is often initially driven by the business development or strategy teams within an organisation. Valuation, strategic rationale, synergy analysis and integration are not always matters which involve an in-house legal team at the outset. However, these matters can have significant legal implications for a transaction.
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Set out below are three issues GCs should raise with their deal teams during the early stages of a transaction: 1. Be cautious of synergies and valuation disclosure. Can an organisation ever do too much synergy and valuation analysis? Probably not, but there is one key issue that most deal teams tend to forget in preparing their valuation models and synergy assumptions: disclosure. In a public M&A transaction, and in any transaction which requires FIRB approval, the intentions of the buyer for the business and its assets and employees must be disclosed to target shareholders and to FIRB. And that doesn’t even take into account the implications of such analyses for competition clearance purposes. Often, versions of the valuation model, its underlying assumptions and board or committee papers outlining the strategic rationale of the transaction are not necessarily reflective of the intentions of the bidder or the likely impact on the market, but can create an unhelpful (if unintentionally inaccurate) paper trail should they ever be revisited and are challenged as being inconsistent with the position disclosed to the public or the regulators.
AT THE FOREFRONT A collection of insights for General Counsel
Before the bankers and the deal team are let loose on the excel spreadsheets and board papers, GCs should take a step back to determine what material should be produced and how that aligns with their organisation’s intentions and strategies for the deal at hand. 2. Don’t rush to integrate. Some of the most successful M&A transactions we have been involved in have had a laser-like focus beyond the acquisition and towards integration. However, GCs should be aware that recent developments relating to the ACCC’s approach towards concerted practices and cartel conduct may mean that forward planning for post-M&A integration will need to be balanced against the need to comply with information sharing and ‘gunjumping’ restrictions. Frequently, M&A deal teams have a very different perspective to competition lawyers and regulators on what constitutes anticompetitive conduct. For example, what may seem like a diligent effort to ensure continuity of service for existing customers in the pre-closing phase of a transaction could in fact constitute illegal cartel conduct. Similarly, restrictions on a target’s activities in a sale agreement which are designed by the deal team to protect the financial interests of a buyer could result in a breach of competition law. GCs should get involved early and brief the deal teams negotiating the transaction on acceptable parameters so these restrictions can be factored into the transaction well in advance.
Even if no specific ‘red flags’ are raised during legal due diligence, GCs should not ignore warning signs and should encourage both legal and deal teams to report back on any qualitative issues which expose concerns with a company’s governance system. A too-rigid approach to diligence reporting may mean that you miss out on truly understanding the underlying risks of an organisation.
Organisations are increasingly expanding their diligence scope to areas of reputational governance such as environmental, social and governance (ESG), modern slavery, corruption, whistleblowing, and business and human rights.
3. Don’t ignore reputational and governance red flags. Society is demanding that business do better. In the current environment, legal due diligence needs to take into account risks which may impact a company’s reputation and, ultimately, cause financial detriment to a company. Organisations are increasingly expanding their diligence scope to areas of reputational governance such as environmental, social and governance (ESG), modern slavery, corruption, whistleblowing, and business and human rights. In addition to this more formal type of diligence, legal counsel can often assess the quality of the organisation’s corporate governance environment during the course of an M&A transaction based on the responses provided to questions and an understanding of the legal systems and processes of the target business.
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The ever wider reach of competition and consumer laws Mark McCowan, Head of Competition
Competition and consumer laws are, around the world, in a state of flux and re-evaluation. Big questions are being asked about whether critical industries have been allowed to become too concentrated, whether existing legal frameworks are up to the challenges of regulating digital markets prone to oligopoly, and whether the core mission of such laws should be broadened to encompass issues such as employment, security, data privacy and media diversity. While that introspection occurs, existing laws are already being applied by enforcement agencies including the ACCC to a much broader range of conduct than ever before – creating new, and often under-appreciated, risks for businesses.
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Historically, the categories of conduct vulnerable to challenge were predictable. In broad terms, merger enforcement primarily focused on horizontal overlaps, market power enforcement focused on conventional categories of conduct such as predatory pricing, refusals to supply and bundling, and cartel enforcement focused on explicit collusion in relation to the pricing and supply of rivals’ output. In all cases, the focus was on the aggregation or use of economic power in a manner that could (or did) lead to increased prices, lower service levels or reduced output. Examples of a new, more expansive approach to enforcement include: • Cartels – As traditional immunity applications decline, regulators are increasingly pursuing less conventional cartel cases. In the US, the antitrust agencies are focused on ‘no poach’ agreements between employers and competition in M&A bid processes – a focus echoed in the ACCC’s litigation against Pacific National and Aurizon. Similarly, the ACCC’s proceedings against ANZ, Deutsche Bank, Citi and various executives relating to the operation of an underwriting syndicate surprised many, but were quickly followed by similar action focused on capital markets activity in the UK.
AT THE FOREFRONT A collection of insights for General Counsel
• Market power – In Europe, significant findings of previously rare ‘exploitative’ abuses of a dominant position (a category of market power misuse not recognised in Australia) have recently been made against Pfizer for excessive pricing and against Facebook for data privacy infringements. • Mergers – Less conventional theories of harm are being pursued in major merger decisions, for example: -- the testing of ‘common control’ theories relating to co-ordination between competitors arising from cross-shareholdings and directorships held by institutional investors; -- “potential” competition concerns arising from the acquisition of nascent competitors; -- the focus of regulators on the implications of mergers that combine data sets or data capabilities; and -- the US Department of Justice’s failed attempt to block AT&T’s acquisition of Time Warner on the basis of a vertical foreclosure theory. • Fairness – Laws regarding corporate ethics, whether framed as matters of unconscionability or unfairness, have been a strong focus of the ACCC in recent years. As it has bumped up against the limits of unconscionability, the ACCC has become increasingly vocal in advocating for a further expansion of existing laws voiding unfair contract terms to incorporate prohibitions and the introduction of a wide prohibition on ‘unfair practices’. • Data issues – In the context of its Digital Platforms Inquiry, the ACCC appears to be intending to pursue consumer protection cases relating to concerns that are fundamentally data privacy issues. The German Facebook decision referenced above is an instance of a competition law contravention said to arise by virtue of a data privacy infraction.
Paired with the above issues are some increased practical risks. Regulators are increasingly prepared to ‘chance their arm’ and may see a dignified loss in a marginal case as a worthwhile exercise – particularly in sensitive sectors. In Australia, the ACCC is also showing signs of a preference to litigate rather than settle certain cases and to seek fines of a different order of magnitude than it did previously. The prevalence of private damages claims following enforcement action has exploded in Europe (typified by the trucks cartel, in which total claims have been estimated to exceed €150billion), and the arrival of this trend to Australia is a matter of when not if. The cutting edge of competition and consumer law enforcement has moved markedly in recent years. Large Australian corporates need to rethink the conventional assumptions about their exposure and ensure their compliance programs have kept pace. A black-letter understanding of the laws will tell only half the story – a deep understanding of both the public policy pressures on an industry and the broader enforcement trends, in Australia and around the world, is critical.
The ACCC is showing signs of a preference to litigate rather than settle certain cases and to seek fines of a different order of magnitude than it did previously.
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Harnessing your data assets: opportunities and threats for Australian companies James North, Head of Technology, Media & Telecommunications
A fundamental shift is occurring in the global economy with respect to data. As it stands, only 30% of the global economy has been digitised, but 5G wireless networks and other highspeed telecommunications solutions will enable the digitisation of the remaining 70%, driving huge increases in data generation. The exponential growth in the use of internet-connected machines and AI is ushering in the ‘4th industrial revolution’, and every company will effectively become a data company in the short to medium term. This trend can already be seen in a significant number of ‘old economy’ sectors, including agriculture, mining and engineering.
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These developments will require businesses to shift their thinking away from simple questions of strict data privacy compliance and start viewing data as a critical component of enterprise value which provides opportunities (in terms of service improvement and personalisation), but also requires effective management and protection. Implementing best practice data governance will increasingly become a business imperative – both to fully realise its value and to avoid the significant brand damage and loss of social licence to operate that can arise from failures to secure personal data and ensure it is used ethically. Many data-rich industries are already taking proactive steps in this space. For example, a number of major Australian data companies, including banks, insurers, airlines and data analytics firms have recently formed the Data Institute to work on defining data governance best practice beyond simple questions of compliance. While social media companies have arguably been somewhat ‘late to the party’, Facebook’s recent calls for increased regulation of privacy and data portability (amongst other things) show how quickly debate on these issues has shifted.
AT THE FOREFRONT A collection of insights for General Counsel
How to understand your data An essential first step in developing any strategic approach to data management is to understand: • What data your business collects – this may be increasingly difficult to determine as machines start collecting information on your behalf. • Whether the data is accurate – the results of the application of data analytics tools will only be as good as the data they are based on. • Whether the data is accessible and able to be analysed – legacy systems and a lack of integration can create data silos, making the task of getting the most out of your data assets challenging.
includes clear reporting lines and allocation of responsibility for data management.
2. Ownership of data Until relatively recently, data collected by companies tended to be viewed as entirely its proprietary material, with only limited qualifications arising from privacy law. We see this paradigm shifting rapidly due to policy developments around the world that call this proprietary model into question. Examples of this include: • the Consumer Data Right announced by the Australian Government which, over time, will mandate the transfer of data between competitors in designated sectors at the request of consumers;
• Whether the data is secure – risks from malicious actors will rise as internet connected machines increase the number of entry points into a business’ IT systems.
• the recent announcement that the California Governor is working on ‘data dividend’ legislation that would see companies charged for the use of information collected from consumers;
• Whether the data belongs to the business – understanding the basis on which data was collected is critical to assessing how it can be used.
• increasing use of the EU’s General Data Protection Regulation (GDPR) as a global standard to ensure cross-jurisdictional privacy compliance; and
Best practice data governance increasingly requires systems and processes that incorporate transparency, accuracy, consumer and customer choice, security/de-identification, stewardship and accountability. Two important issues that require consideration in this context are:
• a number of regulatory inquiries, including the ongoing Digital Platforms Inquiry conducted by the ACCC in Australia and the recently concluded expert panel review on Competition Policy for the digital era undertaken in the EU, both of which have presented arguments for greater consumer choice in terms of how their data is handled and more open access to data sets that provide certain competitive advantages.
1. Implementation of digital transformation strategies Digital transformation can remove data silos created by legacy systems, offer single source of truth capability and render data more readily accessible to analytic tools and AI. However, there are also challenges which must be carefully navigated. Combining data from different sources requires careful consideration of the different permissions and licences that may attach to each data source and the appropriate application of access controls. For example, without proper data governance, under a ‘single source of truth’ model, data originally sourced from a customer database may be used by another part of the business for a purpose it was not collected for, resulting in privacy breaches and the potential for regulatory investigations. Further, systems and processes which allow effective oversight of data management issues (including at senior executive and board level) are key. This
While it is true these policy developments have the potential to change the nature of the rights businesses have in relation to data, it is worth remembering that the Copyright Act still vests ownership of a database in the business (and not in the consumers whose information is included). The fast approaching end of the global ‘techtopia’ and ‘free’ internet raises difficult questions about how the enterprise value of data is best determined. It is likely to drive the need for increasingly sophisticated information management systems which permit greater customisation based on consumer preferences and enable secure data transfers without compromising their integrity. In this new paradigm, company boards will need the governance structures in place to allow full oversight of, and accountability for, data governance. This can only be achieved with the best practice data management processes and technology. PAGE 13
Human rights as an ethical framework for corporate governance Dr Phoebe Wynn-Pope, Head of Business & Human Rights
In presenting the Final Report and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in February, Commissioner Kenneth Hayne found that many of the organisations they were called upon to investigate throughout the Commission had failed to meet ‘community standards and expectations’.
Human rights are based in international law, and provide an ethical lens that can transcend national and cultural boundaries. They put people at the centre of decision-making, and can be used to assess and address any unintended harm. They also remove the subjective element from ethics and replace it with internationally agreed standards that are ready to be incorporated into thoughtful governance, corporate decision-making processes and sustainability reporting.
One way organisations can meet community expectations of corporate conduct is by ensuring that decision-making is consistent with internationally recognised human rights norms.
• obey the law;
In his Report, Commissioner Hayne summarised ‘community standards and expectations’ through an ethical lens that he felt should inform business conduct, including corporate governance in its widest sense: • do not mislead or deceive; • be fair; • provide services that are fit for purpose; • deliver services with reasonable care and skill; and • when acting for another, act in the best interests of that other.
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AT THE FOREFRONT A collection of insights for General Counsel
The Report challenges corporate Australia to rethink the orthodoxy of their corporate governance model by suggesting that the community expects corporate Australia to foster a culture that promotes good leadership, decision-making and ethical behaviour. It also highlights the important role of directors and management in embedding such a culture. Human rights is a well-established ethical framework through which to frame that conversation. If well implemented, a human rights framework would also contribute to the Report’s recommendation that shareholder interests be considered alongside (but not necessarily in priority of) those of other stakeholders. A human rights framework can provide a value-based underpinning for directors as they try to balance the interests of a number of different stakeholders whose interests in the organisation, direct or indirect, appear to now form part of a director’s statutory and fiduciary obligations.
What does a human rights approach entail? A human rights approach asks an organisation to consider their business conduct and practices against the legitimate rights of stakeholders and the duties and obligations of the business to respect human rights. Where individuals may be directly affected by decisions, an organisation taking a human rights approach will consider the legal, regulatory, moral and actual rights of those involved and, where practicable, will include affected persons in the decision-making process through communication and consultation. An organisation that adopts human rights policies and principles will not only ask the question ‘can we?’ but ‘should we?’ When it is done well, a human rights approach to governance can help develop a corporate culture that considers all stakeholders affected by a certain decision. It is a model that, in the language of the Commission, recognises the ‘differences between a short-term and a longer-term view of prospects and events’.
Human rights are good business Separately from meeting some of Commissioner Hayne’s requirements regarding culture and community expectations, human rights make good business sense. Organisations that integrate human rights considerations into their core business practices can see decisions as justifiable and in the best interests of the organisation. As the Australian Human Rights Commission sensibly points out, doing so: • safeguards an organisation’s reputation and brand image; • highlights human and environmental risks before technical or investment decisions are made; • reduces cost burdens associated with stakeholder damage control, labour disputes and security issues; • reduces the risk of costly litigation; and • improves governance. In essence, human rights can provide a basis for practical understanding of what is ethical, what is efficient, honest and fair, and what is the ‘right’ thing to do.
When it is done well, a human rights approach to governance can help develop a corporate culture that considers all stakeholders affected by a certain decision.
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From ‘bricks and mortar’ to ‘bricks and clicks’: six key PropTech considerations Nathaniel Popelianski, Head of Property & Real Estate
Originally the domain of technology start-ups, PropTech has emerged as a serious player in property and construction markets. The integration of new technologies in the property space and the opportunity this creates is being embraced by investors, major construction companies and property developers alike to enhance the residential, commercial and retail customer experience.
As the appetite for agile working environments, tailored technology and automation grows, businesses will increasingly expect property developers to incorporate PropTech solutions (such as collecting data about how occupants are using spaces and controlling critical building operations and facilities) into new developments and require property managers to offer technology services as part of their tenancy arrangements. While the benefits are enormous, PropTech solutions also present a number of legal and reputational risks. Explored below are six key PropTech considerations for investors, developers and owners.
1. Collection of data Data that identifies an individual (such as information collected by sensor technologies to identify how individual occupants interact with their buildings by tracking individual movements) is likely to be personal information in Australia, and attracts different privacy obligations for recipients that access and collect it. For example, a tenant that collects personal information about employees may rely on the employee records exemption under the Privacy Act 1988 if the personal information is collected for the individual’s employment. However, when personal
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AT THE FOREFRONT A collection of insights for General Counsel
information is collected from guests or contractors, the tenant cannot rely on that exemption and will be subject to privacy legislation concerning the collection, use, disclosure and storage of personal information. A property owner that is collecting information to understand how a space is being used for the purposes of the facility or future developments will be subject to privacy laws if the individual can be identified. The owner will need to satisfy privacy obligations, including that the collection is necessary for one or more of its functions and activities. If not, the information should be de-identified.
2. Security of data As large repositories of valuable data grow, organisations in the property chain need to move beyond managing physical security to managing the secure storage of information. Because data is often managed by third-party cloud providers with servers globally, collectors of this information must ensure protection from cybersecurity risk operationally and contractually.
3. Facial recognition software
It is important that property participants think about the value proposition created by the technologies and whether legal arrangements are properly defined to ensure that data, information and intellectual property rights are protected and revenue streams are preserved.
5. When things go wrong The risk profile for owners of smart buildings that deploy AI technology to operate key functions goes beyond the physical infrastructure. Who in the PropTech supply chain bears responsibility for malfunctions and liabilities, particularly given the potential for harm where automated technology operates an essential building function such as lifts or fire detection? The potentially catastrophic consequences of a PropTech defect requires owners to closely examine the technology chain to ensure that: • the contractual framework with technology providers, integrators and others is robust; • service levels are appropriately identified; • responsibility matrixes are documented; and
Within retail property, facial detection applications use algorithms to detect the presence of a human face. While they don’t identify an individual, data is being used to collect information such as age, gender and even mood, which is then used to connect the shopper with particular retailers. This raises ethical and reputational issues for the centre operator as to the level of transparency required over what information is collected about the customer experience and how it is used.
• liability regimes are allocated to cover the new risk paradigm.
In some countries, facial recognition software is being used as a security measure to create a digital record of individuals that pose a threat. Unlike facial detection, facial recognition uses biometric technology to recognise the human face. In the retail property context, if one retail outlet identifies a threatening individual, other outlets using the network could form the same view, resulting in the individual being automatically banned from multiple outlets.
To this end, construction companies and property developers should conduct due diligence and enquiry on the IP ownership framework to ensure the IP resides with the correct ‘owner’ and is appropriately licensed to enable unimpeded use while the PropTech solution is in operation.
4. Ownership of data
6. Intellectual property Construction companies and property developers that embed PropTech solutions into the design or build of a development must ensure that the PropTech solution is immune from IP infringement claims and that IP is accessible should an emergency occur.
PropTech is set to revolutionise the construction and property sectors. While it will raise a number of new and varied legal and operational risks, those organisations that can manage these risks effectively will be best placed to make the most of the enormous opportunities this exciting sector presents.
Multiple parties with access to the same data all seek to analyse and derive insights for their own businesses and identify new commercial opportunities. Could a property owner that operates sensor technologies set parameters in leases with tenants about what rights they have over the data? PAGE 17
Tax policy in an era of disruption: where to from here? Rhys Jewell, Head of Tax
As the ways we do business continue to evolve, aided by disruptive technologies and globalisation more generally, our tax framework is often slow to respond. This is in large part because it is built upon traditional and well-understood tax principles formed around the way business was conducted in the early part of last century. Now, however, we find ourselves in the midst of the so-called ‘sharing economy’ and a climate in which perceived disruptive business practices are becoming the new normal. The pace of change is only accelerating, but policymakers are rising to the challenge.
Increasingly, they are introducing measures that signal a shift away from the traditional model of simply taxing the supplier of goods and services towards a framework focused on imposing tax based on where the economic substance is located or the consumption is taking place. Some recent examples of measures introduced in Australia that are specifically designed to counter disruptive business practices include: • The Multinational Anti-Avoidance Law (MAAL) – This is designed to combat arrangements where a foreign entity supplies goods or services to Australian consumers but does not do so through an Australian presence. The MAAL may be applied where: -- there is a related Australian entity carrying out material functions (e.g. marketing and negotiating contract terms between consumers and the foreign entity); -- the foreign entity derives income under the arrangements that is not attributable to an Australian presence; and -- there is a principal purpose of reducing Australian tax.
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AT THE FOREFRONT A collection of insights for General Counsel
• The Diverted Profits Tax (DPT) – The DPT is a 40% penalty tax rate where Australian tax paid is reduced by diverting profits offshore in contrived arrangements between related parties by reference to where the economic substance resides. • GST on inbound digital sales and low value goods – Previously, foreign suppliers of digital products and services (e.g. movie downloads, e-books) and low value goods (i.e. less than $1,000) fell outside the Australian GST net, either because no supply was made in Australia or the cost of collection on import of the goods was too high. These measures mean that GST is now payable in respect of such things imported by Australian consumers. Importantly, in dealing with disruption caused by electronic distribution platforms and the difficulty in collecting tax on a myriad of foreign sellers, the legislature simply targeted the operator of an electronic distribution platform (e.g. App Stores, Amazon), typically large corporates with deep pockets, who are now liable for the GST on deemed taxable supplies instead of the actual foreign seller. The rise of the sharing economy has also made policymakers pause. One such example of this is the Australian Treasury’s establishment of the Black Economy Taskforce (BET), which was designed to develop an innovative, multi-pronged policy response to combat the black economy in Australia. From the BET emerged a consultation regarding a ‘sharing economy reporting regime’. The associated consultation paper identified participants in the sharing economy as including not only those selling their goods and services online, but also the ride sharing or short-term accommodation services facilitators, or application software operated by the platform provider.
According to the consultation paper, a consistent feature of sharing economy platforms is that the supplies and payments are facilitated by the platform. The lack of transparency for tax authorities of the income being generated through such platforms is flagged as a concern for efficient tax collection, but the centralised nature of the platforms is also viewed as an opportunity to implement a reporting regime that would be focused on the platform providing the data regarding payments to participants. However, one must ask how long it might take for such a regime to morph into withholding obligations imposed on the platforms. The precedent, though, has been set – when collection of tax on the actual supplier is difficult, target the distribution platform. As businesses and the technology they employ evolve, it is reasonable to expect that this trend towards developing and administering a tax framework focused on imposing tax based on where the economic substance is located or the consumption is taking place will continue – not just in Australia, but globally.
The precedent, though, has been set – when collection of tax on the actual supplier is difficult, target the distribution platform.
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Ten predictions for class actions in 2019 Chris Pagent, Head of Class Actions
2019 is shaping up as a watershed year for class actions. With royal commissions, the release of the ALRC report and its proposals for law reform, increased competition in the litigation funding market and confirmation of courts’ power to make common fund orders in open class actions, some say there are the conditions for a perfect storm. Our class actions group has identified ten developments we expect to see this year.
1
Perera v GetSwift Limited (2018) FCAFC202; 363 ALR394.
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1. We’ll see fewer competing open class actions. Even though common fund orders have been upheld, in the shadow of GetSwift,1 funders will be less interested in funding open class actions because they carry an unpredictable risk of being stayed. 2. Funders will sharpen their focus on claims other than for securities fraud. Funders, and lawyers who originate litigation concepts, will be attracted to claims outside of the securities space because history tells us they are less likely to be the subject of competing open class actions. 3. We’ll see a renewed focus on closed class actions and book-building, particularly outside the securities fraud space. To avoid the risk of a GetSwift result, look out for funders to focus more of their attention on closed class actions, and building solid books to sustain them. 4. We will continue to see open class actions in the securities space. Institutional book-building will present a challenge.
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5. Despite courts discouraging a ‘race to the court’ by plaintiff lawyers, expect those who stand behind open class actions to strive to file quickly. We wouldn’t be surprised if the first filing douses the enthusiasm of some lawyers and funders to file a competing claim. 6. We will see a spate of employment misclassification claims. It appears to be the flavour of the month. 7. While the findings of the Banking Royal Commission will catalyse some claims, the floodgates will not open. We don’t subscribe to the floodgates theory. There are too many natural constraints in play, including: • the bandwidth of plaintiff law firms capable of prosecuting major class actions; • the historic conservatism of funders; • the expense associated with prosecuting major claims and securing costs; and • the adverse costs exposure. 8. There may be a spike in claims against service providers in the aged care sector. Much will depend on how the current Royal Commission into Aged Care pans out.
While the findings of the Banking Royal Commission will catalyse some claims, the floodgates will not open.
9. Expect courts to take a more interventionist approach where appropriate when approving settlements to ensure the reasonableness of legal fees and net returns to funders relative to the net returns to group members. 10. Short sellers will come under the microscope.
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Australia’s workplace reform debate heats up John Tuck, Head of Employment & Labour
Debate over workplace reform in Australia has been ongoing, with varying degrees of intensity, for almost 15 years. In this federal election year, however, industrial relations policy has assumed increased significance. The Australian Council of Trade Unions (ACTU) has run hard on its ‘change the rules’ campaign, highlighting the union movement’s concerns over elements of the current legislative framework.
The Fair Work Act 2009 was the Rudd Labor Government’s answer to John Howard’s 2005 ‘Work Choices’ legislation. Whereas Work Choices implemented an individualised model of labour regulation, reducing the role and influence of unions and the federal industrial tribunal, the Fair Work Act prioritised collective bargaining and brought unions back into play. For the ACTU, however, employers over the last ten years have found ways around the legislation’s mechanisms compelling union-centred workplace negotiations. The union movement’s reform aspirations have pushed the Labor Opposition to adopt a fairly bold workplace relations policy. If implemented, some of the key commitments adopted by the ALP will have a major impact on the current approach to workforce management of many businesses. These include: • Introducing the principle of ‘same job, same pay’ for employees engaged through labour hire agencies. This could mean, for example, that labour hire staff become entitled to the wages and conditions in an enterprise agreement applying to direct employees at the site where they perform work (instead of the lower employment standards applying under a modern award).
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AT THE FOREFRONT A collection of insights for General Counsel
• Ending the notion of ‘permanent casuals’ by legislating an objective definition of ‘casual’ employee. Employers’ capacity to engage casual staff may therefore be restricted to short-term, ad hoc circumstances. • Imposing criminal liability for businesses that engage in deliberate, systemic underpayment of employees (i.e. ‘wage theft’). • Allowing industry-level or multi-employer collective bargaining for certain categories of lowpaid employees. This would be a major departure from the system of enterprise-based bargaining which has operated in Australia since 1993, especially if industry bargaining is accompanied by the right to take protected industrial action. • Halting, or restricting the availability of, certain avenues employers have utilised to circumvent the operation of union-negotiated agreements. This includes, for example, applications to the tribunal to terminate expired agreements based on a public interest test. • Increasing parties’ access to arbitration of long-running bargaining disputes. While this is principally intended to assist unions in dealing with employers that resist concluding an enterprise agreement, some employers (e.g. in the public sector) could also benefit from an easier pathway to an arbitrated outcome.
Commission in 2015 have gone unimplemented. Regardless of the election outcome, businesses need to remain alive to the need for a proactive approach to managing staff and (where present) union relationships. The latter will be even more important in the event of an incoming ALP Government, given the recent resurgence of unions in national policy discussion. There will always be challenges and opportunities in the transition to any new regulatory environment. Informed employers with workplace strategies which align their labour and engagement models with their operational imperatives will still be able to remain ahead of the game.
Businesses need to remain alive to the need for a proactive approach to managing staff and (where present) union relationships.
• Enabling the Fair Work Commission to establish a ‘living wage’ for workers on the minimum wage and lower classification levels in awards. Priority would be given to cost of living factors over economic objectives in the wage-setting process. • Abolishing the specialist regulatory body for the building industry, the Australian Building and Construction Commission (ABCC), and the Registered Organisations Commission (ROC), which was established primarily to tackle trade union corruption. As for the Coalition Government, its policy is mostly restricted to retaining the current legislative and institutional framework – particularly the focus on curbing excessive union power (through the ABCC and ROC). Although short-lived, the Work Choices experiment has had a lasting impact, quelling the reform appetite of contemporary Coalition politicians. Having paid the electoral price in 2007, they have not since advocated major workplace relations change, to the frustration of many in the business community. Even some modest recommendations of the Productivity PAGE 23
Setting your IP strategy: key ownership and enforcement questions Kate Hay, Head of Intellectual Property
Whether it’s latent or highly managed, locked down or open source, there is not a business in existence that doesn’t have IP in its DNA. Often, IP sits at the heart of what enables a business to differentiate or dominate in its market. When evaluating the IP your people create, your business buys or your competitors assert you infringe, make sure you think about it from both an ownership and an enforcement perspective – investment in ownership will strengthen any subsequent enforcement strategy (offensive or defensive).
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Set out below are a number of key questions that will assist in both setting your IP strategy and making transparent any legacy IP issues you may need to confront. These questions are usefully asked across all common IP rights – trade marks, designs, domain names, copyright, patents – as well as trade secrets and confidential information. If embedded in an organisation, they will go a long way towards helping avoid the pitfalls of fragmented or fragile ownership and wasted investment in IP.
Ownership questions 1. What do you own, who else has an interest, and do you need to protect your title? IP can be a result of in-house enterprise collaboration or an acquired asset. At the creation phase (often a honeymoon period), assumptions can be formed about who owns the IP – especially when senior employees have external appointments or work is commissioned – that can compromise a chain of title in perpetuity.
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To counter this, make sure you address at least the following from the outset: • Consider who is materially contributing to the IP and could make a claim to entitlement or ownership, and ask yourself whether there are any competing contractual and fiduciary relationships. In relation to employees, make sure the scope of their duties (e.g. an obligation to invent) and IP vesting in the employer is express. In relation to subcontractors, make sure you have the contractual arrangements in place to secure ownership including any necessary assignments, licences and warranties. • If co-ownership is contemplated – think twice before doing it. If it is unavoidable: -- ensure there is a written agreement that clearly sets out the parties’ rights; and -- agree a mechanism in the agreement that allows a co-owner to exit if one co-owner changes. • Ensure registered rights are secured and annuities paid. A gap in protection can lead to a gap in damages. • Consider whether IP rights subsist in key assets, and if they don’t, adopt alternative approaches to protect these assets. It is a common misconception that IP rights subsist in any “data” held by a business, and that such assets can be “owned” by the business. This is often not the case, and these assets require careful licensing and access control strategies to monetise, which are not hinged on traditional models of IP ownership.
2. Who owns something you need or something that causes you grief? Investment in your freedom to operate can not only avoid infringing third party IP rights but also highlight where the sweet spots are, and where the return on investment is greatest. If there is crucial IP you need access to, consider whether your strategy is to challenge (invalidate) or co-operate (licence). Stress test the IP you purchase in the same way.
3. Publish or protect? Sometimes, an ownership strategy can be about preventing anyone from owning IP as opposed to securing it for yourself. In tech-heavy and research intensive sectors, there can be more to be gained from publishing an invention (so no one can own it). This avoids the diligence of keeping something confidential and the costs of patent protection, but also ensures a competitor who may be making parallel innovation doesn’t lock you out.
Enforcement questions 1. How will the IP withhold a cross claim? An allegation of IP infringement is most often met after a denial of infringement, with a cross claim that the IP right asserted is at risk or invalid. The easiest win in a cross claim can be an attack on ownership. Shore this up before any enforcement action is taken, and strategically work through what the consequences are if the IP is threatened or, worst case, invalidated. Some IP is so business model crucial that protective measures are warranted before any dispute is kicked off.
2. What’s the ROI? Accumulating IP is not an end game. Flexing those rights is where the real return on investment can be realised. Australia is a sophisticated, rightsowners friendly jurisdiction. When successful, injunctions are awarded in addition to monetary relief which is compensatory as well as punitive (where infringement is flagrant). Robust IP rights are a powerful tool to protect innovation and the competitive advantages they embody. There is also an intangible benefit in cultivating an enforcement reputation – copyists are less attracted to businesses that enforce their IP. Consider the infringer from the same perspective (are they likely to fold or fight?).
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Trends in Australian loan markets and the role of alternative lenders Rommel Harding-Farrenberg, Head of Banking & Finance
What is the state of play in Australian loan markets right now and what is the outlook for the foreseeable future for corporate and institutional borrowers and alternative online finance? While regulatory headwinds stirred up by the Banking Royal Commission and the recent increase in market risk capital requirements for banks by the Basel Committee will no doubt have an effect on the lending landscape, all indications are that demand from alternative lenders will continue to increase.
2018 saw a strong syndicated loan market in Australia, with great support for investment grade credits. The availability of credit at this level was high and spread across industries. Key features were the volume of underwritten loans (from both banks and institutional investors), driven by acquisition finance and stable market conditions (in contrast to the periods of volatility which at times closed down activity in the Australian bond markets). Demand from institutional investors (such as Metrics Credit Partners and super funds) continued to grow and extended to unrated borrowers. These conditions resulted in important upside for borrowers, including: • competitive pricing across all sectors, and in particular for infrastructure borrowers, with pricing up to 30 basis points inside the broader market; • support for longer tenors; • headroom in financial covenants and debt-sizing criteria; and • a number of self-arranged transactions.
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AT THE FOREFRONT A collection of insights for General Counsel
Thus far, 2019 has seen a variety of Asian banks establishing or (together with certain European Banks) expanding operations in Australia, coupled with the trend of increased participation by institutional investors. Conditions at the start of 2019 were very strong, particularly for corporate borrowers of good standing. This was illustrated early this year by the Australia Pacific LNG (APLNG) refinancing, which was oversubscribed by more than 100%, leading to a request for, and receipt of, better terms and pricing. However, syndicated lending in the Asia Pacific (excluding Japan) in the first quarter of 2019 dropped by almost 40% – despite the fact that event-driven financings in Australia have been healthy. The trade war between the US and China and concerns about the global outlook appear to have resulted in some borrowers adopting a wait and see approach.
Outlook for corporate and institutional borrowers Regulatory headwinds stirred up by the Banking Royal Commission will no doubt have an effect on the lending landscape. For example, among Australian banks, tighter lending standards and improved ethical behaviour could perhaps result in lower loan volumes. In addition, the Basel Committee increased its minimum capital requirements for banks for market risk in January and again in February this year. The result of this is that bank regulators (including APRA) will be expected to require an increase in in total market risk capital requirements relative to the Basel 2.5 framework. While the increase does not commence until January 2022, banks are beginning to take compliance steps. The effect of this on loan markets is not clear at this stage. However, it could have an effect on availability of bank credit, in particular for longer tenors. Nevertheless, all indications are that demand from alternative lenders will continue to increase for the remainder of this year and the foreseeable future, as funds they have under management or access to increase. Thus, while the make-up of lending syndicates may change, the availability of loan credit is expected to continue. The question is whether there will be any gap as a result of the changing environment for the banks.
Now would be an opportune time for borrowers to consider taking advantage of the liquidity available in the market to refinance debt on improved terms and, prior to any potential downside from the recent decisions by the Basel Committee, potentially expand their universe of financiers beyond traditional bank lenders.
Outlook for alternative online finance According to the 3rd Asia Pacific Region Alternative Finance Industry Report, Australia is the largest alternative (online) finance market in Asia Pacific (excluding China) with 36 platforms and over US$1.14 billion raised in 2017. The largest share of market volume came from balance sheet business lending, followed by P2P/market place consumer lending. Invoice trading was the next largest segment of the market. While the amount raised in 2017 is small in the context of the corporate and institutional market, the Report notes that the average growth rate in 2017 was 88%. Could the online alternative finance market become a viable source of funds beyond SMEs? The next few years should answer that question, and it would certainly be worthwhile keeping an eye on developments in this area.
Now would be an opportune time for borrowers to consider taking advantage of the liquidity available in the market to refinance debt on improved terms and potentially expand their universe of financiers beyond traditional bank lenders.
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The implications of the recent Rocky Hill decision for major development Christine Covington, Head of Environment & Planning
A recent landmark ruling by the NSW Land and Environment Court in which it refused a proposed coal mine on climate change (amongst other) grounds will have broad-reaching implications for future development and major projects across the country. The Rocky Hill decision1 builds upon a growing international jurisprudence directly linking fossil fuels and climate change and – independently of the numerous political machinations around the Paris climate change agreement – is likely to significantly affect coal and other fossil fuel-dependent industries in Australia.
1
Gloucester Resources Limited v Minister for Planning [2019] NSWLEC 7
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In reaching its decision, the NSW Land and Environment Court drew upon international authority and expert climate change evidence to place the downstream (or scope 3) greenhouse gas (GHG) emissions at the feet of the proponent of a NSW coal mine. The proposed Rocky Hill coal mine, set in rural Gloucester in the Hunter Valley, was found by the Court to be in the ‘wrong place’ at the ‘wrong time’. The ‘wrong place’ because of enduring impacts on community amenity and lifestyle, and the ‘wrong time’ because direct GHG emissions and indirect emissions from the use of produced coal would increase global concentrations of GHGs “at a time when what is now urgently needed, in order to meet generally agreed climate targets, is a rapid and deep decrease in GHG emissions”. The proponent argued it was not for the Court to enforce the Paris Agreement, and particularly not in relation to scope 3 emissions. But the Court applied a State Environmental Planning Policy, which prescribes consideration of downstream GHG impacts, and also found that ecologically sustainable development principles (also a component of the statutory ‘public interest’ criterion) require an assessment of climate change impacts.
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The proponent offered no specific carbon offsets, arguing that others were doing enough to offset the project’s GHG emissions. The Court did not agree. Expert evidence applying the ‘carbon budget’ methodology was well received. Evidence that all existing fossil fuel resources should remain in the ground to achieve global targets, however, was not. Instead, the Court found that deciding which fossil fuel reserves should be exploited requires a merits evaluation of each proposal, considering both its likely contribution to climate change and its other impacts. The decision has been appealed.
Implications for major development The climate change-related reasons for refusal cited in the Rocky Hill decision will have broad-reaching impacts on all high GHG emitting developments. Opponents of major projects here and around the world will cite the decision because of its thorough analysis of Australian and international law linking climate change impacts with GHG emitting projects. NSW approval bodies are bound by the decision for all significant GHG emitting developments, including major infrastructure and fossil fuel projects. While the State Environmental Planning Policy applied by the Court in its ruling is NSW-specific, ecologically sustainable development principles and the public interest test broadly apply in environmental legislation. Consequently, direct and downstream GHGs should now be assessed. A further implication of the decision is that carbon offsetting mechanisms will have greater importance. In balancing the benefits of approval versus a project’s negative impacts, consent authorities must assess a project’s climate change impacts, including likely indirect GHG emissions.
How to mitigate risk While approval of significant projects may be harder, the decision specifies that each project must be assessed on its merits. Five tips for high GHG emitting developments are: 1. Assess the full range of project GHG emissions, including from downstream use of products. 2. Consider adopting the ‘carbon budget’ methodology to assess climate change impacts. 3. On the project benefits analysis, pay significant attention to direct and indirect impacts of your proposal. Mere job creation may not be enough. Rigorous economic and social impact analysis is required. 4. Well defined and concrete proposals for offsetting carbon impacts should be included for high GHG emitting projects. 5. Engage the best legal and technical consultants at the outset, in case your project finds itself in Court.
The climate change-related reasons for refusal cited in the Rocky Hill decision will have broad-reaching impacts on all high greenhouse gas emitting developments.
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How to choose the best contractual strategy for the construction of major projects Andrew Stephenson, Head of Projects
This risk-reward equation between the principal players associated with construction projects is extremely important. If the market fails to price risk properly and, as a result, principals pay too much or contractors earn too little for the risk assumed, this will lead to market failure. Principals may fail to commit to new projects or, perhaps worse still, contractors will become insolvent because they have taken too much risk for the agreed price. Ultimately, this will lead to a drop in competition and an associated increase in price.
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The recent collapse of RCR Thomlinson is but one example of a significant contractor having suffered a succession of losses on projects in the order of half a billion dollars or more. This is not sustainable and will either result in the failure of more contractors or the withdrawal of contractors from the market. The effect will be the same – an increase in price and loss of competition in a macro-economic sense, which is, in the long term, unsatisfactory. Accordingly, it is necessary to review risk allocation in contracts to ensure that the market operates properly and, ultimately, the consumer gets the required product at a sustainable market-tested price. The alternative is serious disputes and market failure. Contracts allow the risks associated with the construction of a major project to be transferred from the owner of the project to various counterparties for a price. In some cases, notwithstanding the high price, extensive risk transfer is appropriate. In other cases, it is not. Therefore, choosing the appropriate contractual strategy requires careful consideration of a number of factors.
AT THE FOREFRONT A collection of insights for General Counsel
For example, if the owner intends on funding the project using project finance, then it should seek to allocate as much risk away from itself to a construction contractor as possible, with a robust balance sheet. Such an approach will be favoured by the banks and may also allow the debt to equity ratio to be increased. For those funding the project with equity or corporate finance, however, such an approach may not suit, particularly if the owner of the project has significant in-house expertise. This is because an effective risk transfer to a construction contractor usually carries with it a shift in control from the owner to the construction contractor. Owners with high levels of expertise may wish to have very high levels of control over the detailed design and methods of construction to ensure that the design will: • suit its preferred method of operation; • have sufficient redundancy to ensure that the required level of reliability is achieved; and • meet overall whole of life costs that are appropriate for the project. Where owners have sufficient experience and expertise, such an approach is likely to produce the best outcomes. The lowest risk is achieved by the owner taking control and dictating exactly what it wants. A good example of a project of this type would be the construction of a refinery by a major oil company. Such companies have enormous internal expertise and experience. As a consequence of owning other refineries (and having been in the business for over 100 years) they will be fully aware of the way they prefer their facilities to be operated. They also know the desired level of reliability and whole of life costs they want to achieve, having regard to the economic trade-off between capital cost on the one hand and operating costs and reliability on the other. The loss of control is less important for those owners who do not have sufficient internal expertise and are likely to be relying on the contractor’s expertise to deliver the project to the required standard. Such an owner usually also needs the comfort of a fixed-price, fixed-time contract to secure the funding of the project.
The examples discussed above are the extremes of the spectrum. In between those extremes lies a continuum of alternatives, all of which are suitable for projects. The trick is to identify which strategy is best for the specific project and then consider the state of the relevant market to see whether the contractors in that market are willing to contract on what the owner considers is the optimum risk allocation. To the extent that the market will not accept the owner’s preferred risk allocation, it is necessary to tailor the approach to obtain the best risk allocation possible in the circumstances. One must also examine how proportionate liability legislation and the ability to enforce the contract – against both domestic and international counterparties – can affect the risk allocation agreed between the parties. It does not matter how well the contract is drawn or how complete the risk transfer is if the contract cannot be enforced in an economical way. Accordingly, to protect the value of a well-drawn contract, that contract must have appropriate drafting to deal with proportionate liability and enforcement. For complex engineering projects, it is worth considering an arbitration clause. Where the contract involves an international counterparty, international arbitration is likely to provide the best solution from a cultural and enforcement point of view. In the context of a process engineering project, the allocation of risk in relation to time, cost and quality depends on the delivery method. However, the detailed drafting of the final contract can give surprising results. The consequences of misunderstandings and errors regarding insurance are especially severe. Even if the parties have agreed on the allocation of risks in principle, the contract must contemplate legal barriers to benefiting from that risk allocation. Proportionate liability legislation and the difficulties of efficiently enforcing contracts against domestic, and especially international, counterparties are just some of those barriers. The central message is that a practically enforceable allocation of legal risk requires much more than good sentiment and in principle agreement between the parties.
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So far, so good? Considering the success of Australia’s safe harbour reforms Cameron Cheetham, Head of Restructuring, Insolvency & Special Situations
The introduction of a safe harbour protection for company directors was one of a number of generational reforms to the restructuring landscape throughout late 2017 and 2018 aimed at relaxing Australia’s unforgiving insolvency laws. Now that more than a year has passed, have the safe harbour reforms been a success? And what steps can directors take to ensure they obtain the protections they afford?
1
The safe harbour reforms provide directors with protection from personal liability for insolvent trading if they have begun developing a course of action that is reasonably likely to lead to a better outcome for the company than the immediate appointment of a voluntary administrator or liquidator. The idea behind the introduction of the reforms was to give directors breathing space to consider innovative solutions and take reasonable, considered risks to restructure viable companies – without necessarily exposing the company to the stigmatism of a formal, public insolvency process. It was hoped that this shift1 in focus to recycling capital through an existing entity would better preserve enterprise value rather than forcing directors to precipitously appoint a voluntary administrator or liquidator to avoid personal liability for insolvent trading.
Together with the imposition of a prohibition on ipso facto clauses in contracts entered into from 1 July 2018. An ipso facto clause generally provides that a party may terminate a contract or take other enforcement action upon the counterparty entering into a formal insolvency process.
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AT THE FOREFRONT A collection of insights for General Counsel
Considerations for ASX listed companies
Ultimately, the company emerged from the safe harbour with a renewed focus and refined business plan.
Given the safe harbour reforms are still relatively new, a degree of uncertainty remains, including around their impact on listed public companies. This uncertainty exists despite the fact that an updated ASX guidance note on the interaction between safe harbour and the continuous disclosure obligations has been released.
Management had benefited from the opportunity to focus on the most important aspects of the business at probably the most challenging stage of the company’s life, rather than on their own personal liability. This undoubtedly resulted in a better outcome for all stakeholders, including unsecured creditors who can continue to trade with a market leading service provider.
While the guidance note does not require company directors to disclose the invoking of the safe harbour, it has also not been updated to remove the longstanding continuous disclosure obligations in respect of the financial position of the company. The precise interaction between safe harbour and continuous disclosure will be heavily fact dependent.
So far, so good? In our experience, the safe harbour reforms have been successful in their stated goal of preserving value in distressed companies by providing directors with time to consider, plan and implement restructuring proposals designed to turnaround the company. We have been involved in a number of examples that have achieved the legislative intention and avoided the often experienced value destruction that formal insolvency regimes usually invoke. One such example is set out below.
While there is not yet any judicial guidance on the exact steps required to be taken by directors to obtain the protection afforded by safe harbour, we consider that directors should take the following three steps: 1. Ensure that the company’s accounts are up to date, noting that the failure to maintain proper financial books and records leads to a presumption of insolvency in and of itself. 2. Engage specialist accounting and legal advisors to assist in the development of a restructuring proposal and conduct modelling on the likely outcome for the company of that proposal as against a formal insolvency process. 3. Ensure that adequate board minutes and management records are maintained documenting the timeline and steps taken in the development of the restructuring proposal.
Case study Corrs recently advised an Australian private equity firm regarding its mining services portfolio company that was experiencing solvency issues following the unexpected loss of a critical contract. Our client was both a majority shareholder and the second ranking secured creditor. We recommended a suitable insolvency professional to work with us and the portfolio company and its board to devise and implement a restructuring plan that involved the realisation of non-core assets to repay the first ranking secured creditor.
The safe harbour reforms have been successful in their stated goal of preserving value in distressed companies.
Following that, we restructured the remaining secured debt facilities and the insolvency professional worked with management to better understand the cyclical liquidity issues and necessary procedures to significantly reduce the number of ‘lock up days’ for the company’s work-in-progress. PAGE 33
Attracting capital from financial investors in the current climate Robert E. Clarke, Head of Financial Sponsors Group
It is undeniable that, due to a confluence of circumstances, financial investors have capital in the billions (if not trillions) at their disposal, ready to deploy. Their main problem, however, is insufficient investment opportunities. What does an entity seeking institutional capital to expand its business (we will call this entity a Corporate) need to know about how to deal with these types of investors going forward? Given enormous liquidity and insufficient investment opportunities, we’ve set out seven considerations for Corporates looking to maximise the benefit of non-public institutional capital in the current climate.
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1. Funder or partner? A Corporate with a good business case can, in broad terms, be selective as to what type of investor it wishes to deal with. A threshold question is whether to view potential financial investors as simply providers of capital, or as capital partners that can provide something more – for example, geographical reach, operational expertise, distribution networks, expansion opportunities (including through acquisition), exit opportunities and the like. If the latter, the financial investor’s track record of portfolio investments (including exits) should help identify whether they have been successful in growing particular types of businesses. 2. Weighing up the benefit of auctions. Not surprisingly, financial investors hope to avoid competing with other investors to close investment opportunities, and consider proprietary opportunities as the holy grail of the investment world. Armed with the answer to the threshold question identified above (funder or partner), a well advised Corporate will consider carefully what process is more likely to yield an optimum result. Increasingly – given the liquidity / investment opportunity dynamic – we would expect to see more Corporates exploring whether they can push a ‘pay to play’ agenda with financial investors (for example, paying for the opportunity to engage in proprietary opportunities).
AT THE FOREFRONT A collection of insights for General Counsel
3. Governance. While financial investors may need to compete hard for good investment opportunities, governance terms remain of paramount importance to investors. In the Australian context (particularly following the Financial Services Royal Commission) we would expect that, in light of the increasing focus on fiduciary responsibility for investor capital, governance terms for investments will only become more important, particularly if investors move up the risk curve in order provide better returns to members and investors. Corporates will need to have a clear picture of what governance arrangements they are prepared to offer to financial investors, and equally, should have a view about investor expectations in light of the proportion of institutional capital they are seeking (for example, minority versus majority positions). A view about financial investor expectations can start with an assessment of how they represent themselves in the market – some will make it very clear, for example, that their mandate and investment philosophy is to take control positions. Our financial investor clients tell us that alignment of interest among stakeholders (including alignment on governance expectations) is key to a successful investment. 4. Understand the range of capital opportunities. Increasingly, more and more financial investors are able to invest at multiple levels of a ‘capital stack’ within the terms of investment mandates. Accordingly understanding the capital injection options available from your potential financial investors is important – for example, common equity, preferred equity, mezzanine funding, convertible debt, PIPE (i.e. selling of publicly traded common shares or some form of preferred stock or convertible security to private investors), amongst others. Certain forms of investment will likely suit the Corporate’s longer term growth plans better than others. Obviously a comparison of capital funding options with other ‘traditional’ funding alternatives – for example public capital raising or traditional debt funding markets – will be necessary. 5. Understand the investment cycle of potential investors. The anticipated duration (and therefore also the governing terms) of an institutional capital investment will be driven by a variety of economic considerations, but can also be driven by the wide-ranging structures and investment mandates of financial investors. To the extent that they can be selective when attracting capital, Corporates should understand the various implications that might flow from the structure and mandate
applicable to an investor. For example, managed investment funds are structured broadly as two types – ‘open-ended’ (or ‘evergreen’), and ‘closedend’. The former category can raise capital on an ongoing basis and can theoretically hold investments indefinitely. Private equity funds and other private managed investment funds that invest in privately-owned entities are typically closed-end – the fund life is defined at the outset. There are some exceptions, especially in the case of infrastructure funds in Australia, which are also often open-ended or evergreen. A typical closedend 10-12 year fund life structure might comprise a five year investment (capital deployment) phase (including an initial one year capital raising phase) and a 5-7 year realisation phase. Accordingly, a Corporate needs to understand: • the nature of the fund making the investment (or to whom the investment opportunity is allocated); • the point in its investment cycle (particularly if it is closed-end); and therefore • the time horizon within which the fund might have to effect a liquidation. 6. Capacity for follow-on investments. Above and beyond the initial investment, Corporates should understand the capacity of the financial investor to provide further capital as and when expansion opportunities arise (and without relying only on external leverage to grow the business). This question is highly relevant for closed-end funds because they will typically allow ‘follow-on investments’ even during the realisation phase (when new investments are not permitted), but often subject to rules and limits and available uninvested capital. Corporates should understand the capacity of the fund to participate in expansion opportunities. 7. Environmental, social and governance (ESG) is real. The ultimate source of capital managed by professional fund managers is very often retirement savings managed by superannuation and pension funds, which are frequently creatures of (and influenced by) public law or policy. It should not be surprising that these funds – whether as direct investors in Corporates, or through the managed investment funds in which they invest – are increasingly exerting real pressure to ensure that their investments (and therefore the investee Corporates) comply with ESG policies and rules. Corporates need to understand that ESG compliance is likely to be high on the list of considerations of the investment committees of financial investors. PAGE 35
Preserving arbitral integrity: UK Supreme Court to hear Deepwater Horizon appeal Joshua Paffey, Head of Arbitration
In a decision being watched with keen interest by many in the international arbitration community, the UK Supreme Court will soon hear an appeal on whether an arbitrator may accept appointments in multiple references concerning overlapping subject matter with only one common party – without giving rise to an appearance of bias and without disclosure. Subject to the Court’s approval, the ICC International Court of Arbitration, the LCIA and the Chartered Institute of Arbitrators are expected to intervene in the case, known as the Deepwater Horizon appeal.
As it stands, the decision of the Court of Appeal means arbitrators can accept multiple appointments in arbitrations with overlapping subject matters, without disclosure, and without necessarily giving rise to doubts about their impartiality. Under Australian law, a similar position could be reached. Section 18A of the International Arbitration Act 1974 (Cth) provides that there are justifiable doubts as to the impartiality of an arbitrator if there is a ‘real danger of bias’ on the part of the arbitrator. This test is not unlike the English test, which assesses – from the perspective of a fair-minded and informed observer – whether there is a ‘real possibility’ that the arbitrator is biased.
The facts of the case The factual backdrop to this important case is the BP oil spill in the Gulf of Mexico in 2010. Transocean was the owner of the Deepwater Horizon oil rig. Halliburton had been engaged to provide cementing and well-monitoring services in relation to the abandonment of the well. Both settled claims against it arising from the oil spill. Halliburton then made a claim on its insurance policy with Chubb, who refused to pay, contending (among other things) that the settlement was unreasonable.
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AT THE FOREFRONT A collection of insights for General Counsel
As a result, Halliburton commenced arbitration against Chubb in London under the insurance policy. Both parties appointed an arbitrator but, unable to agree the chairman, the English High Court appointed ‘M’ as chairman. Subsequent to his appointment, M accepted appointments as arbitrator in two other references arising out of the oil spill. First, a claim by Transocean against Chubb in relation to the settlement of its claims and second, a claim by Transocean against another insurer. In the first reference, M was appointed by Chubb. In the second reference, M was appointed as chairman by agreement of the parties following the resignation of the first-appointed chairman. Critically, M failed to disclose these appointments to Halliburton. When Halliburton learned of the appointments and challenged M’s impartiality, M said that it had not occurred to him that he had a duty to disclose the appointments but offered to resign if Chubb agreed. Chubb did not agree, so Halliburton sought to have M removed as arbitrator under section 24(1)(a) of the Arbitration Act 1996 (UK), which provides that a party may apply to the court to remove an arbitrator if ‘circumstances exist that give rise to justifiable doubts as to his impartiality’. The application was founded on a submission that M’s conduct (in accepting and not disclosing the appointments, and then not resigning) gave rise to an appearance of bias.
Significance of appeal The outcome of the appeal in Deepwater Horizon is critical to the integrity of the arbitral process. The facts of the case aside, the real issue here is the perception of the prospective participant in or user of arbitration – the person on the street. Arbitrator trustworthiness and reliability is critical to preserving the legitimacy and integrity of the arbitral process, and the Deepwater Horizon case has brought to the fore the issue of transparency of arbitrator appointments. In an environment where international arbitration is the preferred method of resolving crossborder disputes (according to 97% of participants in the 2018 Queen Mary International Arbitration survey), and national courts in some jurisdictions are being influenced more than ever, a decision which ensures that respect for arbitrators (and therefore the process) is maintained, is essential. As it stands, the Deepwater Horizon case means that arbitrators can accept more than one appointment in arbitrations with overlapping subject matters,
without necessarily giving rise to doubts about their impartiality. Even if the Supreme Court agrees with its lower courts and finds that the circumstances of the case do not give rise to justifiable doubts as to the arbitrator’s impartiality, it should be minded to grasp the opportunity to clarify the disclosure obligations of arbitrators and prospective arbitrators alike. Specifically, the Supreme Court should confirm that arbitrators are required to disclose, at any stage of the proceedings, related arbitrator appointments, no matter the extent of the relation (big or small). The IBA Guidelines already provide that any doubt as to whether an arbitrator should disclose certain facts or circumstances should be resolved in favour of disclosure. But it is clear from this case that arbitrators need more guidance. The ICC recently issued a revised note to parties and arbitral tribunals on the conduct of arbitrations under the ICC Rules, which applied from 1 January 2019. This note extends the existing disclosure obligations of arbitrators and prospective arbitrators, which are with respect to the parties and their affiliates, to ‘non-parties having an interest in the outcome of the arbitration’. Therefore, arbitrators are now required to consider relationships with interested non-parties which may give rise to doubts as to impartiality. The Supreme Court should also take the opportunity to clearly opine that disclosure must include disclosure of related arbitrator appointments, no matter to what extent the facts of the related arbitrations overlap. It may then fall to arbitral institutions to pick up and incorporate this extension in their rules. It is also important that this guidance is given because where arbitrators fail to abide by the requisite standards (often unintentionally) it imposes significant costs on the parties, whether by challenging arbitrator appointments, or in the unfortunate annulment of arbitral awards (which then leaves the parties with the prospect of having to start proceedings afresh). A failure to abide by requisite standards also undermines public confidence in arbitration. To maintain its legitimacy, international arbitration must ensure that its decision-makers are, and are perceived to be, impartial. We look forward to the Supreme Court’s further guidance on the issue.
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A transformational impact: the Papua LNG Project Gas Agreement Vaughan Mills, Head of PNG Practice
The next phase of Papua New Guinea’s development is well and truly upon us. Reaching a significant milestone for the country, a Gas Agreement was signed on 9 April 2019 for the USD$13 billion Total S.A. operated Papua LNG Project. Coupled with the proposed contemporaneous expansion of the USD$19 billion PNG LNG Project that commenced production in 2014 and had its own significant impact, the Papua LNG Project will have a further transformational impact on the Papua New Guinea economy, bolstering the emerging middle class and propelling the country’s development.
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The Gas Agreement, made between the Government of Papua New Guinea and the Project‘s sponsors Total, Oil Search and ExxonMobil, defines the scope of the Papua LNG Project, outlines fiscal terms and benefits sharing arrangements and paves the way for the commencement of front-end engineering and design later this year. A final investment decision for the Project is scheduled for Q4 2020 ahead of the commencement of production in 2024. The last Gas Agreement to be signed was in May 2008 for the PNG LNG Project, operated by ExxonMobil. That project went on to achieve FID in December 2009 and to transform the Papua New Guinea economy – precipitating the emergence of a Papua New Guinea middle class and a corresponding growth and maturation of domestic businesses and institutions. The period from FID through to the early stages of production of the PNG LNG Project coincided with a period of strong global oil prices and expansionary Government budgets that were expected to be underwritten by tax revenue from the Project. However, the Government was not well prepared for the curtailment of revenue as global oil prices declined, putting significant pressure on the country’s fiscal position. Foreign exchange liquidity in particular became a significant challenge for business in Papua New Guinea throughout this period, although it is now
AT THE FOREFRONT A collection of insights for General Counsel
improving as tighter foreign exchange control policies take hold and the Government successfully raises foreign currency debt. The Government has clearly learned from these experiences to be more cautious, reflected in its budgetary and policy responses and the fiscal terms agreed in the Papua LNG Project Gas Agreement. The further transformational economic impact of the Papua LNG Project and PNG LNG Project expansion can therefore be expected to be more sustained and less volatile, setting a strong platform for further maturation and development of domestic businesses and institutions. For example, we are likely to see reform and modernisation of financial services regulation as the domestic economy grows and users of financial services become more sophisticated and demanding. Economies of scale, generally, are likely to emerge, enhancing conditions for corporate mergers and acquisitions. Investors, and superannuation funds in particular, as their funds under management swell, will seek cross-border investment opportunities for diversification. The signing of the Papua LNG Project Gas Agreement is a further demonstration that large scale projects can be developed in Papua New Guinea, and will encourage other project proponents such as Newcrest Mining and Harmony Gold in the development of the world class Wafi-Golpu underground copper/gold project. It also comes less than six months after the governments of Australia, Japan, New Zealand and the United States announced that they will jointly invest in a massive expansion of Papua New Guinea’s electricity system with the aim of reaching 70% of the population by 2030, up from 13% currently. This too should further pump-prime the expansion and diversification of the Papua New Guinea economy.
The signing of the Papua LNG Project Gas Agreement is a further demonstration that large scale projects can be developed in Papua New Guinea.
There is a bright future ahead for Papua New Guinea and great opportunity. Papua New Guinea truly is a developing country and the next phase of that development is well and truly upon us.
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Contacts
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Sandy Mak
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Tel: +61 3 9672 3335 mark.mccowan@corrs.com.au
Joshua Paffey
Chris Pagent
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Tel: +61 2 9210 6162 chris.pagent@corrs.com.au
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Cameron Cheetham
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Robert E. Clarke
Christine Covington
Tel: +61 3 9672 3215 robert.clarke@corrs.com.au
Tel: +61 2 9210 6428 christine.covington@corrs.com.au
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Rhys Jewell
Tel: +61 2 9210 6734 rommel.harding-farrenberg@corrs.com.au
Tel: +61 23 9672 3455 rhys.jewell@corrs.com.au
Vaughan Mills
James North
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Head of PNG Practice Tel: +61 7 3228 9875 vaughan.mills@corrs.com.au
Head of Environment & Planning
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Head of Technology, Media & Telecommunications Tel: +61 2 9210 6734 james.north@corrs.com.au
Nathaniel Popelianski
Andrew Stephenson
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Dr. Phoebe Wynn-Pope
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