Don’t live in a glass house! Practical tips to get your house in order
ABOUT THIS SERIES
- This is the first of McCullough Robertson’s six part Commercial Law Masterclass series.
ABOUT THIS ARTICLE
- Effective and clear corporate governance practices can be critical when selling your business, raising capital and arranging financing. In this article we discuss simple but effective steps businesses can take to refine their corporate governance practices to increase efficiency and promote investor confidence.
- We’ll wrap up the series with a Masterclass in Brisbane in early 2019 where you can ask our expert panel any questions.
COMING UP NEXT
- Our next article in this series will focus on practical tips for dealing with the new ipso facto regime and the implications for existing and new agreements
Commercial Masterclass: First Edition
As any good real estate agent will tell you, a neat and tidy house will set you up for success when selling your property.
And, as any good lawyer will tell you, neat and tidy corporate governance practices will set you up for success when selling your business (and in many other situations including raising capital, financing or refinancing).
Corporate governance traditionally comprises three major areas, being:
- a framework for internal management;
- a system of checks and balances between the board, management and shareholders; and
- a system by which the objectives of a business are set and measured.
This edition of the Commercial Masterclass will discuss simple but effective steps in-house counsel and senior managers can take to refine their corporate governance practices within their business to increase efficiencies and reduce costs in order to promote investor confidence and economic growth.
Records – who needs them?
Proper record keeping often takes a backseat to seemingly more important and interesting work. However, staying on top of corporate record-keeping is essential for both strategic and legal reasons. In our experience the three most common areas that cause issues due to out of date records are:
1. Minutes and subsequent regulatory filings
Minutes of both shareholders and directors meetings serve as the official record of corporate decision making including appointments of new officers or directors, remuneration increases, approval for financial decisions or issuing shares. Accurate and up to date minutes are important, especially in the event that past actions taken by the board, transactions involving the raising of capital or sales of assets are challenged.
Company secretaries should also take active steps to update their company’s records with regulatory bodies as and when appropriate. Failure to do so may result in:
- unnecessary (and expensive) late fees being incurred;
- unexpected commercial delays where the records of the Australian Securities and Investments Commission (ASIC) do not reflect the company records (for example where the appointments of officers have not been updated); and
- the company secretary being held personally liable under the Corporations Act 2001 (Cth) for failing to maintain its company’s records and notify ASIC as appropriate.
2. PPS Register
Where the organisation is a secured party:
Since the establishment of the Personal Property Securities Register (PPS Register), we have found that secured parties are under prepared in managing their secured party groups and registered security interests.
The steps involved in registering and discharging a registration from the PPS Register are relatively simple and straightforward, however:
- for registrations, time is of the essence. Registering on the PPS Register earlier (i.e. immediately before the agreement giving rise to your security interest is signed) will give you the best possible priority and protection and reduce the risk of not registering within the prescribed time frames (which depending on the collateral type and security interest being taken will range from 15 to 20 Business Days). Not registering within the prescribed time frames may result in ineffective and unenforceable registrations and loss of priority. It is important to also take care to appropriately classify and describe the security interest to ensure that the security interest is perfected; and;
- for discharges, finding and the discharging the correct security interest can be challenging where secured parties have not accurately noted or recorded their security interests internally. The consequences of discharging an incorrect security interest can have severe financial consequences, particularly where the grantor enters administration.
In our experience, secured parties that have robust internal record keeping processes in place for security interests registered on the PPS Register (including making sure the underlying security document are referred to in the internal record or even on the PPS Register, if appropriate) are better prepared for making timely registrations and better equipped to efficiently respond to requests for discharge and undertaking discharge of the correct security interests.
Where the organisation is a grantor: Depending on the type of organisation, there may be hundreds of security interests registered over it on the PPS Register. Businesses that undertake a regular audit of the security interests registered over the organisation are better equipped to understand how those registrations may impact any future sale or financing arrangements.
It is common for incoming buyers (or even financiers) to request certain security interests be released on or before completion of a transaction (or financial close). It can be a time consuming and expensive process to deal with third parties for release of those security interests. Businesses that take proactive steps to have obsolete security interests removed or discharged from the PPS Register on a regular basis will be better placed to efficiently deal with any requests by third parties at a critical time, such as during due diligence for a sale process.
3. Contract register
A contract register helps to monitor and measure the objectives of the business by summarising the details of the main contracts that relate to the organisation. A detailed contract register also serves as an audit trail and reduces the pressure during a due diligence or financial auditing process.
An effective contract register will record the following:
- the name of the counter party;
- a description of the contract, and what it is for (including who is responsible for managing the contract within the organisation);
- the commencement and termination date and the process for renewal or extension (if any);
- any amendments to the contract (including assignments or notations);
- value of the contract; and
- location of the original copy of the contract.
We find that contract registers are most effective when they are maintained centrally by the in-house legal or contracts team (or in their absence, senior management) with members throughout the organisation providing updates to ensure the register is kept up-to-date.
During the input process, the contracts should be reviewed to ensure that they have been properly executed and entered into by the parties. Incorrectly executed contracts may prevent a party from enforcing their rights under those contracts.
To delegate or not to delegate?
Despite being appointed to do so, the board is often not in a position to take responsibility for the day to day business operations of an organisation. Therefore, a comprehensive and detailed delegation of authority policy is key to an effective internal management framework. All delegations of authority should be properly documented by the Board and recorded.
To avoid liability issues relating to incorrectly executed documents (and potential embarrassment), board members and senior managers should be familiar with their internal delegation of authority policies to understand who does and does not have authority to take certain actions or make certain decisions. For instance, closing a deal may be unnecessarily delayed where senior managers or employees intend to sign a contract and that person cannot demonstrate that they have the authority to sign.
Notwithstanding any delegation of authority, each director remains ultimately responsible for the exercise of their delegate’s power as if the power had been exercised by the directors’ themselves. There are exceptions to this rule, however there are high expectations on directors to ensure that they meet the duties imposed on them (even where those duties have been delegated).
Fail to plan, plan to fail – intragroup agreements for company groups
For corporate groups, the value of intragroup agreements often does not become apparent until an issue or liability arises.
Documenting your internal arrangements is a straightforward tool for businesses to improve the overall corporate governance while allowing businesses to also ring-fence assets and liabilities, to ensure that intellectual property rights can be monetised and enforced and to reduce the personal liability of directors.
Further, these arrangements do not have to be complicated or costly to implement. Failing to plan ahead and take steps to document your internal arrangements may leave the group open to regulatory scrutiny and limit your ability to enforce your rights. It is also important to ensure that any intragroup arrangements that give rise to security interests are appropriately registered on the PPS Register.
Recently, we have seen the Australian Taxation Office take a closer look at intragroup arrangements (particularly where there are transfer pricing implications). Corporate groups that have appropriately documented and registered intragroup arrangements in place are better equipped to manage such enquiries. Corporate groups without those arrangements properly in place are unable to present clear statements as to what supplies are being made, the price for those supplies and how risks are allocated within the corporate group.
Contractors vs. Employees
The distinction between an independent contractor and an employee can be difficult to determine and may evolve and change over time due to developing a close relationship with the contractor. While not definitive, organisations which take on most of the commercial risk and responsibility for the work performed and have the ability to direct the way in which the work is done may need to revisit their classifications of independent contractors to avoid any potential exposure or liability.
Organisations that incorrectly treat persons as independent contracts rather than employees may be at risk of the following:
- not meeting their tax and super obligations;
- denying their workers employee entitlements; and
- illegally reducing their labour costs and gaining an unfair advantage over their competitors.
To reduce any potential exposure, senior management in an organisation should implement a system of checks and balances to regularly review the classification of its independent contractors to ensure that the relationship has not evolved into an employee/employer one.
Keep it simple…
It is important for all levels of stakeholders within a business to work together to keep their organisation (house) in order. An organisation with a robust corporate governance framework will be able to offer third parties a comprehensive understanding of its business when they go to sell, raise capital or refinance. Some simple steps to refine these processes were set out in this edition of the Commercial Masterclass but we are always happy to discuss other ways to improve your corporate governance framework.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.