PwC International Business Reorganisations Network Monthly Legal Update Edition 11, November 2017 Contents PriewaterhouseCoopers (Australia) 1 PriewaterhouseCoopers Oy (Finaland) The Finish Supreme Court broke the priniple of 6 Welome Welome to the eleventh edition of the PwC International Business Reorganisations (IBR) Network Monthly Legal Update for November 2017. The PwC IBR Network provides legal servies to assist multinational organisations with their rossborder reorganisations. We fous on post-deal integration, pre-transation separation and arve outs, single entity projets, and legal entity rationalisation and simplifiation as well as general business and orporate and ommerial struturing. Eah month our global legal network brings you insights and updates on key legal issues and developments relevant to multinational organisations. We hope that you will find this publiation helpful, and we look forward to hearing from you. In this issue In our November 2017 issue: PriewaterhouseCoopers (Australia) examines new exposure draft legislation for the introdution of a orporate olletive in Australia; and PriewaterhouseCoopers Oy (Finalnd) onsiders the impat of a reent deision of the Finish Supreme Court ase on the priniple of limited liability. Contat us For your global ontat and more information on PwC s IBR servies, please ontat: Rihard Edmundson Managing Partner and Head of International Business Reorganisations, Washington D.C. +1 (202) 312-0877 rihard.edmundson@illegal.om PwC International Business Reorganisations Network Monthly Legal Update Edition 11, November 2017
PriewaterhouseCoopers (Australia) Proposed Australian orporate olletive At a glane In its 2016-17 Budget, the Federal Government ommitted to developing a regulatory framework for a orporate olletive (CCIV) followed by a regulatory framework for a limited partnership olletive. The exposure draft of the CCIV legislation (Exposure Draft) was released by Treasury on 25 August 2017, in the form of a new Chapter 7A of the Corporations At 2001 (Cth) (Corporations At). This first artile onsiders the objets of the new legislation, the key features of the CCIV and issues regarding governane and authority. In an artile to follow, we will provide more detailed ommentary on responsibility and aountability issues for the CCIV in the ontext of the duties of its orporate diretor, as well as key matters for onsideration under the regime to be released for insolveny. In brief The Exposure Draft strutures the CCIV as a body orporate, whih houses one or more sub-funds for olletive passive investment purposes. While the tax detail is yet to be released, CCIVs are to provide tax neutrality for investors, as well as features familiar to both the domesti and offshore funds markets, in order to resolve pereived regional unpopularity of Australian unit trusts as ommerial s. The CCIV is a hybrid: a body orporate operated as a trust, more partiularly a managed investment sheme (MIS). Key elements of the proposed regime remain to be drafted, but Treasury s ore framework imports the language and mehanisms of a trust, presumably with trust law overlay, to a body orporate. The United Kingdom (UK) applies the orporate form in its well-tested, open-ended investment ompany (OEIC). However, the UK regulatory framework operates as a standalone set of regulations, borrowing only selet onepts from other soures suh as the Companies At 2006, Insolveny At 1986, and the Finanial Condut Authority s Handbook. The Australian CCIV regime sits in the Corporations At and the Exposure Draft has reated some anomalies between the traditional harater of a orporate and a trust In partiular, further onsideration must be given to additional legislation to provide: a ertainty of governane and authority; b larity of responsibility and aountability for persons and entities within the struture; and effetive operational flexibility. The detail for the regime s operations will follow the initial onsultation proess. Given the work yet to be done, an effetive date of 1 July 2018 appears ambitious, unless the regime is to be overly dependent on Australian Seurities and Investments Commission s (ASIC) proposed rulemaking powers to supplement the legislation. PwC 1
In detail Historial hallenges with trust strutures Historial onerns 1 in relation to the ommerial adequay of the trust and MIS struture, when ompared to the global managed funds landsape, inlude that: a suh vehiles are not separate legal entities: i they annot exist in perpetuity; ii they have no apital base; and iii their members do not have the benefit of general law or statutory ; b there is no oherent insolveny regime. In partiular, aess to trust assets is not neessarily guaranteed in insolveny where the rights of unseured reditors to aess the assets of the trust depend on the trustee s right of indemnity being unimpaired; and there is disharmony of regulation; any gaps under the Corporations At require referene to state based trustee ats. 1 Johnson Committee Report on Australia as a Finanial Centre. Objetives of new legislation In its onsultation, Treasury identified some key objetives: a CCIVs are to reflet best pratie for export, inluding by providing an insolveny regime; and b a poliy direted towards: i aligning CCIVs with the MIS regime, so both provide tax neutrality for investors (i.e. CCIVs are limited to passive investment); ii avoiding leaving the MIS at a domesti ompetitive disadvantage to CCIVs; iii failitating migration from MIS to CCIV (where it makes sense to do so); and iv regulatory and ompliane simplifiation. Have the poliy objetives been met? Assessment at this stage would be premature, for the reasons below: a Tax: the relevant legislation has not yet been released, although it is presumed to follow a similar oneptual basis to that already in plae for managed investment trusts. b Competitive domesti (dis)advantage: is diffiult to gauge. The Australian domesti market is omfortable with MIS strutures; a new struture with a new regulatory framework may not have immediate appeal for established funds managers relying primarily on Australian soured investment, although there is likely to be interest from Europe and Asia. Failitation of migration to CCIVs: Appliation of MIS onepts to the CCIV struture does suggest that a responsible entity (RE) ould adapt its existing business model to inlude an additional Australian Finanial Servies Liene (AFSL) authorisation to operate CCIVs in a similar fashion to that whih it employs for existing MIS. Migration failitation will also rely on appropriate tax rollover relief. d Insolveny: Treasury will provide the insolveny regime in the next release of legislation. Key objetive: regulatory and ompliane simplifiation This last objetive is arguably the most important. Treasury s ommentary in the Explanatory Memorandum to the Exposure Draft suggests that CCIVs will rely heavily upon ASIC to make CCIV rules under legislative instruments, speifi exemption and modifiation orders. A regulation making power is also inluded for the new regime. PwC 2
ASIC s Consultation Paper 296 sets out that it proposes to provide guidane about key aspets of the CCIV and Asia Region Funds Passport regimes in a suite of substantive regulatory guides. ASIC has also taken this opportunity to reorganise its existing guidane to inlude requirements for CCIVs. The proposed regulatory guidane overs establishing and registering funds, onstitution requirements, ompliane and oversight, holding assets, and proposed guidane for passport funds under the new regime for that model. The Australian finanial servies industry has struggled inreasingly under the diffiulties posed by pivotal regulatory requirements being spread among the Corporations Regulations, numerous regulatory guides, legislative instruments and other douments, making regulatory ompliane a omplex, expensive and labour intensive proess. This paper respetfully submits that the CCIV regime would benefit greatly from more detail and larity in the primary legislation in lieu of a similar series of fixes after the fat. CCIV strutural solution: a trust/ ompany hybrid The CCIV, being a body orporate, has its own legal identity, so that it an: a exist in perpetuity; b provide a orporate veil for members; own and deal with its own assets; and d transat and be solvent or insolvent in its own right. However, the CCIV is an unusual body orporate. It is a ompany limited by shares, with a sole orporate diretor (Corporate Diretor) to funtion in aordane with trust based priniples. The Corporate Diretor is required to at on behalf of the CCIV in a fashion similar to that of the RE, as trustee of an MIS. Aordingly, more detail will be required to omplete the CCIV framework, in partiular, to identify and neutralise those trust and ompany law priniples that are inonsistent with a well understood orporate funds management model meeting international and domesti expetations. CCIV features Constitution The CCIV is a speial Australian ompany limited by shares, identified by the letters CCIV at the end of its name, and able to be inorporated as wholesale or retail. Its onstitution, whih must be lodged with ASIC, will at as the statutory ontrat between the CCIV, its members and the Corporate Diretor. The replaeable rules in the Corporations At (ontaining basi strutural and proedural features of a ompany) annot apply to a CCIV. Both the retail and wholesale CCIVs are to be registered with ASIC. Similar to registered MIS, there will be statutory requirements for the onstitution of a retail CCIV (but not for the wholesale CCIV). Unlike wholesale unregistered MIS, the requirement for registration of the wholesale CCIV and lodgement of its onstitution may mean wholesale CCIVs will not be popular with those sophistiated investors who prefer to keep their negotiated ommerial arrangements (usually embodied in the onstitution) out of the publi domain. Corporate Diretor The CCIV will have a sole Corporate Diretor and no other employee or offier. The Corporate Diretor must be an Australian publi ompany holding an appropriate AFSL akin to an RE. The Corporate Diretor may appoint an agent, or otherwise engage a person to do anything the Corporate Diretor is authorised to do in onnetion with the CCIV. The Corporate Diretor is liable for those agents, even if they at fraudulently or outside authority. Again, importing statutory onepts from the Corporations At whih apply to an RE. As with an RE, the Corporate Diretor an retire or be removed by members, but must be replaed (inluding by a temporary Corporate Diretor undertaking the proess to replae itself) or the CCIV must be wound up. If the Corporate Diretor hanges, provisions in the legislation whih mirror the statutory novation provisions applying on the hange of an RE will also apply. PwC 3
Depository retail CCIV requirement to supervise Corporate Diretor funtions The retail CCIV regime has imported the European Undertakings for Colletive Investment in Transferable Seurities (UCITS) requirement for a depository entity (Depository) that is independent from the Corporate Diretor. The Depository is to hold (on trust) the assets for a retail CCIV, exeute the diretions of the Corporate Diretor in relation to those assets, and supervise various funtions undertaken by the Corporate Diretor (inluding issuing, redeeming, anelling and valuing shares in the CCIV). The Corporate Diretor an also appoint a ustodian to hold CCIV assets. Wholesale CCIVs do not require a Depository, however they an make an irrevoable eletion into the Depository regime. Neessity for a Depository in the Australian ontext (other than to follow UCITS norms) is not immediately lear. The requirement is not a feature of the MIS regime, and will add a layer of investor osts with questionable regulatory gain. Transations affeting share apital The urrent Australian statutory regime appliable to transations affeting share apital, suh as redutions of apital, buy baks, self-aquisition and finanial assistane, will not apply to CCIVs, whih will have their own regime. A CCIV an undertake redutions of apital, based generally on priniples of fairness as between members of affeted subfunds, and solveny of the sub-fund immediately before and after the redution. Self-aquisition of CCIV shares and finanial assistane to aquire shares are prohibited (without exeption). In addition, while not entirely lear from the Exposure Draft, payment of dividends to CCIV members will be subjet to new requirements partiular to this kind of entity (potentially in addition to, or in replaement of, the net assets test). The CCIV will permit a single orporate entity to offer investors a number of different investment portfolios through its sub-funds. A sub-fund may onstitute a single profile portfolio or offer variations to the portfolio within the sub-fund through different lasses of shares issued referable to the sub-fund (for example apital and inome alternatives). Issues of ertainty of governane and authority Corporate theory Traditional orporate theory provides for a ompany to at through its two organs: the board of diretors and the members in general meeting. The board of diretors is not an agent of the ompany, it is the ompany; its governing mind. The Exposure Draft provides however, that the Corporate Diretor of a CCIV is to operate the CCIV and to perform the funtions onferred on the Corporate Diretor by the CCIV s onstitution and the Corporations At, as an RE/trustee of an MIS/trust manages the property it holds on trust. The Exposure Draft also distinguishes some funtions of the CCIV from those of the Corporate Diretor. For example, the redemption of shares and alloation of assets and liabilities to sub-funds is done by the Corporate Diretor on behalf of the CCIV, rather than by the CCIV itself. The Corporate Diretor is in this way more akin to an agent of the CCIV with some rights and obligations in relation to its funtion being personal. This raises the question as to who onstitutes the CCIV, in partiular for the purposes of identifying the prinipal in dealings of the Corporate Diretor with third parties. PwC 4
Unertainty as to apaity of ontrating party The legislation proposed is unlear on how a CCIV exeutes douments. On the basis of the proposed provisions, it appears that the Corporate Diretor will exeute ontrats as Corporate Diretor, rather than the CCIV entering ontrats in its own apaity (unlike a onventional Australian body orporate). Detail as to statutory assumptions or safe harbour rules is yet to be provided, inluding how third parties might be entitled to assume ertainty of apaity. Unless statutory ertainty is provided, the basis for determining whih are personal rights and obligations of the Corporate Diretor and whih are rights and obligations of the CCIV need to be determined under the general law. To date, the Court has determined that the apaity in whih an RE purports to ontrat is not determinative. The extension of these hallenging onepts to a Corporate Diretor, whih does not hold assets on trust, has the potential to reate signifiant omplexity in the event of a dispute. Commerial aeptane of the CCIV requires that third parties be able to engage with the Corporate Diretor with a lear understanding of the apaity in whih the Corporate Diretor ontrats; this area is one that will benefit from greater larity in the next draft of the legislation. The takeaway It is enouraging to see greater onsideration of alternative investment strutures being onsidered for adoption in Australia. Suh s, strutured properly, should lead to improved investor pereption as Australia as a hub for finanial investment, partiularly inbound foreign finanial investment. However, in its urrent form, the CCIV is a hybrid: a body orporate operated as a trust; some of its proposed features have reated some anomalies between the traditional harater of a body orporate on the one hand, and a trust on the other; and the tax detail is yet to be released. Further onsideration must be given to additional legislation to provide CCIVs with: a ertainty of governane and authority; b larity of responsibility and aountability for persons and entities within the struture; and effetive operational flexibility. What is lear from the above, is that there is ertainly more water under the bridge to go before CCIVs beome an aepted alternative to the traditional MIS/trust vehile that is ommonly used in Australia. Who to ontat For more information, please ontat: Natalie Kurdian Partner, Sydney Diret: +61 (2) 8266 2763 Email: natalie.kurdian@pw.om Jane Ann Gray Diretor, Sydney Diret: +61 (2) 8266 5243 Email: jane.ann.gray@pw.om PwC 5
The Finish Supreme Court broke the priniple of At a glane The Finnish Limited Liability Companies At is based upon the priniple of, aording to whih the assets of the ompany and its shareholder are separate. However, in its ruling, KKO 2015:17, the Finnish Supreme Court broke this priniple after onsidering the ownership and ontrol between a ompany and its shareholder. In detail The Finnish Supreme Court broke the priniple of the in its ruling KKO 2015:17 The Finnish Limited Liability Companies At (FCA) does not inlude any stipulation aording to whih a shareholder ould be held responsible for the ompany s liabilities. The regulatory framework of the FCA is based upon the priniple of limited liability, aording to whih the assets of the ompany and its shareholder are separate. Speial legislation (Bankrupty At, At on Tax Proedures, Enforement Code) inludes stipulations regarding situations, where using a ompany ould be regarded as an artifiial onstrution, and therefore the legal form does not omply with the true nature or meaning of the onstrution. In suh situations, the separation of the ompany s and shareholders liabilities may be put aside, and the liability may be regarded as the shareholder s liability. The separation is alled identifiation, in ase it is made based on other than the speial legislation. Sine identifiation is a lear deviation from the main priniple stated in the FCA, the identifiation of liabilities must be based on strong arguments. Aording to the Supreme Court, suh strong arguments prevail in situations, where the group struture, relationships between the ompanies or the shareholders ontrol have learly been used in an artifiial and reprehensible way, that has resulted in tort of the reditors or irumventing statutory responsibilities. The ruling KKO 2015:17 onerned an Estonian Limited Liability Company, X OÜ, whih delivered devies exlusively to Finnish onsumers. The ompensatory payments required in the Finnish Copyright At were not paid on the devises. All trading operations were exeuted via a Finnish Y Oy. In addition, during the trading operations, 80-100% of X OÜ s shares were owned by the Finnish ompany, Y Oy, and by Y Oy s sole owner and ontroller, Z. PwC 6
The Supreme Court ruled, that the purpose of X OÜ s ations were to avoid the ompensatory payments of the devies sold to Finland that were subjet to ompensatory payments. Considering the ownership and ontrol between the ompanies and the artifiial onstrution, the Supreme Court ruled the ations of Y Oy being so reprehensible, that in this ase X OÜ s separation of liabilities ould be ignored. Y Oy was obligated to pay jointly and severally with X OÜ the ompensation deriving from the negligene of the ompensatory payments. The ruling has a strong onnetion to European Union legislation (Diretive on the harmonisation of ertain aspets of opyright and related rights on the information soiety) and to European Union Court rulings, that have supported shareholder s responsibilities in equivalent situations. A speifi feature in this ase was the fat that the identifiation was made on behalf of an Estonian ompany, although due to the Finnish registration priniple the Finnish ompany law does not apply to an Estonian ompany. Thus, the ruling may be seen more as a prevention of abusive pratie rather than a ase onerning identifiation in the aspet of ompany law. Who to ontat For more information, please ontat: Mikko Reinikainen Partner, Helsinki Diret: +358 50 365 8577 Email: mikko.reinikainen@fi.pw.om Milla Kokko-Lehtinen Senior Manager, Helsinki Diret: +358 50 354 9687 Email: milla.kokko-lehtinen@fi.pw.om PwC 7
www.pw.om This publiation has been prepared for general guidane on matters of interest only, and does not onstitute professional advie. You should not at upon the information ontained in this publiation without obtaining speifi professional advie. No representation or warranty (express or implied) is given as to the auray or ompleteness of the information ontained in this publiation and, to the extent permitted by law, PwC does not aept or assume any liability, responsibility or duty of are for any onsequenes of you or anyone else ating, or refraining to at, in reliane on the information ontained in this publiation or for any deision based on it. 2017 PwC. All rights reserved. PwC refers to the PriewaterhouseCoopers global network and/or one or more of its member firms, eah of whih is a separate legal entity. Please see www.pw.om/struture for further details.