COMPANIES AND SECURITIES
LAW
77947
Week 6
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WEEK 6 TOPIC
Corporate Funding

Corporate Funding
Fundraising Rules
Dividends
Debentures
Personal Property Security Rules


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DISTINCTION BETWEEN SHARE
CAPITAL AND LOAN CAPITAL
Two sources of funds:
¢  Loan capital – company borrows funds:
—  Various forms, such as bank loans, short terms loans,
leases, trade creditors
—  Can also include debentures, a type of security
—  Lender is repaid “interest” plus principal
—  Interest is usually tax deductible
¢  Share capital – company issues shares
—  See last week
—  Shareholder is paid dividends, which are usually not
tax deductible
—  Rare to return capital: capital reduction, share
buyback, liquidation
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WEEK 6 TOPIC
Corporate Funding

Corporate Funding
Fundraising Rules
Dividends
Debentures
Personal Property Security Rules


4
FUNDRAISING – CH 6D
PROVISIONS
¢  Aims of the Ch 6D Provisions
¢  To balance the need for investor protection with an
efficient and credible capital market
¢  This requires Disclosure
¢  When is Disclosure Necessary?
—  Public companies – Ch 6D
—  Proprietary companies – note s 113(3)
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WHEN IS DISCLOSURE NEEDED?
¢  General rule: offering securities for issue or sale
¢  ASIC v Maxwell (LHW 7.25)
¢  Exceptions: see Table 7.3
—  Small scale offerings: 20 persons & $2m
—  Sophisticated investors: large offers, or wealthy,
experienced or professional investors
—  Senior managers
—  Existing security holders
—  Rights issues
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PROCEDURAL REQUIREMENTS AND
TYPES OF DISCLOSURE DOCUMENTS
q  Types of Disclosure Documents – Table 7.2
§  A prospectus (full disclosure document)
§  A short form prospectus
§  A profile statement with ASIC approval
§  An offer information statement when money raised is
$10 million or less
q  Procedure: Table 7.1
§  Prepare document
§  Lodge with ASIC: see LHW 7.90
§  Offer securities, enclosing correct document
§  Lodge supplementary document or return money
§  Hold application money until received
§  Issue or transfer securities
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CONTENTS OF DISCLOSURE
DOCUMENTS
¢  Prospectuses
¢  Requires more information than other documents
¢  Must be worded and presented in a “clear, concise and
effective” manner
¢  Must include information required by general
disclosure test: see LHW 7.105, 7.110 (on forecasts)
¢  Meet specific disclosure requirements: see LHW 7.120
—  Alternative disclosure requirements are provided for listed
companies: LHW 7.115
¢  Not be misleading and deceptive
¢  Other documents:
¢  Short form prospectus: LHW 7.125
¢  Profile statement: LHW 7.130
¢  Offer information statement: LHW 7.135
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OTHER RELEVANT RULES
¢  Restrictions on issue of shares: there are particular rules if
the disclosure document requires for a minimum number
of securities to be subscribed, or if it states that the
securities will be listed.
¢  Disclosure document must also specify an expiration date
¢  Fundraising provisions generally apply to issues of
securities. In some instances, it will apply to secondary
trading: sales by controller, sales amounting to an indirect
issue, securities hawking
¢  There are prohibitions on the advertising of securities
issues: LHW 7.175
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IMPORTANT PROHIBITION IN CH
6D PROVISIONS
¢  Misstatements or Omissions
—  Prohibition - s 728(1)
—  Criminal liability – s 728(3)
¢  Compensation
—  Loss and damage suffered resulting from
contravention of s 728(1) – s 729
—  See LHW table 7.5
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CROWD SOURCED EQUITY FUNDING –
LHW 7.210 TO 7.220
¢  A new framework to facilitate crowd-sourced funding
by small unlisted companies has been introduced.
¢  Replaces rules dealing with disclosure documents in
relation to crowd-sourced funding offers
¢  Sets out eligibility requirements for a company that
wishes to make an offer under the regime
¢  Regulates such offers and intermediaries, including
rules dealing with defective disclosure and
intermediaries
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WEEK 6 TOPIC
Corporate Funding

Corporate Funding
Fundraising Rules
Dividends
Debentures
Personal Property Security Rules


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DIVIDENDS
—  What is a dividend?
¢ Return of investment to shareholders
¢ Usually paid out of profits (but see net solvency
test)
¢ Can be interim or final
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WHO DECIDES WHETHER TO PAY
DIVIDENDS? AND DIVIDEND
RIGHTS
¢  Governed by constitution or replaceable rules
¢  In the replaceable rules directors control
—  amount, time and method of payment - s 254U(1)
¢  Shareholders cannot force a profitable company to
pay dividends
¢  Failure to pay dividends may be oppressive/unfair
conduct – s 232
—  Sanford v Sanford Courier Services
¢  Shares in a public company presumed to have the
same dividend rights unless the constitution says
otherwise s 254W(1)
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BALANCE SHEET SOLVENCY TEST
—  A company may pay dividends if its assets exceed its
liabilities immediately before the dividend is declared and
the excess is sufficient for the payment of the dividend:
s 254T(1)(a)
—  Assets and liabilities for purposes of the s 254T(1)(a)
balance sheet solvency test are calculated in accordance
with accounting standards in force at the relevant time:
s254T(2).
—  But:
—  Payment of the dividend must be fair and reasonable to
the company's shareholders as a whole: s 254T(1)(b)
—  Payment of the dividend must not materially prejudice
the company's ability to pay its creditors: s 254T(c)
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IMPROPER DIVIDEND PAYMENTS
¢  Contravention of s 256B – unauthorised reduction of
capital LHW 10.35
¢  Directors may contravene s 588G
—  s 588G(1A) deemed incurring debt
¢  Breach of fiduciary or statutory duties – prejudice
interests of creditors
—  Hilton International v Hilton
—  ASIC v Loiterton
¢  Creditors may apply for a s. 1324 injunction to stop
contravention of s 254T
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WEEK 6 TOPIC
Corporate Funding

Corporate Funding
Fundraising Rules
Dividends
Debentures
Personal Property Security Rules


17
WHAT IS A DEBENTURE?
¢  Company has power to issue debentures and give security
for loans – s 124(1)
¢  Debenture – Undertaking to repay as a debt, money
deposited or lent to a company – s 9
¢  Debenture may be secured by a security interest over
property or it may be unsecured
¢  Description of debentures: see table 11.1
—  Mortgage debenture
—  Debenture
—  Unsecured note or unsecured deposit note
¢  Convertible debenture or note
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RULES RELATING TO DEBENTURES
¢  Debenture = securities: s 727 applies.
—  That is, issue of debentures is covered by fundraising
provisions
¢  Company enter into a trust deed and appoint an eligible
trustee for debenture holders – s 283AA: LHW 11.40
—  S 283AB requires the trust deed to provide that certain
rights are held on trust for debenture holders
—  S 283AC specifies who may be the trustee
¢  Borrower’s and guarantors duties:
—  Duties are provided under 283BB – 283BF
—  Requirement to keep a register of debenture holders
—  Duties of guarantor: 283CB and 283CC
—  Trustee’s duties: 283DA
¢  Various rights are available to debenture holders
—  E.g., 283EA power of 10% or more to call a meeting of
debenture holders
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WEEK 6 TOPIC
Corporate Funding

Corporate Funding
Fundraising Rules
Dividends
Debentures
Personal Property Security Rules


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PERSONAL PROPERTY
SECURITIES
¢  The law regarding borrowing on security of personal
property underwent major reforms in 2012 with the
enactment of the Personal Property Security Act
2009, a single national law to govern such security
¢  What is personal property?
¢  What happens to real property?
—  Fixtures
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SECURITY INTEREST
¢  Section 12(1):
—  A security interest means an interest in personal
property provided for by a transaction that, in
substance, secures payment or performance of an
obligation (without regard to the form of the
transaction or the identity of the person who has title
to the property).
¢  Examples in section 12(2): fixed charges, floating
charges, chattel mortgages, retention of title
arrangements, hire purchase, lease of goods.
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PPSA
¢  The PPSA Introduces new terms to replace traditional
terms such as charges.
¢  A fixed charge is now a non-circulating security interest
and floating charge is circulating security interest.
—  Purchase money security interest: retention of title
clauses
¢   Grantor is the person borrowing money (example the
company).
¢   Secured party is the entity taking security over assets
(example the bank)
¢   Security agreement is the document by which a security
interest is created. The terms of the security agreement
will set out the circumstances that constitute a default of a
circulating security interest example the non payment of
principal or interest when specified in the contract.

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ATTACHMENT AND PERFECTION
¢  A security interest must attach to personal property
—  E.g., non real estate assets of company such as plant
and machinery, before the security can be enforced. This
property is called collateral.
¢   Attachment can take place when the grantor signs the
security agreement.
¢  Signing a security agreement gives the grantor enforceable
rights against the collateral.
¢  Perfection can take place when registering an interest in
the collateral. It can also take place by taking possession of
the personal property. Perfection gives priority over
competing security interests in the same collateral.
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REGISTRATION
¢  The Act has created a Register of Personal Property
Securities.
¢  Registration involves lodging a financial statement that
contains prescribed data on the PPS Register. Not
necessary to lodge the actual security agreement.
¢  Registration commences from the moment the description
of the collateral becomes available for search on the PPS
Register and it is called registration time.
¢  If a company goes into liquidation, voluntary
administration, or executes a deed of company
arrangement, a PPSA security vests in the company if it
was not perfected (registered) within twenty days after it
came into force.
¢  “Came into force” normally means when it was signed by
the company borrowing the money
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PPSA – OTHER TOPICS
¢  Vesting if not registered within time:
—  If the security interest vests in another body then the
originally secured party loses the right to enforce
their security interest and the originally secured
party (the lender) will become an unsecured creditor
if, for example, the company goes into liquidation.
¢  Invalidation of security interests:
—  Voidable antecedent transactions: Will be discussed
in Week 12
—  Security interests in favour of officers
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PPSA PROBLEM AREAS
¢  Some types of “traditional” but informal security
arrangements will now need to be more structured
(e.g. oral security agreements, retention of title
arrangements).
¢  Status of fixtures (is it a fixture?; attached, then
detached, then reattached items?)
¢  Failed attempts to perfect a transitional security
interest – possible loss of priority.
¢  Integrity of migrated data.
¢  Lack of co-operation from secured parties.
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WEEK 6 TOPIC
Corporate Funding

Corporate Funding
Fundraising Rules
Dividends
Debentures
Personal Property Security Rules


28