Corporate / Commercial Law

What is Key Person Insurance or Buy/Sell Insurance?

Key Person Insurance or Buy/Sell Insurance (or in the case of a Partnership Agreement, Partnership Buyout Insurance) provides the funds needed for the remaining owners of a business/trust to:

✅ Takeover or purchase the exiting owners share; and/or

✅ Have access to the required funds to replace the Key Person or recover from the loss of the Key Person from the business …

In the event of their death, total and permanent disability, or severe illness/trauma such as heart attack, stroke, cancer and/or paraplegia.

This type of insurance cover helps the business continue running with minimal disruption.

For the departing person or their estate, this insurance assists them to receive the agreed (normally market value) of their shareholding in return for transferring their business share to the remaining owners of the business/trust, or terminating their Employment / Independent Contractor Agreement.

Best Practice in a Shareholders' or Unitholders' Agreement

The Best practice within a Shareholders' or Unitholders' Agreement is to include terms that ensure life, permanent disability + trauma insurance is taken out in relation to all of the Securityholders.

The company or unit trust pays the annual insurance premiums.

Then, if a Securityholder is required to offer its securities for sale to the remaining Securityholders as a result of death, permanent disability + trauma sufficient to be covered by the insurance policy, the proceeds of the insurance policy are used to assist the remaining Securityholders in buying those securities.

The directors or trustee/s determine the amounts for the insurance policy from time to time, with the consent of Key (that is the majority or controlling) Securityholders.

Death or Incapacity of a Securityholder

In our Shareholders' or Unitholders' Agreement, by default, the death or incapacity of a Securityholder will not trigger a right for the other parties to buy out that Securityholder.

If you choose to add our Best Practice Buy/Sell Insurance provisions to the  Shareholders' or Unitholders' Agreement, then death/incapacity will be added as a trigger event requiring the affected party to offer its securities for sale to the remaining Securityholders.

Professional Tax/Accounting/Legal Advice is always Recommended

The potential for future ownership changes, and triggered tax implications {including income tax, capital gains tax, and fringe benefits tax) should be considered before final arrangements are made.

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

What is a Force Majeure clause?

A force majeure clause is a method of allocating the risk of a disruptive event. It is a broad catch-all provision whereby the parties list categories or specific instances of otherwise frustrating events, together with the party or parties to bear the risk of the event occurring.

The clause can also grant options to vary, suspend or terminate the contract to one or more of the parties. [1]

Force majeure clauses form part of a contract’s express terms, subject to the conventional methods of construction.

Absent a force majeure clause, it is unlikely a contract’s commercial purpose would suggest that such a provision is so apparent that it goes without saying [2], meaning a court is likely to refuse to imply it.

Further Reading:

For a more detailed discussion please refer to our blog article “Force Majeure Clauses & Frustration: Why the COVID-19 Pandemic is a Wake-Up Call" by Shakvaan Wijetunga | Virtual Intern at Blue Ocean Law Group℠.

Footnotes:

[1] Eg., Yara Nipro P/L v Interfert Australia P/L [2010] QCA 128, [26].

[2] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266, 283.

Important Notice:‍

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

Which companies need a Constitution?‍

The following companies must be governed by a Constitution:

⚖️ 'No Liability' public companies; and

⚖️ 'Special Purpose Companies' seeking a reduced Annual ASIC Review Fee.

A proprietary company (that is also a Special Purpose Company) must have a Constitution.  

Public Company Constitution Changes

A Public Company must lodge a special resolution adopting, modifying or repealing its Constitution with ASIC within 14 days after it is passed, together with:

(a) if the company adopts a Constitution – a copy of the constitution; or

(b) if the company modifies its Constitution – a copy of the modification.

The penalty for failure to lodge with ASIC

The maximum penalty for the offence of failing to lodge the above with ASIC is:

❌ 20 penalty units (a Commonwealth penalty unit is currently $210).

Note: Maximum penalties are reserved for the most serious cases.

What is a special purpose company?

A 'special purpose company' is generally one that's created for a set reason, not just general business.

Special purpose companies are usually one of the following:

Superannuation Trustee Company

A superannuation trustee company acts solely as a trustee of a regulated superannuation fund.

Refer to s19 of the Superannuation Industry (Supervision) Act 1993 for more information.

The company's Constitution must prohibit the company from distributing income or property to its members.

Home Unit Company

This type involves a group of people (directors or members) who own or live in a block of flats or units.

The company exists as a body corporate to administer the property.

Only proprietary companies can be home unit companies.

Not-for-profit Company

This company is for charitable purposes only.

The Constitution requires the company to:

✅ Apply its income in promoting charitable purposes;

❌ Prohibit distributions to its members and paying fees to its directors, and

✅ Make its directors approve all other payments the company makes to them.

In each case, the company's Constitution must meet the requirements under the Corporations (Review Fees) Regulations 2003.

Does the special purpose company constitution need to be lodged with ASIC?

The special purpose company Constitution does not need to be lodged with ASIC, but a copy must be kept with the company's records.

How can shareholders obtain a copy of the constitution?

A company must provide a current copy of the Constitution to any member who requests it within 7 days.

If a fee is charged, the Constitution must be provided within 7 days of payment.

Replaceable Rules

Replaceable rules are in the Corporations Act and are a basic set of rules for managing your company.

If a company doesn't want to have a Constitution, they can use the replaceable rules instead.

It is also possible for a company to be governed by a combination of a Constitution supplemented by the replaceable rules.

Replaceable rules do not apply to a proprietary company if the same person is the sole director as well as the sole shareholder.

Replaceable rules provide for the rules outlined in the Corporations Act and which section they're in.

The content in each of those sections applies as the replaceable rule. 

If a company wants to change or remove a replaceable rule, they will need to adopt a Constitution that outlines the changes.

For further information please read the ASIC Guide on Replaceable Rules and our 11 FAQ on Replaceable Rules.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

What are Tag-Along Rights?

Tag-along rights give non-selling securityholders the right to sell alongside the selling securityholder (ie, the selling securityholder can't complete its sale unless the proposed purchaser also offers to buy out the tagging securityholders).

What are Drag-Along Rights?

Drag-along rights give the selling securityholder the right to force the non-selling securityholders to also sell to the proposed purchaser.  

This is particularly important where the proposed purchaser will only complete if it gets 100% ownership.

Check you Shareholders' / Unitholders' Agreement

Depending upon the terms of your Shareholders' / Unitholders' Agreement, generally both Tag-along and/or Drag-along rights apply in the event of a proposed sale of shares by a securityholder.

Generally tag/drag rights will only apply:

✅ After the transfer pre-emption provisions have been followed;

✅ If the remaining securityholders do not offer to purchase all of the sale securities;

✅ If the seller then elects to sell all of the sale securities to a bona fide third party; and

✅ If the size of the proposed sale exceeds specified thresholds.

What if there is no Shareholders' / Unitholders' Agreement?

If there is no Shareholders' / Unitholders' Agreement, then the above tag-along / drag-along rights will not be able to be exercised.

Once there are multiple Shareholders / Unitholders it is often too late to get them all to unanimously agree to enter upon agreed terms of a Shareholders' / Unitholders' Agreement.

The ideal time to establish these important rights is in a Shareholders' / Unitholders' Agreement entered at establishment.

That is, before more than 1 Shareholders / Unitholders subscribe for securities.

If you would like the tag/drag rights to apply in the above and/or any other circumstances, we recommend you obtain legal advice at the time the Shareholders' / Unitholders' Agreement is being drafted.

Typical Thresholds Triggering Tag-along rights

Tag-along rights will apply if a proposed sale would result in a third party acquiring a certain level of voting power or more.  

Please note that, since the threshold is linked to voting power, a choice of 100% can make sense where the intention is to permit the holders of non-voting securities to tag along in an exit by the holders of all voting securities.  

Voting power threshold for tag-along rights is typically 80-90%.

This is a percentage of the total securityholder voting rights.

The tag-along rights will only apply if the sale would result in a third party acquiring this level of voting power or more.

Typical Thresholds Triggering Drag-along rights

Voting power threshold for drag-along rights is typically 80-90%:

This is a percentage of the total securityholder voting rights.

The drag-along rights will only apply if the sale securities carry in total this level of voting power or more.

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

What is an ABN?

An ABN is a unique 11 digit number that identifies your business to the government and community.

It doesn't replace your TFN tax file number, or your ACN Australian Company Number (if your legal entity is a Company).

You can use an ABN to:

✅ Identify your business to others when ordering and invoicing;

✅ Avoid pay as you go (PAYG) tax on payments you get;

✅ Claim goods and services tax (GST) credits;

✅ Claim energy grants credits; and/or

✅ Get an Australian domain name.

Not all Businesses need an ABN

To obtain an ABN you need to be running a business or other enterprise.

Visit the Australian Business Register (ABR) website to find out about your entitlement to an ABN.

When must my business register for an ABN?

It is compulsory for businesses with a GST turnover of $75,000 or more to have an ABN and to be registered for GST.

How to Register for an ABN

Before you register, please ensure you have the following:

⚖️ Decided Your Business Structure or Legal Entity, and have the details on hand;

⚖️ Proof of Identity;

⚖️ Be able to provide details of your business activities or proposed business activities + associates.

👉 Register for an ABN

Check your / Supplier's ABN Registration Details

You can use the ABN Lookup website to look up information about a registered ABN.

For example, to check:

✅ That your ABN details are up-to-date; and

✅ The details of a supplier.

ABN Lookup allows you to search publicly available information supplied by businesses when they register for an ABN.

👉 Search ABN Lookup

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

1️⃣ What are Replaceable Rules?

Replaceable rules are in the Corporations Act and are a basic set of rules for managing your company.

If a company doesn't want to have a Constitution, replaceable rules will apply by default instead.

It is also possible for a company to be governed by a combination of a Constitution supplemented by the replaceable rules.

They can be an easy way for proprietary companies to manage their corporate governance.

The below FAQ assume that a company does not have a Constitution, and the replaceable rules apply by default.

2️⃣ Do Replaceable Rules apply to all Proprietary Companies?

Replaceable rules do not apply to a proprietary company if the same person is the sole Director and the sole Shareholder, or if the proprietary company adopts a Constitution to vary, displace or replace the Replaceable Rules.

3️⃣ Where can I find the Replaceable Rule provisions outlined in the Corporations Act 2001?

The Replaceable Rule provisions can change, so you should always refer to a current copy of the Corporations Act at legislation.gov.

4️⃣ Can a Director of a Proprietary Company Vote on Matters in which they have a Material Personal Interest?

Yes, a Director can vote on matters related to their interest if they disclose the nature and extent of the interest and its relation to the affairs of the company at a meeting of the Directors, or if the interest does not need to be disclosed under section 191 of the Corporations Act.

5️⃣ How are Directors Appointed in a Company?

A company may appoint a person as a Director by resolution passed in a general meeting.

The Directors of a company may also appoint a person as a Director.

6️⃣ Can a Company appoint a Managing Director?

Yes, the Directors of a company may appoint one or more of themselves to the office of Managing Director for the period and on the terms they see fit.

7️⃣ How is a Director's Remuneration Determined?

The Directors of a company are to be paid the remuneration that the company determines by resolution.

The company may also pay the Directors' travelling and other expenses incurred in attending meetings and in conjunction with the company's business.

8️⃣ How can a Director Resign from a Company?

A Director of a company may resign by giving a written notice of resignation to the company at its registered office.

9️⃣ How are Meetings of Members (a.k.a Shareholders) Called and Chaired?

A Director may call a meeting of the company's Members (a.k.a. Shareholders).

The Directors may elect an individual to chair meetings of the company's Members.

🔟 How many Votes does a Member have at a Meeting of Members?

Subject to any rights or restrictions attached to any class of shares, at a meeting of Members of a company with a Share Capital, each Member has one vote on a show of hands and one vote for each share they hold on a poll.

⏸️ How are shares transferred in a company?

A person transferring shares remains the holder of the shares until the transfer is registered and the name of the person to whom they are being transferred is entered in the Register of Members in respect of the shares.

The Directors of a proprietary company may refuse to register a transfer of shares in the company for any reason.

Further reading: ASIC Guide on Replaceable Rules

Credits:

This FAQ was written by Titan Lawyer [AI] then reviewed with minor changes by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.