Corporate Update - August 2007

Contents

• Private Equity: Senate Committee Delivers Report – No Need For Further Legislation

• Emissions Trading Scheme Reporting Requirements

Private Equity: Senate Committee Delivers Report – No Need For Further Legislation

On 20 August 2007, the Senate Standing Committee on Economics ('Committee') delivered its report on the effects of private equity on capital markets and the Australian economy.

The Committee, comprising three Liberal, one National, four Labor, one Democrat and one Family First Senator, found that a case for specific regulation of private equity had not been made out.

The Committee assessed the following:

• domestic and international trends concerning private equity and its effects on capital markets

• whether private equity could become a matter of concern if ownership, debt/equity and risk profiles of Australian businesses were significantly altered

• long term effects on government revenue

• whether appropriate regulation or laws already apply to private equity acquisitions when the national economic or strategic interest is at stake and, if not, what those should be

• appropriate regulatory or legislative response required, if any.

The Committee:

• considered written submissions from 31 parties including Australian Venture Capital Association Limited, the Australian Bureau of Statistics, the Australian Manufacturing Workers' Union, finance and legal industry bodies, various companies, lawyers, accountants and academics

• conducted three days of hearings, receiving evidence from several witnesses including the Deputy Governor of the Reserve Bank of Australia, the Deputy Chair of Australian Securities and Investments Commission ('ASIC'), the Executive General Manger of Australian Prudential Regulatory Authority and the Legal Counsel for the Australian Institute of Company Directors.

The Committee found that the effect of private equity on Australian capital markets is not likely to be significant, for the following reasons:

• public company buyouts represent only about 1% of the total equity market

• the number and value of large buyouts is likely to slow, due mainly to the:

• increased cost of debt; and
• falling equity earnings yields

• the vast majority of businesses in Australia already have access to capital and proper management, and therefore have no need for private equity intervention

• the main area of investment for institutional investors is likely to continue to be in listed companies, and this will limit the amount of funds available for investment in private equity

• whilst private equity transactions may have an impact on debt markets by increasing supply of debt instruments, the debt market itself has a greater impact on private equity, through the cost of borrowing and the level of demand for debt instruments created from private equity deals.

Tax revenue implications

The Committee's view was that:

• the impact of private equity activity on tax revenue is low, but overstated

• whilst tax revenue might be affected by:

• increases in gearing; and
• shifting capital gains tax liability to parties who are not liable to pay it,

this loss in tax revenue may be offset by other factors

• overall, there is insufficient information about how private equity activity will affect tax revenue.

The Committee noted that the Treasury and the Australian Tax Office were monitoring developments, including shifts to defensive gearing among companies that currently carry low levels of debt.

The Committee found that a case for specific regulation of private equity was not made out, for the following reasons:

• foreign investment should generally be encouraged, and the Australian economy should not be protected from private equity

• private equity re-invigorates underperforming public companies, benefiting Australian consumers, shareholders and workers

• the current regulatory system, including the Corporations Act, various sector-specific legislation and foreign investment policy (including the Foreign Acquisitions and Takeovers Act), adequately protects Australian businesses and the Australian public from any potential dangers of private equity, including from undesirable foreign investment.

However, the Committee's view was that the private equity watching briefs maintained by the Reserve Bank, the Australian Competition and Consumer Commission, ASIC and the Foreign Investment Review Board should continue.

The National Senator (Barnaby Joyce) and the Family First Senator (Steve Fielding) dissented from the Committee's findings.

Barnaby Joyce's view was that:

• certain private equity investment structures allow foreign investors to avoid payment of tax

• these structures are not available to Australian investors

• such structures should not be allowed, as they disadvantage Australians in their own country.

Steve Fielding's view was that:

• the highly geared nature of private equity transactions may result in lost revenue to the government

• this would create an unfair tax burden on Australian families

• further regulation should be considered in the interests of Australian families.

Private equity investment will continue to operate within the existing regulatory system, however the effects of private equity on the Australian economy and capital markets will continue to be monitored.
Article by Andrew Lind and Zmarak Zhouand

Emissions Trading Scheme Reporting Requirements

Underpinning any Emissions Trading Scheme is the need for a sound reporting regime and the first installment has come in the form of the National Greenhouse and Energy Reporting Bill 2007 (Bill). The Bill, which was introduced into parliament on 15 August 2007, also provides for the appropriate use of information gathered under the regime. The Bill is intended to form a single national reporting framework largely eliminating the need for State based reporting.

A company or group of companies must be registered if it falls in one of the following categories. Firstly, if all the activities of all the entities under the control of a company fall within the table below. Secondly, if in any financial year a single entity within a group of companies causes CO2-e emissions of 25 kilotonnes (kt) or more, or energy production or consumption of 100 terajoules (TJ) or more.

Registration must take place during or shortly after the end of the relevant financial year (FY).

A corporation may also apply for registration if it intends on entering into a greenhouse gas project which would remove greenhouse gases or reduce or offset greenhouse gas emissions.

Registered corporations must report the greenhouse gas emissions, energy production and energy consumption from its operations each financial year. Greenhouse gas emissions are measured in carbon dioxide equivalents (CO2-e). Exactly what this means for your business will depend on its specific activities. Different emissions have varying levels of CO2-e for instance, one unit of methane gas is worth over 20 carbon dioxide equivalents.

A person who inappropriately uses information gathered acting as an officer of the government or an external auditor is a criminal offence and may face severe penalties including up to 2 years imprisonment.

Reported information may be published through the internet by the Greenhouse and Energy Data Officer. Requests for information not to be published may be made to the Greenhouse and Energy Data Officer on the basis that it may reveal some sort of confidential commercial value.

Breaches of provisions under the Bill can be up to 2,000 penalty units for corporations and 400 penalty units for an individual. Failure to report information can attract a penalty of up to 100 penalty units per day.

Interestingly, a chief executive officer may face civil penalties for failure to act upon when it is clear that a contravention will occur. Authorised officers of the Greenhouse and Energy Data Office may even enter premises to monitor compliance.

Corporations need to act now to ensure that they comply with the requirements that are expected to come into effect next financial year. If you have any questions about how to manage your responsibilities under the Bill then contact gadens lawyers.
By David Lukas

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.