Legal Structures Flashcards
What might acquisition of re in the wrong legal vehicle involve?
- **lost oppo** to max avail deductions
- **breaches** of certain mandatory statutory requirements (such as those under the Corporations Act 2001)
- prohibitive costs in transferring land into correct vehicle (e.g. stamp duties/CGT)
Briefly describe company as a legal vehicle to acquire re.
Company - independent legal entity able to do business in its own right; owned by shareholders; run by directors. structure is well understood and readily accepted for purpose of commercial, financing and borrowing negotiations.
Name the important features of company as a legal vehicle structure?
- separate legal entity - limited liab attaching to shareholders/members (as in they’d only be called on to pay unpaid portion of the nominal value of the shares)
- diff types of coys - most common coy vehicle used for re inv is coy limited by shares (other forms : coy limited by guarantee where a group of members guarantee liabs of the coy is limited with no shares issued, no liability coys in mining industries /other high risk ventures but no very common)
- contractual arrangements - rights and obligations between shareholders are controlled by the coy’s constitution (enforceable against members, directors and other officeholders; may divide shares into diff classes based on diff voting rights and hence investors end up with diff entitlement to profits), a shareholder’s agreement (regulate the rights although shareholder’s agreement is not mandatory), the Corporations Act and common law
- transfer of shares - simply sign share transfer form (stamp duty payable on share transfers in some states; most states impose duty on share transfers in landholding/land rich coys, so land transfer stamp duty applies)
- raising equity by a public offering - coy structure commonly utilised as a vehicle to raise finance involving large numbers of investors in a public offering (offering is controlled by statutory and common laws to ensure investors are best informed of the inv project being offered e.g. income growth, factors affecting capital value etc.)
- raising bank finance - financiers/banks often require some form of security as coy structure comes with limited liability . could be corporate guarantees (from other coys within the same corp group), directors’ guarantees, mortgages over re, charges over assets of the coy, cash retentions
- admin & mgmt - again, coy constitution provisions dictate conduct of business. e.g. appointment of directors, calls on shares, transfer of shares, divs, accounts, audit… so all internal affairs of the coy. but coy is effectively bound by the acts of its directors i.e. mgmt of the coy vested in the directors ultimately. so they are responsible for coy’s financial health, impact of each business decision and liability for that matter incurred in relation to business decisions.
What is a unit trust? Why is it called unit trust?
It is an equitable arrangement binding trustee to deal with tst prop (and holds the legal title to the re ) for the benefit of the beneficiaries /unitholders;
**reason it’s called ‘unit’ tst is coz the beneficial interests beneficiaries hold in the tst are divided into units.** there is private unit tst (must comply with tst deed and possibly corporations act) and public unit tst (listed or unlisted, must comply with tst deed and the corporations act, and ASIC requirements if listed)
What are the advantages of unit tst (unitisation)?
To the investor -
- readily transferrable ownership,
- flexibility,
- liquidity (as in listed tsts),
- mgmt by a professional mgr,
- smaller amt of capital required (hence helps investor in diversifying capital into other asset classes if desired;
- listed tsts became popular for they facilitate diversified ownership of re.
What factors are to be considered when assessing suitability of a unit trust vehicle?
- equitable obligations (i.e. how tst relationship is governed by contract and equitable principles),
- accepted structure (we wanna know it’s reasonably well understood and accepted),
- liability of unitholders (most tst deeds will provide for limitation of liability)
- mgmt (tst should be an administratively convenient vehicle),
- Corporations Act requirements (unit tst regarded as a managed investment scheme by the Corporations Act, hence trustee needs to know how to comply with relevant obligations under the Act w.r.t. registering the scheme, fs licensing, disclosure requirements …)
Briefly describe what a managed investment scheme is
a managed inv scheme is defined by pooling of funds contributed by wholesale and retail investors for the scheme to produce financial benefit to unitholders who hold interests in the tst, whereby unitholders do not have day-to-day control over the operation of the scheme.
What are managed investment schemes’ obligations under the Corporations Act?
- registration of managed inv schemes - mgmd inv scheme is required to be reigstered if interests in the shceme are issued not only to whole sale clients and has more than 20 members (reminder: investing > $500k; or netassets >$2.5m within the preceding 2 years as per accountant, gross income each of the last 2 FYs> $250k; or a person as such controls a coy or tst to invest in the scheme; or is a professional investor e.g. FS licensee)
- operating a registered managed inv scheme - operator must be a public coy and licensed to operate responsibly (acting honestly, exercising reasonable care and diligence, acting in the best interests of membets, treating members fairly), there must be a constitution and compliance plan w.r.t. the scheme which meet the corporations act requirements
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licensing requirements of the operator of a managed inv scheme - as in must hold an AFSL for services provided w.r.t. the scheme at min (then we also worry about experience, fame, character, education, capacity, care, skill, accountability, insurance requirements…)
* **Note**: ::if scheme has >20 investors or if trustee/mgr is in the business of promoting schemes, then operator may still be required to hold an AFSL even if the scheme is unregistered (offered to only to wholesale clients):: - raising equity by public offering - responsible entity of the tst (could be mgmr or tstee) have to prepare and issue regulated doc, a PDS to potential investors
- stamp duty - recall if unit tsts are land-rich, the stamp duty is payable on transfer of units
Briefly describe what partnership is as a legal vehicle?
- unlimited liability attaching to each partner (1 fails the other then has unlimited liab for the debts and obligations of the partnership) ;
- control involves greater trust than coy structure (coz one partners are bound by the acts of partners e.g. 1 partner executing a contract binds other partners to the contract) although by participating in the partnership through a special purpose subsidiary coy, partners can avoid exposure of the entire group to partnership liabs;
- mgmt involves agreement on the accounting and tax treatment and mgmt can be undertaken by a mgmt committee equivalent to a board of directors in a coy;
- dissolution - if partnership is deemed to be dissolved then there can be deemed disposal of depreciation prop and trading stocks for tax purposes; note that if parties are in receipt of income jointly or parties jointly and serverally are liable for total debts of the venture, then they can be construed as a partnership for tax purposes even if the partners do not call the arrangement a partnership.
What types of joint venture are there?
- incorporated joint venture - a coy formed by investors as a separate legal entity. advantage: familiarity with corporate law, ease of admin and ease with share transfer
- unincorporated joint venture - an association of investors lacking both corporate form and equity capital, brought to existence by contract. reason this is chosen over partnership: oppo to keep separate accounts and tax independence (albeit tax independence limited if joint venture is in joint receipt of income, in which case income may be taxed as a partnership)
How can we assess the suitability of an unincorporated joint venture as a vehicle for prop acquisition/re venture?
must assess contract, liability (joint venturer’s proportionate share of joint venture debts is unlimited), objectives, mgmt (jv not a legal entity so can’t contract, borrow, employ staff or own prop. mgmt normally undertaken by a special purpose coy/committe), accounts (again jv not a legal entity, so each joint venturer free to select its own basis for accounting), regulation (some JVs can be treated like managed inv schemes), fiduciary relationship (e.g. principal & agent - not to gain personal benefit without consent of the other person, not to act in ways that conflict with interests of the other party, not to exploit opps derived from jV relationship for personal benefit)
Describe what a stapled structure is as a legal vehicle?
investors hold units in a unit tst and securities in the associated coy ( coz units in the tst and securities in the coy are contractually stapled together), no tax on the trust income, income tax only payable by investors/unitholders, coy generally in a trading business (earning mgmt and dvelopment income, any income derived from coy is subject to tax at corporate tax rate, coy pays tax on dist and franked divs to investors)
What is property syndicate as a legal vehicle?
a number of investors entering an unlisted collective investment arrangement to acquire interest in direct prop (could be acquiring a unit tst or coy ) ; often appoints one of the participants or a 3rd party as syndicate mgr; syndicates are regulated as managed inv schemes and operator required to hold an AFSL , if retail clients PDS must be provided
What is SMSF as a legal vehicle?
- increasing popluar vehicle to acquire re inv due to low tax rate 15% on income earned by super fund.
- highly regulated by SIS legislation which generally prohibits borrowing and charging of super fund assets
- but with LRBA (limited recourse borrowing arrangement), smsf can go for a leveraged purchase of re (lender only given limited recourse security tied to prop acquired using the loan and no other assets of the smsf)
- generally re loans taken out by smsf cannot be used to fund re development activities (way too risky)
What are the regulatory requirements when raising equity capital from investors?
- disclosure requirements - help investors make informed decisions via use of **PDS to retail clients** who are potentially acquiring interests in a **registered** scheme. what PDS must contain is governed by the Corporations Act ; if it is an **unregistered scheme**, then **an information memorandum** instead (e.g. where all clients are wholesale clients). either way, issuer of the doc **must ensure disclosures made a re not misleading or deceptive**
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::other key regulatory requirements::
- if offering interests to **retail clients**, the responsible entity/trustee must hold an **AFSL** to operate the particular scheme (which must be registered with ASIC) ;
- scheme must have a **constitution and compliance plan** that meet the corporations act requirements
- **auditor** must be appointed (for reviewing compliance plan)
- at least half of the board of the responsible entity/trustee MUST be **external members** ; if not , entity must appoint a compliance committee(majority of which are exernal members)
- financial advisers should be prohibited from receiving conflicted remuneration (as per FOFA) - think upfront and trail commissions to adviser from re fund inv
