NOHC, NOHC — Who’s there? — The Federal Government

The Federal Government has stepped in to help Australian financial services groups compete alongside their offshore counterparts. This help comes by way of the Financial Sector Legislation Amendment (Restructures) Act 2007 (Amending Act) which inserts new provisions into the Financial Sector (Transfers of Business) Act 1999 (FSTOBA) to facilitate the implementation of a non-operating holding company (NOHC) structure by financial services groups. The resulting legislation is now called the Financial Sector (Business Transfer and Group Restructure) Act 1999.

While Members Equity introduced a NOHC last year without the benefit of the new legislation, Macquarie Bank Limited does intend to take advantage of the new legislation and on 20 August advised that it was well progressed towards implementation of a NOHC structure. In the meantime, both National Australia Bank Limited and Commonwealth Bank of Australia have announced that they are considering whether to implement a NOHC structure.

The adoption of a NOHC may offer some key benefits to a financial services group that has a listed bank or insurance company as the holding company. These benefits should include:

• greater operational flexibility and ability to manage risk
• improved means of meeting prudential requirements by allowing separation of prudentially and non-prudentially regulated businesses, and
• reduced capital requirements in non-prudentially regulated businesses (and across the group) as a result of quarantining prudentially regulated businesses that are subject to capital adequacy requirements.

The reality and extent of the benefits will depend significantly on APRA and how non-bank, non-insurance members of these groups are required to account for their capital and otherwise regulate their affairs under prudential standards. APRA continues to be in discussion with the banks and their representatives on these issues. Macquarie Bank’s recent announcement covered corporate governance arrangements agreed with APRA, where management of the authorised deposit-taking institution (ADI) was quarantined from the NOHC and non-banking business management while the non-banking business management was not quarantined from the NOHC management.

The Amending Act provides short term relief from the Corporations Act for financial services groups undertaking a NOHC restructure and potentially longer term relief from the consolidation provisions of the taxation law. For instance, in some cases NOHC subsidiaries, such as the ADI, may remain part of the consolidated group even though they have preference shares on issue. (Corporate groups in other sectors of the economy do not get the benefit of this relief after a top-hat scheme.)

Former position

Before the Amending Act, the only method for a financial services group to implement a NOHC under the FSTOBA was to seek approval of a ‘voluntary transfer’ of the business assets and liabilities of its holding company to one or more operating subsidiaries (Downstream Transfer). The transfer became effective by force of statute, relying on the legal principle of ‘universal succession’ to give legal efficacy to the arrangement.

A financial services group adopting this procedure would be faced with some significant issues, including:

• uncertainty about the efficacy of a transfer of foreign assets and liabilities, especially in the context of a ‘partial transfer’
• the logistical difficulties associated with having to list all assets and liabilities in the case of a ‘partial transfer’, and
• the likely triggering of the need to obtain consents to transfers and changes of control.

A financial services group could alternatively implement a NOHC by way of a scheme of arrangement between the holding company and its shareholders under the Corporations Act (Upstream Scheme). This procedure did not rely upon the FSTOBA for effect or assistance, but had its own issues including:

• limitation on the NOHC’s capacity to pay dividends immediately following the restructure, and
• the likely triggering of the need to obtain consents to change of control.

Amending Act changes

The Amending Act creates a regime for facilitating Upstream Schemes in a manner similar to the way in which the FSTOBA already facilitated Downstream Transfers.

An ADI, general insurer or life insurance company that is presently a holding company may apply to the Treasurer for a ‘restructure approval’ in relation to a scheme of arrangement that will result in it becoming the subsidiary of a NOHC.

The Treasurer’s restructure approval may facilitate the adoption of a NOHC structure by providing short term Corporations Act relief, including from the dividend trap problem introduced by the restructure, and associated relief from the Corporations Act provisions dealing with capital reductions and buy-backs (since the solution to the dividend trap will technically involve a capital reduction).

The Treasurer’s restructure approval may also facilitate a NOHC restructure by authorising APRA to issue ‘internal transfer certificates’ that provide for the transfer of specified assets and liabilities (eg non-banking) between two related bodies of a financial group in broadly the same manner as the FSTOBA already provided for Downstream Transfers (see above).

• particular types of preference shares issued by an ADI or an extended licensed entity (ELE) member to be disregarded for the purposes of tax consolidation
• dividends paid by the NOHC to be frankable if those dividends would have been frankable had they been paid by the ADI prior to the ADI restructure, and
• scrip-for-scrip roll-over relief for the Upstream Scheme, even where preference shares issued by an ADI or ELE member in the group remain on issue, or where foreign shareholders who cannot be issued NOHC shares take advantage of a share sale facility.

Broadly, to get the benefit of these tax provisions, the ADI (or ELE member) preference shares must be non-voting Tier 1 (or equivalent) preference shares with a return fixed upon issue by reference to the amount subscribed.

Outstanding issues

While the Amending Act has gone some way to facilitating NOHC restructures by financial services groups, the legislation has not, and in some cases cannot, address a number of potential impediments to these transactions. These potential impediments include:

• uncertainty about the efficacy of transfers reliant on ‘universal succession’, which continues to affect Downstream Transfers, and now also potentially affects transfers pursuant to an ‘internal transfer certificate’ following an Upstream Scheme
• the continued likely triggering of change of control provisions upon an Upstream Scheme (including, for example, to trigger cash or conversion rights in preference shares even though their continued existence would otherwise benefit from the consolidation relief in the Amending Act)
• accounting-related issues, including the requirement to revalue transferred assets, and
• reasons outside the ambit of the Amending Act, such as availability of stamp duty reconstruction relief for post-NOHC restructures and the potential for ‘claw-back’ of stamp duty reconstruction relief in relation to pre-NOHC restructures.

This article was written by Fiona Gardiner-Hill, Partner, and John Natal, Solicitor of the Sydney Corporate group.

For more information please contact

Name : Fiona Gardiner-Hill
Title : Partner
Office : Sydney
Phone : +61 2 9225 5327
Fax : +61 2 9322 4000
Email : fiona.gardiner-hill@freehills.com