The Securities and Futures Commission (SFC) published, on 15 May 2013, proposals to revise the existing “professional investor” regime in Hong Kong as well as proposals to introduce additional requirements for client agreements (Proposals).

The Proposals demonstrate the SFC’s ongoing desire to further enhance investor protection in Hong Kong; in this case with the most significant focus (and potential impact) on the treatment of those who are “professional investors” as defined in the Securities and Futures (Professional Investor) Rules (Rules) and in particular individuals or their wholly owned investment vehicles or those wholly owned by family trusts.

The Proposals suggest change in three specific areas:

• Conduct regulation,
• Suitability requirements; and
• Minimum content of client agreements, where required.

The SFC also considers the “professional investor” private placement safe harbour but does not appear minded to change this for now.

The consultation paper reiterates comments and addresses views previously expressed by the SFC, in particular in its Report on the Thematic Inspection of Selling Practices of Licensed Corporations published in October 2012 (2012 Report). Furthermore it revisits certain questions raised in the SFC’s consultation on “Proposals to Enhance Protection for the Investing Public” (September 2009 Consultation), as well as questions raised by members of the Legislative Council (LegCo) on the Rules – which came into force in December 2011 following the October 2010 Consultation.

The Proposals, to the extent they come to fruition, are not intended to require the Securities and Futures Ordinance (SFO) or the Rules to be amended, and therefore changes following the public consultation will not require the approval of LegCo. The Proposals, if introduced, will be implemented via amendments to the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).

The public consultation period will close on 14 August 2013.

Classification of Professional Investors

The Proposals include classifying “professional investors”, for the purpose of the Code of Conduct, as either Institutional Professional Investors or Corporate Professional Investors or Individual Professional Investors. Currently, “professional investors” are classified in the Code of Conduct as those who fall within paragraphs (a) to (i) of the definition of “professional investors” of Schedule 1 of the SFO, and those who fall within the Rules.

Institutional Professional Investors are those that fall within the “professional investor” definition in paragraphs (a) – (i) of Schedule 1 of the SFO, for example regulated funds and fund managers, banks and insurance companies. This is the same as the first category of the current classification.

Corporate Professional Investors are (a) any trust corporation (which is regulated either in Hong Kong or elsewhere) having been entrusted with total assets of not less than HK$40 million, (b) any corporation or partnership having a portfolio of not less than HK$8 million or total assets of not less than HK$40 million, and (c) any corporation the sole business of which is to hold investments and is wholly owned by a “professional investor” under (a) or (b) above (section 3(a), (c) and (d) of the Rules but excluding section 3(d)(ii) i.e. investment companies wholly owned by high net worth individuals).

Individual Professional Investors are individuals who (either alone or with spouses or children on a joint account) have a portfolio of not less than HK$8 million (see section 3(b) of the Rules together with investment vehicles wholly owned by them and investment vehicles that meet the monetary thresholds under the Rules and wholly owned by family trusts. It should however be explicitly confirmed that a family trust with a regulated trustee falling within the definition of a Corporate Professional Investor should be treated as such, and not an Individual Professional Investor.

A “professional investor” classification will dictate the extent to which the conduct and suitability Proposals as well as the client agreement requirements apply and therefore the overall obligations of a licensed corporation or registered institution (Intermediary) and its treatment of relevant clients.

The Proposals do not impact on Institutional Professional Investors.

Conduct regulation

This is the most significant area of change contained in the Proposals, in particular with regard to the treatment of Individual Professional Investors.

Individual Professional Investors

Under the Proposals, Individual Professional Investors (which include all investment vehicles wholly owned by individual “professional investors” and investment vehicles that are wholly owned by family trusts) should not be given the option of dispensing with the investor protection measures available to them under the Code of Conduct. Intermediaries should observe all requirements in the Code of Conduct, including the knowledge and experience assessment when dealing with individuals, regardless of their wealth. This Proposal would represent a significant shift in the treatment of Individual Professional Investors by Intermediaries who currently may be exempt from performing certain obligations where an Individual Professional Investor meets criteria set out in paragraph 15.3 of the Code of Conduct, and the client agrees to be treated as a “professional investor” and paragraph 15.4 of the Code of Conduct is complied with.

Corporate Professional Investors

Corporate Professional Investors will still have the option of dispensing with the investor protection measures if the Intermediary is satisfied that the Corporate Professional Investor has the necessary financial sophistication. However instead of the current “bright line test” the SFC proposes that an Intermediary should instead apply a principles-based approach in determining whether a Corporate Professional Investor is sufficiently knowledgeable and experienced in relevant products and markets; the existing benchmark based on dealing experience, including frequency, may “not be a reliable indicator of financial sophistication”. The new requirements would include an assessment of the corporate professional investors’ corporate structure and investment process and in particular how investment decisions are made and by whom, as well as an assessment of the experience of relevant decision makers, and the Corporate Professional Investor /its decision makers should be aware of the risks involved (Knowledge and Experience Assessment).

This Knowledge and Experience Assessment is proposed to replace, in its entirety, the current assessment criteria set out in paragraph 15.3 (a) – (e) of the Code of Conduct, which involves assessing the dealing experience of an investor alone. These were introduced following the September 2009 Consultation and became effective on 4 June 2011. The existing requirement to conduct the assessment in writing and that separate assessments should be undertaken for different product types or markets will remain. Whilst the proposed wording for new paragraph 15.3 (b) (i) of the Code of Conduct refers to “specialized treasury or other function” being responsible for investment decisions, we assume that an external decision making function would also be acceptable. This would be relevant for example in the context of a private corporate fund which is externally managed by an investment manager.

The requirements of paragraph 15.4 of the Code of Conduct are proposed to broadly remain the same. In summary these are the requirement to obtain a written and signed declaration confirming the client is willing to be treated as a “professional investor”, to explain the consequences of being so treated and for what products or markets the client is treated as a “professional investor”. The need for an annual assessment is also proposed to be retained.

Suitability requirements

The SFC reiterates the importance of Intermediaries ensuring that the suitability of a recommendation or solicitation for a client is reasonable in all the circumstances (Suitability Requirements). These are contained both in the Code of Conduct (paragraph 5.2) and elaborated on specifically in two SFC circulars issued in May 2007 and February 2009. The Suitability Requirements are described in the proposals as the “cornerstone of investor protection” and “core and important in the whole regulatory regime”. Further the SFC’s view is that it is a “comprehensive principles-based standard” which is “flexible and scalable” and therefore “reasonable and practical for Intermediaries to comply with”. It would appear that the SFC has no intention of changing the Suitability Requirements however it seeks views from the market, in particular asking whether they provide adequate protection to investors, whether any refinements should be considered / introduced and whether they are “well balanced between investor protection and compliance costs on Intermediaries”.

When considering this question posed by the SFC, respondents might want to consider the Suitability Requirements in the context of the Proposals which do not allow derogation from the Code of Conduct where Intermediaries are dealing with Individual Professional Investors – or Corporate Professional Investors who do not meet the criteria for exemption.

For private banks whose primary regulator is the Hong Kong Monetary Authority (HKMA), it is worth noting that the SFC clearly states in the consultation paper that the conduct of Suitability Requirements now and in the future apply to all Intermediaries irrespective of the type of advisory services and its operation is independent of the private banking customer concept that the HKMA introduced, the most recent definition of which is in the HKMA’s circular dated 12 June 2012 “Selling Investment Products to Private Banking Customers”.

Content of client agreements

The SFC is proposing that (i) Suitability Requirements should be incorporated into client agreements as a contractual term “without qualification”, and (ii) client agreements should not contain terms which are inconsistent with the Code of Conduct nor the actual services to be provided to the client; these should be accurately set out in clear terms.

From the commentary in the consultation paper the SFC’s position seems clearly influenced by decisions and findings of the High court of Hong Kong and more recently the court of First Instance inKok Wai Hing Selina v HSBC Private Bank (Suisse) SA HCCL 7 of 2010 and DBS Bank (Hong Kong) Ltd v San-Hot HK Industrial Company Ltd & Hao Ting, HCA 2279A/2008, respectively. Of particular relevance to the SFC’s rationale for the proposed new client agreement requirements are the findings expressed by the court in the first case that the bank did not owe any contractual duty to perform regular “know your customer” updates, that the sanctity of the contract had to be upheld as a matter of contract law and that obligations are not to be implied into the contract where they would be contrary to the express terms of the agreement. A key concern is that whilst breaches of Suitability Requirements by an Intermediary could lead to disciplinary action by the SFC against the Intermediary, such breaches cannot, of themselves, enable an aggrieved client to claim compensation from the Intermediary. These and other findings, as well as the SFC’s own findings during its thematic review of selling practice, examples of which are set out in the 2012 Report, are the background to current Proposals.

It will raise interesting questions if mis-selling claims are brought before the court where there is a potential conflict between any risk disclosure statement and the Proposals, if and when effective. In any event the facts of such allegations may lead to a case for disciplinary action.

Should these Proposals – or something similar – become effective, Intermediaries will need to consider the sufficiency of their client documentation, at least for new clients.

Private placement with Professional Investors

hilst the SFC notes the concern that Individual Professional Investors or Corporate Professional Investors may not have sufficient knowledge to make informed decisions to participate in private placements (particularly in the absence of a “professional investor” having an intermediary or other appropriate adviser), the SFC is of the view that they should continue to have access to private placements.

Nevertheless the SFC has asked for feedback as to the market’s view together with comments on whether the monetary threshold to qualify as Individual Professional Investors or Corporate Professional Investors should be increased – a question first publicly raised in the September 2009 Consultation. In that consultation (and the preceding soft consultation) responses did not support raising the minimum requirements and the SFC clearly accepted the responses. The SFC notes in the current consultation that the current thresholds are higher than that in the UK but lower than that in Australia or Singapore.

We would not expect a different response from the public nor a change in the SFC’s stance in this regard.

Grandfathering provisions, and a transition period?

The consultation paper is silent with respect to how and when the Proposals might be introduced. Respondents might however wish to consider proffering their thoughts. A grandfathering process for existing clients who are Individual Professional Investors and currently treated as “professional investors” for Code of Conduct purposes may continue to be treated as such in the knowledge that they can under the current Code of Conduct withdraw from being treated as such at any time (Paragraph 15.4 of the Code of Conduct), and this right is not proposed to be removed. This should also moderate the initial compliance burden and cost to Intermediaries. With regard to Corporate Professional Investors, a similar approach could be adopted. There should also be adequate time provided for relevant Intermediaries to review and if necessary revise their on boarding practices in particular for new Individual Professional Investors and Corporate Professional Investors.

Conclusion

For those Intermediaries who deal with, or intend to deal with, Individual Professional Investors and/or Corporate Professional Investors, should the Proposals be effected in their current form this will represent a significant change for the industry – both operationally and legally. The Proposals do not include any grandfathering provisions or a transitional period which would facilitate Intermediaries to adjust according to the Proposals and reduce relevant compliance burden and costs. Views should be reflected when responding to the SFC.

On April 26, 2013, the State Administration for Industry and Commerce ("SAIC") - one of China's three antitrust law enforcement bodies - noted on its website that it had held a meeting with certain industry participants to obtain feedback on the latest draft Regulation on the Prohibition of Conduct Eliminating or Restricting Competition through Abuses of Intellectual Property Rights ("Draft IPR Abuse Regulation").  In a conference at Peking University on April 28, SAIC officials gave additional comments on the draft regulation.

The request for feedback on the draft regulation is just the latest in a series of developments in relation to antitrust enforcement in the field of intellectual property rights ("IPRs"). It also illustrates the ever-increasing impact of antitrust law on the high technology sector more generally.  In this update, we discuss the development of the Draft IPR Abuse Regulation as well as judgments by the Guangdong High People's Court in the Qihoo 360 v. Tencent case and by the Shenzhen Intermediate People's Court in the Huawei v. InterDigital dispute.

The Draft IPR Abuse Regulation

SAIC has been drafting guidance on how the Anti-Monopoly Law ("AML") should be applied in the IPR context for some time; at least one of the prior drafts was circulated informally for comments. Perhaps the most important change to the latest draft, when compared to the preceding draft, is that SAIC now envisages adopting a regulation (a 'departmental rule') as opposed to guidelines. Whilst the guidelines would have applied to IPR-related activities across the board, the scope of the regulation (if enacted) will be confined to SAIC's regulatory jurisdiction - i.e., anti-competitive agreements between companies and abuses of a dominant market position by a single company which do not directly relate to pricing conduct.  Price-related conduct related to IPR falls under the remit of the National Development and Reform Commission, and is not meant to be directly covered by the Draft IPR Abuse Regulation.

The scope of activities caught by the Draft IPR Abuse Regulation is relatively broad, covering the use, licensing, assignment and enforcement of patents, trademarks, copyrights and trade secrets and is non-exhaustive in nature. In short, all the main classes of IPRs are caught.  Generally speaking, the Draft IPR Abuse Regulation focuses more on abuse of dominance than anti-competitive agreements. The Draft IPR Abuse Regulation provides some safe harbors for the latter,i.e., 20% total market share in the relevant technology or product market affected if the parties to the IPR-related agreement are competitors, and 30% if they are not.  For abuses of dominance, the Draft IPR Abuse Regulation outlaws the following types of practices, provided that certain conditions are met:

• refusal to license;
• tying an IPR with other IPRs or products; and
• the imposition of 'unreasonable restrictions' when licensing IPRs.

Beyond the specific licensing context, the setting of 'unreasonable conditions' can similarly be illegal under the Anti-Unfair Competition Law, and no showing of dominance is required under that law.

The Draft IPR Abuse Regulation also mentions that exclusive grant-back obligations of improvements to the technology without justifiable reasons, prohibitions to challenging the validity of the underlying IPR or on using competing technology after the expiry of the licensing term, and the requirement to pay royalties after expiry of the IPR (as well as other yet-to-be defined clauses) can be 'unreasonable restrictions.' Many of these types of clauses may already potentially be unenforceable or subject to challenge under the Chinese Contract Law, under which technology contracts which unlawfully monopolize technology, impede technological progress or infringe upon the technological achievements of others are void.  These provisions in the Contract Law, in a Supreme People's Court Interpretation on disputes involving technology contracts and in the rules applicable to the import or export of technologies apply even in the absence of dominance.  In a way, the proposed new rules in the Draft IPR Abuse Regulation would not represent a paradigmatic shift of the state of the law in China, although a violation of the regulation would trigger the sanctions under the AML - e.g., fines in the amount of 1% to 10% of the perpetrator's annual revenues - rather than simply giving rise to an enforceability and invalidation issue. 

In any event, particularly if a company believes it has a dominant market position, its licensing agreements will henceforth need to be robust enough to withstand a much greater degree of legal scrutiny than before.

The Draft IPR Abuse Regulation also defines and contains specific rules on the operation of patent pools, the setting and implementation of standards involving patents, and on the operations of 'collective copyright management organizations' (in Europe mainly referred to as "collecting societies"), all of which have the potential to give rise to antitrust issues (as has been seen in other jurisdictions).

In addition, the draft regulation also contains a broadly worded 'abuse of rights' clause, prohibiting an IPR holder in a dominant market position from issuing infringement warning letters against companies when their "conduct manifestly does not constitute an infringement of intellectual property rights."

The Qihoo 360 v. Tencent judgment

On March 20, the Guangdong High People's Court reached its decision in the high-profile Qihoo 360 v. Tencent case.  The two leading Chinese software/Internet companies - Qihoo 360 (whose main strength lies in anti-virus software) and Tencent (whose flagship product is QQ, an instant messenger service) - have been playing out their dispute in a variety of fora, including the courts in Beijing and Guangdong and with certain government authorities. 

The question before the Guangdong High People's Court was whether Tencent had abused its dominant market position in violation of the AML. The court found that it had not.  In a lengthy opinion, the court held that plaintiff Qihoo 360 had failed to define the relevant market properly and also rejected Qihoo 360's claim that Tencent was dominant in the instant messaging market.  Despite having dismissed the plaintiff's arguments on market definition and dominance - and effectively concluding that Tencent had not breached the AML - the court went on to determine whether Tencent's conduct was abusive. The reason for doing so was to provide guidance to companies in the Internet industry.  Interestingly, the court found that Tencent's conduct would indeed amount to 'exclusive dealing' - a type of conduct that is prohibited for companies in a dominant position - but not to 'tying.'

The Guangdong court's judgment is now on appeal, before the Supreme People's Court.

Although China is essentially a civil law jurisdiction and hence court judgments do not have precedential value, the Qihoo 360 v. Tencentjudgment may nonetheless be of interest to companies involved in other cases in the high technology sector. For example, the court's analysis regarding the definition of the relevant product market is particularly noteworthy:  first, the court examined the arguments of the economists acting for the plaintiff in quite some detail.  Second, it relied quite heavily on a decision by the European Commission, in Microsoft/Skype, a merger case.  Third, it emphasized the dynamic nature of Internet-related markets and held that the analysis of the market should not exclusively date back to the time before the lawsuit was filed.   Fourth, the court got very close to recognizing that competition in the Internet space takes place between platforms, not individual products: "in the development of the Internet industry until today, the choice of any free product or service to attract users is merely a different method of building up a platform, but the essence of competition is competition between Internet companies to develop value-added services and the advertisement business on the basis of their own application platforms."

The judgment by the Guangdong court contains similarly interesting language on the definition of the relevant geographic market - which it found to be worldwide in scope - and the analysis of dominance - finding, for example, that "due to the particular market conditions of the Internet industry, market shares cannot be used as a decisive factor to determine a business operator's dominant market position."

The Huawei v. InterDigital judgments

A few weeks earlier, on February 4, 2013, the Shenzhen Intermediate People's Court issued two rulings in the dispute between Huawei and InterDigital. 

InterDigital holds patents that are essential to implementing 3G mobile telecommunication standards, and the dispute essentially centered around the terms on which Huawei can use the patents.  In July 2011, InterDigital filed actions before the US International Trade Commission ("ITC") and the District Court in Delaware against Huawei, ZTE and Nokia, alleging patent infringement.   In December 2011, Huawei filed two lawsuits in Shenzhen - the location of its headquarters - inter aliaclaiming that InterDigital had violated the AML.

According to the Shenzhen Intermediate People's Court, InterDigital breached its obligation to license its standard essential patents ("SEPs") under fair, reasonable and non-discriminatory ("FRAND") terms to any company that wants to implement the relevant standards, as it had promised to the European Telecommunications Standards Institute.  The court found that by filing complaints to the ITC and the Delaware District Court to seek an injunction to ban Huawei from using those patents - while the negotiations with Huawei to license the SEPs were still ongoing - InterDigital violated its FRAND obligation.

The court held the FRAND breach - together with InterDigital's licensing offers - to be a means to extract excessive royalties from Huawei, and condemned it as an abuse of dominance in violation of the AML. Moreover, the Shenzhen court also held that InterDigital's licensing of SEPs with the licensing of non-essential patents in its portfolio constitutes illegal tying.

Finally, in the other judgment issued on the same day, the court reportedly ruled that the FRAND rate for InterDigital's 2G, 3G and 4G essential Chinese patents should not exceed 0.019% of the actual sales prices of Huawei's products incorporating the patent technology. 

The judgments are currently also on appeal.

Conclusions

It is possible that the Draft IPR Abuse Regulation may be further amended before it becomes law.  By focusing the draft on areas within its scope of competence, notably anti-competitive agreements and abuses of dominance that are not related to pricing, SAIC is likely trying to avoid the scope for regulatory overlap and possible 'turf battles' with other AML enforcement bodies.  Meanwhile, in the Chinese courts, proving dominance has been a difficult task.  Taking a positive viewpoint, it is interesting to note that the Guangdong High People's Court looked to European Union case law and went beyond simple market shares when making a ruling on dominance in the Internet industry.

In the Huawei v. Inter Digital dispute, the ruling by the Shenzhen Intermediate People's Court may have been one of the very first cases worldwide - if not the first - that actually determined a specific FRAND royalty fee.  More generally, these recent developments indicate that patents essential to technology standards have increasingly become a focus of the authorities and courts in China.  On top of SAIC's Draft IPR Abuse Regulation and the verdict of the Shenzhen Intermediate People's Court in Huawei v. InterDigital, the Standardization Administration of China has recently released draft rules on the process of setting national standards, which would in part bring the Chinese system closer to international practice while maintaining some distinct Chinese characteristics.

Against this background, it appears that antitrust claims - whether used as a 'shield' or a 'sword' - are likely to become a prominent feature of high technology-related litigation in China for the foreseeable future, which requires companies to update their licensing agreements, other contracts and compliance policies and consider antitrust issues when drafting IPR-related agreements to stay within the bounds of the fast-changing legal framework.

The Special Working Unit for Upstream Oil and Gas Business Activities (“SKK MIGAS”) issued a Decision Letter on April 3, 2012, amending part of its guidelines dealing with local content and domestic company preferences (the “Amendment”) in the context of the procurement of goods and services. PTK 007 Rev. 2 has been issued by SKK MIGAS to all production sharing contractors.

We will focus on the domestic company preference. Under this preference, if a domestic company participates solely or as a leader of a consortium in a tender for an oil and gas project, its bid will be entitled to a pricing preference of 5 percent, meaning that if its bid is within 5 percent of the lowest bid, it will be awarded the tender, all other factors being equal.

Prior to the Amendment, the SKK Migas procurement rules provided that a domestic company was one that was owned 51 percent directly or indirectly by Indonesian shareholders. This requirement itself raised issues whether it unlawfully discriminated against companies formed under Indonesia’s Investment Law that were majority foreign-owned. The Investment Law requires that PMA companies (i.e., companies with foreign investment) be treated equally with companies owned by Indonesian nationals. At least one international business association has filed a protest with the Government of Indonesia about such discrimination.

The Amendment now imposes more stringent requirements to be classified as a domestic company. The minimum 51 percent Indonesian shareholding must consist of voting shares with dividend rights and two-thirds of its Board of Directors must be Indonesian nationals, one of whom must be the President Director and one of whom must be the Finance and Business Development Director.

The Indonesian Company Law permits non-voting shares, which the Amendment now disqualifies from preference consideration. Under the Indonesian Company Law, all shares are required to have dividend rights and thus all Indonesian companies must comply with this requirement in any case. The requirements imposed on the Board of Directors are new.

These rules apply immediately to all tenders unless the tender offer documents have already been submitted under the one or two envelope procurement method or unless a price offer has been submitted under the two-phase system. This latter exception means that if a bidder has already submitted the technical data for phase one, it must nonetheless conform to the new requirements if it has not yet filed its financial bid.

A company that violates these provisions is subject to disqualification from the tender and can be prohibited from future bids for one year with either that production sharing contractor or all production sharing contractors. It is also subject to a financial penalty if it performs the contract but is subsequently found to not qualify as a domestic company.

For further information, please contact:

Homegrown Energy & Project Finance Firms in Thailand  

Legal News & Analysis – Asia Pacific - Hong Kong – Dispute Resolution

For further information, please contact:

Eversheds has announced the launch of its Beijing office, opening on 20 May 2013, with the appointment of two new partners: corporate energy law expert Ingrid Zhu-Clark and corporate lawyer Jay Ze.
 
Ingrid Zhu-Clark joins Eversheds from the Beijing office of US law firm Morgan Lewis where she was co-Managing Partner. Ingrid's practice is focused on the international oil and gas sector, in particular representing Chinese clients in outbound investment matters across multiple jurisdictions including Russia, Central Asia and Africa.

Ingrid's appointment further strengthens Eversheds' International Oil and Gas practice and follows the recent recruitment of a number of oil and gas specialists including Greg Hammond – Corporate Head of International Oil and Gas (London) who joined Eversheds from Akin Gump in February this year, Dani Kabbani (formerly in-house at Qatar Petroleum) – Corporate Projects Partner (Qatar) and Hussein Haeri – International Arbitration Group Principal Associate (Paris). Ingrid was attracted by Eversheds' approach to developing long term integrated relationships.

Jay Ze practices cross-border M&A working with state-owned enterprises, global companies and investments banks across the globe. Prior to joining Eversheds Jay worked with international law firms in Beijing. Jay will play a material role in Eversheds Global M&A team as it develops both inbound and outbound opportunities in China.

Eversheds' Beijing office was granted a license to practice in late 2012: Ingrid Zhu-Clark will be Managing Partner of the office.

Stephen Kitts, Eversheds' Asia Managing Partner said:

"In the past five years, since the launch of our first office in the region, Asia has been a significant and growing market for Eversheds. We are confident that the recruitment of high calibre M&A experts like Ingrid and Jay will build on our success."

Lee Ranson, Eversheds' Managing Partner, who has Executive responsibility for developing the Asia region for Eversheds, said:

"The Beijing office opening marks the next stage in our journey to create a truly global law firm servicing our clients in their key markets. We are particularly excited by the expertise and depth these hires bring to our international energy and natural resources offering."

For further information, please contact:

karollau@eversheds.com

Legal News & Analysis – Asia Pacific - Australia – Shipping, Maritime & Aviation

Ailsa Walker Eyre v Emirates [2012] QDC 364

WHAT YOU NEED TO KNOW

• Proceedings were commenced under the Civil Aviation (Carriers' Liability) Act 1959 (Cth) for damages relating to personal injuries. The defendant, Emirates, sought to have these proceedings struck out on the basis that pre-trial requirements imposed by separate Queensland legislation had not been complied with.
• Justice McGill of the Queensland District Court decided that the plaintiff, Ailsa Walker Eyre, was not required to comply with the requirements of this Queensland legislation prior to commencing the proceedings.

WHAT YOU NEED TO DO

• This decision provides guidance on the conduct of proceedings under the Civil Aviation (Carriers' Liability) Act 1959 (Cth) both in and beyond Queensland.
• You will need to consider the impact of this decision in any future claims

On 19 December 2012, Justice McGill of the Queensland District Court handed down the judgment in Ailsa Walker-Eyre v Emirates [2012] QDC 364 (a full text copy of this judgment is available from the Queensland Court's website by clicking here).

The background

The plaintiff was travelling from the United Kingdom to Australia on a plane operated by the defendant. Following landing at Brisbane Airport on 11 January 2010, while waiting to disembark, the plaintiff was struck on the head by luggage falling from an overhead locker as a result of the actions of another passenger. This caused the plaintiff to suffer personal injuries.

On 7 November 2011, the plaintiff filed a claim in the Queensland District Court, claiming damages for personal injuries from the defendant under the Civil Aviation (Carriers' Liability) Act 1959 (Cth) (the Act).

The Act gives force to the 1999 Montreal Convention (the Convention), which addresses the liability of the carrier and the extent of compensation for damage.

Article 17 of the Convention provides that a "carrier is liable for damage sustained in case of death or bodily injury of a passenger upon condition that the accident which caused the death or injury took place on board the aircraft or in the course of any of the operations of embarking or disembarking".

The defendant sought to have the claim struck out on the basis that the plaintiff did not comply with the pre-trial requirements in the separate Personal Injuries Proceedings Act 2002 (Qld) (PIPA).

The parties agreed that the plaintiff had not complied with the requirements of PIPA prior to lodging the claim.

The question therefore before Justice McGill was whether the plaintiff was required to comply with PIPA prior to commencing the proceedings.

The judgment

Justice McGill started his analysis by confirming that PIPA does not apply of its own force because of section 109 of the Australian Constitution.

His Honour identified the relevant question to be whether, and to what extent PIPA is applied by section 79 of the Judiciary Act 1903 (Cth) (the Judiciary Act).

Section 79(1) of the Judiciary Act provides:

The laws of each State or Territory, including laws relating to procedure, evidence, and the competency of witnesses, shall, except as otherwise provided by the Constitution or the laws of the Commonwealth, be binding on all Courts exercising federal jurisdiction in that State or Territory in all cases to which they are applicable.
 

The consideration that Justice McGill had regard to was, firstly, whether PIPA is applicable in this case, and secondly, whether the Constitution or the laws of the Commonwealth "otherwise provide".

Does PIPA apply?

Justice McGill noted (in obiter) that if the plaintiff had suffered an injury on an aircraft which had just completed an intra-state journey in Queensland, section 6(5) of PIPA would expressly exclude the applicability of PIPA.

His Honour considered this exclusion strongly suggested a legislative assumption that claims for damages in relation to personal injury under the Act would not be subject to PIPA.

Justice McGill then considered section 59 of PIPA and decided that it is not applicable for the purposes of section 79 of the Judiciary Act. Section 59 of PIPA provides that in certain circumstances, a claimant may commence a proceeding even though the limitation period has ended. This is inconsistent with Article 35 of the Convention (which provided that an action must be brought within two years).

"Otherwise provides"

Justice McGill focused his attention on the Act and the way it operates to decide whether, if the relevant part of PIPA applies, it derogates from the effect of the Act.

His Honour first considered the actual text of the Convention. Article 17 (which imposes liability for damage) exists upon condition only that the death or injury took place on-board the aircraft or in the course of any of the operations of embarking or disembarking.

Justice McGill considered that "only" was key here as it meant that Article 17 is expressed so as to require no other condition for the liability of the carrier. The provisions of PIPA are contrary to this as they impose additional conditions (namely prelitigation procedures) or securing the leave of the relevant court to commence the proceeding.

Accordingly, his Honour found that bringing the action within the two year period allowed by Article 35 of the Convention was the only pre-requisite for litigation to be brought under Article 17. Imposing further pre-litigation requirements before a plaintiff commences proceedings derogates from the operation of the Act and the Convention.

Justice McGill also considered the reasons why the Act and the Convention "do otherwise provide". His Honour considered this was because the process contained in the Act and the Convention is inconsistent with the operation of the relevant part of PIPA as the Act and the Convention provide a detailed basis for carrier liability, not just in relation to damages for personal injury, but also in relation to other losses in other circumstances and this is part of a scheme designed to provide international harmonisation of liability.

His Honour was of the opinion that it would derogate from the overall scheme of the Convention as adopted by the Act if a Queensland law imposed, only for Queensland, the pre-litigation requirements of PIPA.

For further information, please contact:

Shane Bosma, Ashurst
shane.bosma@ashurst.com

Paul Newman, Partner, Ashurst
paul.newman@ashurst.com

David Morgans, Ashurst
david.morgans@ashurst.com

Ashurst Shipping, Maritime & Aviation Practice Profile in Australia

Homegrown Shipping, Maritime & Aviation Law Firms in Australia

WHAT YOU NEED TO KNOW

• The Government has released exposure draft legislation to implement the third and final element of the investment manager regime (IMR3).
• Foreign funds that satisfy the strict conditions set out in the proposed IMR3 rules will generally be exempt from Australian tax in relation to:

- Australian-sourced gains from Australian portfolio (ie, interests of <10%) investments; and

- gains from foreign investments (whether portfolio or non-portfolio (ie, interests of ≥10%)) which may otherwise have been within the Australian tax net, solely because an Australian intermediary was used in connection with making the foreign investment.

Notwithstanding the proposed IMR3 rules, foreign fund managers and their auditors will still need to deliberate on whether an ASC 740-10 (formerly known as FIN48) provision needs to be raised for the 2012 calendar year given the IMR3 rules have yet to be legislated and review their historical positions, given the intended retrospectivity of the proposed IMR3 rules.

WHAT YOU NEED TO DO

• Foreign fund managers planning to make investments in Australia should consider the potential benefits of being taxed under the proposed IMR3 rules rather than Australia's ordinary income tax rules.

Background

The creation of a taxing regime for foreign funds had its genesis from recommendations set out in the Johnson Report. The Johnson Report found that the uncertain application of Australia’s tax rules were dissuading foreign funds from issuing mandates to Australian investment advisors and Australian fund managers to invest in Australia.

An investment manager regime to tax certain funds was introduced in three stages, with the proposed IMR3 rules being the final stage (and it will effectively be the taxing regime for foreign funds from the 2011/2012 income year). The FIN48 rules (Stage 1) and the Interim IMR rules (Stage 2) became law in the 2012 calendar year were limited in application, but did resolve some Australian tax uncertainties for eligible foreign funds.

The FIN48 rules resolved the uncertainty around the ASC 740-10 (formerly known as FIN48) disclosure by exempting certain foreign funds resident in any country from Australian tax on passive portfolio investments for the 2010/2011 income year and prior income years, subject to a number of restrictive conditions (eg, the foreign fund must never have lodged an Australian income tax return).

The Interim IMR rules resolved the Australian tax uncertainty where a widely held foreign fund engaged an Australian investment advisor or Australian fund manager and made gains from certain foreign investments and Australian assets. The Interim IMR rules ensured that income from such investments would be exempt from Australian tax if the only reason it was taxable was because the foreign fund used the Australian investment advisor or Australian fund manager. The change applied from the 2010/2011 income year and later income years.

The proposed IMR3 rules introduce a number of additional conditions for foreign funds to satisfy in order to be taxed under the investment manager regime. The exposure draft legislation states that the proposed IMR3 rules will be effective from the 2011/2012 income year.

Conditions for the proposed IMR3 rules to apply

The proposed IMR3 rules will cover a broad range of collective investment vehicle structures and arrangements, but will only apply to foreign funds which meet all of the following conditions:

• resident of an exchange of information (EOI) country throughout the income year;
• must not be an Australian resident throughout the income year;
• does not carry on a trading business in Australia;
• does not directly or indirectly control a trading business in Australia;
• satisfies the "widely held" test at all times during income year;
• does not breach the "closely held" test; and
• provides an annual information statement to the Commissioner and investors within 3 months of the end of the foreign fund's income year.

The conditions included in the proposed IMR3 rules are currently drafted to apply to the current IMR rules. Foreign fund managers and their advisors may be required to revisit prior year positions to confirm that the foreign funds satisfy the requisite conditions. Foreign funds that do not satisfy the conditions will be taxed under general Australian income tax rules.

Proposed changes

The proposed IMR3 rules introduce a number of changes to the investment manager regime. Some of the more pertinent changes in the proposed IMR3 rules are set out below.

Widely held test

To qualify for the proposed IMR3 rules, the foreign fund must satisfy the "widely held" test. The "widely held" test as currently drafted in the exposure draft legislation may now allow common structures such as feeder funds, co-investment funds, direct investor funds and general partner funds to satisfy the "widely held" test. Currently, there is a strong risk that many of these funds were not satisfying the requirements (despite the fact that the policy intent of the FIN48 rules and the Interim rules was to enable a number of these structures to meet this definition, provided the other conditions in the law were satisfied).

The exposure draft legislation allows tracing through interposed entities to the ultimate individual investors with direct or indirect interests in the foreign fund. Special concessionary tracing rules will apply to interests held by foreign life insurance companies, foreign superannuation funds and foreign government pension funds, making it easier for those entities to satisfy the requirements (as an example, where one of these entities has a 50% interest in the foreign fund, the foreign fund will satisfy the "widely held" test).

However, the "widely held" test will not be satisfied if a foreign fund fails the "closely held" test. The foreign fund will not be considered to be "widely held" where 10% or more of the economic interests are ultimately held by one entity or if 10 or fewer entities hold 50% or more of the foreign fund. Foreign fund managers will need to carefully monitor the "closely held" test, particularly in general partner funds where general partner interests can be significant.

There are a number of issues with the tracing requirements in applying the "widely held" test and "closely held" test to fund structures. For example, the "closely held" test appears to require the foreign fund to trace its interests to confirm the "closely held" test has been satisfied. It will likely be difficult for many foreign funds to satisfy these tracing requirements. Further amendments to the exposure draft legislation may be necessary to allow the rules to operate in the manner intended.

Portfolio interests in Australian assets

The proposed IMR3 rules will apply to exempt certain portfolio (<10%) Australian-sourced returns and gains from Australian tax, irrespective of whether the foreign fund has used an Australian intermediary.

This change provides tax certainty to foreign funds in that the tax outcome for foreign funds is not affected by whether the asset is held on revenue or capital account and aligns the investment manager regime with the existing capital gains tax exemptions for foreign residents.

Portfolio interests in foreign assets

The proposed IMR3 rules will apply to exempt gains from foreign investments (whether portfolio (<10%) or non-portfolio (≥10%)) which may otherwise have been within the Australian tax net, solely because an Australian intermediary (eg, broker) was used in connection with making the foreign investment (subject to certain exceptions).

Annual information statement

Under the proposed IMR3 rules, an annual information statement is to be provided to the ATO within 3 months of the end of the income year and contain the:

• name and address of the foreign fund;
• tax residency of the foreign fund;
• foreign fund's status within the IMR (this information will be used in the written notification that is to be provided to the partners); and
• application of the IMR to the foreign fund.

The form of the annual information statement has yet to be finalised and will be a key issue for foreign funds to consider. For example, it is unclear what disclosure will be necessary regarding the underlying investors in the foreign fund.

Also, foreign fund managers will be required to provide written notification (or publication on a website for generally up to 4 years) to investors within 3 months of the end of the income year containing information that the foreign fund satisfies the conditions of being an "IMR foreign fund".

Conclusion

A number of issues have been rectified in the proposed IMR3 rules, however there remains some key issues which need to be addressed further, particularly around the eligibility of limited partnerships, the tracing requirements imposed on foreign funds and the compliance requirements that need to be satisfied by the foreign funds.

It also remains to be seen whether the eligibility requirements are too prescriptive to be of practical use to many foreign funds and whether further amendments to the "widely held" test and the "closely held" test should be made.

Foreign funds and their advisors will need to closely monitor any further changes to the exposure draft legislation to determine the impact on historical positions and the impact it may have on future investments.

For further information, please contact:

Ian Kellock, Partner, Ashurst
 ian.kellock@ashurst.com

Tim Loh, Ashurst
tim.loh@ashurst.com

Legal News & Analysis – Asia Pacific - Australia – Capital Markets

WHAT YOU NEED TO KNOW

• ASIC will soon issue rules which will establish a mandatory reporting obligation for participants transacting in certain classes of over-the-counter (OTC) derivatives. This will require participants to report their transactions and positions to a trade repository.

WHAT YOU NEED TO DO

• Identify whether you will be affected by these reporting obligations.
• Ensure that you have arrangements and systems in place to report to a trade repository.
• Consider engaging a reporting agent to report transactions on your behalf.

Background

In late 2012 the Corporations Act 2001 (Act) was amended by the Corporations Legislation Amendment (Derivatives Transactions) Act 2012. The amending legislation introduced new Part 7.5A, which contains a framework for the regulation of derivatives transactions, including mandatory execution, reporting and clearing requirements. In particular, Part 7.5A contemplates that ASIC may make rules, to be known as derivatives transaction rules, in respect of these matters.

On 28 March 2013, ASIC released rules for the mandatory reporting of certain OTC derivatives – the Derivative Transaction Rules (Reporting) 2013 (draft Rules). At the same time ASIC released Consultation Paper 205 Derivative transaction reporting (CP 205) which contains more detail on the proposed reporting regime.

What derivatives will be affected?

At this stage, no determination has been made by the Minister as to which classes of OTC derivatives will be affected by the mandatory reporting obligation. However it is expected that the following types of derivatives will be reportable:

• commodity derivatives
• credit derivatives
• equity derivatives
• foreign exchange derivatives
• interest rate derivatives.

Which entities will be affected?

The reporting obligations apply to Reporting Entities. The draft Rules define a Reporting Entity to be:

• an Australian Entity (being an entity incorporated or formed in Australia, including a corporation, partnership or trust);
• a foreign subsidiary of an Australian Entity;
• a foreign authorised deposit-taking institution (ADI) that has an Australian branch; and
• a foreign company which is registered as such under Part 5B.2 of the Corporations Act.
   

Which transactions will be reportable?

Reporting Entities will be required to report to a trade repository the details of a Reportable Transaction. Whether an OTC derivatives transaction is a Reportable Transaction will depend on the nature of the Reporting Entity concerned.

In the case of an Australian Entity and its foreign subsidiaries, all prescribed OTC derivatives transactions to which the entity is a counterparty are Reportable Transactions, regardless of where the contract was entered into.

In the case of a foreign ADI with an Australian branch or a registered foreign company, only transactions which are booked to the profit or loss account of a branch in Australia or which are entered into in Australia are Reportable Transactions.

Any central clearing counterparty which clears derivatives transactions in Australia (such as, for example, ASX Clear (Futures) and LCH.Clearnet, which have each indicated their intentions to clear interest rate derivatives in Australia) will be Reporting Entities in their own right. It is proposed that they will be subject to the reporting obligation.

What information must be reported?

The draft Rules specify the information which is required to be reported for each class of derivative transaction.

This includes transactional information in respect of a derivative transaction entered into, modified, terminated or assigned after the date on which the reporting obligation takes effect. The obligation is to report by no later than the business day following the execution, modification, termination or assignment of the transaction (T+1).

Reporting entities will also be required to report up-to-date information on mark-to-market valuations and collateral information in respect of reported transactions.

The draft Rules also require a Reporting Entity to report information in respect of open positions on the date the reporting obligation takes effect. It is proposed to allow a period of six months following the commencement date for this information to be reported.

To whom must the information be reported?

Under Part 7.5A of the Act, the information in respect of a Reportable Transaction must be reported to a licensed trade repository or another prescribed facility. At this stage there is no licensed trade repository. It is understood that the Government is considering prescribing a facility as an interim measure pending the licensing of one or more repositories.

ASIC is also proposing to allow foreign entities to report Reportable Transactions to an overseas trade repository, where there is a corresponding reporting obligation in the overseas jurisdiction which is subject to similar regulatory requirements, and where ASIC has in place co-operation arrangements and access arrangements in respect of Australian Reportable Transactions.

Implementation phases

ASIC proposes a phased implementation of reporting obligations, beginning with an interim reporting phase on a "opt-in" basis and then three further phases (Phase 1, 2 and 3). In each of these phases, the reporting obligation would first apply to credit derivatives and interest rate derivatives, with reporting of other asset classes (excluding electricity derivatives) to commence six months after the start date of each phase.

Phase 1 – major financial institutions – from 31 December 2013
These are entities which have greater than $50 billion of notional outstanding positions in OTC derivatives as at 30 September 2013 and are:

• an Australian ADI
• the holder of an Australian financial services licence (AFSL)
• an exempt foreign licensee (being an entity which is exempt from the requirement to hold an AFSL and which is regulated by an overseas regulatory authority and which limits its dealings to wholesale clients)
• a clearing and settlement facility licensee.

Phase 2 – other financial institutions – from 30 June 2014
These are financial institutions in the categories covered by Phase 1, but which were not captured in that phase because their notional positions as at 30 September 2013 were less than $50 billion.
 

Phase 3 – other counterparties – from 31 December 2014
All entities which trade in OTC derivatives and were not captured in Phase 1 or Phase 2 will be required to report from 31 December 2014, subject to any de minimis reporting thresholds which may be prescribed. Phase 3 will be subject to further consultation by ASIC later in 2013.

For further information, please contact:

Jonathan Gordon, Partner, Ashurst
jonathan.gordon@ashurst.com

Paul Jenkins, Partner, Ashurst
paul.jenkins@ashurst.com

Don Maloney, Partner, Ashurst
don.maloney@ashurst.com

Jamie Ng, Partner, Ashurst
jamie.ng@ashurst.com

Corey McHattan, Ashurst
corey.mchattan@ashurst.com

Joseph Chow, Ashurst
joseph.chow@ashurst.com

Homegrown Capital Markets Law Firms in Australia

Legal News & Analysis – Asia Pacific - Australia – Environment

WHAT YOU NEED TO KNOW

• The Australian Energy Market Commission has released its final report of the Transmission Frameworks Review making a package of recommendations for changes to the framework for connecting generators and large loads to the transmission network.

WHAT YOU NEED TO DO

• You will need to watch this space as the Standing Council on Energy and Resources will now consider and make policy decisions on the recommendations in the review.
• The amendment of the National Electricity Rules as recommended by the Australian Energy Market Commission seeks to remove the current ambiguity in the connection process and strike a fairer balance in the bargaining power between Transmission Network Service Providers and connecting parties.

Transmission Frameworks Review

In April 2013, the Australian Energy Market Commission (the AEMC) released its final report of the Transmission Frameworks Review following its review of the transmission arrangements that underpin the National Electricity Market (the NEM). This is the culmination of a three year review undertaken at the direction of the Ministerial Council on Energy, now the Standing Council on Energy and Resources (SCER).

The review in part considers the arrangements for connecting generators and large loads to a transmission network. The intention of this part of the review is to enhance contestability, transparency and clarity in the connection process, whilst ensuring that clear accountability for service outcomes on the shared network is maintained. The final report is available from the AEMC's website by clicking here.

Current situation – AEMC suggests change needed

The AEMC has identified that considerable uncertainty exists under the current connection provisions in the National Electricity Rules (the Rules) as to the services Transmission Network Service Providers (TNSPs) must provide, the scope of the services and the classification of the services for regulatory purposes. Significantly, these factors affect important matters such as:

• how charges are determined;

• whether the market settlement, metering, technical and performance standards of the Rules will apply to all of the assets to be constructed; and

• whether a connecting party will have recourse to arbitration if agreement on the terms and conditions of access cannot be reached with the TNSP.

These issues are particularly relevant to any extension that is likely to be required to an existing transmission network in order to connect generation or large load. The cost of such an extension, which will be entirely funded by the connecting generator or large load, is usually considerable and can have a material impact on project funding. Currently, TNSPs generally view the provision of extensions to existing transmission networks as being outside the scope of the Rules.

The AEMC's report identifies that this part of the review attracted significant stakeholder comment. This is not surprising as, in our experience, the scope and classification of the services for regulatory purposes can be a contentious issue in the negotiations between TNSPs and connecting parties, impeding timely and cost-effective connections to the transmission network.

Following careful consideration of all stakeholder comments, the AEMC has made a package of recommendations which it says seek to address:

• the complexity, ambiguity and lack of clarity in the Rules and framework in relation to transmission connections; and

• the asymmetric power held by TNSPs in negotiating with connecting parties.

AEMC's recommendations

High level principles

Application of the Rules

As a starting point, the AEMC recommends putting beyond doubt that all equipment operated at transmission voltages and interconnected with the rest of the transmission system should be subject to the Rules.

If this recommendation is implemented, this will be a good outcome for connecting generators and large loads, as it means the technical and performance standards, market settlement and metering requirements under the Rules will apply to any extension required in order to connect to the transmission network. Removing the uncertainty as to the application of the Rules will, we believe, remove a number of the contentious issues currently underlying negotiations between TNSPs and connecting parties.

Classification of transmission assets

The AEMC considers that the uncertainty surrounding the classification of transmission services (and consequently the application of the Rules) has arisen largely because there is no clear linkage between service classifications in the Rules and the assets underpinning the provision of the service. To remove this uncertainty, the AEMC has recommended that transmission assets be separated into:

• shared transmission assets, which include as a subcategory identified user shared network assets; and

• dedicated connection assets.

The separate identification of transmission assets will be necessary only for determining who may operate; who is required to pay for; and the extent of the TNSPs obligation to develop the relevant asset. The AEMC's recommendations for this are summarised in the table below.

Table adapted from the Final Report Transmission Frameworks Review (p153)

Identified user shared assets

Contestability in construction and ownership

The AEMC recommends greater contestability for the construction and ownership aspects of shared transmission services where it will not compromise the ongoing security and reliability of the transmission system.

This proposal allows for contestability and ownership of identified user shared assets in any one of the following ways:

* Or a third party contractor engaged by the generator/load

Although the connecting party may build and/or own identified user shared assets, the AEMC's recommendations expressly provide that as the TNSP will always have accountability for operation, control and maintenance of all shared network elements (including identified user shared assets), the assets must be constructed in accordance with a design agreed with the TNSP.

The AEMC believes that if these recommendations are implemented, this should give generators and loads greater control in the cost and timing for the provision of identified user shared assets as well as provide the connecting party with countervailing power in negotiations with the TNSP.

Increased transparency for negotiations

The AEMC has recommended that all aspects of the service provided by a TNSP in relation to identified user shared assets be provided as a negotiated transmission service. Additionally, while the current Rules set some "ground rules" for negotiations, the AEMC recommends that the principles in the Rules underlying negotiations should be bolstered and directly applied to all TNSPs. The AEMC believes that updating and extending the negotiating principles in this way will ensure all aspects of the service provided by a TNSP for identified user shared assets are covered by the negotiating principles.

To inform negotiations, the AEMC proposes that TNSP's should be required to publish standard form contracts, design standards, clearer costs breakdowns and pro forma preliminary programs.

Additionally, the AEMC proposes that parties should have a right to seek resolution of disputes and have access to an independent expert review when they are unable to agree on any technical aspects of the negotiations.

The AEMC considers that these recommendations will facilitate more timely and cost-effective connections to the shared network.

Dedicated connection assets

Contestability

The AEMC's recommendations regarding contestability of dedicated connection assets are based on the following underlying factors:

dedicated connection assets will not form part of the shared network – TNSPs can isolate them at the connection point to the shared network if necessary; and

the connecting party will bear all risk associated with the quality of the dedicated connection assets.

Given this, the AEMC considers that the provision of dedicated connection assets should be fully contestable so a connecting party can make its own choices on design, build, ownership, operation, control and maintenance (provided minimum standards are reached).

The AEMC considers that there are sufficient providers and barriers to entry are low enough that a connecting party will have an alternative to the TNSP for the provision of these assets.

Interestingly, the AEMC did not consider TNSPs holding compulsory land acquisition powers were a significant barrier to entry for non-TNSP parties. There was considerable debate on this issue during the review process. Ultimately, the AEMC determined that holding compulsory land acquisition powers did not appear to be a significant barrier to non-TNSP parties providing dedicated connection assets. We anticipate that this will be a continuing
area of contention and may affect the ability of the proposed reforms to achieve their stated objective of enhancing contestability in the provision of dedicated connection assets.

Third party access

The AEMC considers that the efficient development of the national grid will only be facilitated if all transmission assets are subject to third party access provisions.

The AEMC proposes that any party owning transmission voltage plant and equipment (over 2km in length) should be required to:

• register as a TNSP – where third party access requirements in the Rules would apply; or

• gain exemption from the AER from the requirement to register – where a condition of exemption should be a requirement to negotiate third party access on reasonable terms where a generator or large load wishes to connect.

Additionally, the AEMC considers it would be appropriate for similar protections and principles to those contained in Part IIIA of the Competition and Consumer Act 2010 (Cth) to apply for third party access to dedicated connection assets. Relevantly, these principles include precluding a third party obtaining access that would prevent an existing foundation user obtaining sufficient capacity to meet its reasonably anticipated requirements. Currently, there is no contractual or regulatory mechanism for foundation customers to reserve uncontracted capacity in a transmission network. While it is not yet entirely clear from the AEMC's report, the amendments to the Rules may allow a foundation customer to reserve uncontracted capacity in dedicated connection assets (but not shared assets) which it has fully underwritten.

Next steps

The AEMC has recommended that SCER submit a rule change request to give effect to the package of recommendations regarding connection arrangements.

There is considerable complexity in the drafting of the amending rules to implement the drafting directions in chapter 14 and Appendix C of the AEMC's report and all interested parties should closely follow the development of any draft rules resulting from these recommendations.

For further information, please contact:

Paul Newman, Partner, Ashurst
paul.newman@ashurst.com

Teresa Scott, Ashurst
teresa.scott@ashurst.com

Peter Limbers, Partner, Ashurst
peter.limbers@ashurst.com

Liza Carver, Partner, Ashurst
liza.carver@ashurst.com

Joy Hooker, Ashurst
joy.hooker@ashurst.com

Richard Robinson, Ashurst
richard.robinson@ashurst.com

Yun Ho, Ashurst
yun.ho@ashurst.com