The opportunities for restructuring in the agri sector
This article considers the changes to corporate laws that are aimed at supporting distressed or declining businesses and the opportunities this could provide in the agribusiness sector.
With the release of the Federal Government's National Innovation and Science Agenda (NISA) last year came some proposals for changes to corporate laws to encourage entrepreneurs. More recently the Federal Government sought submissions for its proposed changes. Submissions for those proposals closed late last month.
The proposals are aimed at supporting distressed or declining businesses by allowing certain protections to directors and businesses for attempting proactive business restructuring. The complaint about the current regime has been that often otherwise saveable businesses are being wound up because it is too harsh on risk takers and acts as an unnecessary deterrent given the already challenging task of restructuring a business for a better future. The proposed reforms fit with the innovation statement as they give innovators and business builders more protection and therefore encourage a higher level of risk taking. Time will tell if the policy has the desired effect, although from our point of view it is encouraging to think that a more restructure-friendly regime is being considered. We have been considering what this might mean for agribusiness.
According to recent statistics released by the Australian Bureau of Statistics, agriculture, forestry and fishing enterprises have one of the highest survival rates. Even so, for businesses that started operations in the 2010 financial year only 56.4% of businesses remained operating at June 2015, versus an average of 50% across all industries. Clearly, the restructuring opportunity in agribusiness exists.
In last year’s article Agri stocks make a comeback in 2015 we highlighted the significant outperformance of agri stocks that had undergone some form of restructuring. In fact, we found that ‘restructured’ businesses made up the vast majority of the excess return over the market return. It is interesting to think what might be possible across the broader agribusiness industry if restructuring businesses becomes easier, including growth opportunities for those looking to expand through acquisition and access to a greater range of investors willing to participate in restructuring situations.
Key reform areas include:
- A key component of the reform is to introduce a ‘safe harbour’ concept. These so called ‘safe harbour’ laws aim to give directors a defence if they use proper business judgment prior to insolvency in an attempt to save the business. In an agribusiness context this might give some farmers and agribusiness owners more options when facing distress. The proposal suggests that proper business judgement will include the use of a qualified restructuring advisor and demonstration that steps taken were in the best interests of creditors
- Other reforms include making ‘ipso facto’ clauses more difficult to terminate on insolvency. Ipso facto clauses are those clauses in contracts that allow the party that has granted a right to terminate that right without notice if an insolvency event occurs. The impact can be devastating to a business if it is reliant on that contract for its core business. For some agribusiness enterprises this could include certain plant breeding or genetic rights, off-take and other key agreements for inputs or sales, and licences to use technology and software.
Of course, an improved regulatory framework is only part of the picture; we will need lenders, directors, advisors, governments and other key stakeholders to bring a restructuring culture to business in Australia. An improved framework will push us closer to this future.