In April 2021, Wisewould Mahony was engaged by Right Lane Consulting Pty Ltd (Right Lane) to assist Right Lane in undertaking a restructure whereby a not-for-profit entity (NFP) – The Right Lane Foundation Ltd (the Foundation) – would be established for the purpose of the Foundation acquiring a majority or all of the issued shares in Right Lane (Foundation Restructure).

To be a NFP and registered charity, the structure and governing documents of the Foundation were required to ensure that all profits must go back into the organisation towards its NFP public benefit purposes.  A public company limited by guarantee is the most common company structure for charities and not-for-profits as a company of this kind cannot pay dividends to its members and, as such, the Foundation is a public company limited by guarantee.

Funding for the Foundation’s acquisition of shares in Right Lane was to be implemented by Right Lane’s net profit being passed onto the Foundation by way of dividend payments on shares it acquired in Right Lane, such dividend payments which would then be used by the Foundation a) to pay the purchase price for the shares it had acquired in Right Lane and b) to achieve its NFP objectives.

Right Lane is a proprietary limited company.  In April 2021 (prior to the Foundation Restructure), Right Lane’s share structure was comprised of 750 ordinary shares held by 7 different shareholders and 250 F Class shares held by 7 different shareholders.  Each F Class share had the same rights as ordinary shares save that it was only able to be transferred with the consent of Right Lane’s board of directors. F Class shares were essentially created as a dividend share for Right Lane employees.

Following is a summary of the process undertaken, and the steps and documentation that were required, in order to implement the Foundation Restructure.

1. F Class share conversion

As the ultimate aim was, and remains, for the Foundation to own 100% of the share capital in Right Lane (other than employee dividend shares), it was necessary to first convert all F Class shares to ordinary shares.

This was achieved by the holders of F Class shares transferring their F Class shares to the founder of Right Lane, Dr Marc Levy, in exchange for Right Lane issuing the F Class shareholders with an equal number of newly created dividend only E Class shares. All F Class shares were then converted into ordinary shares.

2. Conditional Offer to Right Lane Ordinary Shareholders

Prior to the incorporation of the Foundation, an initial Information Memorandum was provided to all Right Lane shareholders whereby a conditional offer was conveyed to the holders of ordinary shares for them to sell some or all of their ordinary shares to the Foundation (Foundation Acquired Shares) on the following terms:

(a)The price offered per ordinary share was based on a total company equity valuation for Right Lane determined pursuant to a valuation prepared by an independent valuer;

(b)The purchase price would be paid by the Foundation (Foundation Share Purchase Price) by way of annual instalments from dividends received by the Foundation on its Foundation Acquired Shares with interest accruing on the balance of the Foundation Share Purchase Price outstanding (Foundation Payment Terms); and

(c)Shareholders had 10 business days to accept the offer.

Four Shareholders (Selling Shareholders) agreed to sell, in total, 55.5% of the ordinary shares in Right Lane to the Foundation.

3. Incorporation of the Foundation and registration as a charity

The Foundation was incorporated as a new public company limited by guarantee on 7 October 2021 with 3 initial directors on the basis that a public company limited by guarantee must at all times have a minimum of 3 directors. The Foundation then applied to the Australian Charities and Not-for-profits Commission (ACNC) for registration as a charity (ACNC Application) and to the Australian Taxation Office (ATO) for registration as a tax-exempt NFP entity.

As part of the ACNC Application to register as a charity submitted on 27 October 2021, the Foundation was required to demonstrate its charitable purposes to the ACNC. This was done by including the Foundation’s charitable purposes (Objects) in its company constitution (Constitution), such Objects being that the Foundation would pursue the charitable purpose of advancing the effectiveness of other charitable organisations by:

(a)funding and/or subsidising charitable organisations’ access to quality consulting and professional services which would not otherwise be affordable for such charitable organisations;

(b)advancing knowledge of charitable organisations in the fields of strategy, growth, organisational effectiveness and other related areas (Relevant Fields);

(c)building capabilities in the Relevant Fields within charitable organisations by working with current and future charitable organisation leaders;

(d)providing forums for charitable organisations to discuss and learn about best practice, and commercial and professional procedures, in the Relevant Fields; and

(e)raising funds, and applying its income, for the purposes of achieving the Objects.

The Foundation’s application for registration as a charity was approved on 22 March 2022.

As the proposed Foundation structure, whereby the Foundation would own shares in Right Lane and use profits/dividends derived from those shares to engage Right Lane to provide consulting services in furtherance of the Foundation’s Objects, was a novel charitable organisation structure to the ACNC, over the 5 month period between the date of the ACNC Application and the ACNC’s acceptance of the ACNC Application the ACNC submitted a number of requests for information in respect of the Foundation Restructure and the relationship between the Foundation and Right Lane.

In particular, the ACNC conveyed that it needed to satisfy itself that the proposed relationship between the Foundation and Right Lane:

(a)would result in a greater benefit flowing to the Foundation (and, therefore to its charitable Objects) by it engaging Right Lane to provide consulting services to charitable organisations on its behalf than if the Foundation was to engage a service provider in which it does not hold any equitable interest/shares; and

(b)was otherwise at an appropriate arm’s length; which resulted in the ACNC requiring that, for so long as Right Lane was not wholly owned by the Foundation, no director of the Foundation may also be a director of Right Lane, and no shareholder of Right Lane may be a director of the Foundation. This resulted in:

i.2 of the initial directors of the Foundation resigning as directors given that they would continue to hold shares in Right Lane post the Foundation Restructure. The 3rd initial director remained on the Foundation board as she transferred to the Foundation all shares held by her in Right Lane; and

ii.2 new independent directors being appointed to the board of the Foundation.

4. Sale and transfer of Foundation Acquired Shares

To effect the sale of the Foundation Acquired Shares, each Selling Shareholder entered into a Share Sale Agreement with the Foundation containing the following bespoke sale terms:

(a)The terms upon which the Foundation Share Purchase Price would be paid by the Foundation to the Selling Shareholder under the Foundation Payment Terms, including:

i.the mechanism for determining the relevant portion of each dividend received by the Foundation on its Foundation Acquired Shares (net of tax and expenses) which would be used to pay an instalment of the Foundation Share Purchase Price to the Selling Shareholders; and

ii.that title to the Foundation Acquired Shares would transfer to the Foundation upon the date of the Share Sale Agreement (Completion) notwithstanding that the Foundation Share Purchase Price would not be paid in full upon Completion but, rather, by way of ongoing annual instalments;

(b)That, as security for payment of the Foundation Share Purchase Price and interest, upon Completion the Foundation would grant each Selling Shareholder a first ranking registered security interest over the Foundation Acquired Shares acquired from the applicable Selling Shareholder, by the Foundation executing a Security Deed in favour of each Selling Shareholder;

(c)That upon Completion each shareholder would execute a Deed of Amendment amending Right Lane’s shareholders agreement to cater for the Foundation becoming a majority shareholder in Right Lane; and

(d)That upon Completion the Foundation would execute an Accession Deed whereby it would agree to become a party to Right Lane’s shareholders agreement (as amended).

As Right Lane’s shareholders agreement contains a pre-emptive sale rights provision whereby a shareholder is required to first offer to sell its shares to the other shareholders before agreeing to sell its shares to another person (including the Foundation) (Pre-Emptive Rights Provision), all shareholders were required to sign a Deed of Waiver and Consent permitting the Selling Shareholders to sell and transfer its Foundation Acquired Shares to the Foundation without the need to comply with the Pre-Emptive Rights Provision.

Completion of the sale and transfer of the Foundation Acquired Shares was effected on 1 July 2022.