MURDOCH UNIVERSITY

UNIVERSITY COMPANIES and UNIVERSITY CONSULTANCIES

A RISK MANAGEMENT REVIEW

Background

Murdoch University for many years has recognised the need to obtain additional income streams to support the traditional student place and research income provided by the federal government and the income provided by local postgraduate and international students.

As early as 1975 the University entered into a joint venture arrangement with a private company to exploit and patent discoveries arising from University research. At that time the University deliberated and approved the establishment of a limited liability company for this purpose. These decisions led to the establishment of the University Company Pty Ltd (UNICO) - see Attachment 1 History of the University Company Pty Ltd.

In more recent times the University Senate has agreed to the establishment of a number of other subsidiary companies or other non-subsidiary companies in which the University has an interest[1] primarily aimed at raising additional income, with either the University as sole proprietor or in a joint venture arrangement - see Attachment 2 Companies in which the University has an Interest. For the most part, with the exception of UNICO prior to 1992, the governance of these companies has been vested in senior executives of the University. NB: Prior to 1992 a Senate member was appointed to UNICO as a director.

Senate has been kept informed in an indirect way of the performance of these companies only when their activities form part of a Resources Committee agenda, for example Murdoch Retirement Services, which was created for administrative purposes in order to manage the operations of the St Ives Retirement Village project. (In the past UNICO financials were reported to the Resources Committee; the practice ceased when UNICO's business dealings became insignificant.)

Given the impending unfunded litigation that has arisen out of a staff member's consultancy, which was arranged through UNICO, and the increasing complexity and value of some of the companies in which the University has an interest, it is timely to review - in terms of risk to the University - the subsidiary companies themselves, their governance structure and the exposure to the University by academics who engage in consultancies.

Key Risk Management Issues

The following risk management issues have been identified:

1 For each of the subsidiary companies, should the Senate -

  • appoint a board of independent directors who will act at arms length to the Senate, and hence attempt to eliminate any risk to the University if the subsidiary company incurs debt or other liabilities or becomes insolvent?
  • retain executives as directors, or appoint Senate members as directors?

Appointment of Directors to Subsidiary Companies

As explained, current University practice has been to appoint University executives rather than Senate members to the boards of subsidiary companies created for specific purposes of Murdoch University.

It is a basic principle of corporations law that a company is a separate legal entity distinct from its shareholders. The shareholders have limited liability but in some instances the “corporate veil” has been lifted by the Courts to expose the shareholders to liability. The most common situation where Courts have been asked to look behind the corporate veil is in respect of companies associated as a group comprised of subsidiaries.

Examples of where the veil of incorporation has been lifted include:

  • Sections 588V – 588X of the Corporations Act lift the corporate veil in certain circumstances, by making holding companies liable for the debts of the insolvent subsidiaries. Under these provisions, if a holding company allows a subsidiary to incur a debt while insolvent, the subsidiaries’ liquidator may recover from the holding company amounts equal to the amount of loss of damage suffered by the unsecured creditors of the subsidiary. Under Section 588V(1), the holding company’s liability arises if a subsidiary incurs a debt when it is insolvent and at the time there are reasonable grounds for suspecting that the subsidiary is insolvent.
  • In addition to the insolvent trading provisions which impose liability on holding companies for debts of their insolvent subsidiaries, holding companies with subsidiaries face the possibility of being shadow directors. A “shadow director” is a person who is not validly appointed to the position of director, but on whose instructions or wishes the directors of the company are accustomed to act in accordance with. Shadow directors are subject to the same duties and liabilities as directors properly appointed, including the duty of care and diligence and the duty to prevent insolvent trading.
  • It is possible for there to be an agency relationship between a holding company and a subsidiary. In England, the Courts have held that a subsidiary company can be agent of a holding company where:
  • the profits of the subsidiary are treated as the profits of the holding company;
  • the persons conducting the business are appointed by the holding company;
  • the holding company is the “head and brain” of the trading venture;
  • the holding company governs the venture and decides what should be done and what capital should be embarked on it;
  • the profits of the business are made by the holding company’s skill and direction;
  • the holding company is in complete control.
  • It is also possible that if a holding company and a subsidiary operate in partnership, that a Court could find that they are jointly and severally liable.
  • It has been found in Australian Courts that a holding company can be liable for a subsidiary company’s negligence.

Generally, there appears to be a trend by legislators to lift the corporate veil.

While it is not possible to eliminate risk, one means of reducing risk would be for the University not to establish subsidiary companies. In other words, the University could not:

a)control the composition of the relevant entity;

b)cast more than half the votes which could be cast at the general meeting of the entity;

c)hold more than half the issued capital of the entity.

The University would have to accept the consequences of not being able to control the entity in which it had an investment. Generally speaking, this may prove to be unacceptable because the risk may increase by reason of the lack of control.

It is still possible for liability to be found on the part of the University by reason of the company being its agent regardless of whether or not it is a subsidiary or a company in which the University has an interest.

Given that there is an increased risk of exposure of liability in relation to a subsidiary, strategies to reduce this risk in the case of subsidiaries would include:

a)ensuring that there are appropriate systems for financial monitoring of a subsidiary;

b)ensuring competent, reliable, experienced and suitably qualified delegates who are responsible for financial monitoring;

c)ensure that there is timely communication between various boards;

d)ensure that the directors of subsidiary companies independently assess any advice provided by the holding company before implementation;

e)if a subsidiary is in any financial difficulties then it must be obliged to report the matter promptly to the holding company and the holding company must take appropriate action.

f)if a subsidiary is insolvent or is near to insolvency then its directors must ensure that it does not incur any substantial debts without the prior approval of the board of directors of the holding company;

g)if the subsidiary is insolvent or near insolvent, then swift action must be taken to appoint suitably qualified independent professional advisors to investigate the financial situation and provide advice;

h)if a subsidiary is insolvent, or near insolvency, then consider the appointment of an administrator;

i)as suspicion or knowledge of a director is all that is needed to establish liability, make sure the directors know this and keep the board fully informed about what is going on within the company.

With regard to the other non-subsidiary companies in which the University has an interest, Senate may also consider replacing directors who are University executives with external members of Senate to achieve a more objective monitoring of the performance of such companies.

2 Determine whether the original purposes of subsidiary companies is still relevant to the University's needs.

Attachment 2 Companies in which the University has an Interest, sets out details relating to the subsidiary companies, the percentage ownership by the University, the current directors, the purpose of the company and whether it is active or inactive. In reviewing each of these companies from a risk perspective, Senate needs to determine whether the purpose for which the company was established is still relevant and, if so, whether any change to the governance and reporting structure is required.

Subsidiary Companies

/ Comment/Management recommendation
The University Company Pty Ltd
(Refer to later section in this report which elaborates on the issues upon which these recommendations are based) / Option 1: Limit the purpose of UNICO to that of a vehicle for the exploitation of inventions, new or improved processes and other discoveries (Commercialisation of intellectual property)
  • Appoint external directors to the Board who have expertise in the commercialisation of intellectual property. NB: To attract such directors commercial directors' fees may need to be paid.
  • Appoint a Senate member with appropriate expertise to the Board of UNICO.
  • Quarterly reports on the activities and financial performance of UNICO to be provided to the Resources Committee.
Option 2:
  • Wind up UNICO once the Wildflower litigation has been finalised and existing consultancies conducted through UNICO have been completed, returning the assets to Murdoch University.
  • Establish a new subsidiary company specifically for the purpose of the commercialisation of intellectual property through strategies such as licensing or the establishment of “spin-off” companies. NB: This option has the advantage of establishing a fresh company without any historical baggage. The appointment of directors would be as for Option 1.
Option 3: Alternatively, if the Senate is of the view that the commercialisation of IP is best outsourced to another entity or the IP sold to an investor (where the University receives an upfront payment for the IP developed to that point) then the role of UNICO would become redundant and the company could be wound up as described in Option 2 above, i.e. there would no need for the University to establish any subsidiary company.
NB: Each of these options would require the establishment of a separate unit or entity to manage all University consultancies. See Attachment 5 Proposal to Establish a Commercial Consulting Services Unit – Murdoch Consulting,
Murdoch Retirement Services Ltd /
  • Appoint a Senate member with appropriate skills in property development to Chair Murdoch Retirement Services Ltd.
  • Quarterly reports on the activities and financial performance of Murdoch Retirement Services to be provided to the Resources Committee.

Am-Si Pty Ltd / As this company is inactive it is proposed that it be wound up.
Murdoch International Pty Ltd / This company serves no particular purpose or function at this time, and unless the incoming Vice Chancellor wishes to maintain the company to manage the international activities of the University, then the company could be disestablished.
Virtual University of Australia Pty Ltd / This company serves no particular purpose or function at this time, and unless the incoming Vice Chancellor wishes to maintain the company to manage the international activities of the University, then the company could be disestablished.
MS Biotechnology Pty Ltd / The funding for the development of the intellectual property has run out. The directors are currently discussing whether any other party could be found that would be interested in investing in the project. The performance of the company will be monitored and any proposed change reported to the Resources Committee.
Non-Subsidiary Companies /

Comment/Management recommendation

Murdoch College Properties Pty Ltd /
  • Appoint a Senate member with appropriate skills in joint venture partnerships to Chair Murdoch Retirement College Properties Pty Ltd.
  • Quarterly reports on the activities and financial performance of Murdoch College Properties to be provided to the Resources Committee.

ACRE: Australian CRC for Renewable Energy /
  • An independent company for which Murdoch University is the host institution, and manages its financial affairs.
  • No change to existing directorships or reporting relationships.

Rumen Biotech Pty Ltd / As this company is inactive it is proposed that it be wound up.
CRC for Sustainable Tourism / No change to existing directorships or reporting relationships.

3 Examine the exposure to the University from academics who engage in consultancies or other contractual arrangements

It has been recently reported by DETYA (2000) that Australian universities were finding it difficult to develop consultancy and external earnings policies that struck a balance between protecting universities against legal liabilities and maintaining flexibility and responsiveness in their external relations.

Under the terms of the industrial agreement that Murdoch University has negotiated with the National Tertiary Education Industry Union, it is stipulated that the parties recognise that consultancies provide various advantages to academic staff including provisions of opportunities for :

1.beneficial interaction between the University and industry both the private and public, government and the community;[2]

2.maintenance of professional skill levels of staff members;

3.staff members to increase their income.

The parties also acknowledge that consultancies should not:

1.adversely affect the teaching, research and administrative functions of the University;'

2.contribute to increased workload, in inequitable workload distribution;

3.threaten intellectual freedom or intellectual property rights of the University and staff members;

4.bring the University or staff member into disrepute or render them liable for legal action;

5.involve the staff member in a potential or actual conflict of interest.

Attachment 3 Murdoch University Consultancy Policy recognises two types of consultancies:

(i) University consultancies, and

(ii) Private consultancies.

Risk Management of University Consultancies

University policy requires that University consultancies are to be contracted with the external party through the Division of Research and Development who will determine in consultation with the Executive Dean, whether the University Consultancy is to be undertaken through the University company, UNICO, or through the Research Office.[3] This determination will be made on the basis of an assessment as to:

  • The level of commercial risk being carried by undertaking the consultancy;
  • the likely level of contract maintenance or support required and;
  • the likelihood of the consultancy generating a significant intellectual property, which may be subsequently commercialised.

An assessment will also be made as to whether the subject of work to be undertaken fits the criteria for research such that the funds are eligible to be counted towards the DETYA return on Research Income which provides leverage for future University funding from DETYA.

From the point of view of the staff member and their Division carrying out the consultancy there is no difference between a consultancy undertaken through UNICO and one that is not. Except for consultancies requiring a high level of contract maintenance, development support (eg. legal fees, tender preparation, additional insurance, negotiation support), the overhead will be the same as for other grants, that is currently 15 % of the total consultancy.

One of the characteristics of University Consultancies is that the occupational health and safety of University staff is safeguarded while undertaking consultancies and workers compensation cover is provided. Professional indemnity insurance cover is also provided to staff undertaking University Consultancies either through UNICO, the Research Office or one of the Centres.

Currently all consultancies with a value in excess of $3000 are required to comply with the above process which includes some level of risk assessment and subsequent approval by the Executive Dean/Research Office in order to qualify for insurance cover including Professional Indemnity. However, the University is exposed to additional risks from University consultancy activities where the value of the consultancy is less than $3000, i.e. under existing University policy University consultancies undertaken by academics in their Divisions, at the discretion of the Executive Dean, can be treated as having automatic approval. The only requirement to be met is that a standard report be provided to the Executive Dean at the conclusion of the consultancy.

Risk Management of Private Consultancies

A Private consultancy is a consultancy undertaken by a staff member for remuneration or other consideration in their private capacity or through a directorship, partnership, private company, trust, or any similar entity. Staff conducting a Private consultancy are not permitted to use the University’s name, logo, services, space, facilities and equipment. Income received from Private consultancies must not be paid into Murdoch University accounts. The University will not join in the management and or activities of a Private consultancy, nor be associated with it in any way.

University policy on Private consultancies expressly and specifically requires that the University is dissociated from the Private consultancy in such a way that it attracts no liability for any injurious outcome arising from the consultancy either as a result of accident or negligence. This is to be achieved by the University insisting that all Private consultancies must be entered into by way of a written contract or agreement between the staff member (Consultant) and the Contracting Party or client, which includes the following clauses:

"The parties acknowledge and agree that:

(a)In providing the services that are the subject of this contract the consultant:

(i) acts as an independent contractor; and

(ii) is not acting in the capacity of an employee or agent of, does not act for or on behalf of, and is not in any way connected or associated with Murdoch University, or the University Company, UNICO.; and

(b)Murdoch University will not be liable to the parties or either of them, nor will the parties or either of them make any claim against the University in respect of any loss or claim of any nature whatsoever and howsoever (including without limitation loss of profit, special or consequential damage and legal costs on a full indemnity basis) arising out of, related to or connected with this contract.

(c)The parties and each of them indemnify and will keep Murdoch University indemnified against any claim or loss by any person, of any nature whatsoever and howsoever (including without limitation loss of profit, special or consequential damage and legal costs on a full indemnity basis) arising out of, related to or connected with this contract."