Cooperative Research Centres (CRC)

CRC History & Legal Overview

CRC Conference – Alice Springs 2010

Observations made over 20 years working with CRCs on processes and structures that deliver efficiencies in formation, governance, operation and wind up.

Introduction

• The CRC movement is of sufficient operational and legal age now that not only does it make sense to look back at what we’ve done over the past 20 years, we owe it to the future CRCs to do so.

• This reflection is necessarily a legal one but legal imperatives and structures are reflective of what people do, or at least they should be, so the hope is that these observations will also have some practical resonance and utility.

First some history

• When CRCs were introduced in 1991, they were pretty much unique, not just in concept but also in legal structure. Little by little the legal issues started to emerge and I recall one of the first roadblocks was the use of the word, “cooperative”. The Attorneys General had to step in to solve that one.

• It fell to me to draft the Centre Agreement, as it was then called, of the CRC for Tissue Growth and Repair.

• No-one had ever done this before and I’m pretty sure this was the first Centre Agreement drafted.

• The only real guidance on how to shape this Centre was that no-one wanted it to be incorporated.

• That plus a list of Participants and a copy of the successful application were pretty much all I had to go on.

• I sat down with a blank sheet of paper for some time trying to get a bead on this thing, this Cooperative Research Centre.

• After a number of false mental starts it hit me – the old collaborative research agreement with a licence tail.

• That approach formed the mental basis on which the Centre Agreement for Tissue Growth and Repair was drafted.

• I adopted the approach a collaborative research agreement treats such things as:

1. 1. Statement of objectives;
   2. Description of contributions in a schedule, with a commitment to make them in accordance with a research plan;
   3. A management committee of representatives from the various parties;
   4. Arrangements for the dedication Background IP;
   5. Provisions dealing with ownership of Project IP; and
   6. Arrangements for the protection and commercialisation of Project IP and the distribution of the proceeds of commercialisation;

• Of course there were new matters that needed to be introduced:

1. 1. a Board instead of a management committee;
   2. the Centre bank account and arrangements for dealing with the Commonwealth Funding;
   3. the Commonwealth Agreement itself;
   4. trust arrangements to deal with the Project IP;
   5. the fact that there wasn’t just one but many Projects (some of which were still to be identified);
   6. the fact that the Centre’s structure and arrangements still had to be fine-tuned and agreed;
   7. establishing practical arrangements for dealing with a much greater body of intellectual property (which of course led to the trust arrangements we all know well);
   8. arrangements for the exit and introduction of new Participants; and
   9. far more of the infrastructure or boilerplate provisions relating to review of the Centre, indemnities and termination.

• In the end, the agreement got drafted and executed, and the Centre got on with its business. A cleaned up version of the TGR Centre Agreement was provided to the Australian Government Solicitor and informed the basis of the Model Centre Agreement. I am sure the Participants learned more about tax, trusts, beneficial interests and legal persons that they ever thought they would – or wanted to.

• The Model Centre Agreement provided some assistance for the next rounds of CRCs and over the years that, and other material, has morphed into the Model Participants Agreement provided into the Australian Institute of Commercialisation. This new model agreement has achieved further efficiencies with its inclusion of project documentation and trust arrangements.

Formation and operation

• Providing assistance with the formation of CRCs is another FAL initiative, through the Framework issues Document (FID).

• Giving rise to the FID was a number of observations that were made in the formation of CRCs.

• The most fundamental of these was the time and cost taken in putting the Centre Agreement together, and the method used to do so.

• This method involved the exchange of various drafts of the Centre Agreement, which is undoubtedly the most costly and expensive way to achieve consensus.

• The second observation was that this process, or something like it, was necessary because of the incomplete nature of the agreement reached by the parties for the formation of their Centre.

• That is, even though the would-be Participants had got through all of the stages relating to agreeing to form the Centre in the first place, and completing and prosecuting a successful application, they had not turned their attention or at least reached agreement, on many of the essential aspects relating to the Centre they would subsequently form.

• Matters relating to the Centre but not yet negotiated other than through the process of drafting the Centre Agreement included:

1. 1. Board structure, including representation and experience needed;
   2. The kind of corporate structure of any management vehicle established for the Centre;
   3. The kinds of IP to come from the Centre’s activities – Centre IP, Project IP or both, and how it is to be owned;
   4. Access to Centre IP for research / educational purposes;
   5. Ownership of outcomes of research carried out on Centre IP by research / educational use only licensees;
   6. The path to commercialisation, including which Participants are to have what rights and whether there are to be any rights of veto;
   7. Arrangements for the carrying out of Projects;
   8. Risk management arrangements including indemnities;
   9. The rights of an expelled Participant;
   10. Who will be an Essential Participant and what rights attach to that status;
   11. Who will be a Supporting Participant and what rights attach to that status; and
   12. Centre wind up and transition;

• This is not an exhaustive list, and whilst not every one of them arose with every Centre, each of the Points had the potential – a potential that was often realised – to take a long time to resolve. Whilst meetings of the parties between draft agreements did help, it was and is still the case, that more drafts of the formation documentation than one might expect, were and are exchanged by the parties in getting to agreement on what really are fundamental issues.

• The idea of a Framework Issues Document is to encourage the parties to a potentially new Centre – at the outset – to turn their mind to these operational and governance issues with the same degree of attention and effort as is applied to the outer aspects related to forming a Centre.

• The FID is necessarily not a legal document and it is designed to encourage the parties to focus on what you might call the legal infrastructure of the Centre, and to do so in the most efficient and cost effective way.

Governance

• As fair as I am aware, there have been very few crises in governance of CRCs over the past 20 years.

• Whilst I’d like to think this is because, in part at least, of the excellent legal drafting and advice obtained by the Centres from their lawyers, I know enough about Boards to appreciate that good governance comes from good people.

• Good in this context, means people who are properly appointed, and who do their job properly.

• By properly appointed, I don’t just mean observing the administrative arrangements of getting the rights forms filled in but coming from the right quarter – either as a representative director or a director with the right skill set.

• The nature of CRCs is such that a properly composed Board is both representative of the owners of the Centre, namely the Participants, and has the right skill base. The current drive towards majority independent directors is in keeping with current good corporate governance practice.

• As to the concept of governance generally, it is fair to say that today corporate governance is not just a term but an industry.

• Most of the learning on corporate governance comes from corporate collapses or misfeasance of office of company director.

• Most if not all of the general principles underlying company corporate governance apply to the governance of CRCs whether they are incorporated or unincorporated. It would indeed be a brave CRC director who worked on the assumption that because his Centre was unincorporated, the general corporate governance laws did not apply. They do.

• Governance of CRCs is a subject that is capable of absorbing the entirety of a 3 day conference, and that in and of itself is a disturbing and unhelpful circumstance.

• The ever increasing mountain of writing from authors, judges, commentators and others on corporate governance has got to the point that if a director merely tried to keep up with the current developments in this area, that director would have time to do little else.

• With that in mind, I have tried to distil the essence of corporate governance into its simplest form, not only for the benefit of my clients but also for myself as I sit on a number of Boards, including acting as Chair for an ASX listed company.

• Having thought through this at some length, and likened corporate governance to the mass of rules that make up the old and new testaments, I have come down to two:

1. 1. Thou shall be honest.
   2. Thou shall be competent.

• Of course, each of these rules unravels into a series of sub-rules but in the end, it is honesty and competence that are the two main commandments.

• If you apply the corporate governance rules or the duties of directors’ rules to all CRCs – incorporated and unincorporated – you could represent those rules as follows:

Director’s Duties

Honesty

• Duty to act bona fide in the interests of the company
• Duty to act in good faith in best interests of corporation and for proper purposes (Section 181(1))
• Criminal offences if reckless or intentionally dishonest (Section 184)
• Duty to use power for proper purposes
• Duty to act in good faith in best interests of corporation and for proper purposes (Section 181(1))
• Criminal offences if reckless or intentionally dishonest (Section 184)
• Duty not to fetter discretions
• Duty to avoid actual and potential conflicts of interest
• Duty not to misuse information or position (Sections 183, 184)
• Criminal offences if reckless or intentionally dishonest (Section 184)
• Related party transactions (Chapter 2E)
• Disclosure of and voting on matters of material personal interest (Part 2D 1Div 2(Sections 191 -196))

Competence

• Duty to use care and diligence of a reasonable person subject to business judgement rule (Section 180(1) and(2))
• Other sections where Corporations Act requires “diligence” (Section 588G & Sections 292-318)
• Adapted from Figure 10.2 – Current Australian Law, The Structure of Corporate Governance, Ferrar J. 2008.Corporate Governance Theories, Principles and Practice. Third Ed OUP 2008, page 109

• Under the heading of honesty, we have the following duties:

1. 1. Duty to act bona fide in the interests of the company:
   2. Duty to use powers for proper purposes;
   3. Duty not to fetter discretions; and
   4. Duty to avoid actual and potential conflicts of interest.

• Under the heading of competence, we have the following duties:

1. 1. Duty to use care and diligence of a reasonable person subject to business judgement rule (Section 180(1) and (2)); and
   2. Other sections where Corporations Act requires “diligence” (Section 588G & Sections 292-318).

• It can be seen then that it all comes down to honesty and competence, and provided you are both as a director, you can never be accused of failing in your duties. In the result, your Centre will not suffer the consequence of poor corporate governance.

Wind Up

• The wind up of CRCs is a comprehensive subject in its own right, and I wish here to focus on one or two aspects only.

• Many of you would be aware that the Participants Agreement deals with this in a rather broad way that often is little more than a requirement to look to the future of the Centre before its time runs out.

• I want today to focus on the benefits of adopting a very simple rule that links the operational life of the Centre to the end of that life.

• The rule is: “Start as you mean to finish”.

• Throughout its life, a CRC will enter into a range of agreements – confidentiality agreements, material transfer agreements, licence agreements and some more challenging and complex agreements, such as joint venture agreements and shareholders agreements.

• All of these agreements, at formation, need to be looked at from the perspective of what will need to be done with them at the end of the Centre.

• With confidentiality agreements and material transfer agreements, they should be drafted so as to allow the owners of the relevant subject matter to have their rights recognised by the recipient of the information or the material, beyond the wind up of the Centre.

• The next point will sound simplistic, but it is curious how often what I’m about to describe doesn’t get done – keep the story of what happens in the Centre current so as to allow for the efficient completion of a due diligence on wind up.

• This involves not much more than keeping a proper register of what IP has been:

• Licensed to the Centre as Background IP:

1. 1. Licensed to the Centre by third parties;
   2. Created during the Centre’s life;
   3. Which of it is Project IP;
   4. which of it is Centre IP;
   5. Who the owners of the licensed-in IP are;
   6. Who the owners of the IP created are – i.e. who are the owners of the Project IP, and who are the owners of the Centre IP;
   7. What agreements have been entered into with respect to the IP licensed-in to the Centre or created by the Centre; and
   8. Where these agreements are kept.

• With joint venture agreements and other like agreements, particularly those that have led to the establishment of a company, how that company or that venture will continue at the end of the Centre’s life is critical to how the joint venture agreement or shareholders agreement will be written in the first place.

• For good legal and commercial reasons, joint ventures with third parties are often established for the development and commercialisation of Centre IP.

• Typically in these arrangements, the relevant documentation (the shareholders agreement, the joint venture agreement, the licence and other agreements) are not entered into by the Participants with the third party, but by the Centre company or other special purpose entity.

• Taking position behind the corporate wall, the Participants are able to engage in the joint venture without assuming many of the risks and restrictions that would otherwise be unacceptable to them.

• Relevant areas here include risk management, restraint of trade, and management of IP litigation – amongst others.

• What happens however if, at the end of the Centre, a joint adventure entered into during its life, is to be continued.

• This question is thrown into particularly sharp focus if one or more of the members of the Centre is to replace the Centre company and shoulder the burden of being in the joint venture for the benefit of the other Participants.

• Of course, this question does not arise if the Participants on wind up determine to keep the relevant company going.

• If that choice is made, there is still the question of who are to be shareholders, directors, officers and employees of this company, and how are all those parties to be paid.

• Often in the wind up of Centres, it is the wish of all Participants that all Centre companies are also wound up and a clean break made with the Centre.

• It is when that decision is taken that the above question of who shares the burden of carrying the joint venture, arises.

• The issues that arise at this point may include:

1. 1. The ability of the Centre company, as of right, to transfer its interest to either the Participants or one of their number that might be selected to go forward to manage the relationship;
   2. Whether or not this triggers pre-emptive rights;
   3. If those pre-emptive rights are triggered, what accommodations need to be surrendered in order to secure co-operation from the other joint venture partners;
   4. Whether there are any restraints of trade which, whilst acceptable to a Centre company, may not be acceptable to the Participant replacing the Centre company;
   5. Whether there are any continuing contribution obligations; and
   6. Whether there are any prior breaches that need to be cured by a party.

• The same issues might also arise, of course, with respect to licences and other agreements entered into during the life of the Centre.

• Ideally, when entering into these agreements, if the start and continue as you mean to finish theme were to be adopted, all of these issues will be addressed in the agreement prior to it being executed.

• In other words, look at these agreements with a view to what might need to happen to them at the end of the Centre’s life and have particular regard to the right to novate / assign.

Concluding remarks

• CRCs are unique in many ways – including legally.

• Their existence has prompted some innovative legal thinking and some significant challenges across questions of taxation, governance and liability.

• Over the past 20 years much has been experienced and much has been learned, and the success of Centres has been such to maintain their continued support from Government, industry, researches and others.

• Legally, many of the bumps have been removed and there have been efficiencies brought to bear in how Centres are formed, governed, operated and wound up. These include:

1. 1. Narrowing the number of parties required to sign the Participants Agreement
   2. The use of ancillary agreements such as Essential and Supporting Participants Agreements
   3. Greater flexibility in dealing with Centre IP and Project IP

• It should be said however that welcome as these innovations are, they bring they bring their own challenges including achieving consistency across all of the Centre formation documentation.

• Equally the more flexible approach on IP, leaving as it does critical issues of ownership and commercialisation to be dealt with in Project Agreements, brings the challenge of increased negotiation to each Project Agreement.

• Further, the learning is not complete and the journey toward efficiency still must be pursued.

• To revert to the theme of this presentation, the real work in getting the legal issues properly identified and resolved is at the beginning – in the preparation of non-legal documents such as the application and the Framework Issues Document I referred to earlier.

• And to conclude, “start as you mean to finish” is the best way to go.