Electronic Signatures – Binding or not? Part 1

It is a strange thing to find yourself increasingly challenged by the pace of change, and none greater than the impact of technology. People live in a very different way, than say 20 years ago, when I started this business, and the way we communicate with each other is fundamentally altered.

We are under real pressure to respond faster, process more efficiently and create a platform of client interaction that meets the “what’s in it for me” requirement.

We live in a smaller global community, events and the means to communicate have become easily accessible and barriers of distance and time zones have been removed. The way we conduct business transactions is also affected and the bridging of the international barrier has meant much of the mindset has fallen away. People see no issue with downloading agreements from different jurisdictions and using templates for negotiations in many different circumstances. This is regardless of the legal technicalities concerning enforcement if the deal goes bad and great caution should be exercised. Consider the types of transactions affected, the purchase of foreign goods or services on-line, a merger or takeover by a foreign company, property investments by non-Australian residents, contracts for Information Technology and multi-jurisdiction commodity agreements.  These are all regularly negotiated and confirmed using electronic documents and communications.

It is all very well to have documents downloaded, but how do parties effectively sign them? Are electronic signatures in fact legally binding, and can they be used as evidence in court?

The law of contracts formed through electronic means is a tricky area, so consider the following legal issues about electronic signatures.

Main Points

  • Under Australian and International law, electronic signatures are a valid way of executing agreements.
  • When evidence is required confirming the identity of the person signing and their intention to be bound by the content of contract, problems can arise.
  • Digital signature tools and authentication methods (such as public key cryptography) can reduce the risks.

Electronic Signatures – A Difficult Proof?

Electronic contracts

For a contract to be validly formed by law, certain conditions must be evidenced. These elements are:

  • an intention to create contractual relations;
  • acceptance of an offer; and
  • consideration (that is, a benefit in exchange for obligations by both parties such as a payment of deposit).

In most commercial transactions, the formal signing of a valid agreement electronically, satisfies these elements under International and Australian law, and is treated like a paper contract.

In addition to the usual requirements for a paper contract, a contract formed electronically is legally valid if:

  • the contract is stored appropriately and can be accessed after signing; and
  • there has been consent between the parties to receive information electronically, expressly or by implication.

It is important to note that, by law, a person or company will be bound by a communication if it was sent by the person or company, or with their consent. This can create problems on the issue of evidence of intention to be bound, particularly in circumstances where parties to transactions are not dealing with each other face to face (without a witness present).

What are Electronic signatures?

An electronic signature can be defined as, “a signature using software on an electronic document or transmission, either by an encryption method or a scanned version of handwritten signature”. They are recognised under both International and Australian law as having the same effect as handwritten signatures, subject to the following qualifications:

  • there must be consent by the recipient to receive information electronically;
  • the method of signing must identify the person sending the information, and indicate that this person approves of the content of the electronic document signed; and
  • the method of signing must be as reliable as is appropriate for the purposes for which the electronic document was generated, in all of the circumstances of the transaction.  Evidence of the identity of the signing party and that they approve the contents of the electronic document must be identified in the document. This reaffirms the need as to prove the identity of the person signing and their authority to do so (e.g. Director/Secretary of a company).

Note that there are new software programs available that enable a person with qualifications to verify the identity and signature of a person for real estate transactions. For the purposes of new electronic property transactions through PEXA a solicitor can scan a signature, identify the person with 100 points (like a bank) and certify they have done so for this system. This will then enable banks to rely on the signatures and the titles office that will ultimately register the documents for the transaction (such as a release of mortgage or caveat).

The difficulty in using an electronic signature becomes apparent when need to prove the identity of the signing person where the hand written signature isn’t witnessed by another person. Is it really theirs?

There is also the risk that the content of the document has been altered after being signed, as this can happen in any other traditional transaction signed by hand. Digital signatures have been introduced to try and minimise these risks.

Digital signatures and public key cryptography

A “digital signature” is a term used by some to describe a type of “electronic” signature. Digital signatures use technology that associates the scanned signature with hidden electronic data which can be used in an electronic document or communication. The main differences between an “electronic” and a “digital” signature is that:

  • a digital signature is linked to certain information, and can be verified;
  • an electronic signature may just be text on an email.

Digital signatures are therefore unique electronic “identities” which make them a more trusted and secure way of verifying the author of a document.

Many, if not all digital signatures rely on public key cryptography as their identity verification core – including popular products like Adobe EchoSign, and DocuSign. The basic premise behind this method is that a cryptographic private and public keys (being a randomly generated set of digits) are used for identity verification purposes.

The private key is only used by, and known to, the person associated with it. The related public key is shared publicly and visible by anyone else on the receiving end of the document containing the digital signature.

To create a digital signature, the private key is used to generate a unique code from a combination of the private key and the contents of the message. That code is embedded in the document and becomes the digital signature. Usually an image attached to the digital signature is calibrated as the visual aspect of the signature, such as an electronic copy of the signing person’s paper signature. This is not legally necessary, however the party receiving the document can then view the public key associated with the digital signature. There is typically no way for the recipient of the public key to discover the private key through this process.

The information that can be gained by having access to the public key is usually:

  • the name linked to the digital signature; and
  • a verification that the contents of the documents have not been altered since inserting the digital signature to the document (by technical error or tampering).

As you can see there is some complexity about the manner of applying an electronic signature. I will continue more on this next week so make sure you contact us if you need assistance with signing agreements.

Employee Share Schemes (ESS)


It has been a little while since I have had an opportunity to blog about interesting things I encounter when helping clients. The year goes quickly and despite the arctic vortex freezing us there is some heat in business activity right now.

It seems that there is a bit of political football going on with major policy decisions but there is one small glimmer of hope for those business owners wanting to give further incentive to key employees. Take a look at the recent amendments to the Income Tax Assessment Act 1997 which will mean that many small companies can offer tax effective incentives to employees under an employee share scheme (ESS).

What are the new rules?

The new rules operate from 1 July 2015, for companies that are:

  • Not listed;
  • Comprising turnover below $50 million per annum; and
  • Incorporated for less than 10 years.

This will appeal to many of our small to medium business clients. If  shares in the company are issued to a key employee, it is not counted in the employee’s assessable income on one big condition.The discount on the price of shares cannot be any more than 15% of the market value of the shares in the company. This would require an accountant to do a valuation of the shares as at the date of issue.

Options to acquire shares at a later time, require different rules. If the exercise price of the option is equal to or more than the market value of the shares at the time that the options are granted, it is not assessable to the employee. This is great news for employer companies wanting to secure the management team and to broaden the risk profile of the business. It provides a good platform to give added incentive to important employees and allows the key to a better succession plan for the shareholders.

It means that the employees identified as able to add significant value to the business are not penalised in getting taxed on the new shares and a business owner can provide some additional security for the growth that an employee will generate over the next few years. The new rules apply regardless of whether there is a risk of an employee forfeiting their shares or options, provided the offer is broadly available to at least 75% of full time employees with at least three years’ service.

There are rules and conditions that must be satisfied to access these concessions. Careful drafting of the offer documents must be undertaken and also need to comply with requirements for share issues  under the Corporations Act 2001. Think how the minor shares can be dealt with and the rights of access to financial information first.

New market valuation rules what is a safe harbour?

It is frustrating for a fledgling company to be restricted as to how shares can be issued or transferred to core employees when access to other capital is so hard to obtain. The banks talk about wanting to lend money but the reality is that it is extremely hard to get good funding without a set of numbers from a solid trading history. The chicken and the egg argument comes to mind.

To make the start-up concession easier to access, the amendments also introduced a secure method or “safe harbour” which bind the ATO to accept a company’s valuation using  the ATO published guidelines.

The first published method appears to be based on a straight calculation of net tangible assets and most companies seeking to access the new concessions should be able to apply this method. This will save start-up and administration costs (insert “accounting costs”).

A couple of Key Points

As always there is a bit of a catch. You cannot do this share scheme without thinking about all other impacts on the business. Remember these are existing employment arrangements and as such must be though about carefully. You must get advice on the commercial shareholder perspective (for instance the right to buy back the shares if an employee leaves or tries to compete with the company). Do not forget the employment law aspects of any employee incentive arrangement, both from a Fair Work Act 2009 basis and a Contractual basis. Be careful about any representations made as sure enough they may come back to bite you. The beauty of a shareholding is you never know if it is going to produce dividends and it is up to the Director to exercise their discretion whether they declare a dividend or keep the money in the company for further growth.  How about these other things to think about :

  • Will the terms of the share scheme provide a real incentive?
  • When will employees be able to cash out their shares and is there a guaranteed buy back option?
  • When will employees be liable to forfeit their shares?
  • Does the scheme give rise to any claim on termination of employment?
  • Will the share scheme have any Division 7A loan implications?
  • Do the  documents comply with the fund raising requirements under the Corporations Act 2001.(less than 20 investors and less than $2 million in any one year?)
  • Does the share scheme trigger a requirement for an Information Memorandum or a limited prospectus?

Minor shares have ‘oppression’ provisions or rights to a claim in set circumstances and possibly rights to wind up the company. Heavy stuff to think about before you act!

Please contact a member of our team if you would like further information and how we can assist with advice and documentation required to establish this type of share scheme.

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