Bills Digest 115 1996-97 AIDC Sale Bill 1997


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History

AIDC Sale Bill 1997

Date Introduced: 27 February 1997
House: Representatives
Portfolio: Minister for Finance
Commencement: Royal Assent for the Act but with a Proclamation date to be fixed for the commencement of the main provisions dealing with the sale of this Commonwealth asset.

Purpose

To provide for the sale of Australian Industry Development Corporation Limited (AIDC Ltd), which is a subsidiary of the Australian Industry Development Corporation (AIDC), and to wind-down the operations of the AIDC.

Background

The AIDC was established in 1970.As a generalisation, it was mainly the initiative of The Rt Hon J. McEwen, then Minister for Trade and Industry, who saw the need to counter Australia's growing dependence on foreign capital to support its enterprises and industries.The AIDC is an investment bank which finances Australian industries and which also participates in enterprises and projects.McEwen was not opposed to foreign investment per se and, in fact, he acknowledged the importance of the availability of such capital to Australia.The AIDC was created to assist Australian residents match the share of capital required to create or maintain enterprises so as to avoid too often becoming the minor partner in an enterprise which was the target of foreign investment or takeover.At that time, the Australian motor vehicle industry was nearly 90% foreign controlled.The industrial and heavy chemicals industry, and the pharmaceutical industries were over 80% foreign controlled.Overseas ownership of the electrical and electronic industries was around 50%.(1)

The AIDC was created to fill a gap not then adequately covered by the banking and other financial lenders.The AIDC was there to assist in cases where the development would not otherwise take place, or would only be possible in circumstances where, unless local finance was available, ownership and control would go to foreign investors.(2)

The Australian Industry Development Corporation Act 1970 (the Principal Act) received the Royal Assent on 10 June 1970 and commenced on 1 October 1970.A key provision in the Principal Act is section 35 which provides a guarantee by the Commonwealth for all borrowings by the AIDC group.

Financial performance of the AIDC is largely assessed by analysis ofthe activities of its main operating subsidiary, AIDC Ltd.The AIDC is majority owner of AIDC Ltd.According to the 1996 Annual Report for the AIDC, the AIDC now holds 99.98% of the issued share capital of AIDC Ltd.AIDC Ltd, in turn, holds the issued share capital of certain other controlled entities in the AIDC group.The AIDC's almost complete ownership of the shares in AIDC Ltd follows from a takeover offer by AIDC in November 1995 for all of the ordinary shares then listed on the Australian Stock Exchange.The takeover offer closed on 16 January 1996 and AIDC Ltd was delisted on 8 February 1996.According to the Australian Securities Commission's current database, AIDC Ltd's issued share capital is 139,337,655 shares (with a face value of 50 cents) of which 139,311,653 shares are held by the Australian Industry Development Corporation on behalf of the Commonwealth.

It is noted that there is a very small number of AIDC Ltd shares held by private individuals.The sale of AIDC Ltd may involve the necessity of compulsory purchase of those shares.If compulsory acquisition is invoked, the private shareholder must be given compensation at a fair value.

AIDC Ltd's profit after tax for the year ended 30 June 1996 was $45.4 million (i.e. AIDC Ltd in its capacity as a separate entity subsidiary).The AIDC, as a chief entity, returned a net consolidated loss after tax of $7.9 million in the same year.(3)

The buy-back of the shares in AIDC Ltd by the previous Labor Government will now be reversed by this Bill.The history of the AIDC has been somewhat turbulent in recent years.In 1989, the Labor Government sold about 20% of the Commonwealth's shares in AIDC Ltd.The Labor Government had subsequently (April 1994) decided on a full sale (hoping for a return of $180 million) but the AIDC group's performance faltered in 1995 with heavy losses.

A separate problem arose after the initial partial sale in 1989 and came to a head in 1994.The issue was whether the Commonwealth as majority shareholder could (via the Department of Finance) seek privileged financial information from the board of AIDC Ltd.Two government-nominated directors were common directors on the boards of the AIDC and its subsidiary AIDC Ltd.These two directors were also senior government officials.Understandably, they appeared to be in a difficult position.They believed that they were precluded by the Corporations Law from disclosing, as directors, information confidential to the board of AIDC Ltd, back to the AIDC for the benefit of the Department of Finance.They resigned from AIDC Ltd to enable legal clarification of the impasse.(4)

In much the same period, the board of AIDC Ltd also voted to give massive pay rises to its executives.In an answer to a Question Without Notice by the Hon Tim Fischer to Hon Kim Beazley MP on 18 October 1995, Mr Beazley noted with concern the salary increases but advised that it had been suggested to the Government by AIDC Ltd that it would be necessary to offer such incentives to retain quality staff in the competitive merchant banking sector.Mr Beazley said that he had been advised that the salary structures resulted from consultations that the board of AIDC Ltd had with a number of private advisers elsewhere in the private sector who were on equivalent salaries.(5)

Some financial commentators have been forthright in their observations about various aspects of this turbulent period for the AIDC, on issues such as the enhanced staff remuneration and the confused approach in recent years to the proposed sale of this Commonwealth asset.These comments include those by Rowena Stretton in her article Inside the AIDC(6) and Pierpont in his article Relax! It's the day for playing games.(7)

On 18 December 1996, in a joint press release, Ministers Hon John Fahey and Hon John Moore announced a call for expressions of interest in the acquisition of AIDC Ltd.The final date for the lodgment of indicative proposals was 27 January 1997.Media reports indicate that most of the interest in acquiring AIDC Ltd is from foreign investors but there is speculation that the Australian private investment bank, Macquarie Bank, is one of the interested parties.(8)Another media report indicates that AIDC Ltd believes that it is on track to earn a record profit (estimated at $60 million) this financial year.The same report speculated on an unconfirmed asset sale value of $200 million to a high of $400 million for AIDC Ltd.(9)

This Bill provides for the sale of AIDC Ltd, the main operating subsidiary of the AIDC, and then the progressive winding-up of the chief entity, the AIDC.

Main Provisions

Reader's Note: The proposed amendments are included in Schedules to the Bill.The terminology to be used therefore is 'Item' in the Schedule in lieu of 'Clause' in the Bill.

Schedule 1

Items 1-15 are minor amendments to the Principal Act to recognise the proposed separation of AIDC Ltd from the AIDC.For convenience, the legislation, when relevant, refers to the AIDC as the 'Corporation' and AIDC Ltd ( the subsidiary which is to be sold) as the 'Company'.

Item 16 is a key provision.Under the existing Principal Act, section 9 states that the Corporation is not subject to direction by the Commonwealth Government.Section 9 is repealed by Item 16 and a replacement section now empowers the Minister to direct the Board of the Corporation in relation to specified powers and functions resulting from the winding-down of the activities of the Corporation.

Digest Comment: The new Ministerial power of direction proposed by Item 16 is not a disallowable instrument, unless the Legislative Instruments Bill 1996 (now before the Senate) is passed by the Parliament and enacted as law.

Item 17 replaces the existing term and ex officio appointments specified as required for the composition of the Board of the Corporation in section 11 of the Principal Act, with a power for the Minister to appoint the Board membership at his or her discretion.It is accepted that such an arrangement is sensible and practical given the clear intention to wind-down the activities of the Corporation.

Digest Comment:It is noted that the Bill reverts to the use of 'Chairman' of the Board in lieu of the gender neutral 'Chairperson'.This development in the language used in recent Bills introduced into the Parliament has been the subjectof Parliamentary and media comment.(10)

Item 21 replaces section 16 of the Principal Act with a revised provision which recognises that the composition of the Board will change (e.g. no longer will there be ex officio directors), but, consistent with the previous provision, the new section 16 utilises the Remuneration Tribunal's determinations to fix the remuneration of the Chairman and directors.Where no determination is in place, the remuneration and allowances are to be prescribed under Regulations.

Item 24 repeals existing section 19 (Termination of appointment) in the Principal Act.The existing section 19 is now redundant given the Minister's proposed new power in revised section 11 (see Item 17, above), to appoint the Board membership at his or her discretion.

Items 30 and 31 confine delegations by the Corporation and its Chief Executive, respectively, to an officer or employee of a defined subsidiary of the Corporation.These proposed amendments are necessary to ensure that delegations by the AIDC can only be utilised by subsidiaries which are notified, by the Minister, in the Gazette and which satisfy the additional requirements of section 29B of the Principal Act.

Item 32 repeals existing section 24A (Payment of dividends to the Commonwealth) in the Principal Act.That section provided authority for the payment by the AIDC of a dividend to the Commonwealth but limited to its after-tax profit for the year.The proposed new section 24A will empower the Minister to direct the Corporation to pay a specified amount to the Commonwealth within a specified period of time.In recognition of the fact that the Corporation is being wound-down, there is no restriction on the amount that the Minister may specify.

Items 34 and 35 recognise that it is necessary to exclude the application of the mobility provisions contained in Part IV of the Public Service Act 1922, when the Corporation separates from one of its subsidiaries.This means that persons who are employed by the corporate entity which loses subsidiary status in relation to the AIDC no longer retain the right of return to the Public Service under the mobility provisions.

Item 39 is an important provision.It provides the statutory mechanisms for the sell-down of the assets of the Corporation, principally AIDC Ltd.In other words, it is a Commonwealth asset sale.A key provision is the proposed new section 33E which empowers the Minister, before 1 July 1998, to declare that all shares in AIDC Ltd held by other than the Corporation belong to the Corporation.A proposed new section 33H provides that compensation of a reasonable amount is payable to the private shareholder.If an amount of compensation is not agreed between the parties, the private shareholder has to make an application to the Federal Court for recovery of compensation (being an amount the Court then determines).

Proposed new section 33D provides the Minister for Finance with the trigger to declare the sale day for AIDC Ltd.This is the day on which the majority of the shares in AIDC Ltd pass from the Commonwealth (via the Corporation) to a person or persons other than the Commonwealth (or Corporation).The declaration of that date is made by the Minister for Finance in the Commonwealth Gazette.In turn, this declaration triggers the transitional and saving provisions relevant to the employment conditions and leave entitlements of staff (see proposed new sections 34ZA to 34ZX).

Another key provision is the proposed new section 33T (Transfer of Commonwealth guarantees) which continues Commonwealth backing for any existing liabilities or obligations which, in the selling-down process, pass to a purchaser or transferee, provided there is no other variation to the liability or obligation.

Proposed new section 33U authorises the Minister for Finance to direct any AIDC body to pay to the Commonwealth an amount equal to any consideration received as a result of the selling-down process.

Proposed new sections 33V and 33W provide for the adjustment of the dividend franking account balances of companies that cease to be wholly-owned subsidiaries of the Corporation.

Proposed new section 34B is an appropriation to enable the Commonwealth to make payments to discharge any obligations it has accepted arising from taking over any obligations of AIDC bodies.

Proposed new section 34E is a protection for specified persons involved in, or associated with, AIDC bodies to enable those persons to use or disclose internal company information, provided that the use or disclosure of the information is related to the selling-down process.Without this statutory protection, it is arguable that disclosure of such information may contravene the Corporations Law and common law.(See also, the agreements for the protection of information contained in proposed new section 34F).A further provision, at proposed new section 34G, exempts those involved or associated with the selling-down process from any obligation to disclose particular aspects of the same information to the Australian Stock Exchange (e.g. exemption from those obligations which may otherwise have arisen under the continuous disclosure regime (the necessary disclosure of information about events likely to materially affect the price of publicly listed shares) specified in the Corporations Law and the Listing Rules of the Australian Stock Exchange).

To avoid doubt, any sale or transfer of assets of AIDC bodies which would result in the acquisition of property of a person otherwise than on just terms, is subject to compensation in accordance with section 51(xxxi) of the Constitution (see proposed new section 34V).

Digest Comment:It is noted that proposed new section 34S exempts any instruments, such as a Ministerial direction to transfer or sell AIDC assets, from the provisions of the as yet unenacted Legislative Instruments legislation.This means that such instruments are not a disallowable instrument.This exemption is restricted to the new Part VI (Transfer of assets of AIDC bodies) - see also, comment against Item 16, above.

Items 40-44 deal with the Commonwealth's financial guarantee for the AIDC group, as specified in section 35 of the Principal Act.It is this guarantee which gives the AIDC group its AAA credit rating.This existing guarantee applies to all agreements entered into by the Corporation before 1 July 1998.New subsections are added (proposed new subsections 35 (11) to 35(15)), which empower the Minister for Finance to determine a date in lieu of 1 July 1998 to be the date at which this Commonwealth guarantee will cease to apply to any further obligations.This amendment is necessary to recognise the winding-down of the Corporation and the sale of AIDC Ltd.The declared date is notified in the Commonwealth Gazette and that date must be before 1 July 1998.

Schedule 2

The proposed minor amendments contained in Schedule 2 affect a number of statutes including the Administrative Decisions (Judicial Review) Act 1977, Freedom of Information Act 1982, Loans (Australian Industry Development Corporation) Act 1974, National Crime Authority Act 1984, Occupational Health and Safety (Commonwealth Employment) Act 1991 and taxation-related provisions in the Principal Act.These are consequential amendments which recognise that the AIDC is to be abolished.

Concluding Comments

There is media speculation of interest from foreign financial institutions in the acquisition of AIDC Ltd.(11)The Bill does not contain any special provisions to deal with foreign ownership issues.Foreign investors who are interested in acquiring AIDC Ltd will, of course, be required to comply with existing Australian laws on foreign investment, such as the Foreign Acquisitions and Takeovers Act 1975.The provisions of the Corporations Lawwill also apply.

Endnotes

  1. See second reading speech to the Australian Industry Development Corporation Bill 1970, Hon J McEwen, Minister for Trade and Industry, Hansard, House of Representatives, 5 May 1970: 1597–1603.
  2. Ibid.
  3. Annual Report 1996, Australian Industry Development Corporation, November 1996: 6–7.
  4. See Tingle, Laura, 'Bureaucracy pressure worried AIDC directors', The Australian, 11 March 1996.
  5. House of Representatives, Hansard, 18 October 1995: 2341.
  6. Stretton, R. 'Inside the AIDC', Australian Financial Review, Sydney, 8 March 1996.
  7. Pierpont 'Relax! It's the day for playing games' Australian Financial Review, 20 September 1996.
  8. Allard, T. 'Macquarie Bank has eyes on AIDC', The Sydney Morning Herald, Sydney, 23 January 1997.
  9. Blue, T. 'AIDC poised to earn record $60m', The Australian, 27 January 1997.
  10. See Question Without Notice from Senator Margetts to Hon Senator Amanda Vanstone, Senate, Hansard, 3 March 1997: 981; Farr, M. 'Chairman John: Howard's revolt against "PC" titles', The Daily Telegraph, 4 March 1997.
  11. See Allard, T. 'Macquarie Bank has eyes on AIDC' at Endnote 8, above, and Hogan, R. 'AIDC may be sold to overseas investors', Australian Financial Review, 19 December 1996.

Recommended Reading

The Explanatory Memorandum to the Bill is well written and provides useful information on the legislative changes proposed in the Bill.

Contact Officer and Copyright Details

Brendan Bailey
12 March 1997
Bills Digest Service
Information and Research Services

This Digest does not have any official legal status. Other sources should be consulted to determine whether the Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.

IRS staff are available to discuss the paper's contents with Senators and Members and their staff but not with members of the public.

ISSN 1323-9031
Commonwealth of Australia 1996

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1997.

This page was prepared by the Parliamentary Library, Commonwealth of Australia
Last updated: 9 April 1997



Back to top


Facebook LinkedIn Twitter Add | Email Print